To Our Clients, Colleagues and Friends,
- CNBC listed the governments most likely to default on their bonds. Starting with the most likely, they are, in order: Venezuela , Ukraine , Argentina , Pakistan , Latvia , Dubai , Iceland , Lithuania , California (huh?), and Greece . No way will California default, but the rest look pretty shaky. Shorting Ukrainian or Venezuelan bonds might sound like a no-brainer, but how the heck do you find those bonds to borrow in the first place?
- GSE Update: (1) The federal government so far has provided $60 billion to FNMA and $51 billion to Freddie Mac, (2) in return for the investment, the government got preferred stock paying dividends of 10%, (3) the dividend is yielding $11 billion a year to the taxpayers, and (4) executive compensation at the two agencies is down 40% from the pay levels before the conservatorship.
- We mentioned Don King last issue, and we should point out three reasons we like him: (1) he’s a highly successful businessman who’s made millions as a fight promoter, (2) if you ever listen to him, he’s terribly bright and will quote Ayn Rand, Rousseau and Kierkegaard all in the same sentence, and (3) how can you not love a guy with that haircut?
King impresses us as the kind of guy who’d have been successful at whatever he did. If he owned a bank, he’d probably be a CAMELS 1. - With the shrinking of manufacturing, Big Steel and car assembly plants across the land, we wonder if maybe medical research and medical services will replace them. Cleveland no longer epitomizes the steel and automobile industries as it once did, but when we were there a few months ago, the Cleveland Clinic and related hospitals seemed to be really thriving. Baltimore lost its GM assembly plant, and a Bethlehem Steel plant that once employed 30,000 people is down to just a few hundred. But John Hopkins Medical School is now Baltimore ’s largest employer, and hospitals and large biotech parks have been sprouting up. As they say, one door opens as another one closes, and maybe medicine and biotech will be the next engine to pull our economy forward.
- We once were doing a FOCIS-plus Review at a mid-Western bank, and we were working in a cubicle right next to the call center. We couldn’t help overhearing what a lot of the Loan Officers were saying, and it seemed that some statements were being made that put the bank on thin compliance ice. (“I can guarantee you that rates are headed upwards….. Let’s lock you in now, and if rates drop, you’ll automatically get the lower rate….. You don’t need to call around, ‘cuz I guarantee you that ours are the lowest rates you’ll find anywhere in the country.”)
We’d like to suggest you hire some Mystery Shoppers, maybe someone who worked for you once and who knows the business. You can check up on service levels that way, but you’ll also find out if your people are putting you at risk by what they’re telling borrowers. By the way, a very young Mike McAuley and his lovely wife Marie, once were real mystery shoppers. They mostly ate at restaurants and reported on what they experienced, and is that a cool job for a young couple, or what? Mike will tell you that “The only catch was that while we got paid for dining on all four courses, we had to check out each bathroom very carefully. It was a tough call whether to do that before or after the meal.”
- The latest FDIC Supervisory Insights reveals that 20% of all banks have more than half their assets in long terms assets. In 2006, longer-term assets made up the majority of assets at only 11% of the banks. From our own observation, it looks like most of it is banks holding onto GNMA or FNMA mortgage backed securities. Yes, the yield is good, but do you really want to own 30 years paper in this environment where rates are likely to go up?
- Every time a bank fails, the FDIC’s Inspector General writes a report on what happened. We were reading the IG’s Report on Silver State Bank in Nevada , and it reported that “A significant portion of the EVP’s compensation was based on loans they originated. In addition to a salary, the EVP, along with his loan officers, received a production-based incentive of 10% of any loan origination fees and 3% annual bonus on their average outstandings. These compensation arrangements did not emphasize loan quality.” Interesting. Since loan performance wasn’t a factor in bonuses, why not go make tons of high risk, high-fee CRE and construction loans? This is, of course, precisely what they did, and it finally killed them.
- If your bank gets a C&D, how much time do you have? Each one is potentially different, but we’ve seen many that give the bank months to raise capital and implement other changes. But not always. We were reading the Inspector General’s report on Lew Ranieri’s Franklin Bank in Texas , and they got a C&D on November 4, 2008 and were closed on November 7th. The C&D directed the bank to raise more capital, but three days isn’t exactly enough time.
- Our FOCIS Review for Warehouse lenders has always looked at what percentage of revenue is paid out to the owners of mortgage banks, so we were interested to read that a Harvard Law school professor looked at 2,000 companies to see what percentage of total compensation earned by the top five executives went to the CEO. His research showed that the higher the amount that went to the CEO, the lower the company’s future profitability. It’s not quite the same as what we look at, but it’s revealing and not that surprising. Maybe it’s like pitchers in their first season after signing a big contract. They just don’t seem to do as well as when they’re in the last season before free agency.
- We saw and liked Avatar and would give it a solid 8.0. The visuals are stunning, and the avatars themselves look 100% real. The movie involves a love affair between the avatar of a U.S. Marine and a woman from another planet (there’s even some ardvarking between them) but it’s also a great adventure, with a battle scene as good as any you’ve ever seen. It’s also about an indigenous people who are very much a part of nature, a primitive species is attacked by high tech U.S. Marines. It’s not really thought-provoking, but it’s great entertainment.
- When you read about the “private militia” the Iranian regime uses to attack protestors, doesn’t it remind you of the Nazi Brown Shirts? Democratic governments have armies and police. They do not have private militias.
- In looking at the high points and low points of the past year, a definite highpoint was that they finally got Roman Polanski.
- Eugene Burdick was a Cal professor of political science who wrote Failsafe and The Ugly American. We were re-reading his first novel, TheNinth Wave and we found the following dialogue between two college freshmen: “How long will my two hundred bucks last me at Stanford?” “Not very long. Tuition is $115, room and Board is $120 a quarter. Books will cost a little.” The book was published in 1956, and it looks like a full year at Stanford was well under $1,000 a year back then. It’s now $53,000 or so. All the private colleges are about the same.
- With most movies, you only meet the characters bit by bit. One of the things we liked about Goodfellas was how you meet the entire cast within the first minute or two. Here’s a part of that introduction, after you’ve met the leading characters. http://www.youtube.com/watch?v=ZD3y43cyddI a long
- With compliance being such a big issue, we have two professionals we can recommend. The first is Pam Strickland , the top Compliance Consultant we know. We think she only does California , but you can ask her (www.pamstrickland.com). Whatever she charges is worth it compared to the cost of non-compliance if you get caught.
The other professional we can recommend is attorney Dave Medlin of Medlin & Hargrave (510-832-2900). Many of our clients know him because he helped them dodge loan re-purchases, but he probably knows more about mortgage law (as well as mortgage compliance) than anyone we know. Wait. We’d put him and attorney Mike Huber (801-733-5807) in the same category. We think highly of both.
On of the great lines from The Merchant of Venice is when Portia says that “The quality of mercy is not strained. It drops as the gentle rain from heaven upon the place beneath, and it is twice blessed. It blesses him that gives and him that takes.” It’s been a hard year for many people, so let’s all work toward showing more mercy and compassion in the coming year.
Bonuses: A Dog’s Graduation and Healing A Sick Bank
Helping mortgage lenders increase revenues, control costs, and better manage risk.
Joe Garrett ([email protected])
Mike McAuley ([email protected])
Corky Watts ([email protected])