The Garrett, Watts Report (The party, after you left, Dec. 2009)

To Our Clients, Colleagues and Friends, 

• We just picked the first ten technology companies that came to mind, and looked up how many jobs they’ve created and what their revenues are. None of these ten companies below existed 25 years ago, and many didn’t exist even 15 years ago.  For those who despair over America ’s economic future, think about the companies that don’t exist now but which will be huge winners and sources of jobs in twenty years!  Here’s the number of employees they have.

We probably missed some big companies, but these ten names, all start-ups in our lifetime, currently employ 498,000 people!!
Here’s how much revenue these companies generated last year.

This adds up to $308 billion in revenue, more than the GDP of most nations!!  And again, these are companies that didn’t exist 25 years ago.  How can you look at thee two graphs and not believe in the future of America ?

• We mentioned Ownit as the first of the sub-prime companies to fail in 2006, and a few of you reminded us that Acoustic blew up in 2005!  We should know.  Our own Corky Watts was doing Due Diligence on them, and he came back pretty shaken.   “There is one huge firestorm about to happen in Alt-A and subprime, and it’s going to be unbelievably ugly.” 
• China just issued 50 year bonds for its first time, and the issue was over subscribed by a factor of two!  China hardly needs the money, but it clearly establishes the country as being in a very exclusive club of nations strong enough to issue such long-term paper.  Ultimately, issues that go out this far are a test of investors’ confidence, and China passed with flying colors. The yield? 4.3%.
• And how about that 12-0 Boise State football team?  They’re 73-4 this decade.

• We recently reviewed a 2005 valuation on an Alt-A wholesale shop in the mid-Atlantic area.  They did about $600 million a year, and ignoring their earnings, which were very healthy, they were valued at about $51 million.  The valuation report was beautifully done, and the people who prepared it did a near-perfect job.  But the missing element was that their business was doing Alt-A loans, and Alt-A crashed, burned, and vanished.   The company which had been valued at about $51 million doesn’t exist today.  You can draw your own conclusions, but there are a few lessons here for everyone to learn from.

• We were going to finish the list of books we want to read, and then we realized, who the heck would even care?  Maybe we’ll run the rest of them when we’re really desperate to fill some space.  Maybe 5-6 people sent in their suggestions, all quite good, and we thank them.
• We’re still getting lots of e-mails on manners, and the #1 irritant seems to be people looking at their Blackberry or i-Phone while you’re talking to them.  One person wrote “I feel like grabbing their Blackberry and throwing it out the window.”
• We were sitting in a meeting with some very sober commercial bankers in the mid-West recently.  They got an MOU and are having their share of problems with Commercial Real Estate loans.  The Bank President quoted Yitzak Rabin that “If a problem has no solution, it is not a problem, but a fact, not to be solved but to be coped with.”  The CFO added the old cliché that “If you’re not part of the solution, you’re part of the problem”, but that really didn’t apply to this situation and was completely unhelpful.   Finally, someone more junior, presumably a chemistry major in college, added, “Well, if you’re not part of the solution, you’re part of the precipitate.”  It’s not all that funny, but it loosened everyone up in an otherwise pretty grim meeting.
• We were vaguely curious, and mostly bored, so we looked up Time Shares on the internet.  Remember when everyone was so hot-to-trot on these, and people were paying $15-20,000 or more for a single week? It was kind of shocking to see how many of them are now selling for under $1,000! 
• Yes, we think most mortgage bankers doing over $20 million a month should sell on a mandatory basis, but not all of them.  A lot depends on the corporate culture and how it defines the role of the loan officer.  As just one example, if you don’t have tight rules over loan officer behavior regarding locks, extensions and investor selection, then you should not go mandatory, regardless of your loan volume.
• We get asked a lot for a job description for someone to head up secondary, especially for companies just transitioning into mandatory selling.  We don’t have room for the whole thing here, but (1) we firmly believe most companies should use one of the known, national hedging advisory services, and (2) if you’re using one of these advisors, your secondary marketing person’s main job is to manage the rate lock function and ensure the integrity of the data in the pipeline.  The right person will do much more, but nothing really matters if you don’t have 100% accuracy in your pipeline.
• And you think you’ve got problems?  Here are the five banks with the highest ratios of non-performing loans:

We recognized a few others, among them #7 Amtrust with 32% non-performers, Towne Bank in Arizona at 30%, and First Fed in Santa Monica with 22%.  We can guaranty you that the senior officers at these banks are hating life these days.

• By the way, picking the right hedging advisory service is not always as easy as you might think.  Each has its own strengths and its own twists, and even if they all appear to do the same thing and do it at about the same price, you want to rely heavily on talking to people who’ve used these services and do some very serious due diligence on what the relationship will look like and what you can expect.
• All you new Windows 7.0 users, what do you think?  Is it worth switching from Vista ?
• We once did a project for an Islamic oriented bank in Southern California .  Their Chairman has published book on Judeo-Christian-Islamic values in Banking. We’re pretty swamped with books to read, but we’re going to try to get to this one: The Art of Islamic Banking and Finance: Tools and Techniques for Community-Based Banking (Wiley Finance) by Dr. Yahia Abdul-Rahman.  We know him and respect him greatly.
• Do you like HELOCs? If you’re the Bank of America, you’d better like them. The BofA owns $151 billion of them, followed by Wells Fargo with $127 billion and JP Morgan Chase with $235 billion.

Take care, stay warm, read good literature, go easy on yourself, always have a kind word for others, be loyal to friends and family, and enjoy life! . Garrett, Watts & Co.  Helping mortgage lenders increase revenues, control costs, and better manage risk.·Corky Watts ([email protected])Joe Garrett ([email protected])Mike McAuley    ([email protected] )