The Garrett, Watts Report ( December 16, 2009)

To Our Clients, Colleagues and Friends, 

• Two weeks ago the government made a profit of $146 million selling the Capital One warrants they got in return for TARP money, and this week the government sold its JP Morgan Chase warrants for a profit of $936 million!  So far, the taxpayers have earned over $3 billion on these warrants.

• There was a time when the Oakland Raiders had phrases like Commitment to Excellence and Pride and Poise.  Now, they’re just an NFL embarrassment.  Last Sunday, Brandon Marshall of the Denver Broncos had 21 catches in a game. There’s only one Oakland Raider with as many as 21 catches all season!
• Our simple view on Tiger Woods: “Judge not, lest ye be judged.”  Let’s just leave the guy alone and mind our own business.
• Millions of college students learned economics from the Paul Samuelson text, called, simply, Economics.  Prof. Samuelson died this week at 94.  We still have our copy of the book from our freshman year in Hanover , N.H. reading the book and discovering the magic of the demand curve and the supply curve meeting, watching the snow fall, listening to the professor walk us through this text. The book was written in very clear English, and its 886 pages made the dismal science really come alive.
• A client reminded us that gyp ‘ems were originated under FHA Section 245. The securities were called “Dolly Partons” for obvious reasons. They were also known as “Jeeps”.
• Someone else wrote “I remember the GPM’s. I used to say they were the perfect loan program for people who either expected to win the lottery or had some terminal illness. 
• Here’s a graphic view of consolidation among mortgage lenders:

• It will be interesting to see how Avatar does, but we generally think it’s kind of insane to spend $300 million on a movie.  Paranormal Activity cost $15,000 and grossed more than $100 million.  We just don’t like management making huge bets with shareholders money.

• Is there more mortgage fraud committed by mortgage brokers, mortgage bankers, or commercial banks? It’s a known fact that mortgage brokers have committed the most fraud, but what about the other two categories?  We suspect that mortgage fraud was very rare at commercial banks.  Too many controls.  Does anyone have any statistics on this?
• It occurs to us that if you live in Santa Monica , you could send out cards this time of year saying Happy Hanukkah from Santa Monica .  Has a nice ring to it.
• People like to complain the credit card rates are too high.  Let’s look at JP Morgan Chase’s portfolio (ex-Wamu cards).  The portfolio has a yield of 15.7%, which does seem like a high rate.  However, charge-offs are running 8.8%, so the net yield to Chase is 6.9% (that is, 15.7% – 8.8% = 6.9%).  This should put it in perspective.
• A Lake Oswego mortgage banker, one of the very best operators we know, asked us recently which metrics we’d most want to know if we were running a mortgage company.  If we could only track, say, a dozen metrics, these are what we’d choose.  (1) Cost-to-originate, (2) Gain-on-sale margin by product, (3) Commissions in bps, (4) Salaries in bps, (5) Average days on WH lines, (6) Pre-tax earnings in bps each month & YTD, (7) Liquidity (in bps) to monthly fundings (8) Loans in WH over 30 days (9) Loans closed but unshipped over 5 days (10)  Leverage Ratio (Total Liabilities/ATNW) at month end, (12) Loans Shipped but Not Purchased > 15 days.
  If you don’t have all this on one piece of paper, on your desk within 2-3 days of the end of each month, then it’s hard to see how you can be highly profitable.
• The most lucrative part of any bank is its non-interest bearing deposits, so here’s a look at some California banks and what percentage of their deposits are non-interest bearing: 1^st Enterprise Bank (40%), American Business Bank (38.2%), Bridge Bank (44.1%), Chino Commercial Bank (43.7%), CVB Financial (34.9%), NCAL Financial (36.9%), and Silicon Valley Bank (64.1%).  Not surprisingly, the banks with the most non-interest bearing deposits seem to have the lowest Texas Ratios!  Someone with some extra time should look at all banks across the country and do some statistical analysis to see the level of correlation between these two ratios.  We think they’d be highly correlative.
• We went with Evan Stone to a meeting for Oakland A’s ticket holders.  There were maybe 20 of us, plus the team President, the Manager, and General Manager Billy Beane.  As you might know, the A’s developed five terrific rookie pitchers last year, but they didn’t produce runs.  Billy said that the statistics going back a hundred years show that the team that hits the most homers in a game will win 70% of the time, so their big thrust this year is to add power to the lineup.  Interesting that Billy’s statistics mirror what Earl Weaver used to say (and Earl probably knew nothing about regression analysis).  His formula for all those winning Orioles teams was simple:  Great pitching and three run homers. La plus ca change, la plus c’est la meme chose.

We don’t have coffee mugs with our logo on them to give people during the year, and we don’t send Christmas cards to our clients. Instead, we try to pick one charity at Christmas time that we give a small donation to, and this year we’ve chosen the USO, (USO.org) the non-profit organization that provides services and programs to soldiers and their families throughout the world.  When you’re ten years old and watching John Wayne war movies, all soldiers seem like men, but when you get older, you realize that they’re mostly boys.  Boys of 18-19 years, boys that would otherwise be college freshmen, boys risking their lives before they’ve really have a chance to start their lives.  

Whether you support or oppose our efforts in Iraq and Afghanistan, all Americans support these young men and women, and all of us hope to bring some light and cheer to them, especially at this Holiday season when they’re so far from home and their families.

Garrett, Watts & Co.  

today’s bonus:  “Simple vs. Complex Models in Mortgage Lending”

Helping mortgage lenders increase revenues, control costs, and better manage risk.

• Mike McAuley      ([email protected])
• Corky Watts         ([email protected])
• Joe Garrett         ([email protected])