The Garrett, Watts Report (March 28, 2008)

March 28th, 2008 · No Comments


To Our Clients, Colleagues and Friends:

· We still like the Washington Mutual 6.875’s of 2011.  They’ve traded down to about 84 for a yield to maturity a bit over 13%. These are great bonds to put in a retirement account. Wamu will (a) be sold to a stronger bank, or (b) will raise new capital to strengthen their balance sheet, but (c) will not fail.  Lots of upside and limited downside, and don’t forget these are senior securities.

· When we look at Thornburg, Bear Stearns, CIT, and everyone else being shut out of the capital markets, it occurs to us that this is the modern day version of the bank run.  Retail depositors no longer line up to withdraw all their money when a bank seems weak.  FDIC insurance ended that.  But banks that depend on wholesale or capital market are very much at risk of a bank run.  The modern version is simply the capital markets freezing up and/or losing confidence in your risk profile. Is there one lesson learned?  Maybe that there is absolutely no substitute for core deposits.  Indymac and Flagstar had them, Countrywide didn’t. And companies like New Century weren’t even a part of the conversation.

· Have you noticed that LTV’s have come way down in commercial real estate loans as well?  Union Bank of California is one of the bigger wholesale lenders for smaller commercial properties, and their max LTV is 65% on apartment buildings and only 60% on commercial real estate loans. Smart.

· One reader enjoyed our Best Name Seen in the NCAA tournament (Dionte Christmas) and volunteered his favorite from a few years ago, God Shamgod, a guard on the Providence team in the mid-90’s. When the Austin Peay Governors played in the first round and lost to Texas last week, he noted that their fans were all chanting “Let’s go Peay”. Funny.

· It seems like only yesterday:  In March of 2003, gas was only $1.88 a gallon.  We’ve seen a few gas stations here in San Francisco advertising $4.09 a gallon.

· Poor Irwin Financial ( Columbus , Indiana ): 29% of all their loans are Home Equity Loans. That was a big bet and, we think, a bad bet. That’s the 4th highest concentration of any bank in America .  By contrast, Wells Fargo is at 21.3%, JP Morgan Chase is at 15.9%, the Bank of America at 12.7%, and U.S. Bank has only 10.7% of their loan portfolio in HELOCs.

· When we do a FOCIS Risk Audit, people are always curious about why we ask about a Disaster Recovery or Business Continuity Plan.  It’s not heavily weighted in the score, but it is important, so we’ll share two things. First, it’s not enough to simp