The Garrett, Watts Report (July 24, 2008)

July 25th, 2008 · 1 Comment


To Our Clients, Colleagues and Friends:

· When Congress passed FDICIA in 1992, they required that when a bank failed, the Inspector General must issue a report identifying the causes of the failure and any losses to the FDIC. We don’t know how long it will take to do the report on Indymac, but it will be interesting reading.  Will they name Senator Schumer as part of the cause?

· Who gets the profits when large, financial institutions are profitable?  The shareholders.  Who takes the pain when they fail or are bailed-out?  Typically, it’s the taxpayer. As one analyst put it, we privatize the profits but socialize the risks.   What a clever (and accurate) phrase.

· Why Flagstar will be a survivor:  When we look at their liabilities, they have about $900 million in checking and savings accounts, and $5 billion in retail deposits v. only $950 million in wholesale deposits.  They also have the power of 171 branches that gather retail deposits every day.

· From Larry Bell at the Bank of Idaho: Another great pitching dual was the 1916 game between Brooklyn and Boston in which the starting pitchers both pitched complete games.  The game ended in a tie after 26 innings.  That is a game you would not see today.   

· Warehouse lender Guaranty Bank in Texas has just strengthened its balance sheet to the tune of $600 million.  They sold a combination of common stock, sub-debt, and preferred in a nice vote of confidence by the investment community.   

· Now that loan re-purchases have been hurting mortgage bankers for about a year now, have you analyzed yours?  Have you looked for patterns, such as certain branches being responsible for a disproportionate number of buybacks, or certain loan officers who had more than others? What we see when we’re onsite at clients is that a vastly disproportionate number of repurchases (and EPDs) come from wholesale. Not always, but almost always.

· You’ve read how bad things are in the Inland Empire of California, and Ontario (CA) is probably ground zero for the horrible real estate market there.  But headquartered right there in Ontario is CVB Financial, a $6.5 billion bank.  And what is their level of non-performing assets?  Is it 5%…. 4%……3%?  Not even close. It’s only 0.21% of assets, only one fifth of one percent.  Just because the economy is falling apart and everyone’s’ loans are going bad, CVB is proof that sound underwriting will always prevail.

· The conventional wisdom is that 3rd party loans become non-performing loans two to three times more frequently than retail, and further, that loans outside of a bank’s f