To Our Clients, Colleagues and Friends:  

· Have you ever considered investing in the Kazakhstan stock market?  Before you laugh, consider that (1) the country is bigger than all of western Europe, (2) it has almost as much oil as Mexico, and (3) and it has more natural gas than Kuwait.  You can buy Kazkommertsbank or Halyk Bank, both of which should do very well as that country becomes a global energy power.

· Tickets for the first Super Bowl in 1967 (it wasn’t called the Super Bowl then) cost $12, with end zone seats going for $6.  Face value for tickets this year is $900. Does anyone want to calculate the annualized rate of inflation on these?  We also wonder what has happened to the cost of a hot dog over the years.

· There is always someone looking to add net branches, but we think we know which ones you should avoid – and which companies are worth joining. In fact, there were 4-5 companies in 2005 and 2006 that decided it wasn’t worth the cost of a back-office, maintaining warehouse lines, getting an annual audit and so on. They told us which companies they were thinking of joining as net branches, and we told them to avoid those mortgage bankers they were considering.  At least three almost joined companies that eventually failed in 2007!  So if you’re thinking of becoming someone’s net branch, give us a call.  We think we know which ones are viable, and which aren’t.  By the way, we will not say anything bad about a company which is or has been a client. If we can’t say something positive, we tell people that we’re just not at liberty to discuss them.

· We’re always being asked what the key variables are in building a financial projection for a thrift or bank, and we’d suggest these seven.  Drop deposit growth and substitute gain-on-sale margins and it works pretty well for a mortgage banking company.

(1) Annual loan growth, (2) Annual deposit growth, (3) Net interest margin, (4) Loan loss provision expense (5) Efficiency ratio, (6) Annual increase in operating expense, (7) Tax rate.  Fill in the numbers in dollar amount of bps, and you have the start of a very complete projection of your financial performance.

· We saw a report by The Common Fund that explained the current mortgage crisis very succinctly.  Their argument was that (1) the American public will take advantage of cheap and easy credit to pay for a lifestyle they can’t afford, (2) yield-hungry investors will stretch to achieve superior returns and do so without truly understanding the risks, and (3) Wall Street will be the facilitator to meet the needs of consumers and investors both, while not fully understanding the risks themselves.  We like the clarity and simplicity of this explanation.

· We heard that the Bond Association is insisting that when and if new FNMA limits go into effect, that all FNMA securities be segregated by those under $417,000 and those over $417,000. If this is the case, don’t expect that the current rate-premium for loans $417,001-730,000 to disappear.  We’d assume that at least initially, rates will be somewhat higher for the over-$417,000 loans as opposed to the under-$417,000 loans. There once were Ginnie Mae One’s and Ginnie Mae Twos.  It’s not quite the same thing, but it’s one example of how investors can insist on separate securities for different risks or perceived risks.

· Flagstar Bank just reported earnings, and they came in with a very decent 32 bps gain-on-sale margin. We were disappointed by a too-low net interest margin of 1.62%, but their hidden strength is 162 bank branches. If they can just boost non-CD deposits (checking accounts and non-interest bearing DDA’s) by 10-20%, it would make a huge difference in their earnings. A not-so-hidden strength is the same branches.  With so much deposit-gathering firepower, liquidity should never be a concern. Here’s our overall view on Flagstar: If they can do half as well in their deposit business as they do in mortgage banking, they will be wildly profitable.

· In a note from a friend back in the Great Lakes Region: “The other obvious problem is the tenacity of the investors that are requiring repurchases.  I see loan repurchases requests coming in on loans that are 3, 4, and 5 years old…”  Scary. Your loan loss reserve needs to reflect some aspect of this ongoing, trailing liability. We’ve worked on managing long-tail liabilities like this and can give you some guidance on how to reserve for them.

· A one billion Zloty securitization of auto loans was just done in Poland , the first asset-backed security done in Central or East Europe since the sub-prime crisis swept across the globe. Maybe, just maybe, this implies that the securitization market is coming back to life.  By the way, one billion Zloty’s equals 280 million euros, which is now worth about $190 million dollars.

· A press release from Royal Bank of Scotland made reference to “risky” loans.  Somehow, we like that phrase better than high-risk loans. And we have the title for a new movie on the Sub-prime Crisis: Risky Business Part II.  With Tom Cruise as Angelo Mozilo. By the way, the more we think about him, the more unfair we think the articles about him have been. If you think about every high-risk (oops, risky) loan product, we can’t think of one that got started at Countrywide.  In fact, weren’t they even a bit late to the party with Alt-A and sub-prime?  Let’s leave the guy alone. 

Joe Garrett and Corky Watts  -  Garrett, Watts & Co.    -   http://garrettwatts.com