To Our Clients, Colleagues and Friends:   

· Don’t you find it fascinating to see how a free-market economy improvises as it goes, destroying old, less efficient ways and rewarding new and better ideas?  We just saw yet one more example of this.  Wal-Mart leads the nation in music sales, but coming in at a strong #2 was Apple’s i-tunes. Just a few years ago, wasn’t Apple really just a computer company? And now they’re the nation’s second biggest music seller!

· We get asked all the time when the mortgage problems will subside.  We just don’t know, but we think a good leading indicator is Indy Mac’s asset quality in their securitized mortgage portfolio. The 60+ delinquency rate on the Alt-A first mortgage portfolio was 8.6% in February 2008, up from 6.0% three months earlier and 2.43% in the year-ago period.  When their numbers start to turn around, that will probably represent the turning in the cycle.

· Here’s something to think about: Sometime in the next few quarters, Countrywide will cease to exist as a stand-alone company.  Guess who will be the nation’s largest independent mortgage lender?  Think again.  It will be Indy Mac.  

· The Federal Home Loan Bank of Dallas is buying the FHLB of Chicago.  Yes, yes we realize these are private corporations now, but we still remember them from their days as part of the government. So it just seems weird.  Kind of as if the Dept. of the Treasury bought the Dept. of Commerce.

· We recently watched a few John Waters films, the most outrageous being A Dirty Shame.  Although not up to his usual standards, this one did feature Patty Hearst as the woman who runs the local 12-step Sex Addicts Anonymous group.  Although the heiress to a billion dollar fortune, she was actually pretty good as an actress.  Also starring in this film was David Nelson.  If you remember the Ozzie and Harriet show, he was the older of the two brothers.

· And what’s with those Hawaiian banks with all their low cost deposits?  Bank of Hawaii’s cost of funds was only 2.19% in the 4^th quarter.  You can make a lot of money with minimal risk when you have such cheap deposits.

· Let’s take a longer view:  We found the Chairman’s letter to shareholders from Indy Mac informative, honest, and sprinkled with hopefulness. One of the more interesting points was a review of the years 2001-7, their seven years as a federally chartered thrift.  Despite the massive losses in 2007, the cumulative return on equity for this period was still 7.1%.  That may not set the world on fire, but when there’s a major plane crash with hundreds of lives lost, it’s always a miracle when anyone survives.  The telling story is not that they had major injuries, but that they survived the crash all. For those who would scoff at this return, we’d ask this: How does that compare to the return the shareholders got at New Century or at American Home?

· Just when it seemed safe to go back in the water, Thornburg Mortgage had $300 million in margin calls last week on $2.9 billion of Alt-A securities. Looks like liquidity is still an unresolved issue out there, at least with some product.

· Did you know that since 1900 there have been 207 no hitters in the major leagues?  Even more delicious is that fifty of them ended with the pitcher striking out the final batter. What a great way to end the game.

· We just looked at the math on Thornburg, and they are leveraged 18:1 on an assets-to-equity basis.  Isn’t this a bit high, at least for today’s environment?  Might this be partly why they got margin calls?  A year or two ago, everyone was trying to get maximum leverage in their warehouse lines.  (1) That’s just not going to happen now, and (2) given how quickly you can turn your GSE product, is it even that necessary?  

· One of the clichés we repeat all the time is that you raise capital when you can, and not when you have to.  One of the things Indy Mac did hugely right last year was just that.  They raised $676 million of capital (no debt, all equity) when they could, not waiting till they had to, or waiting till it was no longer possible. Too many mortgage bankers forget that having a capital plan and staying focused on capital is an ongoing process. 

· A last thought on Thornburg and investors in general.  One of the many lessons people learned last year had to do with counter party risk. In this case, it simply means that you don’t originate anything where there aren’t alternative investors for that product.  If you have a $2.0 million loan that you’ve originated to sell to, say, Thornburg, you should do that only if you have another investor who can buy that product.  You do not want to get stuck  that loan on your warehouse line.

It feels like Spring is just around the corner, so everyone have a good weekend, okay?  And we won’t even bug you to work on your Strategic Plan.

Corky Watts and Joe Garrett   -  Garrett, Watts & Co.