To Our Clients, Colleagues and Friends:   

· On this day in history, March 5, 1770, British soldiers fired on a mob of Boston colonists and killed six of them.  The Boston Massacre became a rallying cry and lead, eventually, to our War of Independence. And this was 138 years ago today.

• Washington Mutual just issued an 8-K stating that in 2008, cash bonuses will be determined by, among other items, operating profits excluding loan losses and REO expense. We hope we mis-read this, but if not, this is as outrageous as anything a Board of Directors can come up with. How do you exclude loan losses, when making loans is your core business?  What an insult to every shareholder who lost money when the stock cratered due to loan losses.
• Those losses reported last week by Fannie Mae and Freddie Mac are disturbing.  They didn’t buy sub-prime loans, and while much of the losses were due to loans defaulting, a fair amount was also accounting losses.  Sometimes when we can’t sleep, we wonder if accounting treatments have gone too far.
• On accounting, let’s be really simple:  If you’re supposed to regularly mark-to-market your assets, why can’t you also mark-to-market your liabilities?  As an example, rates go up and the value of your mortgages go down. We get that. But as rates go up, doesn’t that increase the value of your low-rate deposits?  Can’t your low-rate deposits be marked-to-market at something over par?  It seems to us that the insurance companies are also hurt. They have long-term liabilities (contracts to pay out money upon a person’s death), so they obviously must match these with long term assets. If properly matched, what’s the benefit of marking the assets to market?  We’re only asking!
• We probably have less than ten clients who do commercial loans, but we still find it of great interest.  So we noticed that January was the first month in twenty years, (since 1988!)  in which there wasn’t a single commercial mortgage backed security issued.  This is part of the whole move away from mortgages and a greater avoidance of anything that looks at all risky. We’re 100% certain, however, that the CMBS market will return sooner rather than later.
• Datatrak is back. The original ownership bought it back from Fiserv and plans to re-energize and improve it.  We were always big DataTrak fans, and we’re glad to see them back in the game without the burden of a giant corporate parent.
• Here’s an example of why you really want to do the right thing with your warehouse lenders if you go out of business. A slate of warehouse lenders have been getting default judgments against former warehouse borrowers, and Citigroup is the latest in its actions against Silver State Mortgage. A District Judge just awarded them damages of $12.2 million, and about the same time UBS got a $2.96 million judgment plus interest against them. A company called Terwin Advisors bought loans from Silver State and was awarded $4.l5 million under a warehouse purchase agreement that the Silver State owners had personally guaranteed, and 141 former Silver State employees are suing for more than $1.1 million in back pay, claiming that they were stiffed on their final pay checks.
• We just read a Goldman Sachs study titled: Alt-A Collateral Performance: Subprime with a Disguise? We think not.  One of the more interesting items was that that Alt-A non-owner properties perform significantly better than sub-prime owner-occupied properties.  Interestingly, at least for 2006 loans, Alt-A investor loans are performing similarly to Alt-A owner-occupied loans.
• Do you ever see quips or quotes you wish you’d been clever enough to make?  Well, we were looking up some data on Austria’s Erste Bank (a great bank, by the way) and we saw this statement about Austria, a country no one knows much about:  “It has been said that Austria’s two greatest accomplishments were to have persuaded the world that Hitler was German and that Beethoven was Viennese.”  Boy, we wish we’d been clever enough to think of that one.
• Corporate Hero of the Day: Oregon Pacific Bank decided to go private, because they felt that Sarbanes-Oxley was just too damn costly to comply with.  We’re kind of condensing this, but they’re essentially buying out all shareholders with less than 500 shares. By having fewer than 300 shareholders, they no longer have to file with the SEC.  To induce smaller shareholders to go along with this, their Board agreed to pay $13 per share, and this was when the stock was trading at $9.  (Needless to say, we went out and bought 490 shares at $9 or slightly higher and will be tendering them at $13.  It’s not a lot of money, but hey, when you see hundred dollar bills on the street, it makes sense to pick them up.) Anyway, their going private seems like giving the finger to Sarbanes-Oxley, so we tip our hat to this little bank.

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