To Our Clients, Colleagues and Friends:   

• We got lots of mail about Wamu’s comp plan for senior managers, the plan that strangely excludes loan losses from the bonus calculation. Overwhelmingly, people wrote us that this is a slap in the face of shareholders and employees.
• Comerica Bank’s moving to Texas actually makes a lot of sense: We just did the math, and it looks like 42% of their revenue already comes from Texas and the Western states. By the way, we think the people in their warehouse division are a cut above.  Our impression is that they view themselves as your banker, and not just your warehouse banker. 
• Here’s something we don’t see often these days: Standard & Poor’s raised its ratings of 18 classes of Wells Fargo mortgage securities.  Yes, you saw that right.  Raised.
  
• Back to Wamu:  It kind of makes sense that they will take some huge write-downs and reserves over the next years, even bigger than expected.  Why?  Our theory, and this is based on human nature, is that since management’s bonuses won’t be affected, they’ll actually try to over-reserve. (a) There’s no personal penalty in terms of a bonus, and (b) it will set the stage for an even bigger recovery when things turn around, and that recovery will be bonus-able.
  
• Thornburg received margin calls that it was unable to meet, and the company disclosed Thursday night that this default has triggered cross-defaults under all of the company’s other repo agreements. At year-end Thornburg had $11.5 billion of repo debt outstanding which is now in default.  They’re going to have a tough time finding alternative financing or buyers for these billions. Might Thornburg be getting ready for the Sayonara Song?  We hope not, but we fear the worst.
• Boy, this market makes even the smartest guys look foolish.  Perhaps history’s most successful private equity investor is KK&R (Kohlberg, Kravtiz & Roberts). A few years ago they spun off in an IPO a public entity to invest in commercial and residential mortgage instruments. A year ago, the stock was $30, and today it’s about $12. And these guys really are brilliant.  There’s just no place to hide when things get this ugly.
• Not to sound like a broken record, but it can be dangerous funding your mortgages through capital markets.  There is nothing as safe as public deposits that are FDIC insured. The people at Indy Mac can probably have real nightmares by just imagining what their lives would be like today if they hadn’t bought SGV Savings 7-8 years ago.
• We just read that Flagstar Bank opened a branch in a Georgia Wal-Mart.  We like it. And when people say, “Well, everyone got hurt with sub-prime and Alt-A, and no one knew it could be toxic,” they’re forgetting that Flagstar made a conscious decision not to do those products. They understood risk and they understood that just because everyone was doing something, it didn’t mean it was the smart thing to do.  As we’ve said before, if they can gather lower-cost deposits with half the success they’ve enjoyed on the mortgage side, Flagstar will be a huge, huge success.
• We like dividends, but people, let’s be real here.  If you’re not making enough money to pay dividends, stop paying them.  Irwin Financial finally suspended its dividends after stating the obvious that they haven’t earned enough the past two years to afford them.  In times like these, preserving capital is about ten times more important than paying shareholders a 3-4% dividend. If that’s important to them, shareholders should buy your preferreds, but they get upside with your common, and that’s enough to warrant a temporary cut or elimination in the common dividend.
• And how about Happy State Bank in Texas ?  Is this a cool name, or what?
• Do any of you baseball fans remember Andy Messersmith?  This UC Berkeley grad went to the Major League right out of Cal in 1968.  While Curt Flood took on and defeated the hated Reserve Clause, it was Messersmith who went to court to force the start of Free Agency. While he’ll always be famous for that, a little known fact is that in his two first appearances as a reliever, he gave up Grand Slam home runs on his first pitch. What a great way to start a career!

It’s no longer enough to have lots of capital. You need to be making money on a consistent basis, every single month.  So have a good week. And a profitable one.

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