To Our Clients, Colleagues and Friends:

· We still like the Washington Mutual 6.875’s of 2011.  They’ve traded down to about 84 for a yield to maturity a bit over 13%. These are great bonds to put in a retirement account. Wamu will (a) be sold to a stronger bank, or (b) will raise new capital to strengthen their balance sheet, but (c) will not fail.  Lots of upside and limited downside, and don’t forget these are senior securities.

· When we look at Thornburg, Bear Stearns, CIT, and everyone else being shut out of the capital markets, it occurs to us that this is the modern day version of the bank run.  Retail depositors no longer line up to withdraw all their money when a bank seems weak.  FDIC insurance ended that.  But banks that depend on wholesale or capital market are very much at risk of a bank run.  The modern version is simply the capital markets freezing up and/or losing confidence in your risk profile. Is there one lesson learned?  Maybe that there is absolutely no substitute for core deposits.  Indymac and Flagstar had them, Countrywide didn’t. And companies like New Century weren’t even a part of the conversation.

· Have you noticed that LTV’s have come way down in commercial real estate loans as well?  Union Bank of California is one of the bigger wholesale lenders for smaller commercial properties, and their max LTV is 65% on apartment buildings and only 60% on commercial real estate loans. Smart.

· One reader enjoyed our Best Name Seen in the NCAA tournament (Dionte Christmas) and volunteered his favorite from a few years ago, God Shamgod, a guard on the Providence team in the mid-90’s. When the Austin Peay Governors played in the first round and lost to Texas last week, he noted that their fans were all chanting “Let’s go Peay”. Funny.

· It seems like only yesterday:  In March of 2003, gas was only $1.88 a gallon.  We’ve seen a few gas stations here in San Francisco advertising $4.09 a gallon.

· Poor Irwin Financial ( Columbus , Indiana ): 29% of all their loans are Home Equity Loans. That was a big bet and, we think, a bad bet. That’s the 4^th highest concentration of any bank in America .  By contrast, Wells Fargo is at 21.3%, JP Morgan Chase is at 15.9%, the Bank of America at 12.7%, and U.S. Bank has only 10.7% of their loan portfolio in HELOCs.

· When we do a FOCIS Risk Audit, people are always curious about why we ask about a Disaster Recovery or Business Continuity Plan.  It’s not heavily weighted in the score, but it is important, so we’ll share two things. First, it’s not enough to simply back up your data offsite somewhere. That’s not a plan. We want to see a written document that every employee has and knows. 
Second, it needs to show who does what in the critical first few hours of a disaster, list alternatives in case these people aren’t available, and tell people where to assemble and what their responsibilities are. Just imagine if your home office burned to the ground one night.  You need to think through all the activities you need to do to get back in business, and having your data backed up nightly is just one part of such a plan. We often share with clients a 14 point list of things that need to be in a plan.  And we also want to see a dry run, like a fire drill, at least once a year

· The two of us often debate what it means for someone to be a great mortgage banker. We’ve seen a number of people build great careers, but typically at very large companies.  When they leave to run something smaller, we often see them just disappear.  So we’ve wondered: Is it the company that makes the leader, or is it the leader who makes the company?  Are they successful only because the bigger company has the greater resources that allow them to succeed?  We’ve certainly seen very top people with very important roles at companies such as Countrywide or American Home, and when they decide to leave and maybe become a very senior person at a smaller company, they seem to lose quite a bit of the magic the bigger company made them seem to have. An interesting issue isn’t it?

· A similar issue is the role of age.  We’ve also seen people do great things in their 20’s and 30’s, but then never do another important thing the rest of their careers.  In music, a perfect example is Chuck Berry.  He was one of the great pioneers of Rock and Roll in the 50’s, but did he do anything at all meaningful after, say, 1957? Not at all.
If you like poetry, you know that every thing that matters by Wordsworth was written during a single ten year period, 1797-1807.  The next 43 year were devoid of anything at all readable, and the same is true for Walt Whitman. All his best work was written in 1855-1865, followed by 27 years of really bad writing. Harper Lee (who wrote one great book in To Kill a Mockingbird) only wrote one book, great or not. That was 48 years ago, 1960, and she hasn’t written another book since.
We don’t know the answer, but we think these questions actually are applicable to your work.  They become relevant when you’re hiring people.  So the next time you have a chance to hire someone who was a Superstar at, say, Countrywide or Indy Mac, spend a few moments trying to figure out whether he had such big impact on his employer’s success – or whether his employer’s size and resources are what allowed him to be successful. See you here again next Wednesday.

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