To Our Clients, Colleagues and Friends:

· They’ll come back for more:  We’ll bore you with details another time, but we don’t think the $5 billion of new capital that Wamu is getting will be enough. We could be wrong, but we doubt it.

• A client asked us recently what moral hazard means. The idea is simply that if governments bail out irresponsible companies that are failing, if the government protects people from the consequences of their irresponsibility, they’re more likely to be irresponsible in the future.  

· It’s baseball season again, and as usual, there are some teams with huge payrolls and some with very small ones.  Here are the seven highest payrolls as well as the seven lowest.

· We’ve written about the flat tax before, and when countries adopt it, productivity seems to soar. After breaking away from the Soviet Union, almost all of East Europe was going through horrible economic pain – until one by one they adopted flat tax programs. Now, they call it The New Europe , and it’s where all the growth is. There have been 11 nations formerly behind the Iron Curtain with flat taxes. Now there are twelve.  Bulgaria just joined the club and instituted a flat tax of 10% on all income, no deductions, just a flat 10%. This appears to be the lowest rate in Europe . Watch for Bulgaria to attract investment capital, create new jobs and to show some real economic growth. It works every time.

· When the BofA’s acquisition of Countrywide goes through, the Bank of America will close 25% of the nation’s mortgages.  For those of us who remember when the largest originator had maybe 2-3%, this is a pretty stunning number. Can you imagine, a single bank closing one out of every four mortgages?

· When we do our FOCIS Risk Audits for warehouse lenders, we’re seeing much stronger mortgage bankers these days.  It’s pretty obviously why this is, as so many of the weaker ones have failed. Although the survivors are relatively stronger, we dig pretty deep and go beyond conventional financial and operational areas of risk.  One example would be our in-depth look at indemnifications.  A company may have lots of capital and lots of reserves, but their indemnified loans need to be stratified and analyzed for probable losses. As an example, indemnified 100% loans have a high likelihood of going bad, and we run all indems through a model to predict ranges of losses.  We then apply these projected losses to the capital position of the mortgage bank and see what their ratios will look like when stressed with these losses. By the way,  we’re totally booked on FOCIS Audits through the end of April, but we do have some availability in May.

· You can barely pick up a paper without reading about the high price of commodities these days. Corn prices (think Ethanol, not corn-in-the-cob) have skyrocketed, and according to American Banker, there has been a huge surge in Ag lending.  Farm prices have doubled, banks are making a fortune originating mortgages on farm land and lending to farmers, and is this starting to sound familiar?  Have you seen this movie before?  We know northing about agricultural lending, but some smart people are starting to worry about what will happen when commodity and farm prices inevitably come back down to earth. As someone once cleverly put it, in the war against gravity, gravity has never once lost.

· There have been 37 pitchers who’ve struck out the side on nine pitches.  Three started off the first inning with three strikeouts on nine pitches, and what a way to start a game. Pedro Martinez did in 2002, and Sandy Koufax did it in 1962.  Eight pitchers have ended the game by striking out three batters on three pitches each, and what a great way to end a game.

· Does anyone remember singer Phil Ochs?  Today is the anniversary of his death, On this date in 1976, the folk singer and songwriter hanged himself.

· We knew that Australia ’s Macquarie Bank was going to try to buy Chicago Midway Airport .  It now looks like there will be five other bidders to take it private and run it for profit.  Privatization was considered radical and reactionary not that many years ago.  Not it seems so obvious.

· We’ve noted here before that we’re helping more and more companies write Strategic Plans to help figure out what they need to generate good levels of profitability. An interesting aspect of this is that many of these companies are now asking us to stay involved for several months after the plan has been adopted. 
This typically involves attending senior management meetings to make certain tasks are being performed on time and as agreed on.  We’re essentially being asked to help management execute on the various initiatives with their new Plan. We’re told by the CEO (or sometimes the Board) that everyone is so busy, they need an outsider to take charge of accountability, and of making certain everything gets done. It usually involves as little as 3-5 hours month, for up to 3-4 months.  We think it shouldn’t be necessary, but if you have us work on a Strategic Plan, it’s a complete waste if you just put it on a shelf and never put it into effect.  Our Strategic Plans lay out specific, concrete things a company can start doing right away to generate more revenue and better manage costs and risk.  While it’s not that expensive, it’s a complete waste unless it gets implemented. 

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