To Our Clients, Colleagues and Friends:   

· A big report just came out on French bank Societe Generale’s 4.9 billion fraud/trading loss early this year.  Not surprisingly, the thrust was that there was a lack of internal controls.  This is precisely the sort of thing the “C” in our FOCIS Risk Audit looks at – the “C” standing for Controls and corporate governance.  See the attached brief article entitled Can One of Your Employees Kill Your Company?  ( Ask Joe Garrett for a copy)  We wrote this few years ago. Most people think it could never happen to them, but that’s a fatal conceit.  Rogue employees will always exist and, in the right circumstances, they will blow up companies.

· We also read the Inspector General’s report on the failure of Net Bank. The main criticism was the lack of a coherent plan, as the company flailed about, trying different lending programs based on wrong assumptions, never really executing on anything, and unable to control costs.  What struck us was their lack of focus on a single, well-thought out business plan.

· Here’s one of those oddities:  Freddie Mac’s retained portfolio of mortgages is $737 billion, and FNMA’s is $728 billion.  Kind of interesting that after all these years, they’re so close in size.

· N.J.-based Freedom Bank opened for business in April after raising $13 million from 250 investors.  That’s not such a big deal.  What impressed us was that the bank brought in $12 million in deposits during its first month of operation.  Bringing in core deposits is how you build value in as bank, not typically from the loans.

· In a move that was both smart and inevitable, Provident Funding owner Craig Pica has filed an application to buy a $44 million savings & loan in Colorado . While being regulated has its moments, it’s worth every single bit of aggravation. 

With so much talk about the housing bubble, we thought it might be interesting to walk down the memory lane of the tech bubble of ten years ago.  Here are six stories that still give us the heebie jeebies:

· Netscape goes public at $28 but the shares closed at $58.25 the first day of trading.  (August 1995).  Didn’t they sell for stock in AOL, which subsequently lost 80% of its value?

· TheGlobe.com went public at $9 and closed the first day at $63.50. The company has long since gone out of business. (November 1998)

· VA Linux went public at $30, got as high as $320 the 1^st day, and closed at $239. Where are they now? (December 1999)

· Global Crossing went public at $9.50 and moved up quickly to $64.  In February of 2000 it had a market cap of $47 billion.  Less than two years later, it filed for bankruptcy.

· Sycamore Networks went public in 1999 with annual sales of only $11 million. At the close of the first day of trading, it had a market cap of $13 billion.  Unbelievable.

· Corvis Corp. went public in 2000, having never generated one single dollar of sales.  Still, the IPO valued it at $28 billion after one day of trading. Within months the stock had dropped to 47 cents, a decline of 99.6%.

Okay, that was fun, but back to mortgage stuff.  Our latest cause is to make certain that when our clients really push retail, that they really make money on it.  That’s another way of saying we don’t like seeing commission splits getting out of hand in favor of the loan officer.  We’ll back off a bit on this, and if you want to pay some people 80-20 splits, we’ll go along with it, although reluctantly.  But you must calculate your company’s average commission split on a monthly basis and year-to-date basis.  In other words, it’s okay to pay certain producers 75-25 or 80-20, as long as the average for all loan officers is something more reasonable.  We think you’ll learn something if you start tracking this.

Interesting quote from Peter Lynch, in Beating the Street (1993):  “As a place to invest, I’ll take a lousy industry over a great industry anytime.  In a lousy industry, one that’s growing slowly if at all, the weak drop out and the survivors get a bigger share of the market.  A company that can capture ever-increasing share of a stagnant market is a lot better off than one that has to struggle to protect a dwindling share of an exciting market.”   Does this sound applicable?

How bad has the thrift industry been hurt? Here are some indices for the industry showing stock performed over the past 52 weeks: 

It’s almost as ugly as the tech blow-out of 2000, isn’t it?   Banks have done poorly, but not as poorly.  The SNL bank index is down 35% and the worst sector is the Southeast banks which are down 40.1%. New England bank stocks are off only 2.4%.  Interesting.

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