To Our Clients, Colleagues and Friends:

· “The special servicing platform will be combined with our master servicing, default department, and real estate auction business to synergistically work together as a fully integrated platform to maximize the success of opportunistic investments in mortgage assets.” This is from a recent press release by someone we like and admire. We won’t name him as we don’t want to embarrass him, but isn’t this about the worst writing you’ve seen in awhile?   

· Why we worry about Wamu:  As of Q1 2008 Wamu had some ugly assets on its balance sheet.

That’s $116 billion of HELOCS, sub-prime, construction loans and Option Arms alone v. $24 billion in capital.  Is Kerry Killinger the new Alfred E. Neuman, saying “What, me worry?”

· Our strong sense is that senior management and the entire Board of Indy Mac will be hit with Civil Money Penalties. As the second biggest bank failure in U.S. history, the politicians will not allow this to go unpunished. When things go wrong, politicians and the public find the need to see a few witches burned at the stake.

· Does anyone doubt that inflation is headed this way, perhaps on a big-time basis?  Here are commodity prices and their percentage change in 2008.

It looks like the only winners are bacon lovers, with pork belly prices down almost 23% for the year. Actually, you don’t need a chart like this one to know how everything has gotten so much more expensive this year.  You feel it when you pump gas, buy groceries, eat at a restaurant, or go to a movie.  Deficit spending always leads to inflation, and our deficits (which were surpluses only 8 years ago) are horrendous.

· The FHA just announced that they lost $4.6 billion last year.  Is FHA the next big blow-up in the morning news?  We fear so. To make matters worse, the Senate is working on legislation that would allow for even smaller down payments.

· We had a client in the Southwest who wouldn’t deal with buyback requests.  The investor, Wamu, finally sued her and is asking for $2.4 million.  The owners big mistake was that she ignored the letters.  Fight them, argue with them, drag things out, but don’t ignore them.

· What exactly is a credit default swap?  It’s a fee an investor pays to a third party to make him whole if specified bonds default anytime in a 5-year period.  Let’s say you had $10 million of Wamu bonds.  Your annual fee under one of these swaps would be $814,000 (8.1 points per year) against default. That would be 40.5 points over the full five years, a very heavy insurance premium,  A year ago, the annual fee would have been only $46,000.

· What about health insurance for all those Indymac people who got laid off.  Does the FDIC offer COBRA, or do they just figure that the old Indymac doesn’t exist, so tough luck?

· We fondly remember in the early 90’s when the Oakland A’s traded Jose Canseco, with the General Manager calling him the village idiot. Well, they got pitcher Joaquin Andujar in the trade, and he must have been from the same village.  His comment on being traded was that “There’s only one word that describes baseball – you never know.”

Everyone knows about the epic struggle for Civil Rights in this country, but very little is known about the reaction by the white south.  We were curious, so we picked up There Goes My Everything: White Southerners in the Age of Civil Rights by James Sokol. A fascinating book, with few heroes and many surprises.  Yes, there were violent racists, and there were a very few whites in favor of integration.  The interesting part is the great number of people in-between these two extremes. We were quite surprised by this middle group’s reaction.  But we’re not telling you what it was.  You’ll have to read the book.  Have a good week. Or even a great week. Or as the cliché now goes, have a profitable week.

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