To Our Clients, Colleagues and Friends,

· As we look at the global credit freeze, it seems to us that governments need to guarantee all overnight interbank lending.  They can drop it when markets become orderly again, but right now, banks just don’t trust each other’s balance sheets.  We bought and sold Fed Funds for years in our banking careers, and we never really gave much thought to who the counter-party might be because we trusted that the system always worked.  Now, everyone’s paranoid, and governmental guarantees might get things unstuck.  In fact, it might have more of an effect than buying all $500-700 billion in mortgages.

· Have you noticed the banking crisis in Iceland ? Their total population is only 300,000, but the bank assets there grew to almost $150 billion.  The government has taken over the banks and gone to Russia for a bail-out loan - but Putin is no dummy. We’d read that he’s desperately been looking for a re-fueling station in the north Atlantic for his Navy, so now, Iceland will get the loan and Putin will probably get a re-fueling station.  Aren’t geo-politics endlessly fascinating?

· We were looking through stock tables in the WSJ the other day, and it seems like every single stock has fallen this year.  But what caught our eye was Cash America, the payday lender and pawnshop company.  It’s actually up about 9% year-to-date.  Pawnshops never lose money, and maybe with bank credit tightening, more people will use them for short-term loans.  By the way, last we checked out the APRs in the pawn industry, they were well over 100%.

· Every so often we write about Oakland Mayor Ron Dellums and how utterly ineffective he is. We saw a few weeks ago that he went to Miami ’s Breakers Hotel, one of the world’s most luxurious resorts, to attend a conference on “promoting the arts in urban areas”.  The murder rate in Oakland is absurdly high, and the Mayor is in Miami , supposedly attending sessions on art.  What an embarrassment.  Oh, and the trip was paid for by the taxpayers of Oakland .

· The federal government’s deficit for the just-completed fiscal year was $455 billion.  If you add to that the $700 billion from the Rescue Plan, it seems possible that we’ll have a trillion dollar deficit next year. Eight years ago we were running surpluses.

· We were just deleting old e-mail when we came across a Goldman Sachs report on Wamu, upgrading the stock from sell to neutral.  It was dated September 12th.  Wamu was seized by the government and shut down on September 26th.  Oops.

· In 1929 Germany , inflation had gotten so high that the money was worthless.  To buy one loaf of bread, you needed to bring a wheelbarrow full of money. The oft-told story was that someone did just that and left the wheelbarrow outside the bakery for a minute.  When he got back, someone had stolen the wheelbarrow but left the money.  Let’s hope that the long-run effect of our current problems is not horrible inflation.

· Exactly ten years ago Sammy Sosa and Mark McGwire were engaged in The Great Home Run Chase to see who would set a new record.  It captured imaginations nationwide, and everyone loved the competitive camaraderie between the two sluggers.  It turned out, of course, that both were cheating (i.e. using steroids).  What disappointments, these two.  It was ten years ago, but doesn’t it seem more immediate than that?

· A few years ago, Equity Residential (EQR) was suffering.  They’re the nation’s largest apartment building owner, and renters were all qualifying for mortgages and moving out of rentals and buying homes with 100% financing.  Year-to-date, their stocks is actually up about 10%, and our theory is that the reverse is now taking place.  Hundreds of thousands (or maybe millions) of people no longer qualify for mortgages, and they’re all going back to being renters.  That’s just our guess, but it sounds logical, doesn’t it?

· One more reason why it’s nice to own a bank: The government’s rescue plan will now invest in preferred shares for banks.  The cost of the shares is for the banks to pay a low 5% dividend to the government.   We don’t know a single mortgage banker who could raise capital that cheaply.

Has anyone noticed how really bad the Washington State football team is?  They’re 0-4 in conference play and have been outscored 231-33.  They’ve given up over 63 points in three games already.  And speaking of colleges, can we brag for a moment?  The principals of Garrett, Watts & Co. went to UC Berkeley and UC Santa Barbara as undergraduates.  The two schools combined have had 25 Nobel Laureates on their faculty (20 at Cal and 5 at UCSB). That’s more than all but a handful of countries.  On the other hand, we’d give up a few Nobel Prizes to have a consistently great football team like USC’.  Have a good week, stay highly liquid, see if you need further cost-cutting, and make a profit on every loan.  And make certain you have a solid relationship with your warehouse lender. See you in a few days, okay?

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

510-469-8633 or 408-395-5504