To Our Clients, Colleagues and Friends,  

• Our FOCIS Reports now include a review of loan files, and while not our main focus, it does add to our knowledge of the company we’re auditing and/or helping get warehouse lines.  We continue, however to concentrate on areas of risk to the Warehouse Lender and the company itself.  In fact, a typical FOCIS Audit covers 55 different areas.
• Have you noticed the yield on 90-day T-Bills?   It’s all of 4 basis points!  That means that if you invest $100,000, you’ll earn $40. This will buy you and two friends admission to a movie, plus one bag of popcorn, and probably not even a soft drink. 
• Speaking of which, how cool would it be if you could buy a martini and perhaps some dim sum at your local movie theater?

• Do you require a second signature before docs go out?  We saw one company that didn’t, and an untrained doc person thought that a 5% life cap meant the rate could never go above 5% for the life of the loan.  So instead of closing adjustable rate loans that could go as high as 9.5% (5% over the start rate of 4.5%), they were essentially 30 year fixed-rate 5% loans.  When the company had to sell them, they took an 11 point loss per loan.  We uncovered this on a FOCIS Risk Audit the company requested on its self a few years back.
• We were clearing out old files and came across the investor presentation Indymac put together for the third quarter of 2007.  There were 71 slides, and we remember being very impressed at the time on how thorough the presentation was.  While Indymac might have eventually failed because of loan quality, the immediate cause was liquidity and an over-reliance on brokered CD’s and other wholesale borrowings. With that rear-view mirror perspective, we looked at each slide again.  Fully 67 of the 71 slides had to do with loans, and only four slides had to do with deposits and liquidity.  Yes, we realize that loan quality was on everyone’s mind back then, but we still find this interesting.  If Indymac had spent more time getting retail deposits, things might have ended differently.  The near-total focus on loans as shown in the presentation is an interesting example, perhaps, of being very focused, but of focusing on the wrong thing.
  
• Here’s one more Palindrome:     Doc, note, I dissent.  A fast never prevents a fatness.  I diet on cod.”  Do real, live people come up with these, or is it computers?  Curious minds want to know.

• How big is the $700 billion TARP program?  By comparison, we can look at the S&L Crisis of almost 20 years ago.  When the RTC was finished liquidating the 1,043 failed thrifts, the cost was $153 billion.  Adjusted of inflation, that would be $256 billion in today’s dollars.
• Three people are celebrating their birthday today:  U.S. Senator Harry Reid, comedian Sarah Silverman, and Britney Spears.  Can’t you see them all sharing a birthday cake?
• With the economy and the banks in such a troubled state, you’d think regulators would be handing out Cease & Desist Orders (C&Ds) by the hundreds.  But year-to-date, the OCC (Comptroller of the Currency, regulator of about 1,500 national banks) has issued only 21 of them.  The OTS regulates about 800 or so S&Ls and it has only issued 34 so far.  In defense of both regulators, though, the number of C&Ds has increased dramatically in the 2^nd half of the year.
• We were just reading The Day America Crashed, a book about the October, 1929 stock market crash.  Although the market had been nervous for a week, what precipitated the big Tuesday plunge was a huge block of General M otors stock that was put up for sale.  It was for 20,000 shares, back in the days when the daily volume was only 2.5 million shares.  (Today, 600-700 million shares trading in a day is not at all unusual).  This one sell order changed nervousness to panic. Interesting that some 80 years later, amidst today’s stock market problems, G M is still front and center in the financial news.
• We’ve attached a very short piece on the Profit Review we offer.  It’s a one-day onsite process with a written report within two weeks on how to increase revenues, better manage costs, and minimize risk.  They’re all very real, concrete actions you can take to grow your profits.  Take a look at it.
• We heard on the news that 62% of all online searches are done through Google.  That’s one heck of a dominant market share.  Google is fine, but we tend to use Ask.com more.
• Random notes:  If you’re a California taxpayer, you can buy California General Obligation tax-free bonds yielding 6.1%.  On an after-tax basis, that’s close to a 10% equivalent…..  Union workers at Ford, Chrysler, and G M make about $70 an hour.  Their non-union counterparts at U.S. Honda and Toyota plants make $40.  The Big Three (what a misnomer) need to make more appealing cars, but costs must have something to do with their situation…..U.S. Treasury zero coupon bonds maturing in 18 years are trading at exactly 50. So if you had a baby this year, you can invest $50,000 now and you’ll have exactly $100,000 when your child is a freshman in college.
• This economy has made it difficult to find any place for investors to hide. The conventional wisdom is to own gold or gold stocks when things go to hell, but we looked at ten gold mutual funds, and they’re off an average of 43% year-to-date.  Like we said, there’s no place to hide.
• U.S. Bank is awfully quiet for such a great bank.  Did you know that they’ve paid dividends every single year since Abe Lincoln was President?  That’s 145 consecutive years of doing so. We wonder which predecessor banks they use for this statistic?   Star Bank ( Ohio ), Firstar ( Wisconsin ), U.S. Bank ( Oregon ),  West One Bank  ( Idaho ) or First Bank Systems ( M innesota ).
• There are many reasons why it’s hard for a mortgage company to compete with the banks, but the cost of funds is one of them.  The average checking account in the U.S. costs the banks 0.22%, and one year CD’s average 2.53%.  And how does that compare to your warehouse line costs?

In our travels around the country, we see a lot of mortgage bankers with great plans, but little follow-through. We don’t wish to sound harsh, but wishing, hoping and wanting are not good strategies for achieving your goals.  If there’s something you really want for your company, you need to make it happen.  You need to come to your office every day and work on making those ideas a reality.  There are talkers and there are doers.  M ost people are some of both, but it’s the doers who build great companies.  Think of something you really wanted your company to do the past year or two.  Did it happen?  Or are you still talking about it?  

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

510-469-8633 or 408-497-3135