To Our Clients, Colleagues and Friends,  

• We like to ask mortgage bankers what the three or four most profitable parts of a bank might be.  Being lenders, they almost always answer that loans are the most profitable.  Our view, in order of importance, is #4 loans, #3 fee income, #2, deposits, and #1 relationships.  Think about it.  Of all the problems the banks have faced this year, did they lose money on numbers 1-3?  It’s all been on loans that went bad.  Even in good times, banks make their real money (and get the highest PE and P/B ratios), on their deposits, and they get cheap deposits through customer relationships.
  
• The Whopper:  With Indymac Bank being sold, the FDIC has the final number they expect to lose on its disposition - and that number is $9.4 billion. 
• Might Indymac’s failure on July 11 (isn’t 7-11 supposed to be good luck?) be seen as the opening bell of the Financial Crisis of 2008?  It certainly preceded Bear, Stearns, Fannie and Freddie, AIG, Lehman, Wamu and the 5-6 other mega-events. It will be interesting to see if historians look upon it as merely an unrelated event – or as one of the actual causes,
• For some reason, we always find it pretty funny to see what people’s names were before they changed them.  Ralph Lipchitz will forever be #1 in our book. And one of the funnier ones, although not really a name-change, is East European Jewish people named Ferguson , a very Irish name.  When many of them first came to America , they were asked by the Immigration people at Ellis Island “What’s your name?”  Speaking no English, the husband would look at his wife and ask, in Yiddish, “Fur goo sun?”  This meant, essentially, “What the heck did he say?”  When the immigration official heard Fur goo sun, he figured the new immigrant was simply answering Ferguson .

Bernie Mac	Bernie McCullough
Ralph Lauren	Ralph Lipchitz
Bo Diddly	Ellas McDaniel
Cyd Charisse	Tula Finklea
Jodie Foster	Alicia Christian Foster
Natalie Portman	Natalie Herschlag
Nicolas Cage	Nicolas Coppola
Tom Cruise	Tom Mapother
Jennifer Aniston	Jennifer Annastasskis
Demi Moore	Demetria  Guynes
Goldie Hawn	Jean Studlendegehawn
Woody Allen	Allen Konigsberg

• GMAC Bank’s warehouse commitments are down 58% over the past year, nothing unexpected.  But with their becoming a bank holding company and able to access TARP money, we expect them to regain their status as a top WH lender.
• It’s not too late to send Rickey Henderson a birthday greeting.  The World’s Greatest Leadoff hitter turned 50 on Christmas Day. 
• The U.S. auto industry ended 2008 selling 11 million vehicles, down from 16 million the previous year.  Think about our constant nagging you about knowing your break-even and having a plan to match your expenses to that number.  Isn’t that the same with Detroit ?  Their massive losses show a break-even at 16 million cars sold, or at least something higher than 11 million.  The solution for them is, simply, to build  a cost structure around an 11 million number.  It shouldn’t be based on how many they hope to sell or want to sell.  The only thing they know is how many they sold this year, so they need to reduce expenses to where they break even selling only 11 million vehicles.  And isn’t that exactly how you need to run your mortgage business?
• The attached article we wrote is something we feel strongly about.  Hope you enjoy it.
• Here’s a chart we put together on re-default rates for loans modified in the first quarter of 2008.

	Delinquent again after three months	Delinquent again after six months
Private-label securitizations	42%	61%
Loans serviced by their owners	35%	50%
All loans	37%	55%

• The data we found doesn’t help draw too many serious conclusions.  Private label could be super-prime (think Thornburg) or deep sub-prime (think New Century).  The second row might be meaningful.  It refers to loans that a bank owns in its portfolio and also services for itself.  The only serious conclusion we draw is based on the third row, that a big percentage of all modified loans will go delinquent again given enough time.
                                                             *     *

With the new Congress being sworn in this week, we offer here the best introductory speech ever delivered by a new Congressman, by baby-boomer favorite Davy Crockett, 175 years ago.

“ Mr. Speaker, Gentlemen.  A fellow called the Master at Arms told me that a new Congressman is supposed to make an introductory speech.  Well, here she goes. I’m Davy Crockett, fresh from the back woods.  I’m half horse, half alligator, and a little snappin’ turtle. (Laughter) I’ve got the fastest horse, the prettiest sister, the surest rife and the ugliest dog in Tennessee .  ( More laughter). My father can lick any man in Kentucky and I can lick my father.  I can hug a bear too close for comfort and I’ll eat any man alive opposed to Andrew Jackson.  (Cheering). Now, some Congressmen take pride in saying a lot about nothing, like I’m doing right now. Others don’t do nothing for their pay but listen day in and day out.  I wish I may be shot if I don’t do more.  Next time I get up before you, I’ll have something to say worth saying. (Uproarious laughter and loud cheering).”  What a great speech!

Okay, all together now, let’s have a great 2009. And we can almost guaranty this.  It seems impossible it could be any worse than 2008.

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

510-469-8633 or 408-497-3135