To Our Clients, Colleagues and Friends,

• Lehman Brothers Bank has changed its name to Aurora Bank, and it could be headed for some dark days with their regulators.  They have about $500 million in brokered deposits coming due starting in August, and we’d guess they’re not allowed to replace them with new brokered deposits.  Uh oh.

• We occasionally get asked about in-house recruiters who focus solely on hiring loan officers.  Our opinion?   We’ve never really seen it work.
• One night when Corky was a junior at UC Santa Barbara, the students burned a Bank of America branch to the ground. We asked him for details, and he says that “I was out with the rest of the rioting students the night the bank burned, and I returned the following morning to check out the scene.    I was able to get inside the still-smoldering building and retrieve a couple of souvenirs.”  One of them is attached, a framed BofA letterhead with burn marks on the edges.   Did you notice how he says simply that he was “out with the rest of rioting students” that night, never quite saying whether or not he participated in burning the bank?  Kind of suspicious, isn’t it?

· Last issue we mentioned rapid growth as a predictor of bank problems.  Another predictor is the level of non-performing loans + loans 90 days or more delinquent as a percentage of capital + loan loss reserves.  When that ratio hits 100%, it’s pretty certain the bank will fail.  If we were ever on a bank Board again, we’d want to see that ratio in the monthly Board packet. · This is the Griffin family, left to right, Brian, Lois, Mr. Family Guy himself, Peter Griffin, Stewie (the psychopath baby who happens to speak with a British accent), low-IQ Chris and his sister, Meg, desperately wanting to be one of the popular girls at school. Brian (the family dog) drinks martinis, and you’ll notice one in his hand. Stewie could grow up to be a serial killer, and well, you need to watch the show to understand all the family dynamics.  It’s a hilarious show, politically incorrect, and it will make your basic dysfunctional family look absolutely normal by comparison.

• A few rules-of-thumb:  When you hit, say, $20 million a month, you need a full time Senior Accountant.  When you hit about $30 million, you need to step up and have a true Controller.  Get to $50 million and you’re definitely going to need a staff accountant to help the Controller, maybe two.  At $100 million, you’ll have a CFO and 3-4 staff accountants.  We have one client in the mid-Atlantic area that’s averaged about $300 million a month so far this year.  They have one CFO, a very qualified guy, one controller, and seven staff accountants. They’re wildly profitable, and a part of their success is a fully-staffed finance department that generates good reports, many of which we designed for them.
• We read that Barney Frank, Chairman of the House Financial Services Committee, is opposed to killing off the OTS charter.  He’s got tremendous power, and his influence might just keep the thrift industry and its separate charter alive.
• One thing we like to see is a Financial Model with 12-month projections, one which easily allows you to drop in new assumptions and see the results.  Let’s say your projections show everything looking terrific, with nice profits projected for the next 12-months.  Let’s now assume that loan volume drops by 50% for the next six months, but you can only cut costs by 25%? What does this do to your earnings?  To your capital ratios?  Will you now be in violation of certain warehouse line covenants?  You need to have such a model to run a variety of what if scenarios.

• We have always been of the naive opinion that men at the top are well-bred.  But here’s Jimmy Cayne, formerly Board Chairman of Bear, Stearns, in an interview about then-head of the New York Fed and currently Treasury Secretary Tim Geithner:  “The audacity of that little prick announcing that he was deciding whether or not a firm of our stature was good enough to get a loan.  Like he was a determining factor, and it's like a flea floating down underneath the Golden Gate Bridge , getting a hard-on and saying “raise the bridge.”  This guy thinks he‘s a gotta big dick.  He’s got nothing, except maybe a boyfriend.”  We know people talk like that, but you somehow expect better of people at the top.  We guess that Cayne is probably a real jerk. 
• Since we were on the topic of finance departments, what about QuickBooks?  This is from a mortgage banking CFO we respect a lot.  “Using QuickBooks really shows the lack of any real commitment by management…. usually when they realize it, it's too late.”  QuickBooks obviously works, but we much prefer Great Plains , Peachtree, MAS 90 or MAS 200, and several others.
• We’ve written before that a mortgage REIT is essentially a bank with no branches, a very slim net interest margin, and almost no overhead.  If we look at REIT Analy Mortgage, the first thing we see is that they really need to change their name.  But the second thing we see is that they have $68 billion in assets, virtually all of them mortgages or mortgage securities.  If they were a bank, they’d be the size of Comerica Bank ($67 billion). But unlike Comerica, they have no depositors, no borrowers, no real customers, and no real franchise value.  It’s really just a leveraged bond fund that pays a dividend of about 14%.  But what’s wrong with that?
• Although Rickey Henderson hit “only” 297 home runs, we think he could have hit 400 if he’d wanted to. When Oakland traded him to the Yankees, the press there derided him as a one-dimensional base-stealer with no power.  When he heard that, he said he’d go hit more home runs to prove them wrong, and he hit 24 dingers that year.  The next year the press said that was just an accident, and when Rickey heard that, he said he’d show them they were wrong.  So he went out and hit 28 homers.  We’re going to the A’s game Saturday when they retire his number.

· Wouldn’t it be helpful for all your loan officers to have a program that automatically notifies each of them with daily prompts telling them whom to contact, when to contact them and why, all based on details specific to each homeowner's loan?  We heard that there is one such company, Mortgage Returns.  We like the concept.  Any of you ever use them? We just looked at a list of all our clients going back to 2003 when he started Garrett, Watts, and 68% of our clients have been in states other than California . We were really surprised, probably because when we started out, virtually all our work was in-state.  We’re pretty much in all parts of the country, but we absolutely need some customers in Hawaii and the Caribbean .  Anyone? And finally, words of wisdom from Rickey Henderson:  "Do your stretching before you sleep. That way, you wake up loose."  See you sometime next week. WHAT WE DO                  TEN KEYS IN TOUGH TIMES Garrett, Watts & Co.    -   Joe Garrett (510-469-8633)   -   Corky Watts (408-395-5504) “Helping mortgage lenders increase revenues, control costs, and better manage risk.”