To Our Clients, Colleagues and Friends, 

• We’re always harping on people to do a better job of reporting (“If you can’t measure it, you can’t manage it”), and the best mortgage company reporting we ever saw was a Countrywide presentation.  It sliced and diced every aspect of their business you could think of.  We don’t think it’s an accident that they were so hugely successful for so long, and we think a lot of it had to do with the deep understanding they had of their metrics. 
• Since its start in 1985 the California lottery has brought in $56 billion, paid out $28 billion in prizes, and given out $19 billion to the school system. And when those lotteries get huge, wouldn’t it make more sense to make lots of people millionaires rather than make oneperson hugely rich?  When it gets to, say, $25 million, why not give out $1 million prizes to twenty five people rather than $25 million to one person?
• The state motto of New Mexico is It Goes As It Goes.  What the heck does that mean?
• One of the many things we’ve always liked about banks is their ability to make SBA loans.  For the longest time, you could sell SBA loans for a 10 point profit. When credit markets froze up last year, the premium fell quite a bit, but we hear that sellers are now getting 105-106.  And making 5-6 points on an $800,000 loan is still pretty good.
• And how about those Scarlet Knights of Rutgers University ?  They scored on seven straight possessions, including a spree of four touchdowns in six plays in rolling to a 45-7 win on Saturday.  How exciting would that be?    It’s been reported that 17 colleges, among them Castleton State College (Vermont), the University of Incarnate Word (Texas) and South Dakota’s Presentation College, are starting up football programs in the next five years. Interestingly, Rutgers already has already scheduled a game with each new program.  Smart people, those Rutgers guys.
• We’ve attached a securities analyst’s report on the New York banks, written in February, 1933.  Back then, the President was inaugurated in March rather than January, so this report was issued just weeks before FDR declared a Bank Holiday. Interesting reading, especially in light of what we just went through with our current banking system. Banks of 1933
• We were walking out of a San Francisco financial district office building recently, and there were about a dozen 30-something women standing on the sidewalk facing the door.  Right behind us was a guy, maybe mid-30’s, very serious looking, briefcase in hand.  Just as he went through the door and out onto the sidewalk, us, a very tall drag queen, maybe 6-4 in high heels, came out of nowhere, wrapped a boa around his neck and held him way too close.  He/she had really bad makeup,  a slightly askew wig, deep red lipstick, your basic black cocktail dress, and a 5:00 shadow!
  The Drag Queen launched into a really loud but very clever song about what a jerk he was for dumping someone named Sarah, and meanwhile, the crowd, much of which was apparently Sarah’s friends, had their cell phone cameras out and were recording all of it.  When the song was finished, the Drag Queen planted a big kiss right on the guy’s lips, with all of this being captured on film. The guy who dumped Sarah looked like he wanted to crawl into a hole and die.  Looked like Sarah got her revenge.
• Analysts think that one of the best metrics with which to measure excess inventory is the increase in vacant homes in the past decade. Over the past 40 years, this number has averaged about 10.5% of the housing stock, and it has moved up in the last year or so, hitting 14.3% in June.
• In 1949 consumer debt represented 20% of personal income, and this year it hit 120%.  Over these 60 years, disposable income and net worth both increased by an average of 6.8% a year, but mortgage debt increased at a compound annual growth rate of 10.4%.  Back then, people didn’t refinance.  The big goal was to pay off the mortgage.
• Ever wonder if it’s true that the stock market is forward looking?  Home builders are having a very rough time this year, but the nation’s biggest builder, D.R. Horton, has seen its stock rise 91% this year.  Yep, the equity markets price to the anticipated news.
• Ronald Reagan is remembered for a number of statements  (“Mr. Gorbachev, tear down this wall”), but one that people seem to have forgotten is his saying that “There may not be easy solutions, but there are simple ones.”  In that vein, we’ve heard of a very simple solution for the housing crisis that we’ll try to get to it next issue.  By the way, Reagan’s speech had him saying “Herr Gorbachev, tear down this wall.”  In his limo on the way to deliver the speech, Reagan changed it to Mr. Gorbachev.
• In 1961, Pres. Kennedy also gave a memorable speech in front of the Berlin Wall, proclaiming Ich bin ein Berliner (“I, too, am a Berliner”) to almost a million West Berliners who erupted into a massive roar of approval.  As you may know, a berliner is also a type of jelly donut, and, we’re being serious here, there are many people who believe that the way Kennedy pronounced the word, the people of West Berlin thought he had proclaimed “I am a jelly donut.”   They believe that this is what caused the Germans to cheer in amazement, hearing the President of the United States declare himself to be a jelly-filled donut.  If you don’t believe us, you could look it up. 
• Remember when the government invested in Citigroup in the middle of the financial crisis last year?  The government converted its preferred shares into common stock at $3.25 a share, and with the stock now around $4.50, that means that the 7.7 billion shares we taxpayers own have gained almost $10 billon in value!  Isn’t it something when the government actually makes money from their interventions?  
• Should everyone be a homeowner?  Economist Larry Summers may have put it best when he said “No one ever washed a rental car”, but is there maybe some percentage above which it’s just not beneficial?  Once you get over 68-69% ownership levels, maybe those are the people who really should be renting.  Maybe the no-down, low-doc loans were the only way we could go higher, and maybe the performance of those loans shows that such people are better served by staying renters.  We’re just thinking out loud here.

· When I was Chairman of the Berkeley Housing Authority, I met with many tenant groups, and my impression was not that we should make every effort to help them become homeowners, but that we should provide more and better rental opportunities.   Rental housing for lower income people has been pretty bleak in this country (Pruitt Igoe below, Cabrini Greens), much of it the intellectual legacy of master builder Robert Moses.  Jane Jacobs’  The Death and Life of Great American Cities  is a wonderful book, but the must-read is Robert Caro’s The Power Broker about Robert Moses.   You won’t be able to put it down, and you’ll be thinking about it ten years later. By the way, look up Pruitt Igoe and Cabrini Greens on the internet to see what a horrible job our urban planners used to do with rental housing.
 
      Projects like this became vertical slums, and eventually, cities started blowing them up. 

· If you’re like us, you’d like to see as little government involvement in the private sector as possible.  The good news has to do with the Fed’s program late last year to buy commercial paper directly from corporate issuers. By February, the Fed owned $350 billion in commercial paper.  They’re now down to only $46 billion and will have shed this final amount soon.

· The Bank of America is going to sell about $61 million of 5.25% senior unsecured notes. We’re just curious as to why a $2 trillion bank would even bother with such a small offering.  Anyone?

We were doing a FOCIS-plus in Phoenix they last two days, and 100 degrees of dry heat is not that bad. And we like Phoenix . Then we’re off to Cleveland , Missouri , Virginia and Idaho the next few weeks, with one of our colleagues finishing up a pretty lengthy assignment in Florida . We’ll still try to get this out at least twice a week, so we’ll see you soon!

                                 FOCIS-Plus Don’t Find Yourself                         *     *

Garrett, Watts & Co.  -  Joe Garrett (510-469-8633)  -  Corky Watts (408-395-5504)

“Helping mortgage lenders increase revenues, control costs, and better manage risk.”