To Our Clients, Colleagues and Friends,

• What would be better, (a) having one $40 million warehouse line with Bank of America, or (b) having $25 million with the Bank of America and $10 million with Comerica or Flagstar?  Even though (a) is for $40 million and (b) is for only $35 million, we’d probably recommend option (b).  Having two lines is almost always better than having just one, even if the one line is somewhat bigger than the two combined.
• Our annual Client Appreciation dinner is coming up soon.  Details will be forthcoming, but it will be in mid-November in San Francisco. We’ve been busy enough on the East Coast that we’re going to have a Client Appreciation Dinner back there as well.  Possibly in New York , but probably in Washington , D.C.   It will be in February or March of next year.  Our Northwest dinner for clients will probably be in Spring.
• Did you know that Nebraska celebrated their 300^th straight sell-out of their football games last weekend? The streak began in 1962 when Kennedy was in the White house, and they’ve sold out every home game for the past 47 years! 
• It’s almost worth it to buy a small bank just to be able to buy other banks cheaply these days.  First Financial Bancorp in Cincinnati bought failed Irwin Financial from the FDIC last week, and get this, they didn’t take over any nonperforming loans — or any of the more risky ones. For the assets they did buy, however, they paid just 75 cents on the dollar and got the FDIC to cover most of any potential losses. First Financial paid about a 1% premium on the Irwin deposits, which is almost nothing, and in addition to Irwin's nonperforming assets,the FDIC kept the lender's repossessed real estate and construction loan portfolio.  Wow!!  Because it got the assets at such a steep discount to book value, First Financial will realize $341 million of gains, with about half being negative goodwill.  We must be idiots to not go out and buy some tiny bank just to do deals like this!
• And how about that $341 million of negative good will?  Is this a great country, or what?    
• We just read that in the cash-for-clunkers program, only 39% of the cars sold went to GM, Ford or Chrysler.  What do you think about that?
• M.I. companies are good for a lot more than just insuring loans.  We had a community bank client in the Northwest who asked us to help them choose 2-3 new warehouse customers, so while we had some candidates, we also asked MGIC for their perspective.  They recommended two companies based on their strength and the performance of their loans, and both are now getting lines from this bank.  Thank you, Jay Hughes and the rest of your crew at MGIC.
• We visited a San Francisco client that’s going 100% paperless within two weeks.  They will save almost $40,000 a year just in paper and ink cartridges, and we estimate at least $60,000 in related savings. Sweet.
• We saw a hot looking Pontiac sports car the other day and started thinking about GM and the other car makers.  If we were starting a car company today, we’d follow the Dell Computer model rather than the GM auto model.  Why have huge factories making engines, bodies, transmissions and so on?  Dell doesn’t really make computer parts but mostly just assembles computers, and that’s the approach we’d take for cars.  We’d hire the best designers anywhere and have a great looking car.  We’d then buy really great engines from whoever makes the best engines, buy the best transmissions from whoever makes the best transmissions, and then contract with some factory somewhere to make the bodies we’d designed and do the assembly.   We’d only have a limited number of employees, little fixed plant and equipment, and we’d be known for great designs and best-in-class for the parts.  Of course we have no idea what we’re talking about, but it sort of makes sense, doesn’t it?
• Comerica stock is up 53% in the last two months, and it’s still barely trading at book value.  They’re one of a small handful of larger banks that hasn’t raised common equity in the past year, essentially because they have such a high tangible common equity to start with. Looking at it another way, Comerica didn’t dilute their shareholders like so many other banks did.  We should buy some more of their stock.
• If Comerica ever wants to switch to a name with alphabet letters like TCF or PNC, we suggest TBFFD, or The Bank Formerly From Detroit.  Kind of catchy, isn’t it?
• Can we recommend a few books?  How about The Great Gatsby, Dreiser’s American Tragedy, Bud Shulberg’s What Makes Sammy Run, Jack London’s autobiographical novel Martin Eden, and the play Death of a Salesman.  Do you see the common theme, the darker side of the American Dream?  You could say that the lives of Nixon, LBJ, Reagan and Obama all show that the dream is real, but these five books show just how hard it can be to achieve this vision.  If you forget about what we just wrote, they’re still terrific novels and great literature. 
• So you want to push credit scores to 580?  Think again.  From Brian Faith of FNMA:  “Our experience with recently delivered loans with credit scores below 620 is that they reach a serious level of delinquencies approximately nine times higher than other loans during the same period.” It's only natural to go around the corner in search of better profits, but what you usually get is not what you were looking for and you often bump into something else. Just say no to those in your organization who want to push the envelope on credit.
• Recessions can lead to cute phrases:  In the 1991 recession, builders were saying “Stay Alive till ‘95.” Earlier this year, lenders would extend loans past their maturity dates and cross their fingers that things would be better, their phrase being “Extend and Pretend.”  Now, banks are taking their time foreclosing, using the ditty “Delay and Pray.”
• Speaking of screwed up things, did you now that this is the 15^th anniversary of the Orange County, California bankruptcy?  The lesson there is to have a policy, have controls, and have a means to monitor compliance with that policy.  The Treasurer there went wild, buying every piece of junk Wall Street showed him.  His performance was excellent for awhile, till it all crashed and burned.  The county didn’t have investment policies, controls, and monitoring systems.  Don’t let this happen in your organization.
• We drove earlier this week from St. Louis up Highway 61 to Hannibal , Missouri to meet with Farmers & Merchants Bank.  We had extra time, so we pulled off the road from time to time to see some of the small towns along the way.  This led us to thinking about three things that seem to have changed America dramatically, the Interstate Freeway System, the Internet, and Wal-Mart. Before the interstate freeway system got built in the late 50’s and 60’s, you’d drive from place to place and go through all the small towns of America .  It wasn't as fast, but you found wonderful little restaurants, friendly people at the local service stations, and all the Norman-Rockwell quaintness of small town America .  Now, you get on an eight-lane super freeway and see nothing.  Every few miles you can pull over into a monstrously huge gas station along with a MacDonald’s’ or Burger King.  But that’s it, and you get no sense of what you’re passing through and missing

On shopping, we shop less and less at local store where the owner knows us.  We can go on the internet and buy a book, new or used, at the absolute lowest price.  Or maybe you used a travel agent who knew exactly the kind of hotels you like, but now you just go to Expedia.  Same with other goods and services. Now, you almost always find it cheaper on the internet. But don’t you lose some of the fun and the intimacy of shopping in familiar places where owners know your likes and dislikes.  Is cheaper always better? Finally, there’s Wal-Mart.  We pulled off Highway 61 to look at Bowling Green , Missouri .  This town looks like it probably did in 1920, and if you were doing a movie of small town America , this would be the place to film it.  The old brick buildings from the 1880's, the grand court house in the center of town, and all the other features that make you think you have come to the heart of America .  Sadly, Bowling Green seems to be barely holding on, and maybe 50% of the storefronts were empty.  On the way out of town, there’s a huge Wal-Mart that opens next month.   Why would anyone go to the local hardware store when Wal-Mart will sell the same things much cheaper?  Is there any doubt that it will kill off what’s left of magical downtown Bowling Green , just a mile away. We understand the desire to get places faster, to be more efficient, and to buy cheaper goods. We also understand that Wal-Mart creates badly need jobs.  But while interstate freeways, the internet, and Wal-Mart do make things faster, cheaper and more efficient, we have to ask if they’re really worth the cost?  How exactly do you put a price on the soul of a nation?  Must the quaintness and quirkiness of a used book store in a small town vanish from the landscape because you can buy it on Amazon for 30% less?  Schumpeter’s theory of creative destructionism is at the heart of the free market system, and nothing proves it better than Wal-Mart’s destruction of downtowns and mom and pop stores.  But worshiping at the alter of cheaper and faster just seems to demean everything that made America great and everything that gives us character and a soul.

• This is the first time in six years we’ve pontificated like this.  Maybe we should go back to contests of favorite date movies.  But in the meantime, that Highway 61 through Missouri , wasn’t that the title of some Bob Dylan album?  Did he get the same sense of small town America while traveling on it himself?

Well, this is getting a bit long, and we have a lot to catch up on before heading out next week.  Corky’s off to North Carolina , I’m off to Idaho , with Virginia two weeks later.  In between, we have a FOCIS-plus in San Francisco , and it’s so nice to work with clients who’re only 30 minutes away.                                                                     *      * We spend a lot of time with bank Presidents and senior bank officers these days, and there’s a feeling of fear and anger we haven’t seen since the late 80’s.  If you’re a bank executive, we understand why so many of you feel angry and fearful of the regulators.  Our message to you is the message that Pope John Paul II told the people of East Europe :  Be not afraid.  Do the right thing, build capital if possible, deal with non-performers as best you can, and Be not afraid.  This is a time when character and courage are more important than ever. Garrett, Watts & Co.   -  Joe Garrett (510-469-8633)  -  Corky Watts (408-395-5504) “Helping mortgage lenders increase revenues, control costs, and better manage risk.”