To Our Clients, Colleagues and Friends,

• Regulators hate brokered CDs, but in the past month, one-year CDs were paying only 50-65 bps.  Sure, they’re not core deposits, but it’s still pretty cheap money.
• We have a fair number of friends who are now working for the FDIC resolution division that deals with failed banks.  If you’re out of work, there are worse ways to make a living.  The compensation seems pretty good, they pay all hotel and travel expenses, and you can probably get another year or two of work till things are resolved.
• You think you have a lot of employees to manage? Here are the numbers at the nation’s biggest bank holding companies, all rounded

A few others: BB&T 28,000, SunTrust 28,000, GMAC 21,000, Comerica 9,497, First Horizon 5,971, Sterling (Spokane) 2,590, Umpqua 1,821, WestAmerica 1,153, and Western Alliance 1,076.

• Gov. Schwarzenegger delivered a seven line message in a veto last week.  As people discovered, the first letter of each line spells out an impolite two word phrase that starts with F and end with the letter U. The governor’s people say this is a total coincidence, but a mathematician calculated that the odds are 1.1 trillion to one of that happening by accident.  Arnold ’s a pretty blunt guy, and if he wanted to say F___ You to the bill’s sponsor, he’d probably just grab him in the hallway and tell him to his face.
• We saw a condo project in Phoenix recently that seems to have gone full cycle.  (1) It was an apartment building, (2) then it was converted into condos, and (3) now it’s about 99% non-owner-occupied. In a way, it’s gone full circle back to being an apartment building.  If you buy a unit there all cash, you can get a good cash-on-cash return, but how will you sell it 4-5 years from now? What bank would lend on a condo project 100% filled by renters?  Maybe the homeowners need to get together and de-condo it. They could then get a multi-family loan and be able to sell the building as an apartment building someday.
• Last Friday we saw three earnings reports; FNMA lost $19 billion, PMI lost about $90 million, and AIG made about $450 million but still owes the government over $150 billion.  One lesson we can learn from these three troubled companies: Don’t have a company name made up of letters!
• We’ve always loved collecting interesting/funny names of banks.  In the past we found Cowpatch Bank, Tomato Bank, Citrus Bank, and Crazy Woman Savings. There is probably a bunch of others we don’t remember.  Anyway, we just saw Hiawatha National Bank in Hager City, Wisconsin .  It’s a tiny little bank with only $42 million of assets, and it’s not a funny name, but it’s a very cool name.  If you haven’t read Longfellow’s Song of Hiawatha lately, you should!  It’s one of the great American poems.
  And doesn’t it seem like when we were kids, parents always had poetry books lying around the house.  Does anyone buy poetry books anymore? When’s the last time you bought one?
• Nearby Oakland has the world’s worst mayor, Ron Dellums.  Dellums comes to work only a few days a week, and when he does, he arrives about 10:00 and usually goes home after lunch. To make it even worse, the IRS just slapped a tax lien on his house and personal property for not paying his taxes since 2004.  What an embarrassment.
• A client told us the other day that his wife was pregnant, but he used that awful phrase, saying “We’re pregnant.”  We?  When did men start claiming to be pregnant?  We’re all for men being more sensitive, but people, this is a third person singular kind of activity (she) and simply not a first person plural situation (we).  Guys, doesn’t this ridiculous phrase make you kind of embarrassed for your gender?
• East-West Bank just took over failed United Commercial Bank here in California and paid the FDIC a  miniscule 1.1% premium for $7.5 billion in deposits.  The deposit base at United Commercial isn’t bad, and that‘s a tiny premium, a real steal.
• We just read Charlie Wilson’ War, and we liked it so much that we rented the movie. Congressman Wilson was a whiskey-drinking, coke-snorting, womanizing vulgarian, but he played a huge role in the fall of the Soviet Union by funding the mujahedeen who defeated the Soviets in Afghanistan .  Tom Hanks can be kind of irritating at times, but he was perfect as Wilson .  Definitely worth renting.
• Certain words have different meanings in different cultures, and we remember when there was a Sincere Federal Savings here in San Francisco . And although they weren’t named this, there were definitely some Very Suspicious S&L’s here as swell.
  
• Effective immediately, the bank cannot accept, renew or roll over any brokered deposits. This is pretty typical language in Cease & Desist orders, and we believe they cause as much harm as any bad loans.  Effective immediately?? What if you had, say, $200 million of brokered deposits maturing in the next 30 days?  Could you bring in $200 million of retail deposits to replace them that quickly? What if your retail deposits are costlier than the brokered deposits?  Put another way, we won’t argue if the regulators want you to stop taking in new brokered deposits, but how about allowing them to be phased out in an orderly manner?
• Remember when mortgage brokers handled 60-70% of all loans, and maybe more?  We’re hearing that brokers now do only 20% of all loans, and our guess is that this number is still dropping.
• A major reason we get asked to do FOCIS-plus Reviews is that owners know they could be doing better, but they don’t know what to fix or how to fix it.  A first step is to quantify their operations. We have a pretty big data base at this point, so if you’re, say, all retail, doing best efforts, and closing under $50 million a month, we know what your profitability can and should be. We’ll look at your cost to originate and your gain-on-sale to see how you’re falling short of your high-performance peers.
  And once we isolate the problem (Is it secondary execution? Cost structure? etc.), we really tear apart the business to find precisely what needs to be fixed.  It’s not brain surgery, and it’s always hugely gratifying for us to help people improve their profitability.
• We’ve getting asked a lot these days to perform due diligence on branches that are being rolled up or acquired by mortgage bankers. Corky Watts is leading this effort, and you should at least talk to him before taking on smaller brokers and their branches.
• Our ever vigilant clients helped us with some on base percentages.  Willie Mays had a lifetime .384 on base percentage and Hank Aaron was .375.  Ernie ”Let’s play two” Banks was at .330.  Someone wrote in last month that Ernie looks like he weighs 330 pounds.  Maybe his problem is that when he orders a Double whooper with fries, he places his order with a “Let’s Eat Two”.

We’ll be in Pennsylvania and New Jersey next week, so there will probably be just this one newsletter for awhile.  We’ll see you at the Client Appreciation Dinner in San Francisco next Thursday.  And it’s getting a bit chilly here (chilly for us means 55 degrees) so bring your coats and scarves.

Garrett, Watts & Co.

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

• Mike McAuley      281-250-2536
• Corky Watts        408-497-3135
• Joe Garrett         510-469-8633