To Our Clients, Colleagues and Friends,

• We’re half way through the history of the Bank of America, and we’ll share some of what we’ve learned over the next several weeks. One thing we didn’t know was how much the bank grew through acquisitions. A.P. Giannini bought up just about every bank he could get his hands on, especially ones having troubles.  The bank was, of course, called Bank of Italy for more than 20 years until Giannini bought a New York institution called Bank of America and kept the name. More on this amazing man in weeks to come.

• We subscribe to the Congressional Budget Office publications, and we even read them once in awhile. From one the other day: Of the total Defense appropriation of $726 billion in FY 2011, “…that total includes $159 billion for the cost of overseas contingencies operations, primarily in Iraq and Afghanistan .”  As a taxpayer, how do you feel about this? Do you think we’re getting our moneys worth?

• When Corky, Mike and I see highly profitable companies with clean pipelines and no leakage, what we find is that it’s always a team effort.  The LO, the processor, the underwriter, the rate lock desk, the doc drawer, the funder, the insurer, and the shipper are all key players here. You might have a great secondary person and use one of the top hedging advisors, but if these other people aren’t doing their job, it won’t matter how good your secondary people are.

• Remember last year when the Wamu Center building in Seattle was sold?  The building was half empty after Washington Mutual went kablooie, but the $133 a foot price still seemed ridiculously low. The counter-point is the Microsoft building across the bay in Bellevue , which just got sold for $531 a foot, or four times more than the Wamu property.

• The Federal Deposit Insurance Corporation (FDIC) today released a list of orders of administrative enforcement actions taken against banks and individuals in April. They processed a total of 76 matters, including 43 cease and desist consent orders; five removal and prohibition orders; four cross guarantee liabilities; five civil money penalties; nine prompt corrective actions; one order terminating a written agreement; seven orders terminating an order to cease and desist; one notice of intention to prohibit from further participation, and one notice of charges and of hearing.  Someone should take that tune “On the 12th day of Christmas my true love gave to me…” and change the words to show what the FDIC did.  “On the first day of Christmas, the OCC gave to me, one C & D, two civil money penalties, three…..”
• The FDIC puts out a weekly press release on banks that failed that week. Looking at Friday’s release, we see the standard language, this one about a Sun West Bank that failed in Las Vegas .  It had $360 million in assets and the FDIC estimates that the loss will be $96.7 million, or 26.8% of the assets.  This raises many questions, one of which is the question of how accurate their estimates turn out to be.  It wasn’t $96 million or $97 million, but $96.7 million.  Isn’t that a little too precise? The original estimate for Indy Mac was $4-8 billion, and it turned out to be $9 billion.  A study on this should be a no-brainer for Ph.D candidate in search of a dissertation topic, or even a good financial writer like Bob H. at the Wall Street Journal.
• Are banks like Sun West really so much worse than every other bank, or did they just run out capital more quickly? We’re not saying it well, but if hundreds of banks had, say, 3% capital one day and they get seized and now are negative 24%, (3% capital less a 27% loss), does this mean that they were overstating their capital by that 24%? Where does fair value accounting and marking to market enter the picture?
• If we did the math right, Sterling Financial ( Spokane , Washington ) is about to raise around $580 million. Sterling has a powerful Northwest presence, and they’re also owners of Golf Savings. Golf is almost exclusively mortgage banking oriented, and we can tell you this because it’s all publicly available:  They had pre-tax pre-provision earnings last year of $30.6 million on $2.8 billion of originations.  Do the math and you get a profit of 109 bps per closed loan!!  It’s almost impossible to do much better.  Don Costa runs Golf, and as we said a few years back, if we were going to be a loan officer, we’d want to work for Donn at Golf Savings.
• Our federal government just sold 20% of its stake in Citigroup and made a profit of $1.3 billion.  They’re selling another 20% in June, and if they do as well disposing the whole stake, U.S. taxpayers will make $6.5 billion.  Not bad.

• Isn’t licensing fun?  And doesn’t it tick you off that loan officers at banks don’t need to take all those tests?  If you work for a bank, you should be recruiting loan officers like crazy, and a big part of your pitch would be “Hate licensing? Hate taking those tests? Come work for us.”  This is Recruiting Heaven for banks, thrifts and credit unions.
• The California primaries are usually pretty fascinating, and the Republican race to get the nomination for Governor is just amazing: Meg Whitman had a 51% lead over Steve Poizner in March, and it has shrunk to 9%, despite her having spent $79 million of her own money on the race. This could be the biggest collapse since the Graf Zeppelin fell out of the skies over New Jersey and burst into flames.  
• Last week the market cap of Apple hit $221 billion, passing that of Microsoft at $219 billion. What a great story for Apple. We know what Steve Jobs does these days, but what about Apple’s co-founder Steve Wozniak?  Anyone?
• It is a sad thing to report, but Gary Coleman has died. The diminutive star was paid $75,000 for each episode in which he played Arnold Jackson on Different Strokes, and he had amassed $18 million by time he was 18 when the show was cancelled.  Coleman got into drugs, shot someone, and filed for bankruptcy in his late 20’s. He was working as a security guard at an L.A. mall when a woman recognized him and asked for his autograph.  He was insulted when she talked about how cute he was, and his arrest record showed that the two of them got into a brawl and exchanged blows. The photo of his victim shows that he did quite a number on her. In 2005 he ran for governor of California with the campaign slogan that he was the only virgin on the ballot. The 4’-8” actor actually got 14,000 votes but lost to Arnold Schwarzenegger.   The second photo was Coleman with another gubernatorial candidate, an exotic dancer who campaigned on the platform that she had big breasts.  And we wonder why people laugh about California politics?

• Speaking of California governors, I worked for Jerry Governor for one year when he was the boy-governor of California .   Brown had trained for the Priesthood and was a Jesuit seminarian before going into politics, and people whispered that the unmarried governor still stuck to his vows of chastity. His advisors decided he needed a better image so they arranged – and this is true – for him to date the sexy torch singer Linda Ronstadt. They went on an African safari, and it was big news when she stormed out of their tent the first night and got her own tent. No one knows what exactly happened (or didn’t happen), but it apparently affected her deeply and caused her to gain about 200 pounds.  This first photo shows Gov. Brown in a suit, Rondstadt showing some leg, and possibly Charles Manson on the far left. The photo below is Plus-Size Linda today.  She ‘s probably a very nice person, but Jerry Brown sure dodged a bullet, didn’t he?                                                         *     *

We just watched the new Robin Hood movie and give it a B-.  For those of us who watched Robin Hood movies in the past, there are two big missing elements:  First, where are the green tights, and second, Russell Crowe’s Robin Hood never once put his hand on his hip, leaned his head back, and laughed.  But the next time someone says something funny at a Board meeting, you should do the hand-on-the-hip thing, and in your best Errol Flynn imitation, tilt your head back and laugh uproariously. This should be confined, however, only to those things said by actual Board members.   If it’s the Examiner-in-Charge discussing your CAMELS downgrade, it is better to do your laughing in private after the regulators have left.   You may, however, wear green tights to Board meetings as this is always good fun and makes for a livelier meeting. See you guys next week sometime. Garrett, Watts & Co. “Helping lenders increase revenues, control costs, and better manage risk.

• Mike McAuley   (MMcAuley@GarrettWatts.com )
• Corky Watts      (CWatts@GarrettWatts.com)
• Joe Garrett      (JGarrett@GarrettWatts.com )