To Our Clients, Colleagues and Friends,

• Ok, we’re rested, we’re tan and we’re ready to get back to work.  After a nice vacation and not having to think about banking for awhile, we were shocked at what a non-event our absence was.  A few people wrote that they’d been apparently dropped from our distribution and demanded to be put back on, two people said they thought they’d maybe forgotten to renew their subscription, and one person wanted to know if she’d be included in the Publisher’s Clearing House Sweepstakes if she renewed. And a few people wrote that if we started it up again, we should remove their name. We even had 4-5 people write and ask “Did you guys go out of business or something?”

• Rahm Emanuel said that “A crisis is a horrible thing to waste” and while he was speaking of politics and public policy, it also applies to business.  The banking crisis has created one of those once-every-25 years opportunities to really change the landscape of a bank, and we kind of hate to say this, but why isn’t Comerica doing more to take advantage of its strengths during this crisis?  It’s one of the nation’s strongest and best managed banks, and it just seems they could do some game-changing acquisitions, especially in Texas where they probably want to beef up their franchise.

• A British study looked at 500 married couples and measured how much conversation they engaged in per day as a function of how long they’d been married.  If you’re a romantic at heart or if you’re easily depressed, you should skip this item.

We have a couple of questions: (1) If one person asks “How was your day?” and the other person says “Fine, how was yours?” does that count as conversation? Does it still count if neither person really cares? (2)  What if they ask “How did the 10-year Treasury do today?" when they don’t even know what a 10-year Treasury is and they’re just trying to be polite?  Does that also count as conversation?

• If your marital conversations are waning, we can suggest the following conversation starters:  (1) ”My friend at the gym told me her husband has never gotten a re-purchase letter.”  (2) “Yeah, you’ll personally guarantee a warehouse line over my dead body!” and (3) “I don’t mind your trying to pre-qualify the pool boy for a loan, but how come you had to do it in the changing room with the doors locked?”
• Have you ever thought about how hard you work for years and years to build up your reputation, and then one employee, even if just a contract worker, can practically destroy it over night? This is why Reputation Risk is one area of risk you should look at in all your endeavors. It’s just not enough to look at, say, interest rate risk as your one big area of exposure.
• The government’s fiscal year is now eight months old (Oct. – May), and the deficit so far is $941 billion, a fairly insignificant improvement of $51 billion over last year.  Here’s where the money has come from through May.

One thought that occurs is that because income from corporate taxes is relatively small, why not dump the entire business tax code and just have a flat tax of maybe 5% on all business income?  Our guess is that businesses would welcome the sheer simplicity of it and that it would bring huge amounts of new revenue into the government.

• Back to areas of risk:  Along with interest rate risk and reputation risk, what others come to mind? How about systems risk?  What about compliance risk?  A good company looks at every possible area of risk before starting new ventures or new products, and the idea of a having a Chief Risk Officer not only makes sense at a bank,  but it also make sense for a mortgage company once it gets to a certain size.
• The Baltimore Orioles (oops, the woeful Baltimore Orioles) fired their manager a few weeks ago, but when a team sucks, is it really the managers fault?  Our guess is that clever strategic moves may only win an extra 2-3 games a year, and we don’t buy into the “Manager as Motivator” stuff.  Major League players aren’t in high school, and rah-rah locker room talks just wouldn’t seem to matter to professionals.  Don’t teams win because they have better players than other teams?  And if this is the case, why not fire the General Manager who put the crummy athletes on the field in the first place?
• What about your employees?  How do they feel about the company? Do you have a corporate/team chemistry? We’re kind of cynical about this sort of stuff, so let’s look at baseball. Does an inspirational manager create winning team chemistry?  We doubt it.  When Gene Macha managed the A’s, he was about as inspirational as an OCC field examiner, but the team always won 95 games.  Show me a team that wins and I’ll show you a team with great chemistry.  Go into the locker room of a losing team, and there’s no way you’ll find it uplifting.  It’s winning that creates team chemistry and not team chemistry that leads to winning.
• It was This Month in History, June 12, 1987, when Ronald Reagan stood in front of the Berlin and uttered his famous line, “Mr. Gorbachev, tear down this wall.”  The history of that one line is interesting.  A young speech writer initially had it as ‘Herr Gorbachev, tear down, this wall.”  Reagan immediately loved that line but changed it to Mr. Gorbachev.  For more than a week leading up to the speech, there was a huge effort in Washington to get him to take out the line as being too inflammatory. Reagan kept putting it back in with his own handwriting, and as he stepped into his limo to be driven to the site of his speech, in a last ditch effort, Colin Powell handed him an alternative speech without that now-famous line.  He looked at it in route and turned to Ken Duberstein and said, “The boys back in State (the State Dept.) are going to hate this, but I’m leaving that line in there.”  There are men in history, Lincoln and Churchill come to mind, who see things with great clarity and who know precisely the absolutely right thing to do.  At that moment, on June 12^th, 1987 in Berlin , Ronald Reagan was one of them. Interestingly, Reagan’s speech got very little press at the time.  Now it is in the canon of great American speeches, short, but overwhelming in what it represented.
• Speaking of great speeches that were short, we just re-read Lincoln ’s Gettysburg address.  It was only ten sentences long!

• The June 1 issue of American Banker had an interesting interview with Ace Greenberg, onetime CEO of Bear Stearns and now Vice-Chairman Emeritus of JP Morgan.  What we remember most about Ace is that maybe 10-15 years ago he made a charitable donation, something like $1 million, to buy Viagra for homeless men.  Go figure. And the follow-on interview has Greenberg using the F-word all over the place when talking about Jimmy Cayne, his successor at Bear. Utterly fascinating.
• Uber-lawyer Tom Vartanian recently cited a study done by the American Association of Bank Directors.  The review looked at 90 lawsuits brought by the government against Board members.  The largest number of suits had to do with loans that went bad, and frighteningly, 8-9 years had typically elapsed from the time the loan was made till the lawsuit was filed.  Can you imagine being sued over a loan you voted to approve nine years ago?  Do you remember what you did even 8-9 days ago?
• On This Day in History, June 9, 1968, Bobby Kennedy was buried next to his brother, John Kennedy.  Here’ s Kennedy with his family about a year or two before he was killed.  He left behind nine kids and a widow.

• Here were the ten biggest banks in 1983,  listed in order by size:  #1 Citicorp, #2 Bank of America,  #3 Chase Manhattan,  #4 Manufacturers Hanover,  #5 J.P. Morgan, #6 Chemical, #7 First Interstate, #8 Continental Illinois, #9 Security Pacific and #10 Bankers Trust.  Of these ten, only two survived. Want to guess which ones?  Are you sure?  The only two to survive are Citicorp (now Citigroup) and Chemical.  Bank of America was acquired by NationsBank (which kept the name) in 1998, Chase Manhattan was acquired by Chemical Bank (which kept the name) in 1996, Manny Hanny was acquired by Chemical in 1992, J.P, Morgan was acquired by Chase Manhattan in 2000, First Interstate was acquired by Wells Fargo in 1996, Continental Illinois was acquired by Bank of America in 1999, and Bankers Trust was acquired by Deutsche Bank in 1999.  If you look at the twenty biggest in 1993, only one other survived, and that was #18 Norwest which acquired Wells Fargo but kept the name.
• The Federal Reserve has called for a thorough review of compensation practices, calling for them to properly reflect the risk taken. Here’s one scenario that we can see, that being how residential loan officers get paid upfront regardless of how the loan performs. Think of all the loan officers and AE's at New Century, Option One, Novastar and the like who got paid huge commissions on loans that quickly went bad.  Do you think this will really be allowed to happen in the future?  We think loan officers will have significant hold-backs on commissions, with final payouts being based on how the loan performs over a several year period.
• If you look at the fifty biggest banks in 1983, aside from Citi, Chemical, and Norwest, the only others to have remained independent are NCNB (now BofA), Bank of New York , PNC, Comerica and Northern Trust. Isn’t it just amazing that of the biggest fifty banks, only eight remain?
• The official numbers are in, and California is 40.8% White and 37.2% Hispanic.  These are actually for year-end 2008, and experts say there will be fewer whites than Hispanics within a few years.  Making generalized statements about any group is dangerous, especially racial or ethnic groups, but the Hispanic population here just seems very hard-working.  Our family maid does housecleaning five days a week, washes dishes at a restaurant in the evenings, and just announced with great pride that she now has a job cleaning bathrooms for weekend Oakland A’s games. She gets it, understanding that there can be great pride and dignity in any job.  You have to hate the fact that she’s here illegally, but if she could become a legal resident, isn’t she the kind of person we’d be proud to have as a fellow citizen?
• We have nothing new to say about UCLA Coach John Wooden who died a few weeks ago, but we met him around 1997, at a SoCal Mortgage Conference of some sort.  He was sitting all alone at a booth for New Century or Option One, maybe some other sub-prime lender, and you could have him sign a miniature basketball for you. The exhibition hall was pretty empty, and no one probably knew who he was.  He just sat there all alone.  Anyway, it was kind of embarrassing seeing him do this.  Presidents and sports icons shouldn’t be appearing at mortgage conferences to pick up a few extra bucks.  This is Wooden with his star center Bill Walton.  This was obviously before long, baggy pants became all the rage. Speaking of Presidents, Rob Chrisman and I went to an MBA conference in San Francisco maybe 15 years ago where former President Gerald Ford was pimping for Lehman or DLJ.  We shook his hand, and Rob got him to sign something. He gave a really boring speech over dessert and yours truly (too much wine, too stuffy a room?) fell sound asleep in the middle of it. 
• Grammar time:  Which is the correct sentence:  (a)  “There are a number of re-purchase letters from Citi that I’m trying to ignore” or (b) “There is a number of re-purchase letters from Citi that I’m trying to ignore”?  We violate this all the time, but the correct answer is (b).  The word number is a singular, so it should be “There is a number of re-purchase letters…..”  Next time Citi sends you a letter saying “There are a number of outstanding re-purchases, and we are initiating legal action against you unless you deal with them at once” you should refuse on the grounds that the improper grammar makes it impossible for you to comply.
• Remember Western Sunrise Mortgage. Cindy Sample , their CEO, has written a murder mystery called Dying for a Date.  Check out www.cindysamplebooks.com
• There were many silly aspects to the 60’s, and one of the more clever scams was the Black Panther Party. They wore black leather coats with French berets and went around with serious guns drawn in public.  They called for a revolutionary overthrow of racist America and became the darlings of the wine-and-brie set.  The best book you’ll read all year (and it’s very short) is Tom Wolf’s Radical Chic & Mau-Mauing the Flak Catchers  which captures the total absurdity of it all. Deputy Prime Minister Bobby Seale made a funny admission decades later: “Yeah, we got a lot of press selling Mao’s Little Red Book on the Berkeley campus, and with our black leather clothes and our reputation, people really ate it up.  But all we knew is that kids in Berkeley would pay $2 for this book that we could buy in Chinatown for a quarter.  Hell, we never read that shit. What’d we care about China ? We were just trying to make some money to go buy some weed.” The Black Panthers were thugs, dope dealers and extortionists, but they were also great at marketing.  They started free breakfast programs for the poor kids of Oakland and wrapped themselves in the cloak of respectability by trying to help “the community.” They also had a great sense of theatrics and would gather 20-30 “party members” and stand on the steps of the State Capitol with their guns drawn, and if Huey Newton would have to go to court for one of his many arrests, they’d escort him with weapons drawn.

Later in life Party Prime Minister Huey Newton tried his hand as a real estate salesman but was gunned down on a street corner at 3:00 am when he tried to rob a drug dealer.  Deputy Prime Minister Eldridge Cleaver designed pants that, how do you say this, had a cod piece so a man's penis could be worn on the outside of his pants, (it was not a big seller), and last we heard Bobby Seale was running a restaurant (“Barbecue with Bobby”) in Kansas City.  One of the worst parts of the movement was that this photo below of Black Panther “Prime Minister” Huey Newton was turned into a 3’x5’ poster that hung in every college students’ room in America . You’d be in some girl’s dorm room trying to make out, and just as you were starting to make some progress, you’d look up over her bed and see Huey Newton glaring back at you.  It certainly did nothing to promote the sense of romance you were portraying. Anyway, forget about leakage and gain-on sale calculations and go buy Radical Chic.  You’ll laugh so hard you’ll be crying when you see how silly all of this really was, and how very seriously some people took it.                                                                *     *Well, we took some time off, caught up on some reading, watched some movies, and didn’t have to be clever for three whole weeks.  It was shocking how few people actually missed this Newsletter.  Shocking and humbling. Garrett, Watts & Co. “Helping lenders increase revenues, control costs, and better manage risk.

• Mike McAuley   (280-250-2536)
• Corky Watts      (408-497-3135)
• Joe Garrett      (510-469-8633)