To Our Clients, Colleagues and Friends:

· Here’s one more interesting investment idea from one of the smartest investors we know. It’s the Wamu 4% bonds maturing in January 2009, trading around 94 for a yield to maturity of 12.3%.  What a great yield for a nine month period. 

· Last week we raised the question as to what constitutes greatness in mortgage bankers. Here’s something we got from Brad Nease of MCM:  “Some people are gifted with being able to manage a large group of people that operate within a large corporate structure.  Others are blessed with an entrepreneurial gift that enables them to start and grow a firm of their own.  Taking one out of one situation and placing them in another is like taking a fish out of water.   The key for the person is to recognize what their gifts are and develop them. “  

Well put: There are also people we know who are amazingly good at generating profits during a bull market, but who don’t know what to do in a  bear markets, and we know people who are good during tough times but who are too cautious to really do well in bull markets.  We got many responses on this one, many of which were very lengthy, and all of which were very thoughtful.

· With all the talk about mortgages going bad, you don’t hear too much about losses on credit cards.  The numbers below are the actual charge-off rates for February ‘08, four of them being below the historical average of 5%. 

We wonder why charge-offs aren’t greater, especially given how many people are busy defaulting on their mortgages. Do they walk away from their mortgage but stay current on their credit cards? Curious minds want to know.   

· Today is actress Ali McGraw’s 70^th birthday. For all of us who though she was so beautiful in Love Story and other movies, this is a real shocker.  We bet she’s still beautiful, and maybe even more than ever.  Happy birthday Ali, wherever you are.

· Here’s another bank with a great name:  Cornhusker Bank (not surprisingly, in Nebraska ). Here’s one with a horrible name: Rurban Financial. Get it? Part rural, part urban.  The bank is headquartered, however, in a town with a great name: Defiance , Ohio .

· After seeing how massively the current Thornburg shareholders have been diluted in their latest capital raise, we are reminded me of the line uttered by the U.S. military after bombing the hell out of a Vietnamese village.  They famously said that “We had to destroy the village in order to save it.”   Sounds like what happened with Thornburg.

· One of the lessons you should have learned in 2007 is that you need to have a loan loss reserve.  Yes, you’re probably doing very low-risk loans now, but things do go wrong from time to time. An easy way is to simply pick some number of basis points and set that amount aside on every loan. You can and should stratify it, setting aside more on high LTV loans and governments, but however you do it, you absolutely need to get started on building your reserve.

· When you’re buying back loans, maybe you’re selling 95% of them as scratched and dented, or somehow trying to clean up the loan or refinance the borrower.  But every so often we see companies that take the property to foreclosure. That’s fine, but you need to think about environmental hazard on the property. On the remote chance that there’s toxic waste there, and on the chance that the EPA comes after you, you will probably be liable if there’s a big clean-up bill.  Spend a few dollars and have an environmental consultant at least give you the history of the property.  Depending on what he finds, you might have to test the soil. It could be that decades ago there was some sort of industrial activity there with toxic chemicals being dumped. You need to know this before foreclosing and taking title to the property.  

· One of the many reasons to have a Strategic Plan is to set goals.  Do you know what your most important 3-4 goals are for this year? Does everyone in your company know what these goals are?  Be honest. We see it over and over again, that highly successful companies are very clear on what their goals are, and everyone is working toward them in everything they do. 

· Does anyone remember GOP Congressman Stewart McKinney from Connecticut ? In 1984, Continental Illinois Bank almost failed because of bad energy loans.  To avoid a banking crisis, the ever-pragmatic Reagan administration stepped in and purchased $3.5 billion of the non-performing loans and eventually engineered the bank’s sale to the BofA. At a Congressional hearing, Congressman McKinney put it pretty clearly:  “We have a new kind of bank. It is called too big to fail. TBTF.”   Old newspaper reports indicate that he said it sarcastically. We’re not aware that he did much else in his career, but he should have this quote enshrined in the Bank Hall of Fame. Or maybe there’s a We-Only-Pretend-To-Believe-in-Free-Enterprise Hall of Fame which honors government intervention in free markets.

Have you written your Strategic Plan for 2008?  Have you listed the most important goals for your company? If the answer is yes, does everyone in the company know what they are?

Joe Garrett and Corky Watts  -  Garrett, Watts & Co.