To Our Clients, Colleagues and Friends:

· We don’t know Angelo Mozilo, and people say we wouldn’t necessarily like him if we did.  Okay, and he might not like us.  But it grates on us when we hear him constantly attacked as the guy who started this whole subprime mess.   Wasn’t it a certain Roland Arnell of Ameriquest who was about ten times more responsible??

· How much have the banks and securities firms lost on write downs since mid-2007?  The ugly, ugly list below is almost all mortgage related. It’s denominated in billions of dollars ( U.S. ).

The only real surprise was that Washington Mutual’s write-downs look suspiciously light, especially given their deep involvement in the mortgage origination business.

· We wrote last week about the high concentration some banks had of HELOC loans on their balance sheets, pointing out that Irwin Bank’s ratio was in the 29% range.   Of the more mortgage-oriented ones, we note that Indy Mac’s HELOCs represented about 6-7% of total assets and 12-13% of total loans. They actually kept none on their books but obviously had some being held or sale when the secondary market for them disappeared overnight. We’ll try to report on the HELOC holdings for Countrywide, Downey and Wamu soon.

· If you’re one the dinosaurs (like us) who like sitting down in the morning with a cup of coffee and a newspaper, this will depress you:  (a) Of people between 18-34, only 19% claim to ever read a newspaper and (b) the average age of the American newspaper reader is 55, and rising each year. Who among us really think newspapers will exist at all in, say, 20 years?

· Yesterday was Marlon Brando’s birthday.  He was born April 3, 1924, and if you want to see some great acting, go watch On The Waterfront. He got lazy and was just mailing it in after his first few movies, but some of his early ones were quite stunning.

· Have you heard the justification for making sub-prime auto loans and why they’re safer than sub-prime mortgages loans?  They say that a gardener or laborer can always sleep in his car, but he can’t drive his house to work.  A clever line, but like so many clever lines, it’s not quite a complete argument.

· We are constantly bombarded on the radio with ads for John Commuta’s “program” on turning your debt into wealth.  Says his special program eliminates all debt.  Sounds like a scam. Let us know if you know anything about it.  If you got scammed, we’ll keep you anonymous.

• We were reviewing the Annual Report for Seattle-area City Bank, and if you know your bank ratios, you’d better sit down. For 2007 they had a 3.64% return-on-assets (an average of 3.27% over the last five years), return on starting equity of 21.6%, equity-to-assets of 16.9%, and an efficiency ratio of 21.5%. This is the equivalent of running the mile in three minutes, hitting 90 home runs or winning 40 games in a season.
• Do earnings growth and overall performance translate into shareholder value?  You bet. Shareholders who invested in City Bank when it opened in April 1974 and re-invested their cash dividends have enjoyed an average annual rate of return of 19% on their initial investment.  We first bought the stock is 1996, but for those who invested $10,000 in 1974,  it would be worth about $3.1 million today.

· Although few of you take it seriously, vendor management is just sound business practice. A few simply thoughts for a Vendor Management Program:  (a) Identify all your  vendors, (2) detail the contractual key points – expiration an d renewal dates, costs, key contact people, (3) maintain documentation. We’re always surprised at how many people simply can’t locate their contracts with various vendors, and (4) you need to document the vendor’s performance.  If they have agreed to certain service levels, you need to be able to prove that they are or aren’t meeting these goals.  It’s all pretty basic, but it just makes life easier if you have all this in one file per vendor, and if someone takes responsibility for maintaining these files

· Another cool bank name:  Cattle National Bank in Nebraska .  And then we saw a Forethought Federal Savings Bank.  We spent about half second wondering about that name, and then we read that their sole business is managing trust accounts that people set up to pay for funeral expenses. An interesting line of business for obtaining deposits, and a good name to go with it. 

Joe Garrett and Corky Watts  -  Garrett, Watts & Co

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