To Our Clients, Colleagues and Friends,

· A few months ago we were really harping on going paperless.  If you’re not already paperless, this needs to be one of your top five goals for 2009.  Ask us if you need the names of some good vendors who can help you achieve this.

· One thing we observe is that top performing lenders get rid of non-producing (or low-producing) loan agents very quickly. They don’t care that they’re commission only. They believe their winning culture is damaged by allowing low-producers to stay, sending the message that mediocrity is acceptable.  What are your thoughts on his?

· Sperm donors are getting about $100 per “donation”, but women donating their eggs typically receive from much more.  UC Berkeley’s Daily Cal had a quarter-page ad yesterday:    “Urgent!  Young Chinese Egg Donor needed. Remuneration: $100,000 and negotiable.  A loving and caring Chinese family is looking for healthy young (under 32) highly intelligent, Chinese egg donors.” We’ve seen ads that are very specific about wanting egg donors with high SAT scores and other targeted characteristics.  All very interesting.

· Will a given bank fail?  There’s one very predictive ratio.  Take the banks tangible equity plus their loan loss reserves.  Now look at all non-performers plus those loans that are 90 days past due as a percentage of the first number.   The higher that number, the more likely a failure.  Downey had a 172% ratio.  That means, essentially, that for every $100 of equity plus reserves, they had $172 in bad loans.  Indymac was at 191%, and Franklin Bank in Texas was at 264%.  The higher number, the worse off the bank, and anything over 50, quite frankly, worries us.

· When we ask clients about diminished margins and revenues, the response we almost always hear is about how many people they laid off.  Layoffs are an effective way to reduce expenses, but we rarely hear about improving the workflow process. Improving on an inefficient workflow will not only save you money but will also provide better service to the customer.  Do the layoffs if necessary, but look at improving your factory design as well. We’ve done many studies of companies with very specific suggestions on how to make the workflow more efficient.

· Albert Pujols is clearly the best baseball player of our time.  He’s the only player in history to hit 30 or more home runs with 100+ RBIs and a .300 hitting average in each of his first eight years in the majors. And he never strikes out.  Here’s how we compare to him to some of today’s other power hitters over the past three seasons

For our St. Louis area clients.  Is Pujols even better than Stan Musial was? 

· When Richard Allen was appointed Ronald Reagan’s first National Security Advisor, he approached the President-elect and suggested they set aside some time to discuss foreign policy philosophy.  “Perhaps if we could meet for a few hours, sir, I could get a sense of your views on foreign policy, the Cold War, and how to approach the Soviet Union .”  The reply from Reagan was brief:  “You don’t need a few hours to understand my thinking about the Soviet Union , because it’s very simple:  We win. They lose.”  As Reagan once said, there might not be any easy solutions, but there are simple ones.

· Simplistic thinking?  Maybe, but in the end, Reagan was on the right side of history. Margaret Thatcher once said that “Ronald Reagan won the Cold War without firing a shot.”  Historians will debate for years what caused the Soviet Union to fail, (to us, the real question is not why it failed, but how it managed to last so long), but whatever the reasons, the world can celebrate that it did.  And it was eighteen years ago this month.

· Albert Einstein once said that “Love is a matter of chemistry, but sex is a matter of physics.”   Funny guy, that Einstein.

· Free markets do a great job of allocating recourses, and it’s done in coldly efficient and effective ways. This is in contrast to governmental decisions which try to help people but often hurt them.  You need look no further than New Orleans .  Why were tens of billions lost with Katrina? It was because the government, in wanting to help people, subsidized flood insurance in Louisiana . If property owners had to pay the true market rate for insurance, they probably wouldn’t live there because the cost of insurance would be prohibitive.

· With everyone talking about the Big Three bailout, we decided to look into the history of automobile manufacturing the United States .  First, this is the 100th anniversary of General Motors. It was founded in 1908. Second, there were 253 auto manufacturers that year.  By 1929, it had narrowed to only 44.  What a mess the whole thing is now.

Have a profitable week… and make certain that you know the exact cost-to-originate loans (CTO) at your shop.  If you need help on the calculation, call us. But as we’ve said so many times before, you absolutely must know your margin and your CTO. Absent these two numbers, you’re a rudderless ship.

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

510-469-8633 or 408-497-3135