To Our Clients, Colleagues and Friends, 

· This week is the 50^th anniversary of Fidel Castro’s taking power.  Although he’s outlasted ten U.S. presidents, aren’t his people worse off today than when he took control?  Has there ever  been a dictator or a police state that made lives better for its people? 

· Interesting that FNMA is loosening its requirements for investors.  Aren’t they a partial cause of the current problems?

· Has anyone noticed the healthy prices being paid lately for flow and bulk servicing?

· We just were reading the joint OCC and OTS Mortgage Metrics Report, and six months after mortgages have been modified, an amazing 55% of them are in default again.  

· Someone recently asked us for a definition of moral hazard.  It’s simply that when people or institutions don’t suffer negative consequences for risky  behavior, they are more likely to act in a risky manner for the potential upside.  Last week it was revealed that a trader at Deutsche Bank lost them $1.8 billion.  What happened to him?  He simply lost his job and left the bank.  No negative consequences.  When he did well, however, he made tens of millions in bonuses. 

· Our solution to this issue, and we’ve been pushing it for years, is that all bonuses be based on trailing two or three year performance.  If someone has a great year, he doesn’t get a monster bonus.  That great year has to be averaged in with the next two or three years.  For better or worse.

· What a bunch of nonsense over Wells Fargo having their retreat for top producers.  Successful companies need to acknowledge their star people.  And it’s not bailout money that’s being spent.  Capital isn’t put into separate buckets, and federal TARP money does not go into some special category. It all goes into one big bucket.  Some people say, well, if those persons are doing so well, they can afford to go on their own.  But (a) it’s important that they get together with other top producers, and (b) all sales people need a pat on the back and acknowledgement that they’re important to the company. 

· The February 9th issue of the New Yorker has a dark article on what they call the Florida Foreclosure Disaster.  It must be what Oklahoma was like during the Great Depression. You sort of don’t want to read it because it’s so grim and depressing, but it’s also like a roadside accident on the freeway where you can’t help but look.

· A telling quote from this New Yorker article on the years leading up to the big real estate and mortgage bust:  “When the gardener comes and says he’s not going to mow your loan because he’s going to become a mortgage broker, that’s a sure sign that something is very wrong.”

· Remember when all bank Safety & Soundness Exams were every 12 months, or 18 months if you did really well?  We have a friend on the Board of a bank that is doing well and which was told their next exam would be in three years.  We believe that the regulators told him that.  But we’re not certain we believe the regulators.

Last week we heard from a friend who was just diagnosed with breast cancer, plus two friends who’d just lost their jobs.  After all the time spent when we were in college, reading the great philosophers and discussing the meaning of life, it might be that John Lennon said it best: Life is what happens when you’re busy making other plans. Sometimes life works out better than you had planned, sometimes worse.  But mostly, it just turns out differently.

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Joe Garrett and Corky Watts  -  Garrett, Watts & Co.    -  510-469-8633