To Our Clients, Colleagues and Friends,   

• We saw Paul McCartney on the David Letterman show the other night, and he seemed funny, self-deprecating, and normal.  He seemed the kind of guy you might meet at a PTA meeting, the kind of person you’d enjoy getting together with sometime.  In light of Michael Jackson’s tragic life, McCartney seems like one person who figured out how to deal with fame.
• We looked at Bank of America’s earnings the other day, and one thing struck us. They have $32 billion in non-performing loans, and that’s a lot of bad loans. But it’s still one of the world’s greatest brands, and they still earned $3.2 billion for the quarter!
• Are you worried that your Board might fire you?  If so, here’s the perfect line:  When Ronald Reagan became California ’s Governor in 1967, his first act was to fire Clark Kerr, President of the University of California .  When Kerr walked out of the meeting where he was fired, the press asked him how he felt.  His perfect response was “I leave my job just as I started it, fired with enthusiasm.”  Feel free to use this line if the need arises.
• We’ve been doing more and more FOCIS-plus Reviews lately:  It’s a full-blown FOCIS Risk Review, the kind your warehouse lender might order, but on top of that, we overlay our basic Profitability Review.  We do the FOCIS Review, but along with analyzing your areas of risk, we make concrete suggestions throughout the Report on ways to increase revenues, better control costs, and manage your risk.  We’re in dozens and dozens of shops, and we see what works and what doesn’t.  A FOCIS-plus will show you how to operate like the top performers operate.  It’s probably one of the best, easiest ways to really improve your profitability.
• We got an e-mail from an old client about a Seize and Desist order, which was kind of funny.  He obviously meant a Cease & Desist, but sadly, Seize & Desist is often what it turns into. Each regulator handles the escalation of orders differently, but it typically starts out with a Formal Agreement, moves to a Memorandum of Understanding, and then to a Cease & Desist.  Just before being seized, they often issue a Prompt Corrective Action Letter.  Anyway, watch out for a C&D.  They’re like those Roach Motels.  Easy to check into but hard to check out of.  American Liberty Bank had a C&D and a CAMEL-5 when we bought it, and we got it to a CAMEL-2 before the regulators finally lifted the C&D.
• We just finished The Selfish Gene. It was absolutely fascinating stuff and brilliant scientific writing, but it was intellectually exhausting. So if you have some suggestions for light, summer reading, let us know.
• Banks are busy writing down their loans and investments (i.e. assets), and now, a number are doing something similar with their liabilities. The best example is a bank that has issued bonds.  The bank starts doing poorly, losing lots of money and having its loans go bad, so the bonds drop in value from 100 to, say, 70.  On the theory that they could buy the bonds back at 70 and make 30 points, they can now write them up (i.e. book into income) those 30 points.  The reason we have doubts about this is very simple.  If the bank is doing that poorly, they probably don’t have the capital to buy back the bonds. 
• How exactly do foreigners perceive American culture? We talked to a banker in Estonia once who told us that her perception of America was based on watching Dynasty, a not terribly accurate picture of how 99% of us live. This makes us wonder if foreigners think that the American high school experience is just like it’s portrayed in Mean Girls.   By the way, did you know that Mean Girls is a cult movie among today’s teenagers?  They’ve memorized every single line!
• We’d like to talk today about the relationship of Danish philosopher Søren Kierkegaard to commercial banking, the connection being the depression that both Kierkegaard and today’s bankers suffer from.  Mr. K’s depressed view of the world is summed up in the title of his classic,Sickness unto Death. And he didn’t even have non-performing loans to worry about.

The reason Kierkegaard is so important is that he makes it possible to read more important things such as The Globe and the National Inquirer.  Last week we bought a copy of The Globe because there were actual photos of the Michael Jackson death scene in it!!!  Only when we got it home did our daughter point that it said, in smaller print, that it was a photographic re-enactment of the death scene.  Anyway, the real point is that you must always keep a copy of Kierkegaard by your nightstand.  This way, when your wife says, “I can’t believe I’m married to someone who reads crap like the National Inquirer!”, you immediately point out your copy of Sickness unto Death sitting on the nightstand and tell her, “Look at what I’m reading!  I’m reading Søren Frickin’ Kierkegaard, so how about giving me a little slack here?”  So buy one of his books and put it next to your bed.  It should also work if you get caught reading dirty magazines.

• We just finished watching a few YouTube videos of Little Richard from the early 60’s.  What an amazing talent.  And what an amazing hair style!  The funny part is watching the teenagers dancing in the background.  It kind of makes you embarrassed to be white.
• The one time we had dinner with Chuck Berry, we asked him about Little Richard.  He told us, and he was being serious, that Richard had once suggested they get married.  What a trend setter that Little Richard was!  This was decades before same-sex marriage.  And remember a month or two ago when we wrote about Ronald Reagan’s role in the fall of the Soviet Union ?  Look, Little Richard also played an important role here, proving that we were a superior culture with better hair and thoroughly demoralizing the Russians. The Soviets never produced anyone remotely like him.
• Remember all the contests we’ve had, like your favorite date movie or your favorite coming-of-age movies?  Let’s have a contest for the worst movies you ever saw.  Get your nominations in now.  You can nominate up to three, and the ten with the most votes will be the winners. We can already think of several, all of them French.
• Is it too early to think about Football?  In the Pac-10, USC will, of course, win the title like they always do.  But we predict a battle between Cal and Oregon for the 2^nd spot, and we think the Ducks will win it. They won 10 games last year and will have a great offense this Fall.  Lots of returning starters.  We’re already planning on going to Eugene September 26 to watch the Bears and the Ducks battle it out.
• Unemployed? Not making enough money?  Get a job at Goldman, Sachs, even if just emptying the trash.  Goldman has allocated $11.4 billion for compensation for this year’s first half, and if you divide that by the number of employees they have, it works out to an annualized $770,000 per person!

It bothers us, but most of our clients do not have very good I.T. people. The typical person is someone who’s a Mr. Fix-it, the guy who un-jams a printer or sets up new employees with computers.  Very briefly, this isn’t good enough.  Once you get to about $40-50 million a month, the I.T. person needs to be proactively thinking about the company’s future and how technology can be used to drive down costs and provide better service to employees and customers.  Mortgage banking is largely a commodity business, and in commodity businesses, it’s the low-cost provider who wins.  You need to have this person write a 3-year plan that shows what technology your company will need to stay competitive in the years to come.  The plan should be updated annually and should also include an annual I.T. budget.

Take care!                                             

Garrett, Watts & Co.  -  Joe Garrett (510-469-8633)  -  Corky Watts  (408-395-5504)