To Our Clients, Colleagues and Friends:

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· What’s your Christmas Party going to be like this year? During the boom years, we were turned off by some of the absurd spending on lavish parties, some of which cost over $100,000.  They’re wonderful functions to show the company’s appreciation for its employees, and they’re good morale boosters for the employees themselves.  But waste is waste, and money doesn’t buy loyalty.  Potlucks are still our vote for the most fun functions.

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· If the sub-prime mess will ultimately generate losses of $400 billion, the number you see a lot, that will be 2-1/2 times greater than the S&L crisis.  That one had an official price tag of$151 billion.

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· Most cities, counties, school boards and other government agencies are too small to have full time professionals to invest their tax receipts and other cash balances.  As a result, many state governments have a pooled account which invests cash on behalf of any smaller jurisdictions.  It turns out that many of these state funds invested in sub-prime mortgage securities.  Florida ’s state-run fund held securities that declined in value drastically, and along with withdrawals by worried local government officials, the value of the fund has dropped from $27 billion to $14 billion almost overnight. State officials froze the fund, and there are now school districts unable to pay teacher salaries.  What a mess!  And isn’t it just amazing how these mortgage securities popped up in the strangest, most unlikely places?

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· Have you hugged your warehouse lender lately? Right now, he or she might be just about the most person in your life. Talk to your rep regularly, keep them up to date on your business, and if you’re not profitable, you absolutely must show them a plan to become profitable.

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A year or two ago, companies not making any money could get a warehouse line if they had enough capital and experienced management.  That’s largely a thing of the past.  Capital is important, but lenders are getting fed up with companies consistently losing money and unable or unwilling to make the necessary changes stop the bleeding.  When we do FOCIS Risk Assessments on behalf of warehouse lenders, lots of capital doesn’t compensate for consistent losses. 

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· The tentative date for the Garrett, Watts 2008 Client Appreciation Dinner is January 31^st in San Francisco .  Our last few have been a blast.  No long speeches, just various clients sharing ideas on things that have worked as well as those that haven’t worked. What we love seeing is people exchanging business cards and hearing them make plans to talk the next day. It can be lonely out there these days, and it’s good to be able to compare notes with one’s peers. Details will be forthcoming.

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· Last week we listed the ten biggest college endowments in the country, and quite a few Fighting Irish wrote in to comment that we left out Notre Dame, and that their endowment of $5.1 billion is among the top ten in the nation.  Notre Dame has very loyal alumni.  

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· We understand cutting costs, but we see people making a mistake when choosing their auditors. If you want to be HUD approved and do FHA loans, your HUD audit must be done by an audit firm that gets a Peer Review. This means that another CPA firm actually audits their audits.  We’ve seen some lenders get turned down by HUD because their audit wasn’t done by someone who gets this Peer Review.  You need to check with your audit firm on this. If they’re not subject to Peer Review at least once every three years, you need to switch firms, It might cost a bit more, but it’s worth it.

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· Let’s go back to talking about warehouse lenders.  If there’s any chance you might lose your line – for whatever reason – you’d better have a Plan B. We can probably help you find a new line.  Maybe. But whether you have us help you or not, don’t wait until you get your line yanked away. Plan ahead, be prepared, be pro-active.

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Joe Garrett and Corky Watts

Garrett, Watts & Co. http://garrettwatts.com/