To Our Clients, Colleagues and Friends:  

· In working with current or potential warehouse lenders, we suggest you show them your 2007 income statement prepared, informally,  in two ways.  Prepare a separate Profit and Loss Statement that shows losses from repurchased loans – with an adjusted bottom line that shows what your profit or loss would have been without those extraordinary items. It doesn’t change anything, but it might show your company in a more meaningful way.  The key is operating earnings, and it’s possible you had an operational profit last year despite losing lots of money on loans you had to re-purchase. And since you no longer do those higher-risk loans that lead to buybacks, you can give a glimpse of how much better your company is probably going to perform this year.

· Last week we listed banks according to their asset size. We thought it would be interesting to look at deposits as well as assets for the four biggest banks in the U.S.

What about these banks with so many more loans than deposits?  How do they do that?  Extra credit for getting this one right.

· On May 12, 1972 Rod Carew had five hits (two of which were doubles)  and three walks – and didn’t score once.  This has to be listed in some Directory of American Phrases under “An exercise in futility.”

· You’ve read plenty about that rogue trader at the French bank that caused them to lose over $7 billion last week? It’s a good wake-up call to get you really thinking about the controls you have (or don’t have) to prevent someone from blowing up your company.  In mortgage banking it has typically been someone in secondary who took unauthorized risk and destroyed companies.  But it can occur in many other areas as well.

One of the worst breakdowns in controls we ever saw was in a Southwestern company we were sent into a few years back.  In short, the problem was someone in doc draw.  This company was doing a lot of 2/28’s, with a 4.5% start rate and a 5% life cap. The person in doc draw assumed a 5% life cap meant the loan could never go above 5%.  It actually sounds pretty logical, doesn’t it? In any case, she was checking her own work, there was no 2^nd signature, no 2^nd  set of eyes.  By times this problem was discovered, they had closed 83 loans which were, essentially, 4.5% for two years and then 5% for the next 28 years.  And this was a few years ago when rates were much higher.  The company lost over twelve points selling these loans.

Ronald Reagan used the phrase “Trust, but verify” about the Soviets, and it applies here.  Have good controls, but verify everything.

· Next time your college solicits you for a donation, you should look up the size of their endowment. Although Harvard has the biggest with over $30 billion, many of the smaller schools have larger endowments on a per student basis.  Tiny Grinnell College has a fairly small endowment, but at $944 million per student, it’s #6 in the nation. Princeton has the 4^th biggest endowment ($13 billion), but they’re #1 on a per student basis at $1.9 million.

· We were stunned last year when  Washington Mutual closed its warehouse lending group, and we were even more disturbed when we heard last week’s announcement from First Collateral.  We remember when Bill Ridder started it with his little Apple computer.  We remember their ownership by Honolulu Federal, Michigan National Bank, The Associates, and finally, Citigroup. We remember all the great people who worked there – and who work there today.

Aren’t decision-makers who close warehouse groups like Wamu and First Collateral like Generals fighting the previous war?  First Collateral had a tough year in 2007, but from what we know, they have a very clean book of business now. Their weaker borrowers are gone, and in our view, they were going to have a highly profitable 2008.

· Interesting article on Countrywide in the current Business Week. Page 77, February 4^th issue.  Also, Bank of America bonds (5.375’s of 2012) are yielding 4.3%, while Countrywide bonds (6.25’s of 2009) are yielding 13.6%.  Is that the market telling us that they don’t think the deal will go through? Or is it the much-discussed concern that the BofA won’t assume the debt obligations of Countrywide?

· With February just a day away and the weather being so cold, we got to thinking about our New England clients.  It was H.L. Mencken who said that “The worst thing about New England is not Puritanism, but February.”   Witty.

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