BACK TO THE FUTURE

Well, tomorrow is the BIG day. The "Stress Test" (there's Al Gore 
again..."Lock Box") is going to be explained. Of course we are going 
to have to wait until May 4 to really find out who will be the winners 
and losers in this but the markets is already showing signs of being 
more than nervous about the entire concept.

Last week, Robert Merton commented on events leading up to and the 
cause of, the latest hiccup in our financial system. Paraphrasing of 
course, and among other things was, "...of course the mathematics 
contained in the models was correct but perhaps we should explore 
whether the models were in fact flawed." Geoutttatown, or as we used 
to say when I was a kid, "No *&^% Dick Tracy." Now Prof. Merton is 
not to be ignored, after all he has about a $25,000,000 endowed chair 
at Harvard, a Nobel Prize and has, as a director and principal, been 
in the midst of two of the more spectacular financial failures in the 
past 10 years one of which almost ended the world as we know it. So 
one must speculate that with this sort of authority raising issues of 
the appropriateness of financial models, how is it that Our Hero is 
about to undertake rescue of the nation's financial system on a model 
which, to my knowledge has never been seen much less independently 
tested. Or to put it another way, isn't this just about the point 
where the excrement hit the revolving blades. It reminds me of 
Lindsey Nelson in the replay of the Notre Dame football games back in 
the last century; "...and now we move to further action in the fourth 
quarter.'' For God sakes, Lindsey, the game was played yesterday, WE 
KNOW WHAT THE HELL HAPPENED!!!!

I suppose all of this has occurred to Our Hero, but he seems to have 
minimized the chance that one of his quants might have had a bad day 
in the algorithm-creation phase of this exercise (or a bad minute for 
that matter) and he is determined to press on believing in his ability 
to convince many and explain away all doubts. He's had a hell of a 
run so far in doing that hasn't he? Once this part of his master plan 
is completed the elimination of bad assets from bank balance sheets 
will begin through the "public-private partnership" he so breathlessly 
touts and about which so many of the proposed players are heard 
muttering, "aint no way I'm getting into bed with this mob" believing 
it seems for some incomprehensible reason that they may not be 
completely men of their word. Oh, suspicious souls.

While all of this has been going on the Germans have merrily announced 
the creation and proposed funding of their "good bank, bad bank" idea 
with some strangely familiar sounds to it. It seems that what is 
being thought about across the pond is pretty much leaving the "bad" 
assets with the banks themselves but giving the institutions in some 
cases up to twenty years to write them off all the while funding the 
banks to hold the assets. Brilliant those Germans...except that is 
exactly what the Chileans did twenty-five years ago, the Brazilians 
twenty years ago, the Mexicans fifteen years ago and...oh hell, 
there's no point to carry on except to say that this "novel" approach 
is precisely what bankers and regulators have been doing since Joe 
lent Harry the first unit of exchange back at the beginning of time. 
For you see, if you provide liquidity to banks, time will heal...AND 
IT PROBABLY THE ONLY THING THAT WILL HEAL!! There is another thing 
that we should keep in mind. There are very few truly new ideas; I 
used to tell folks who worked for me the only truly new idea in the 
past 2000 years was the Sermon on the Mount. Everything else is a 
variation on a theme. I still believe that. The problem is that 
hubris and a lack of personal and institutional memory prevent the 
application of perfectly good OLD concepts with a modern variant to 
solve problems we have seen a hundred times before. It is not 
surprising that it appears the Germans are prepared to apply 
successful past concepts to present day problems. Not lacking in 
Hubris, Europeans are nevertheless far more aware of history that we 
Americans. They may have this one right. Anyway, we will have an 
opportunity to comment on what is to be revealed tomorrow. I have 
another one of my bad feelings about what that may be.

A sidebar. The pols are still howling that Banks aren't lending. 
Look at the Fed statistics; there's a whole lot of lending going on. 
It is a lot more selective and a great deal of it has been the draw- 
down of committed lines to large corporates, but the banks are 
lending. What has happened is that everyone else---WHO BEFORE this 
debacle provided about 80% OF THE CREDIT IN THE COUNTRY, have 
stopped. And therein dear reader is the problem.