AUGUST COMES EARLY

'Twas a grand day.  It started with Cameron back from Brussels where reports had it that he had been battered...and everyone ignored the reports.  Up went the market and by the time things got going in New York, things were really rolling.  The DOW close up 285 points and everything else followed.  The realization that the UK was not going to sink beneath the sea grabbed everyone and the geniuses who predicted disaster were fewer and fewer to be found.  Of course the July 4th. weekend is coming up so a lot of them might have been off to the Hamptons, having gotten square, where they could count their losses and blame them all on the stupidity of the British voter.  As Richard Haass of the Council on Foreign Relations said the other day--in public, mind you--"These issues should never be left to a referendum."  I'm sure he'll convince everyone at Donut du Jour in Sag Harbor this weekend...if the place still exists. After a few, he might consider a little swim in Plum Gut.  Glub, glub.

But wait!  It got better.  After the bell, Big Danny and his mob announced that from their standpoint 33 out of 35 major bank had paid the vig, got the numbers right and passed the capital plans on their stress test.  Announcements of raised dividends and buy-backs immediately followed.  In after hours trading, the entire sector was up.  Keeping in mind that it was this sector that suffered the heaviest losses on Friday and Monday, tomorrow's opening could be through the roof--keeping in mind that I don't know a damn thing about the stock market.

Oh, the two banks that did not pass?  The U.S. units of DeutscheBank and Santander; which is indicative of what the Euros are facing.  After 8 years, their financial sector still hasn't gotten itself out of the deep do-do in which it has been mired.  Frankly, I'm a bit surprised at Santander but NOBODY is surprised at Deutsche and I suspect that there are many others in the same boat who simply don't operate in size Over Here.  Not to panic, however, as  DeutscheBank has its Angie.  Anybody know the German for bailout?

So, what's it all about, Alf?  Back to original prediction.  The howling will die down, July will come and go and all of the Continent will shut down for August.  While this is going on, the Conservative Party will choose a new P.M. from, I suspect, a goodly number of applicants for the job--more than people expect.  He or she will take control when Cameron decides to leave.   Boris is odds-on but there is a reasonable chance that a REMAIN member might get the nod and this could be important.  Cameron's time-table will come to pass as many in the leadership realize that time is on their side and the Euros can't do a thing until the UK invokes article 50, all the time watching as things get nastier both politically and financially.  There will be rumblings to declare Mario Draghi a Living Saint but look out for Greece in this whole thing.  Their bargaining position has just traded on a major up-tick and it will be interesting to see how far they are prepared to push it.  I believe that the time is now for them to get the best possible deal even if a bit has to come direct from the Bundesbank--which is a total no-go, but in times of stress a way could be found.   Anyway, this is a day to day proposition, so let's wait to see what happens tomorrow.  Fascinating, truly fascinating.

NO STRESS

I keep telling you good folks that I will write the blog whilst chasing about for information of the goings-on of the day/week/month and trying to catch up with 8 year old triplets on a daily basis.  I have constantly lied, although my intentions were good.  It is an impossibility.  I shall never do it again.

I started late today because in my mind the most important breaking event was the results of the stress test, subjective version.  DeutscheBank flunked as did Santander.  Bank of America got a conditional pass and there were issues with J.P. Morgan.  Goldman Sachs passed as did Morgan Stanley and Citigroup hit it out of the park.  Why any of these things happened?  Again, I haven't a clue and as you read over the next few days why all this occurred, just keep in mind that whoever is writing the story doesn't know either because quite frankly, I doubt if the Fed could supply a cogent, intelligent answer either.  but, it does appear that from what has been released the "worst case" scenario was indeed a worst case, and from this we can take away the conclusion that the system is in pretty good shape...or not.  It is always the black swan, and should there be another event...and there will be, we just don't know when...it all goes in the crapper again.  One can only do one's best and move on.

We are going to talk a lot more about this in the days to come, but having reached this point in the Journey from 2008, there is something that I would like to query which has been on my mind for a bit. Why in the hell are Goldman Sachs and Morgan Stanley bunched in with B of A, Citi, Morgan, or even Wells Fargo S.A.?  It would seem tome that if one wishes to reduce the risk of Too Big to Fail to the taxpayer, why not reduce the number of institutions that fir into that risk group?  Goldman, for example, has led a charmed life.  Little does one hear of the sudden creation in 2009 of Goldman's commercial bank in order to make them eligible for the Fed discount window.  Bankhaus Goldman?  Tell you what.  Wander into Goldie some day and tell them you would like to open a checking account.  Sure, would be the response, sign here and give us $5 million.  Why not simply remove Goldie from the discount window chain and tell them they are on their own.  Ditto with Morgan Stanley.  If they want to make FHA mortgages, fine, but otherwise let's get real as the kids say and have them manage their business in the open, for all to see, and stop with this apples and oranges/pick a winner/nonsensical regulatory gamesmanship.   Just one less river to cross...can anybody say Volker Rule?

OK, I got that off my chest.  Tomorrow we get into the barrel of fun of the past week.  Shall we start with currencies?

AS EXPECTED

The stress test that it.  The Italians are weak, the Spanish aren't in great shape, Caxia...after a zillion Euros of support still look to the Belgian Burgers for support, the Germans are fine with the exception of a few little Landesbanken and the French are brilliant.  Do I believe it?  Not for a minute but there seems to be general agreement that this go-around was conducted with a more cogent view of reality than any of its predecessors.  Whilst all the Brits passed, the Old Lady will do her own thing next months which promises to be a bit more demanding than what came out of the ECB.  Nevertheless, the system should make it through that one as well.

So, what does all this mean?  Not much, really.  Those two nasty words--structural adjustment--keep popping up and reduced fears about the banking system, whilst no doubt a good thing--will not have any real effect on the European growth outlook.  Today, like yesterday, it is still stinko with nothing on the horizon to change it.  It would appear, therefore, we get through this year with a whimper and look to 2015 to change the course of events.  Of course, that change could be in either direction as there is a heck of a lot of political activity scheduled.  Remaining is the  Big Destabilizer...Russia...with a currency in free fall, an economy in tatters and a nut running the place.
A worse scenario one could not imagine but there's not really much anyone can do.

Of more immediate interest and perhaps concern is that Dilma won...and Brazil lost.  Oh, make no bones about it, the lady is a communist, they don't change, and as a result her economic policies and dismal governing record will persist and doom her country to no better than the gloom that has accompanied the past four years as well as to the continued destruction of the jewel in the crown, Petrobras, as a result of corruption, mismanagement and unconscionable incompetence.  Remember the Masters of the Universe of a few years past?  The BRICS?  Brazil, Russia, India and China?  Gee what happened, what went wrong?  The rule of law gang.  If it isn't there, nothing else is.  Might be something to keep in mind as we approach our elections next week

WHAT SCOPE!

I had no idea I was being read in the White House and more importantly by the editorial board of the Wall Street Journal!  Copy cats!  Their leading article today was on Jacob/Jack, killer of businesses.  Oh well, better late than never.  Next time I'll give them a heads up so we can be on the same page.

The White House was busy as well.  Responding to my claim that we were witnessing very little leadership in regard to the economy and the Ebola outbreak, The Leader today announced the appointment of Ron Klain as the Ebola Tsar.  Now Ron Klain goes back a ways.  He was the chief of staff to Al Gore and the guy in charge of the recount (he lost primarily because he limited the counties recounted).  Before that he was Joe Biden's head guy when Uncle Joe was in the Senate.  Klain ran Biden's attack of now-Justice Thomas (he lost).  He ran Uncle Joe's Presidential campaign (he lost) and then became Chief of Staff to Vice President Biden where, among other things, he was the point guy for America's investment in Soylandra (he lost about a billion of the taxpayer's money).  In D.C. circles he is know as being very consist ant and a son-of-a-bitch of a political hack.  With the nation half terrified (probably without much reason) over this Ebola thing, he seems like the perfect choice for the position of Tsar.  He can take some of the pressure off the head of the CDC and allow him to get back to the business of banning the sale of 32 oz. bottles of soft drinks but preserving Americans' rights by allowing them to purchase two 16ozers at the same time as he did in New York.  As I have said, you can't make this stuff up.


Markets rebounded today for absolutely no reason but it was good to see.  This thing is more and more about Europe, gang, and the Euros, bless them, aren't making things any easier.  Relations between Germany on one hand and the entire southern cone led by France and Italy are at the lowest point in years.  The issue?  Fiscal stimulus vs. fiscal conservatism.  Economic restructuring vs. same old, same old.  Don't need me to tell you about it.  However, behind all of this but looming very large is the stress test results which I though were scheduled for next week but apparently I was in error.  They will be soon, however, and Brussels and the EBC are making a big thing of the fact that for the first time there will be a real transparency in the conditions of the financial sector.  Now as I have said the previous stress tests were jokes but I also have to wonder if "real transparency" is a completely good thing given what I feel is the true state of European banking.  I await the result.

Finally, I have been asked why I haven't commented on the AIG trial.  Simple, Don't know what happened, don't understand what is being alleged and don't care.  There are more important things: the World Series starts next week, the Premiership is back in business and there is one BIG game tomorrow in college football.  Let's keep our priorities straight.

BACK HOME...

Just got in.  I hope nothing earth shattering happened today, so let me gather my thoughts and sally forth tomorrow.  Thanks for waiting.

Oh, almost forgot.  As it turns out Citibank still "failed" the stress test for what it's worth.  The errors did not involve accounts of a sufficient size to change the result.  Nevertheless, the exercise remains as a perfect example of how not to run a central bank.

MEMO TO BEN

Bennie, Bennie, Bennie.  How did you get bagged by that Greek?  No, not the guy in Athens the guy at 270 Park, Jamie...yeah, Dimon...you got this headline-grabber stress test and before you say word one he's off raisin' dividends and buyin' back stock before you tell him it's ok so it looks like he runs you and not the other way around and you know what, Bennie, now it's not Helicopter Ben any more but Bennie the Schliemiel--you know from Schliemiel down South--and for you this is not a good thing.

Bennie...another thing.  I love the worst case...oy, THAT'S a worst case!  But only four banks don't have enough capital and one of them is Citibank?  So what does that mean?  No more Citibank in your worst case?  Bennie, I got news so you should listen:  in your worst case there isn't NOBODY LEFT!  It gets this bad and nobody cares for capital.  You think people feel good when Jamie says, "My primary capital is 5.4% but the Indian's is only 4.9%!  Do business with me!  Capital, schmakable.  I want cash and how quick can you give me my cash!!  And Bennie, when that happens again what do you do?  Make money like the last time?  Bennie, you're the second biggest bank in the world right now next to the thing in Frankfurt that the paisan runs.  What are you, in competition?  LIKE YOUR FATHER RAN THE BUSINESS BY SEEING HOW MUCH HE COULD SPEND?  Like your father had a Goisha Kop?   Bennie,  listen to your Uncle Charlie.  This is feel good, this isn't real.  You tell this to them out there and they think everything is ok except for one or two.  You know better Bennie, but you're beginning to think like the politicians, oy, I think you ARE a politician.  You want I should tell them that the stress test is really for Bennie the politician and that's all it's good for?  Bennie, I'm your uncle and I want to help.  You want, you ask, but Bennie you better start payin' attention to what counts and what's real otherwise soon it's going to be Bennie the Schmuck.



I don't have any idea how one can really design a stress test in general much less a stress test for institutions as different as Wells Fargo, J.P Morgan-Chase and Citigroup.  For the latter it must be particularly difficult given the far greater international nature of the institution.  But, there it is and frankly, I have no idea what it proves.  The markets took it in stride; JPM went up, C went down.  Fair enough, let's move on.  But when one speaks of exposure isn't it remarkable that the rating of the world's two largest central banks are never mentioned in the same breath inasmuch as their activities over the past few years makes them vulnerable to exactly the same risk as the institutions they oversee and, in addition, their exposure to interest rate risk and duration risk is far greater given the vast holdings of government fixed rate paper.  If someone thinks that there can never be an...issue...with central bank risk, one had best think again.



Oh, the Euros approved  Greece's bail out today.  So nu?

MAYBE AL WAS RIGHT

It's a long shot, but the fly-over zone is hot as hell so maybe Al Gore was on to something other than how to make a quick 100 million and score Hollywood babes.  Maybe, but I doubt it.  Al was never on to anything that required any degree of intellectual effort.

This is a bad time for guys like me because we need action; we can't make up things out of thin air and right now that's what we have and hot thin air at that.  I've been around long enough to realize that when it all goes quiet that mwans there are real problems.  Politician of any stripe cannot resist babbling about all that they're doing to solve the problems of the day with their astounding intelligence and super-human energy levels.  When it goes quiet that means they got nuthin'.  Washington is at an impass and the Euros are starying into an abyss known as the End of the EURO.   The stock market is wandering lower, gold is wandering higher, durations are becoming shorter and shorter, and a new breed of geniuses are clammoring for investors to buy T-Bills because they are sold on a discounted yield basis which means there cannot be an interest payment default...huh?   If there is anyone out there who can understand what the hell that is supposed to mean, call me.  I'm tellin' ya, it's the silly season.  Must be the heat.

The fate of the Euro, however, is now being openly discussed, not only within the blogosphere and academia, but by serious folk on both sides of the pond.  Frankly, I think the French and the Germans along with a few others would sacrifice anyone and anything to preserve the currency but I have to admit that a few doubts are creeping into this, my long-standing belief.  I must admit at being surprised as to how long it has taken the Euros to come to the realization that as to Greece the jig is up and really
surprised at the lack of pragmatism which heretofore had always been synomious to them as to finding a solution.  Academic arguments as to what constitutes "eligible paper" at a time like this is well out of character.  Then again that might change.  Last week the results of the new "stress tests"  on Euro banks were released and greated with instant incredulity on the part of everyone.  I am told the ECB was stunned at the reaction which in it self would spark incredulity.  The postponement of the ministers' meeting to Thursday of this week was in no little part influenced by the reaction.  The last vestage of clothing has been torn away: there aint nothin' on the Emperor.  I think they must--and will--move shortly; they have run out of time.  Hence, now the silence.  We shall wait.

Over here, it's much the same.  The suit was talking tough on tv this morning and the comment was made that the markes did......nothing.  He's irrelevant.  Has been for a while, just no one noticed.  We've reached the end of ideas and now it comes down to can the respective caucasuses reach majorities within themselves to allow a deal to happen or not.  Frankly, I don't know and as I have said if not, I don't know the result.  Here, too, we wait.

Carter checked in as you have probably seen.  There are not many of us involved with triplets at any level but I can offer this advice:  Carter, if you are thinking about retiring from the world in a log cabin somewhere in the woode, think again.  There is no cabin so big that does not become small when triplets come a-calling.  You need a place to run and hide.  And I don't think the Euros make it to September even if it means the French don't get all of their holiday in August...then again, you may have a point.  Nothing is THAT important...

MUCH ADO ABOUT....

Well, I didn't get any help at all yesterday which is why nothing appeared. That was bad, then the day turned awful as Barcelona drew with Chelsea 1-1 at Stanford Bridge to win the semi-final on a well-earned goal 2:45 into extra time. Bummer. The ground was an hour walk from our old digs in London or a 15 minute ride down the King's Road on the #12. This was personal. On top of all that the match was refereed by Mr. Ovrebo, a Norwegian, who, among other things managed to miss a hand ball in the box by Gerard Pique of Barca that was witnessed by 65,000 in the ground and 200,000,000 across Europe, two other probable penalties in the box and then, just to show he was impartial, issued a red card to Barca's last starting defender for very little which means they face the dreaded Manchester United in two weeks at Il Stadio Olympio nella Roma with a back line of four guys named Schwartz. Not good. Now for those who don't follow this sport too closely, Norway does not have professional referees. Mr Ovrebo has a day job which means these two sides had the most important match of the year and in the case of many of the players, their lifetimes, refereed by an amateur. Mr. Ovrebo receives a fee for the evening and expenses. You pay peanuts, you get monkeys. Got the picture.

Anyway, this morning we awakened to the results of the stress test and an explanation of the same by Our Hero on the Op Ed page of the New York Times. Neither the results nor the explanation told us anything. It would appear that Bank of America was designated as the institution that led the hit parade of those in need of more capital and on the other end of the list was Citigroup who was long expected to be in the most dire straits. Not so. Bank of America's need was listed at $35 billion but C came in at only $5 billion. Equity markets yawned and promptly bid up bank stocks as they had been doing all week. Mr. Geitner proclaimed that this exercise replaced uncertainty with transparency and would bring more private capital to the financial system. Well, I guess I, like St Paul have to get knocked off my ass on my ass, but I am still seeing through a glass darkly. I don't know any more about the true state of the banks any more than I did 6 months ago other than for Our Hero telling me all will be fine now that he and The Leader are on the case. One might keep in mind that most of this went down the gurgle tube when he ran the NY Fed and while I don't for one moment wish to blame him, there remains a suspicion that he provides little to the solution. He sure can play to the markets, however. I don't wish to be misunderstood. I am not for a moment suggesting the this exercise was a white wash. The Fed ran it and the Fed does not play games. I'm sure what was done was fully professional.

One thing that was revealed, almost by accident, is that all of the banks have rather high capital ratios; certainly higher than the regulatory ratios of the Basel Accord. The shortfalls discussed are all related to primary capital or common equity which we have discussed earlier in the week. The yawn of the markets was probably a result of all the equity geniuses realizing that, 'Hey, these guys need but convert some of what they already have and everybody is home and dry." It also has probably provoked some thought that there may be something else involved here than just the designation and then recategorizing capital that was there in the first place. Now some of that preferred is Uncle's money and given what has already transpired, banks will probably be loath to provide any more direct ownership to the government. But the problem, if there was one, appears to be quite manageable. Now, provided Our Hero and his mob get the hell out of the way, stop this ridiculous asset swap/sale idea and keep positive, confidence and the liquidity which always follows will return. And that, boys and girls was what it was all about in the first place.

Mother's day this weekend, bless them all. We are off to see one of them and one pack of grandchildren. See you next week.

I NEED SOMEBODY TO HELP!

This is becoming very difficult. There is very little going on and it appears that the entire world is awaiting the results of the "stress test" scheduled for Thursday. Well, that is inaccurate. Not the entire world. It appears that the International Monetary Fund has found a mission that of predicting with unerring accuracy the condition of the U.S. Banking system an the requirements facing the same for new capital. Excuse me if I am underwhelmed, then again, one must keep in mind that the Fund has friends in high places as it was no other than Our Hero was once an employee. It was there that he became confused as for the need to pay payroll taxes for you see, you salary from the Fund is essentially tax free (they pay it) and it's easy to become confused...oh, why bother. Suffice to say, it has been a dull day in a fairly dull week.

But, we labor on to report that rumor has it the Wells Fargo, Citibank, B of A and apparently a few others are a bit short of the ready according to the Regulator mob. Oh that ominous note, the bank index has traded up big time. Go figure. Or maybe it's not so hard. Part of the report is supposed to set guidelines for "tangible common equity" for each individual bank and it may well be that the stock boys have no more idea than yours truly what the hell "tangible common equity" is supposed to do to make anyone of us sleep better at night. Oh I know the definition;this is the stuff that is supposed to be there at the end of the day after a bankruptcy. The percentage being floated about is 4--4 1/2% of total footings. Last time I looked the Incredible Shrinking Citicorp had about $2 TRILLION in total footings. If any among you feel that 4% of that number is just about right, would you contact me with your reasoning and the best reasonoer will win a prize. I case of ties, duplicate prizes will be awarded. Employees or any member of the family of a Citicorp employee are not eligible. This offer is available to only members of this planet. Advanced life forms from other galaxies are not eligible. All entries must be postmarked by tomorrow at midnight, eastern daylight time. We are going to get to the bottom of this thing.

Once there is agreement, the short-fall institutions will scurry out into the market to raise the necessary capital from private sources or failing that, Our Hero will make up the difference after about six months...assuming that anyone is left after six months. Actually, I was in favor of this approach a few months back but the major difference in my thinking was that there are some things that are best done in private. Announcing to the world that the First National Bank of Boothill (apologies, Chris Fides) is in extremis is not exactly the best way to prepare the market for a fund raising operation on behalf of FNBB or at least in my experience it never has been. But, I have been wrong before (two or three time to be exact) and there is a price for everything so this could become really interesting. Then again, if people believe that the fund raisers are in the nature of a Government Sponsored Organization ala Fanny and Freddie...well, we shall see. Only thing is those two didn't come out well in the end did they? Neither did Mr. & Mrs. Tax Payer. Then again, the Treasury could provide the funds directly as suggested, but that might result in more howls and shouts for ownership on the part of the government rising to a fever pitch. You pay peanuts, you get monkeys. $2 TRILLION in assets run by monkeys? Hummmmm.

You can see my problem. I'm just sitting out here in fly-over country waiting for a bit of inspiration. Worse yet, of the 10,000 Peonies in the world the wife just bought at least 500 of the 1500 she doesn't already own. She buys, she doesn't plant. They are pretty, however. I've left a pass and not at the gate house for John Lennon in case he comes by to visit. HELP!

QUEL SURPRISE!

That's French folks. Know what it means? Stunner of all stunners, it appears--at least according to the Wall Street Journal--that Bank of America and Citigroup might need more capital. Then again, if one speaks with the people who are running the institutions, maybe they don't. And whilst we try to unwind this little conundrum, didn't the Administration, taking a page from "A Walk in the Sun," which is of course familiar to our loyal readers, announce some time ago that, "Nobody dies?" Well, if you have in effect guaranteed the largest banks around, why the hell to they have to go through this exercise of raising more capital in what might be categorized as perhaps not the best of times for such an exercise? Seems like a waste of time to me; hell, just let them earn their way out of it (if they can) just like banks have always done.

Then of course is the irksome question of what kind of capital are we talking about. In theory, capital in regard to a bank as with most other organization is there to protect the institution from losses and by the standards of the Basel Accord all the banks who were subjected to the stress test have adequate capital. Ah ha, say some, there is capital and then there is CAPITAL. It would appear for example the the $45 billion Uncle has in Citigroup aint the kind of Capital one wants because it is in the form of preferred shares not common shares or to make it real simple, the kind of capital against which losses can be directly charged. If your reaction to the thought that $45 billion is no good is, "Huh" you and I are on the same page. Now this piece of regulatory genius comes from the same folks that were all for mark to market treatment for everything, but if you eliminate the mark to market "risk" and get back to cash accrual, doesn't a good deal of the concern for what kind of capital one has go away (as if it should have been there in the first place)? This of course begs the question as to whether "Capital" is relevant in a banking context, but you've heard enough from me on that subject. Nevertheless Mr. Pandit, Citi's CEO has announced his intention of converting the government's preferred shares into common equity thereby making Our Hero The Head Hummer at the joint that never sleeps. The fact that it completely and totally screws the equity holders and everybody else who stuck with this thing until the next generation at least is apparently of no interest to anyone. It can well be said that Citi was nationalized months ago but the finality of this action is still a bit off-putting. Worse yet, is the thought of the government getting control of a pot of money this big. Yikes! In one swell foop, The Leader has found himself the biggest pot of gold around which he can redistribute in the name of the exercise of a management function. Of course Mr. Pandit will pander to the thought in order to keep his job, and one wonders why as he has more money that he could possibly ever spend in a life-time unless he marries my wife. Then too, the Chairman, Mr. Parsons, has caused to be appointed four new directors to the Board who know something about banks and banking...in fact they know A LOT about banks and banking. Michael O'Neill is one of the best I have ever known. There may be hope.

And as for our North carolina good ol' boys...Damn, our boy Ken just found out those damn Yankees at PIMCO ar 'bout to vote 22,000,000 shares 'gainst hisself and all o' the 18 of his boys on the board. Actually, you have to feel sorry for poor ol' Ken. Seems as though he got handled by Paulson and Bernanke and Our Hero---yes, dear reader he was there as well--and as a result all sorts of folks are calling for him to be thrown in the hoosegow for misleading his shareholders. I haven't a clue as to the true story but I can sympathize with him as many years ago I was asked by a group of regulators to extend credit to a certain Latin American Country with all of my management missing in action. It is a very lonely feeling. Anyway, there has been speculation that B of A would find it easier to raise capital than Citi. With a new Chairman and CEO and an entire new board if PIMCO finds the support it needs? I don't think so unless markets have changed more than I realize since I put down my green eye shade. So one might ask, "What is to be accomplished by all this at this time?" Beats the hell out of me again. I'm not much help am I? Maybe we will have some answers tomorrow. If you have any ideas, clue me in.

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.

HOW'S THAT AGAIN?

The Treasury announced today that the results of the "stress test" on the largest banks in the United States would be released to the public sometime in May. Well, that's not exactly correct; SOMETHING relating to the results will be released in May but it appears that just what that may be has yet to be determined. The news was met with a yawn but as we said in A Walk in the Sun, nobody died. Oh, to be sure, one can assume that some banks were found to be in better shape capital wise than others, but just who those laggards were has not and may never be announced. Forgive me, but I'm having a hell of a time trying to figure out how, with the limited resources available to the Treasury, 15 or so financial institutions with assets totaling God knows what multiple of a Trillion dollars, operating in 172 countries could have been tested in approximately a two month period. Color me skeptical. The other thing I'm wrestling with is the nature of the test itself which, if reports be accurate, was primarily designed to determine the capital adequacy of the institutions in question. Loyal readers will recognize that when the words "capital" and "banks" are juxtaposed, I tend to have a sissy-fit, but for the sake of argument let us stipulate that there is value in this kind of exercise to anyone besides a regulator (although only God knows who that might be). If this be the case it immediately becomes apparent that some remarkable conclusions had needed to be reached in a rather short period of time, to wit the ENTIRE asset books of these institutions needed to be examined and VALUED to the agreement of the involved parties, otherwise the entire exercise is a complete nonsense. Yet this is what we are supposed to believe. Forgive me if I opt out.

Anyway, now that this determination has been made, the next step (other than the public being made aware of something) seems to be the requirement that all or most of the banks raise capital within a six month period or have capital provided to them by Our Hero and his mob. Remember this "confidence" thing that I have been talking about? Let us suppose that a majority of the banks approach the capital markets to raise common equity in the next few months. What happens to those who do not? Well, two things: either they are in a position to say, "We don't have to," or, "We choose not to." The first comment may pass muster, the second will be interpreted as, "Nobody will buy our stock," and essentially become the kiss of death. Of course that might even become the case quite early on if one of the institutions involved, for competitive purposes (THEY WOULDN'T DO THAT WOULD THEY!) leaks the perceived status of a competitor. That is one scenario. Another is the market, being aware of the possibility of a flood of bank equity issues decides picking and choosing is a mug's game and simply steps back or, which may be a bit more accurate, causes a rush to the market to be first in line thereby penalizing those who are unable or unlucky enough not to be able to move quickly. For the government to mandate an entire class of issuers to access a roiled market essentially at the same time may not be the cleverest idea ever devised.

And what of the poor souls who can't raise public capital at all? Two options are all that appear to be available. Either accept even greater government ownership and all that entails (you pay peanuts you get monkeys) or rapidly downsize through forced sales of--by definition--the most attractive and valuable--assets. Somehow, I simply don't believe any longer that it is the plan of Our Hero to allow this moment in time to go away without an enormous effort of the part of the government to restructure the entire industry with vast new amounts of government control and influence using this approach as an excuse ("We tried for a market approach but...").

Whilst the future is still a bit cloudy, it appears that The Leader and his administration is bound and determined to take the country as rapidly as possible in the direction mandated by the more liberal wing of his party. Elections do have consequences and as he has said, "We won." Fair enough. This movement is going to cost a great deal of money, however, and I suspect not all of it will be allocated by a Congress that is just becoming aware of what may be the beginnings of a voter reaction to increased deficit spending. Compliant financial institutions are rather valuable in such a scenario. We have seen examples of such public and 'private" partnerships throughout the world. Why not here? I make no value judgment as to the intelligence of such an approach in our time. It just appears that this is the way it may play out. Who knows, The Leader may well make the trains run on time. More about this tomorrow and the role the Federal Reserve might play in this brave, old world.

SEMANA SANTA

When I was working the Latin beat, Holy Week was a time of no action whatsoever. Indeed, in proper Latin thinking there was a period needed to prepare for Semana Santa and then a period needed to properly reflect upon the holy events which had occurred so many years ago. To put it another way, three weeks were shot.

With The Leader wandering around Europe accomplishing Sweet Fanny Adam it appears but looking terribly good doing it, the Congress gone and Our Hero trying to figure out why he said he was in the business of canning bank CEOs and entire boards of directors while trying to convince the same to agree to his plan, nothing much has been happening. Perfect timing for an Emerging Market kind of country. To fill the vacuum, the IMF jumped in today with their analysis of the size of the toxic asset pool held by banks. Now keep in mind this is the mob that were proclaimed to be part of the solution at last week's gathering in London. A true John McEnroe moment: "YOU CANNOT BE SERIOUS!!!" Yep, they are.

I'm getting one of my very uncomfortable feelings again that all isn't going quite right and this is sort of the calm before another storm. Bank earnings are going to be released quite soon as is--reportedly at least--some information regarding the "Stress Test" (there's the Ghost of Al Gore again). One would hope that there is some correlation between the two events because if, as I suspect, the earnings on an operating basis are going to be quite good and the stress test reports don't jive I think somebody might stand up with a, " Hello, hold on" type of moment which will set off a real scramble as to the efficacy of Our Hero's plan. Who's cooking the books in this deal might become a real issue.

In the midst of all of this, The New York Times ran an interesting piece on the FDIC who, from almost total (and somewhat deserved obscurity), has emerged as a central player despite there being nothing really know about their existence. As reported, Ms. Bair & Co. has placed herself in the Queen Seat of guarantor of all that is supposed occur if Our Hero has his way. As we discussed a free days ago, the FDIC has a budget but no real capital. The wonderful thing about it acting in this manner, however, is that no appropriations are needed in a guarantor role as the FDIC and the FDIC alone determines what it's liability might be. 6-5 and even that the determination will be "none." Forgive me, but do I hear the sound of a CDS creator in the background? The great facilitator, the FDIC...and all on unappropriated taxpayer's money. The Art of the Deal as The Donald would say. By all means do the deal. By the by, the word on the street is that The Donald may be in real trouble again. Now isn't that funny? One more tomorrow.