Exhibit 1: "Déclaration sur l'honneur"
(from my children's daily calandar)

Two weeks ago the Financial News (subscription required) was reporting on the active put market in financials citing Lehman, Morgan Stanley and Wachovia as concerns and/or catalysts for the increasing bets that more falls were due.

At the time Legg Mason's Bill Miller and Pimco's Mohamed El-Erian were concurrently writing different conclusions as to what stage the credit crisis is at. Mr Miller argues the peak is past; Mr El-Erian that, though that may be, the financial system is now in a weakened state and vulnerable to the significant economic downturn in prospect – which would re-ignite the credit fire embers.

Then came last Thursday the Bank of England’s (BoE) biannual Financial Stability Report (FSR).

Funny thing, bias. Not many would claim the BoE is an institution that calls a spade an effing shovel. In spite of some fabulous graphics, beautiful packaging and a ton of brainwork the report boils down to a self-serving (could be coincidence of course) argument that markets have got it wrong and have overshot badly. There is a risk, say the BoE, of a self-fulfilling destructive tendency.

This is an opinion sitting on the impressive assumption that the mortgage-backed securities (MBS) market can recover sufficiently to justify the BoE's opinion that mark-to market is a dangerous, socially anarchistic notion.

Ever since credit dysentery took Bear Stearns to Jesus that view has been furiously peddled by regulators and owners of MBS. Capital raising activities - key to restoring balance sheets - have been made sometimes to look like minor hedge actions rather than the primary focus they ought to be. It is, of course, true that if credit spreads narrow (as Mr Miller, a holder of Bear Stearns, JP Morgan and Countrywide, points out) there will be positive surprises in financials. But that does look an act of faith.

Lots of intelligence in the BoE. But there is more in the marketplace. Mr Miller and the BoE may interpret ABX index levels and general reaction as panicky exaggerations – and last week markets were clearly giving the benefit of the doubt to their view. But beside panic many are merely prudent like Mr El-Erian – not a bond guy for nothing. And it is doubtful that camp has been converted to consider this BoE opinion as signal rather than noise.

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