While everybody is expecting the end of the World tomorrow, don’t be too surprised when the leaders of the World turn the S&P Downgrade into something bullish and the Algos save the World. Latest news before the ES futures start trading shortly.
EURO SYSTEM HAS DECIDED TO RESPOND DECISIVELY ON MARKETS TO
CRISIS – EURO ZONE MONETARY SOURCE

ECB CONFERENCE CALL FINISHED, STATEMENT TO BE ISSUED SHORTLY -
EURO ZONE MONETARY SOURCE

Some history on the credit rating agencies and their credibility. Don’t forget Lehman was top rated shortly before going bust….From Richard Sylla;

When the business of bond credit ratings by independent rating agencies began in the United States early in the twentieth century, bond markets—and capital markets generally—had already existed for at least three centuries. Moreover, for at least two centuries, these old capital markets were to an extent even ‘global.’ That in itself indicates that agency credit ratings are hardly an integral part of capital market history. It also raises several questions. Why did credit rating agencies first appear when (1909) and where (the United States) they did in history? What has been the experience of capital market participants with agency credit ratings since they did appear? And what roles do agency ratings now play in those markets, which in recent decades have again become global, to an even greater extent than previously in history.

Full report for those seeking some insight, read this somewhat old but good history on the credit rating agencies.

A Historical Primer on the Business of Credit Ratings

This month marks the 38th anniversary of what began as a fairly routine bank robbery that took place in Norrmalmstorg Square in Stockholm , Sweden .

On August 23rd, 1973, Jan Erik Olsson walked into Kreditbanken at Norrmalmstorg, central Stockholm carrying a small machine gun and attempted to hold up the bank. The alarm was sounded and the police called immediately. The first two officers to arrive on the scene entered the bank whereupon one of them was shot and injured while the other was captured and, rather oddly, made to sit in a chair and sing ‘Lonesome Cowboy’ by Elvis Presley. Four customers were taken hostage and Olsson issued his list of demands.

These included 3 million Swedish Kroner (US$730, 000 in 1973 or a rather staggering $3,541,698.35 in today’s devalued dollars), two guns, bullet-proof vests, helmets, a fast car and the presentation at the bank of his friend Clark Olofsson, a fellow armed robber who had been in and out of prison since the age of 16. The Swedish government gave their permission for Olofsson to be brought to the bank and the two men set about barricading themselves inside the main vault.

So far, so predictable.

A dialogue was opened up between the police and the would-be bank robbers and it was during the course of these conversations that things began to take a turn for the unusual.

One of the captives, Kristin Enmark, informed the authorities that she ‘felt safe’ with Olsson and Olofsson and that she was worried that the police might make the mistake of using force, thus endangering those held hostage.

Olsson phoned then-Prime Minister Olof Palme and threatened to kill one of the hostages and, the next day, Enmark also called Palme and told him how displeased she was with his attitude towards the robbers – begging him to let them all walk out, while Olsson wandered around the vault singing Roberta Flack’s ‘Killing Me Softly’.

The drama continued for several more days as the world’s media turned its attention towards the sleepy Scandinavian capital with several more shots being fired until, five days after the siege began, police managed to introduce gas into the vault which eventually led to the surrender of Olsson and Olofsson and the release of their captives unharmed.

After the robbery, Olsson and Olofsson were quickly tried, convicted and sentenced to lengthy prison sentences but Olofsson’s appeal on the grounds that he hadn’t actually HELPED Olsson but instead had tried to keep the situation calm was successful and his conviction was overturned – helped by the testimony of several of the hostages who spoke on his behalf.

After his release, the Olofsson and Enmark families became firm friends and, to this day, the hostages maintain that they felt far more threatened by the actions of the police than the bank robbers themselves.

In attempting to understand what had happened in the Kreditbanken vault, Swedish criminologist Nils Bejerot – the psychiatric adviser during the siege – coined a phrase that would take its place in the lexicon of the entire world: Stockholm Syndrome; the phenomenon whereby those taken hostage not only sympathize with their captors, but in some cases end up defending them.

Full must read report, Hmmm August 6 2011a

We see three plausible scenarios in the coming months:

1. The euro area manages to regain credibility regarding its willingness to “do whatever it takes” to resolve the current crisis while avoiding defaults and inflation. This ironically requires far more rapid and larger austerity than currently planned in the periphery.

2. The euro area choses decisively to end the moral hazard regime. While this will not be orderly, the problems can be reduced through comprehensive and rapid actions to restructure sovereign and bank debt in highly indebted nations, while recapitalizing banks elsewhere.

3. The euro area remains in limbo, unable to choose a clear path. This would lead to a large disorderly series of finan- cial sector and sovereign defaults, while an “inflationary majority” is likely to eventually assert control of the ECB and manage a massive liquidity expansion.

Full must read report on the European Financial situation. Europe on the Brink.

What are we witnessing in the financial markets? It all seems less of a financial crisis, but more of a politics and a lack of governance crisis. Since the last (financial) crisis we have accomplished nothing but some banksters having made another round of money, and the super rich having been bailed out. As the Economy has once again been falling of the cliff, politicians and regulators have done zero. Unemployment is “stubbornly” high, the debt has just been increased, the Euro problems are beyond fixable. The financial markets have been dominated by central banks trying to intervene in all asset classes.

Despite the last crisis partly being caused by over leverage, nobody has done anything to address the problems. The Monster of unregulated Derivatives, has just been increasing during the last years. The HFT Algo machines, which have absolutely no value to the market, the liquidity, nor effectiveness of the market, have grown into a huge Monster, that will according to us eventually destroy the microstructure of the market.

Yes, Wall Street will contribute even more to the next campaign, but that doesn’t justify allowing the system to eventually be totally unregulated, and behave in a predatory way. Capitalism is great, but needs to be regulated and governed in a different way. While the Fed has been busy trying to reduce volatility and increase market value, nobody has imposed the relevant regulations needed for a modern Capitalism.

The biggest problem still, is the skewed risk reward of the bankers, politicians, governors etc. With no downside in personal wealth, they have all continued taking too much risk, without any thinking about the possible future effects. Worst case, the Tax payer will bail out the “too Big to Fail”, while the Elite continues to fill up their pockets. They are enjoying the biggest free option, and actually acting rationally according to the (non) rules. Moral Hazard at it’s best.

From Macrobusiness,

Who exactly are these ratings agencies? Oh, those corrupted, easily deluded companies who are to sane analysis what a croupier at a roulette table is to an insurance policy. They showed in the lead up to the GFC that they go to the highest bidder and that they have little or no credibility. Suddenly these private companies have authority over the US government? And then let’s look at what happens to demand for US dollars if there is a downgrading. Nothing. The $1-2 trillion that they are arguing about is about six hours trading in the greenback. The US dollar is the world’s reserve currency and will be for some time.

So what is really going on? In one sense, it is just nostalgia for a time when America was stronger. It reminded me a little of the Hitchiker’s Guide To The Galaxy where the world is about to be destroyed by Vogons, an alien race. Arthur Dent asks an informed alien, Ford Prefect, what he should do. He is advised that he could put a paper bag on his head and sit in a corner of the pub. “Will that help?” the terrified Dent asks. “No, but you might feel better,” Ford Prefect cheerily responds.

Or is it all just a Contagion of Bad Ideas by Stiglitz?