Some were billing it as the biggest government bailout of the US housing market since the Great Depression. Perhaps inevitably, President George Bush's package of minor measures to address the crisis in sub-prime lending fell short of these exaggerated expectations.
Yet, in combination with repeated assurances from Ben Bernanke, chairman of the US Federal Reserve, that the Fed would act as needed to limit the impact of financial turmoil on the economy, the markets seemed pleased enough with the response. Both men tempered their remarks by insisting that there would be no government-sponsored bailout of speculators. Even so, there is now hard evidence of at least limited action by the authorities. Already the markets are factoring in a cut in the Fed Funds rate of 75 basis points by the end of the year.
As for Mr Bush's initiative, it was more rhetoric than substance. There is some relaxation of the rules governing when the Federal Housing Administration can underwrite mortgage holders, but analysts estimated that the changes would benefit no more than 80,000, and these would be the already reasonably credit worthy.
There are reckoned to be some 2-3 million in total who face difficulty raising the funds when their mortgages fall due for renewal at higher interest rates over the next year or two. As can be seen, the threat of mass foreclosure, resulting in a potentially devastating downward spiral in house prices, has yet to be properly addressed.
Still, the authorities are, for the time being, probably right to hold back from more drastic action. Despite the rising hysteria of the language, the markets and the press, we are not yet back in the Great Depression, or indeed anywhere close. Growth is plainly going to moderate quite significantly, and, in some parts of the US economy, it already feels like recession. Yet in aggregate, there still seems a reasonable chance of avoiding the R word.
Heads roll at Standard & Poor's
Credit-rating agencies have been cast as some of the chief villains in the present debt crisis. In apparent acknowledgement of the chorus of criticism, the head of Standard & Poor's, the biggest of the three rating agencies, has now stood down.
Not that you would surmise this to be the reason for Kathleen Corbet's departure from yesterday's press release which, poker-faced, said that she was resigning so as to pursue other opportunities.
Her replacement, Deven Sharma, was meanwhile said to be uniquely qualified to pursue the huge growth opportunities that continual expansion of capital markets present. You sometimes wonder what planet the writers of blurbs like this occupy.
Perhaps McGraw-Hill, owner of Standard & Poor's, hadn't noticed that the capital markets it cites are, for the time being, virtually closed for business. Pursuing growth opportunities within them will none the less be the least of Mr Sharma's immediate challenges. His first year in the job is instead likely to be occupied with fighting off politicians and regulators.
On both sides of the Atlantic the rating agencies have been roundly castigated for failing to warn about the build-up of problems in the US sub-prime mortgage market and for the mispricing of debt that flowed from it. Nor is this the first such failure. The rating agencies have been similarly at fault ahead of virtually every financial crisis of the modern age. Why so?
The job of a credit-rating agency is not so much that of anticipating individual defaults as assigning a probability of default. These probabilities are calculated by reference to historical experience. S & P cannot guarantee that no triple-A rated paper will ever go bust. What it can say is that, based on experience, very little of it will.
The problem arises with financial innovation, which the capital markets have always been very good at. With no history of such instruments to guide them, the rating agencies are essentially engaged in just guesswork. It is plainly harder to assess something that is new, because there is no history. By assigning an unjustifiably high credit rating to mortgage-backed securities and other basically high-risk innovations, the agencies encouraged investors to buy them, believing wrongly that they were as safe as houses.
One question for regulators as they crawl over the wreckage is the extent to which these misjudgements were influenced by the agencies' fee structure. Credit-rating agencies get most of their income from the sponsors. It proves much harder to charge the investors. One possibility then is that the agencies were simply too close to the investment bankers who designed and sold these products.
Yet the picture is a complex one. Investors don't have to use the rating agencies as a way of assessing credit risk. That they have chosen to is partly down to financial regulators, who have also come to use the agencies as a low-cost way of assessing credit risk for solvency and capital adequacy purposes.
The ratings system has thus become built into the regulatory structure of global finance in a way that was never intended. Even S&P is a relatively small organisation that has to rely heavily on the evaluation of other professional bodies in assessing credit risk. This would have been the case even with sub-prime mortgages, where some worthy real-estate professional body is almost certain to have opined that they were completely safe.
I'm not excusing the agencies. Reform is, no doubt, long overdue. None the less, it would be an extreme over-reaction to make credit-risk assessment part of the job of government regulation. Credit assessment by civil servants is unlikely to be trusted by markets, and if it was it would almost certainly lead to misallocation of capital far worse than the present mess.
Sir Nigel Rudd takes on BAA challenge
Brave man, Sir Nigel Rudd. Over the years he has drunk long and deep from many a poisoned chalice and always survived to tell the tale. But is not BAA, Britain's dominant airport operator, the chalice too far?
Well, someone's got to sort out the chaos of Heathrow and maybe Sir Nigel, a veteran of the British boardroom, is the man to do it. He certainly loves a challenge and, since selling Alliance Boots at a fabulous top-of-the-market price to private equity, he's been a man out looking for one. They don't come any more challenging than BAA, the most loathed company in the land.
Quite apart from the specific problem of Heathrow, BAA also has no fewer than two Competition Commission enquiries on its hands – one to establish whether the company should be broken up to encourage competition between airports, the other to decide on what it is allowed to charge. At this juncture, it looks like losing the argument on both.
Sir Nigel has accepted the job of non-executive chairman partly out of a sense of public-service duty. Maintaining efficient airports is vital to Britain's economic wellbeing in a fast-globalising world. As things stand, its most important one, Heathrow, is an international laughing-stock and a serious threat to British competitiveness. Correcting its deficiencies is a matter of urgent national interest.
From the point of view of Ferrovial too, the move is a smart one. BAA has been a public relations disaster ever since the Spanish construction group acquired the company in a highly leveraged takeover a year ago.
By creating an independent British board headed by Sir Nigel, Ferrovial defuses the criticism and allows much-needed operational autonomy. Heathrow's operational shortcomings have been greatly exacerbated by attempted micro-management from Madrid, leading to near-paralysis in decision-making. This is the first bit of positive news out of BAA for a long time. Let's hope it marks a turning of the tide.