August 10 Markets' Freefall More Eurocentric Than American

Watching the market give up its hard earned gains from Tuesday was certainly painful, and most likely due to events in Europe, not the United States.

The ECB's purchase of Italian and Spanish bonds to stem uncertainty and add liquidity had a number of unintended consequence. For starters, the cost to insure German bonds from default actually increased yesterday, surpassing the cost of similar protection for the British Gilt. Apparently investors have such a dim view of that paper that it has thrown the credit quality of the strongest economy in Europe in doubt.

All the attention on Spanish and Italian debt ended up pressuring the second largest owner of these bonds – large banks. Bank of America (BAC) continued to bleed, as did every other money center bank and most brokerages. Most French banks got hammered, especially Societe Generale, which lost 15% on the day, as fears of credit rating drop in that country are taking hold.