I knew it!

Anatomy of the Morgan Stanley Panic - WSJ.com

Two days after Lehman Brothers Holdings Inc. sought bankruptcy protection, an explosive rumor spread that another big Wall Street firm, Morgan Stanley, was on the brink of failure. The chatter on trading desks that Sept. 17 was that Deutsche Bank AG had yanked a $25 billion credit line to the firm.

That wasn’t true, but it helped trigger a cascade of bearish bets against Morgan Stanley. Chief Executive Officer John Mack complained bitterly that profit-hungry traders were sowing panic. Yet he lacked a critical piece of information: Who exactly was behind those damaging trades?

I’ll tell you who. Art O’Connor, that’s who! Well, not really … but I think he should share some of the profits from his short positions.

Oh sure, I could blame Merrill and Goldman and UBS and all the other major firms on the street for helping to drive down the value of my stock and retirement plan, but I prefer to blame Art.

And why? Because he’s tall, has a good-lookin’ fiancée, and can ride a bike pretty damned fast. Oh, and because he’s local and a friend … and if you can’t blame your friends for bad shit that happens nationally and internationally, who else can you blame???

This sounds promising.

Summary of the Draft Proposal To Rescue U.S. Financial Markets - WSJ.com

IMPROVING THE FINANCIAL RESCUE LEGISLATION

Significant bipartisan work has built consensus around dramatic improvements to the original Bush-Paulson plan to stabilize American financial markets — including cutting in half the Administration’s initial request for $700 billion and requiring Congressional review for any future commitment of taxpayers’ funds. If the government loses money, the financial industry will pay back the taxpayers.

3 Phases of a Financial Rescue with Strong Taxpayer Protections

• Reinvest in the troubled financial markets … to stabilize our economy and insulate Main Street from Wall Street
• Reimburse the taxpayer … through ownership of shares and appreciation in the value of purchased assets
• Reform business-as-usual on Wall Street … strong Congressional oversight and no golden parachutes

CRITICAL IMPROVEMENTS TO THE RESCUE PLAN

Democrats have insisted from day one on substantial changes to make the Bush-Paulson plan acceptable — protecting American taxpayers and Main Street — and these elements will be included in the legislation

Protection for taxpayers, ensuring THEY share IN ANY profits

• Cuts the payment of $700 billion in half and conditions future payments on Congressional review
• Gives taxpayers an ownership stake and profit-making opportunities with participating companies
• Puts taxpayers first in line to recover assets if participating company fails
• Guarantees taxpayers are repaid in full — if other protections have not actually produced a profit
• Allows the government to purchase troubled assets from pension plans, local governments, and small banks that serve low- and middle-income families

Limits on excessive compensation for CEOs and executives

New restrictions on CEO and executive compensation for participating companies:

• No multi-million dollar golden parachutes
• Limits CEO compensation that encourages unnecessary risk-taking
• Recovers bonuses paid based on promised gains that later turn out to be false or inaccurate

Strong independent oversight and transparency

Four separate independent oversight entities or processes to protect the taxpayer

• A strong oversight board appointed by bipartisan leaders of Congress
• A GAO presence at Treasury to oversee the program and conduct audits to ensure strong internal controls, and to prevent waste, fraud, and abuse
• An independent Inspector General to monitor the Treasury Secretary’s decisions
• Transparency — requiring posting of transactions online — to help jumpstart private sector demand

Meaningful judicial review of the Treasury Secretary’s actions

Help to prevent home foreclosures crippling the American economy

• The government can use its power as the owner of mortgages and mortgage backed securities to facilitate loan modifications (such as, reduced principal or interest rate, lengthened time to pay back the mortgage) to help reduce the 2 million projected foreclosures in the next year.
• Extends provision (passed earlier in this Congress) to stop tax liability on mortgage foreclosures
• Helps save small businesses that need credit by aiding small community banks hurt by the mortgage crisis—allowing these banks to deduct losses from investments in Fannie Mae and Freddie Mac stocks.

Text of Lawmakers’ Agreement on Principles

Congressional Republicans and Democrats came to an agreement on principles for the Treasury’s Troubled Asset Relief Program that they will take into final negotiations with the White House. It includes sections on taxpayer protections, oversight and transparency, homeownership preservation and funding authority.

Agreement on Principles

1. Taxpayer Protection
1. Requires Treasury Secretary to set standards to prevent excessive or inappropriate executive compensation for participating companies
2. To minimize risk to the American taxpayer, requires that any transaction include equity sharing
3. Requires most profits to be used to reduce the national debt
2. Oversight and Transparency
1. Treasury Secretary is prohibited from acting in an arbitrary or capricious manner or in any way that is inconsistent with existing law
2. Establishes strong oversight board with cease and desist authority
3. Requires program transparency and public accountability through regular, detailed reports to Congress disclosing exercise of the Treasury Secretary’s authority
4. Establishes an independent Inspector General to monitor the use of the Treasury Secretary’s authority
5. Requires GAO audits to ensure proper use of funds, appropriate internal controls, and to prevent waste, fraud, and abuse
3. Homeownership Preservation
1. Maximize and coordinate efforts to modify mortgages for homeowners at risk of foreclosure
2. Requires loan modifications for mortgages owned or controlled by the Federal Government
3. Directs a percentage of future profits to the Affordable Housing Fund and the Capital Magnet Fund to meet America’s housing needs
4. Funding Authority
1. Treasury Secretary’s request for $700 billion is authorized, with $250 billion available immediately and an additional $100 billion released upon his or her certification that funds are needed
2. final $350 billion is subject to a Congressional joint resolution of disapproval

So now it’s a matter of codifying these principles into the Paulson Plan, putting it to a vote, and submitting to the White House for signature.

I still want more details.

One thing I’ve learned from working for years in investment services …

From Investopedia:

Risk-Return Tradeoff

The principle that potential return rises with an increase in risk. Low levels of uncertainty (low risk) are associated with low potential returns, whereas high levels of uncertainty (high risk) are associated with high potential returns. In other words, the risk-return tradeoff says that invested money can render higher profits only if it is subject to the possibility of being lost.

Because of the risk-return tradeoff, you must be aware of your personal risk tolerance when choosing investments for your portfolio. Taking on some risk is the price of achieving returns; therefore, if you want to make money, you can’t cut out all risk. The goal instead is to find an appropriate balance — one that generates some profit, but still allows you to sleep at night.

It’s all about risk/reward; sometimes you have to lose a little to gain a lot … but somewhere along the line you have to decide when it’s time to cut your losses and recoup.

And this concept holds true in so many aspects of life.