From this morning’s Wall Street Journal:

‘No’ Votes Came From All Directions

The fatal “no” votes to the financial rescue package came from a strange-bedfellows coalition of lawmakers, from the most conservative to the most liberal members of the House, with a large number of representatives from low-income districts angry that Wall Street seems to be getting handouts while people getting tossed out of homes would get minimal aid.

One common strand that tied some of the diverse opponents together: a tough re-election fight. Eighteen of the 21 most vulnerable Republicans up for re-election, and 10 of the 15 Democrats in the closest races voted against the $700 billion financial rescue, illustrating the political hazards of bailing out Wall Street without offering an equally generous hand to taxpayers.

To me, this illustrates that the members of the House aren’t really thinking about doing what’s best for the country, even if it’s unpopular, but just care about protecting their jobs. It does make me wonder how many of those “no” votes would have been “yes” votes if we weren’t only 5 weeks from Election Day?

As Juvenal said in Roman times, “Two things only the people anxiously desire — bread and circuses.”

If everything was left solely to the people, do you think we’d be paying any taxes? But without tax revenue, how would vital government programs, such as say … Defense … be funded? Taxes are not popular, but are vitally important to ensure that our government can continue to function.

Putting together a plan, even an initially flawed plan that can be revised down the road, is vital to getting our economy back on track. The current ad hoc approach causes more uncertainty, more panic, more consolidation, less competition, and certainly doesn’t seem to be working.

What is going to happen if the Citigroup, Bank of America, and JP Morgan Chase acquisitions of WaMu, Wachovia, Bear Stearns and Merrill Lynch lead to their own financial troubles?

Mounting Liquidation Fears Squeeze U.S. Stock Market
March 6, 2008 5:40 p.m.

Worry about the health of the credit markets made a noisy comeback Thursday, leveling financial stocks and sending many investors scampering for the safety of government debt.

Revelations that two large investors had missed recent margin calls raised fears that more investors could be forced to liquidate assets to meet their obligations to lenders, possibly setting off a nasty spiral in which assets are unloaded into a declining market, placing even more downward pressure on values and leading more lenders to call in loans.

“The uncertainty in the market is rising,” especially in light of the margin calls, said Jim Russell, senior portfolio strategist at U.S. Bank. “Once those things get triggered you can have forced selling by leveraged players. That just adds fuel to the fire.”

The Dow Jones Industrial Average plunged by 214.60 points, or 1.8%, to end at 12040.39, hammered by sharp declines in all three of its banking components. Bank of America dropped 2.7%, Citigroup fell by 4.4%, and J.P. Morgan Chase shed 3.5%. The Dow industrials have slipped in five of the last six sessions and are now down 9.2% for the year to date.

The Standard & Poor’s 500 fell 2.2%, or 29.36 points, to end trade at 1304.34, the lowest close for the broad market measure since Sept. 22, 2006. It is down 11% this year and is 17% below the record close that it marked in October. The index’s financial sector was its worst performer Thursday, falling 4.2%.

It’s one thing when an individual investor misses a margin call, and has part of their portfolio sold out to cover. But when a hedge fund that is leveraged to 32 times its capital under management misses margin calls, life is going to get painful for a lot of people.

Carlyle Capital Receives Additional Default Notices
By PETER LATTMAN
March 7, 2008 7:05 a.m.

Carlyle Capital Corp. Friday said lenders were liquidating some of its mortgage securities, painting an even bleaker picture of its already perilous situation.

In a short news release issued early Friday, the fund, which is managed by a unit of Washington, D.C., private-equity firm Carlyle Group, said it received “substantial additional margin calls and additional default notices from its lenders” and that “these additional margin calls and increased collateral requirements could quickly deplete its liquidity and impair its capital.”

On Thursday Carlyle Capital roiled the financial markets when it said it failed to meet margin calls on its $21.7 billion portfolio. The fund said it had received a notice of default from one of its lenders that helps finance its portfolio of highly rated mortgage securities. Shares in the fund, which is listed in Amsterdam, slid about 60% Thursday.

And then I read this:

Housing, Bank Troubles Deepen
Foreclosures Reach A New Record; Home Equity Falls
By SUDEEP REDDY and SARA MURRAY
March 7, 2008; Page A1

Two crucial barometers of the nation’s housing market have worsened markedly in recent months, ratcheting up pressure on policy makers in Washington for action to stem the growing housing crisis and its widening impact on the nation’s financial system.

Among the latest trouble signals, the number of American homes entering foreclosure rose to the highest level on record in the fourth quarter of 2007. Meanwhile, homeowners’ share of the equity in their homes fell to a post-World War II low.

The unwelcome contrast provides stark evidence of how falling home prices are weighing on consumers. And it could add urgency to efforts by Federal Reserve officials to avert a larger wave of foreclosures by prodding lenders to reducing the principal — or total amount owed — on troubled mortgages.

Now, granted, a lot of people took on a lot of really stupid mortgages over the past few years, and some of them deserve what they get … but what doesn’t make sense to me is how many people are letting themselves get into this situation. Face it … banks don’t want to foreclose on their loans. They would much rather work with the borrowers to set new payment terms … but most borrowers won’t go to their lendors and say “I’m in trouble and need help” until it’s far too late.

Housing should be among the top-three items that get paid for when you get paid. Make sure you have a place to live, make sure you have food to eat, and make sure you have some way to get to/from work. Anything else can wait. If you don’t pay your credit cards, your credit score may suffer (albeit not nearly as much as it will if you default on a mortgage), but you’ll still have a place to live.

Sell your big stupid SUV and downgrade to a sensible little 4-banger (or even, shock & horror, ride a bicycle!). Get rid of cable/satellite … sell the plasma-screen if need be. Take on a tenant in your McMansion, to help cover the mortgage payment. Stop buying steaks and fast food, and make do with veggies and pasta and less meat; you really only need 3-4 oz of protein a day, and there are lots of sources from whence you can get it.

But don’t put yourself in a situation where you might lose your place to live when you still have other options. That is sheer idiocy.

I’m tired of watching my portfolio value continuing to drop … even after receiving my company matches for the past two years in my 401(k), it’s value is less than it was at the beginning of 2007 (prior to actually receiving the match for 2006), and it’s certainly less than it was at the beginning of 2008. I think I’m actually getting close to having a negative average-annual ROI (return-on-investment) overall from when I started at Morgan Stanley in 1999, but it hurts too much to look right now.

My only consolation is knowing that I’m buying in at lower prices now, and that when the market finally does recover, I will own more shares … but the short-term pain is still extremely painful. It’s the financial equivalent of a kidney stone … you know you’ll survive it, but in the midst of the pain, you’re not quite sure how.

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.