The article Obama Wins: What You Need to Know originally appeared on Fool.com.

In a move straight out of October 2008, Warren Buffett's Berkshire Hathaway (NYS: BRK.B) announced it will inject $5 billion into Bank of America (NYS: BAC) . The bank's shares had been falling apart in recent weeks amid speculation it would have to raise capital.

The premium for Buffett's love? B of A is up 25% as I write.

The structure of the deal is similar to what Buffett received for investing in Goldman Sachs (NYS: GS) and General Electric (NYS: GE) during the 2008 financial crisis, though terms aren't quite as attractive. In exchange for $5 billion:

• Berkshire will receive $5 billion in B of A preferred stock yielding 6%, redeemable at any time for a 5% premium (the Goldman and GE preferred yielded 10% with a 10% redemption premium).

• It also receives warrants to buy 700 million B of A common shares at a strike price of $7.14. It has 10 years to exercise the warrants.

Just like the Goldman and GE deals, the preferred are the investment, and the warrants are the kicker. Even if B of A's common stocks plunges and the warrants expire worthless (an unlikely outcome), the preferreds would still be a decent use of Berkshire's capital. It's a fairly safe bet on Berkshire's part.

Two points stick out:

A 6% yield on B of A preferred stock is actually below the going market price. Some existing B of A preferred stock can be purchased on the open market yielding more than 9%; some of B of A's short-term debt yields close to 6%. The warrants, of course, juice Buffett's overall return potential (and by a lot), but it's clear he wasn't gunning to shoot the lights out on the preferred. Last month, Berkshire co-boss Charlie Munger recited a key of Berkshire's philosophy: "How nice it is to have a tyrant's power, and how wron g it is to use it like a tyrant." That may include not acting as a loan shark.

B of A in recent days insisted it doesn't need capital. This morning, it still insists. "I remain confident that we have the capital and liquidity we need to run our business," CEO Brian Moynihan said in a press release. "At the same time, I also recognize that a large investment by Warren Buffett is a strong endorsement in our vision and our strategy." This is, then, a symbolic investment. Buffett is essentially renting his name to a bank trying to regain the market's confidence.

As B of A plunged in recent weeks, analysts speculated Moynihan would eventually do something big. This is pretty big.

Welcome back, panic! After a few days off, it's back: The Dow fell more than 500 points this morning, and 10-year Treasury rates hit an all-time low below 2%. (On that note, if you're one of those willing to lend money to the government for a decade at less than 2%, shoot me an email. We need to talk.)

What's driving the sell-off?

Standard caveat: Who knows. Markets do crazy things. More than 60% of total volume is done by high-frequency computer trading operating off of brainless algorithms.

But a few things stick out.

The past two weeks have understandably shaken confidence. Mutual fund outflows last week hit levels not seen since late 2008 -- although ETF inflows likely offset those figures. Fund giant Fidelity says its customer call volume spiked 50% last week. TD AMERITRADE (NAS: AMTD) says it processed more than 900,000 trades last Monday, with four out of five days last week hitting record levels of trading activity. Many were buying. But if the market is any guide, plenty were panicking.

Panicking over what? The worry du jour is that we're heading into a new recession. This morning, the Philadelphia Federal Reserve released a gauge of manufacting activity now at its lowest level since March 2009:

Source: Philadelphia Fed.

Does this guarantee a recession? No. But it's unmistakable that the economy has slowed in recent months.

Still, don't let any of this push you into panic. As my colleague Todd Wenning said this morning, "Some might see a Bloomberg machine flashing red as a 'panic' sign, but Fools should see it as a 'For Sale' sign."

It can't be repeated enough: The best returns are made during the darkest days. If you wait for the economy to get better, or for markets to "calm down," you'll miss the biggest returns. It's always worked that way. This too will pass, and those with a patient, long-term outlook will win. On the bright side, we're 500 points closer to the bottom than we were yesterday.

What do you think about these wild market days? Sound off below.

At the time this article was published Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright (C) 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

After stocks posted the most volatile stretch of trading since the 1930s last week, the Dow is down about 10% from its May highs. Some feel this is a bad omen. If the market is forward-looking, perhaps the recent sell-off is indicating a second recession. Maybe something worse.

It very well could be. But there's no way of knowing today. The old quip that analysts have predicted nine of the past five recessions is spot-on. The biggest driver of any economy -- confidence -- simply can't be forecast.

That limitation is painfully evident in the stock market. The history of big market pullbacks that ended up as much ado about nothing is long. Here are four examples.

April 2010-July 2010: Dow falls 14%
You don't have to look far to find a market pullback on par with what we've just experienced. Just last summer, fears of a double-dip recession exploded as Greece's finances unraveled and the Federal Reserve's monetary policy medicine wore off. Google searches for the phrase "double dip" went up 20-fold.

The fears never materialized -- at least not as investors predicted. Intervention by the European Central Bank and a new round of quantitative easing by the Fed sparked a rush back into risky assets. Within a year, the Dow rallied more than 30% and job creation hit a multiyear high.

March 2005-April 2005: Dow falls 8.5%
After dropping interest rates to then-historic lows early last decade, the Fed began inching rates up ever so slowly in 2004. As inflation picked up in early 2005, Fed Chairman Alan Greenspan told Congress he felt interest rates were still "fairly low." By most accounts, those two words alone gave investors a sense that the Fed would start aggressively raising rates, pushing the economy into recession.

A recession eventually hit, of course, but not for years, and not because of high interest rates. After the 2005 pullback, the Fed stayed its course of gradual interest rate increases, the economy boomed for another three years, and the Dow rallied more than 40%.

July 1998-August 1998: Dow falls 19%
How misguided nostalgia can be: Most remember the late 1990s as an investing utopia, but the summer of 1998 actually brought one of the biggest market plunges since the Great Depression.

After Russia unexpectedly defaulted, the global economy went into shock. Commodity prices plunged, creating more worry that other commodity-centric countries would also collapse.

Perhaps most caught off-guard was a hedge fund called Long Term Capital Management. With a few billion dollars of capital, LTCM borrowed roughly $100 billion to purchase derivative contracts with exposure to more than $1 trillion in assets -- truly one of the grandest adventures in leverage the world had ever seen.

The fund essentially went bankrupt after Russia defaulted. That created its own panic. With a portfolio that size, and with every Wall Street bank intertwined in the mix, the thought of liquidating LTCM's assets scared investors silly. It was the first true experience with "too big to fail." Economists weren't just worried about a recession. The word depression was on people's minds.

Wall Street eventually bailed out LTCM, mainly to save themselves. Fears subsided almost instantly, and 1998 and 1999 ended up as two of the strongest years the country has ever seen.

August 1987-Oct. 1987: Dow falls 34%
Most investors actually do remember this period. It lived in infamy as the crash of 1987, when stocks fell 22% in a single day.

But there are two important lessons from the 1987 crash that often go ignored.

First is how inconsequential it was to long-term investors. Stocks recovered about half of total losses within days of the crash, and were at fresh highs within two years.

Second is the cause. While still debated today, most accept that the crash of '87 was triggered by an inane financial product called portfolio insurance, in which computers automatically sold stocks to avoid losses, hedged with put options and futures contracts. Portfolio insurance could have worked on a small scale, but became so popular in the 1980s that it ended up cannibalizing itself: Normal stock selling begot more selling, which begot more selling, and so on. It spiraled until computers were effectively trying to sell the entire market at once -- and not because they were bearish on the value of businesses, but simply because they were programed to sell.

Remembering that lesson is as important today as it has ever been. Computer trading now makes up some 60% of total market volume. These computers don't care about economic data, and they aren't studying the intrinsic value of businesses. They're merely trying to outwit one another, often by holding stocks for a few hundredths of a second. The volatility these computers are capable of creating is crucial for long-term investors to be cognizant of -- or better yet, to ignore. A big market plunge isn't always a harbinger of real economic pain. It can be nothing more than a few computers playing tag.

Eye on the prize, Fool
There are plenty of other examples. Corrections of 10% or more are almost an annual ritual. The lessons gleaned from each one should be clear: Markets are volatile; get used to it. Markets aren't perfect seers; they often misjudge the future. And whatever has markets wound up will eventually work itself out.

This too will pass; patient investors will win. That will be just as true over the next 50 years as it was over the past 50.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

At the time this article was published

Copyright (C) 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

After Standard & Poor's downgraded America's credit rating Friday and the stock market lost itself entirely yesterday, everyone's emotions are running high. Mine have gone like this. When news of the downgrade hit, I thought, "Eh, no big deal." In April, S&P gave 50-50 odds of a downgrade if last week's debt-ceiling deal didn't cut $4 trillion from future deficits. The deal didn't. So who was surprised? After I read why S&P made the downgrade, I became annoyed. After yesterday's 600-point bloodbath, I'm now angry. You should be, too.

Who am I angry with? Washington. By S&P's account, they are the sole reason the nation's credit was downgraded. Few sensible people think the U.S. lacks the economic means to pay its bills. Push comes to shove, and taxes can be raised or money can be printed. These create a litany of other problems, but they invariably solve a debt problem. America can pay its debts.

The real roadblock is the political acid that gets in the way of our debt management. The debt ceiling has been raised 88 times since the 1940s, almost always without incident. Last week was different. It was turned into a political hostage. And S&P made it clear that the last week's debt-ceiling rodeo show is what ultimately sparked the downgrade. "The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed," it wrote. "The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy."

Now here's what's outrageous. After S&P made it clear that political bickering drove a stake through our nation's credit rating, political leaders responded by pulling out the howitzers and doubling down. "This is essentially a tea party downgrade," said Obama campaign chief David Axelrod. Republican presidential candidate Mitt Romney said, "The president's failure to put our nation's fiscal and economic house in order has caused a massive loss of confidence that resulted in an embarrassing downgrade."

Um, guys, this is exactly what S&P is talking about. By continuing to throw rocks at each other, you're engraving its point in stone. The biggest threat to our economy is not runaway spending or high taxes or entitlements. It's the vitriol used to prevent rational debate and agreement about those topics. The continuation -- even acceleration -- of that vitriol after the credit downgrade is what makes me angry. It should make all of us angry. When people asked what you thought of political bickering one week ago, the smart answer was, "Oh, I don't pay attention to that childish stuff." But that childish stuff shaved several trillion dollars off global wealth in the past week. This isn't just a sideshow built for cable news sound bites. It has a real, tangible, impact on people's financial lives.

But amid it all, there's reason for hope. There's reason to be thankful. There's reason to smile. It's simple: Every seed of prosperity is planted in the dirt of fear. Every bull market in history found its footing in the screams of panic. In 1933, people utterly gave up hope that the Great Depression would ever end. That turned out being the single best time in history to buy stocks. In 1982, people lost confidence that the Fed could tame inflation. That created a buying opportunity of a lifetime. In 2009, investors were sure that the financial system was unsalvageable. That paved the way for stocks to double within 18 months.

Will the crash of 2011 turn out the same way? Let's make it clear: No one knows how much further markets might fall. There could be more blood to come. But no one I know at The Motley Fool is panicking. Instead, we're looking at the current price of some high-quality stocks with sheer amazement, if not amusement. Yesterday, Fool Jeremy Phillips talked about Colgate-Palmolive (NYS: CL) . Others have mentioned Ford (NYS: F) and General Motors (NYS: GM) . Microsoft (NYS: MSFT) now trades at about seven times next year's earnings. Waste Management (NYS: WM) yields 4.5%. Berkshire Hathaway (NYS: BRK.B) trades at one of the lowest valuations it has seen in decades. We don't know how much lower these stocks might go. But we know that buying them at current prices will serve us well over the long haul. And that opportunity wouldn't be here without the charade that is our Congress.

"We're all in the gutter," Oscar Wilde once said, "but some of us are looking at the stars."

How about you?

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

Fool contributor Morgan Housel owns shares of Microsoft and Berkshire Hathaway. Follow him on Twitter @TMFHousel. The Motley Fool owns shares of Microsoft, Berkshire Hathaway, Waste Management, and Ford Motor. Motley Fool newsletter services have recommended buying shares of Ford Motor, Waste Management, Berkshire Hathaway, General Motors, and Microsoft, as well as creating a bull call spread position in Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

At the time this article was published

Copyright (C) 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Was Standard & Poor's right to downgrade America's credit rating on Friday? We asked our readers this morning. They answered, by a convincing margin, yes.

It's hard to disagree. S&P's rationale for the downgrade is difficult to refute:

The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy.

Treasuries are, financially, still the safest form of debt in the world. The United States has the resources to pay its debt. This is not a question. What's worrisome is whether political leaders will threaten the viability of that debt to make a political point. And as last week showed, they are not only willing to, but they'll also do it again. As Sen. Mitch McConnell remarked, the debt-ceiling debate "set the template for the future" and added: "In the future... no president -- in the near future, maybe in the distant future -- is going to be able to get the debt ceiling increased without a re-ignition of the same discussion of how do we cut spending and get America headed in the right direction." That may be admirable in the mission to cut future deficits, but it's disastrous in the mission to remain creditworthy. That's why S&P issued a downgrade.

But there's more to the story. S&P's original report delivered to the Treasury on Friday contained a large math error. It doesn't dispute the mistake, and it quickly published a revised version, effectively claiming that the error was negligible in the grand scheme of things.

But as Ezra Klein of The Washington Post points out, the changes between the original and the revised report might not have been trivial. Says who? Well, says S&P itself:

In both versions of the report, Standard [&] Poor's say they would upgrade our outlook from "negative" to "stable" if the Bush tax cuts for income over $250,000 expire. That would net the Treasury about $900 billion over 10 years. So according to S&P, $900 billion is a big deal. And it's a big deal because of how much it would do to reduce the deficit.

In the original version, they say that $900 billion would mean net public debt drops from an estimated 93 percent of GDP in 2021 to 87 percent of GDP. But in the second version of the report -- the one they wrote after they discovered their $2 trillion mistake -- they revised their estimate for America's baseline debt path down to "74% of GDP by the end of 2011 to 79% in 2015 and 85% by 2021." In other words, S&P's technical correction improved our deficit outlook by more than letting the high-end tax cuts expire, which S&P had said would raise enough money to stabilize our rating. If the numbers mattered, then by S&P's own logic, that should have changed their opinion of our finances.

You don't have to agree with the logic of letting tax cuts expire. And S&P's final rationale for the credit cut -- political hostility -- remains as valid as ever. But the errors and updates bring a serious question to light: If S&P's math had been accurate the first time around, would it have gone through with the downgrade at all? By S&P's original analysis, one might believe the answer is no.

Today's stock market route showed how the downgrade affects nearly all of us, and potentially in huge, life-changing ways. Demanding that S&P's decision live up to its own standards isn't asking much.

What do you think? Share your thoughts in the comments section below.

At the time this article was published Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter, where he goes by @TMFHousel. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright (C) 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

"People do not get what they want or what they expect from the markets; they get what they deserve. ... Mr. Market doesn't give a hoot. He's got a 'Capitalism at Work' T-shirt on and a sledgehammer in his hand."
-- Bill Bonner

Now that America's credit rating has been downgraded, how is Mr. Market going to respond when the markets open Monday morning?

No one knows. It could be nothing, or it could be ugly. Maybe this is a wake-up call; maybe the damage is already priced in. The Wall Street Journal recently asked dozens of investors, bankers, and economists what the downgrade means. Nearly all gave some variation of I don't know. S&P appears to have accomplished what perpetual underperformance never could: It humbled Wall Street.

Although the future is unpredictable, the past is starting to make more sense. From my perspective, it seems that Thursday's 512-point selloff could have been triggered by early knowledge of the downgrade. There's no way to prove this, but think about it: There was no big news on Thursday. No banks failed. No hedge funds collapsed. No countries defaulted. If anything, Thursday brought a spate of earnings reports that should push corporate profits to an all-time high this quarter. Further, rumors of an impending downgrade were spreading like wildfire on Twitter by early Friday morning, more than eight hours before the news was made public. This all potentially bodes well for the markets going forward. Last week's bloodbath may have priced in the bad news.

Then again, it can't be stressed enough that the traders and algorithms controlling daily market movements have little in common with the long-term, business-oriented view of most Motley Fool investors. After the Flash Crash last May, New Yorker columnist James Surowiecki made a great point: "I don't think yesterday's crash is evidence the market is irrational. It's more that it's a-rational: The computers aren't panicking or herding. They're just following simple rules."

Those rules have nothing to do with the intrinsic value of businesses. They're more about a game of preempting one another -- computers trying to buy and sell before other computers buy and sell. If it comes, a selloff this week isn't necessarily indicative of panic and gloom. It could simply be the actions of short-term investors who are trying to get out first as they perceive that others will be panicky and gloomy. This is why it's so important to ignore short-term market moves and focus on business values.

The real threat from the downgrade is a potential rise in interest rates, which could slow the economy and swell budget deficits. But as I wrote last week, this is no sure thing. Japan's interest rates fell after it lost its AAA credit rating. JPMorgan Chase once did a study showing the effect on interest rates after a group of countries were stripped of their AAA rating. One week out, rates had hardly budged. On average, countries with AA credit pay more to borrow than those with AAA ratings do, but the difference is typically already reflected before a downgrade hits. This tendency bodes well for Treasuries, and it hits on a point that economists have been making lately: The Treasury market is so big, and there are so few alternatives, that the downgrade might just mean that AA becomes the new AAA.

And keep in mind that the downgrade should have surprised no one. S&P put the Treasury on negative-credit watch back in April, stating that there was a 50-50 chance the United States would lose its AAA rating in the near future. S&P's rationale for Friday's downgrade wasn't based on proprietary financial analysis but rather on a statement of the painfully obvious: America's political system is dysfunctional. Who didn't already know this?

Something else to be mindful of is who this downgrade came from: a rating agency with a dubious track record at best. If Goldman Sachs had downgraded Treasuries, no one would care. If Warren Buffett downgraded Treasuries, few would notice. Bill Gross, one of the world's most successful bond investors, ditched Treasuries earlier this year, and no one blinked. Asked about the consequences of the downgrade on Saturday, Buffett quipped: "Remember, this is the same group that downgraded Berkshire."

Indeed, the original downgrade report presented to the Treasury on Friday morning had a $2 trillion mathematical error. S&P doesn't dispute the mistake. After the Treasury pointed out the error, "S&P still chose to proceed ... by simply changing their principal rationale for their credit rating decision from an economic one to a political one," the Treasury wrote yesterday.

It's hard to argue that the United States doesn't deserve a downgrade -- particularly based on a dysfunctional legislature -- but keep it in appropriate context before making any personal investment decisions.

What do you think the downgrade means for your investments? Let us know in the comments section below.

At the time this article was published Fool contributor Morgan Housel owns shares of Berkshire Hathaway. Follow him on Twitter, where he goes by @TMFHousel. The Motley Fool owns shares of JPMorgan Chase and Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright (C) 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Rumors were swirling all day, and then it finally hit: Standard & Poor's downgraded the nation's credit rating Friday evening, the first time the U.S. Treasury has lost its pristine AAA rating since ratings began nearly a century ago.

S&P now rates the United States at AA+. The rating agency didn't beat around the bush when describing why it made the cuts:

The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy. Despite this year's wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the resulting agreement fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged until quite recently. Republicans and Democrats have only been able to agree to relatively modest savings on discretionary spending while delegating to the Select Committee decisions on more comprehensive measures. It appears that for now, new revenues have dropped down on the menu of policy options. In addition, the plan envisions only minor policy changes on Medicare and little change in other entitlements, the containment of which we and most other independent observers regard as key to long-term fiscal sustainability.

No big surprises here. The rating agencies have had the nation's credit rating on notice for months, warning Washington that without getting its fiscal house in order, and keeping political cage matches away from serious economic issues, a downgrade loomed. The debt-ceiling deal struck earlier this week failed on the former, and made the latter go prime-time. So here we are.

What's it mean for markets? No one can say for sure. Some sort of visceral fear-laden response on Monday seems likely. If there is a big selloff, it's not just about investors panicking. It's about investors expecting that other investors will be panicking and trying to preempt them. Do yourself a favor and don't pay much attention to any dramatic market reactions next week. The traders and computer algorithms that influence daily market moves almost certainly have different goals from the average Motley Fool investor.

Longer-term, the downgrade could mean a jump in interest rates. That could slow economic growth and literally add trillions of dollars to the national debt in higher borrowing costs.

This, though, is debatable. On average, AA-rated countries pay about 0.7% more to borrow than AAA-rated ones. But there are exceptions. Japan's interest rates actually fell after it was downgraded in 2001. The United States issues (or used to issue) about 60% of the world's AAA-rated debt. Investors who want high-quality debt in large amounts don't have many choices besides Treasuries. In that case, the downgrade might have little impact. It might just mean that AA becomes the new AAA. This is the argument that those who think the downgrade will be a nonissue use, and they very well may be right.

How did we get here? Federal debt exploded over the past few years as the recession smashed the economy:

Interestingly, though, interest rates have plunged so deeply that even as debt accumulated, total interest paid on that debt -- what I've argued is the most important figure when looking at the national debt -- has dropped to nearly a historic low:

Source: Office of Management and Budget.

And as S&P hints at, the rise in debt in recent years has been caused almost as much by a drop in tax revenue as it has a jump in spending:

Source: Office of Management and Budget.

Silver lining: Let's hope this serves as a wake-up call.

At the time this article was published Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter, where he goes by @TMFHousel. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright (C) 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.