• Agricultural Bank of China raised 50 billion yuan ($7.3 billion) in the nation’s biggest corporate bond sale. The goal of the bond sale was to raise capital and help set up an initial public offering, Bloomberg reported.

• A handful of banks have applied to repay the billions they borrowed from the U.S. government’s Troubled Asset Relief Program (TARP). Sources told Reuters that Goldman Sachs Group Inc. (NYSE: GS) and Morgan Stanley (NYSE: MS) are two of the banks eager to begin repaying the government.

• Fiat SpA (OTC ADR: FIATY) Chief Executive Sergio Marchionne said in a Bloomberg interview that an offer he plans to make for General Motors Corp.’s (NYSE: GM) Opel unit will include assets that are “better than cash.” Today (Wednesda) is the deadline the German government set for Opel bids.

• World Bank President Robert Zoellick said that a global economic recovery could begin at the end of this year, Reuters reported. “I’m neither an optimist nor a pessimist, I am uncertain, a realist. Clearly the fall has been interrupted. I think there’s a good chance that while we face declines, they will be smaller in size. The majority expect a recovery at the end of this year, at the beginning of next year,” Zoellick said on Spanish television.

• The Bank for International Settlements said the derivatives market declined for the first time in the second half of 2008 as the global financial crisis curbed trading, Bloomberg reported. The Switzerland-based bank said yesterday (Tuesday) the amount of outstanding contracts linked to bonds, currencies, commodities, stocks and interest rates dropped 13.4% to $592 trillion, the first decline in 10 years of compiling the data. The amount of credit-default swaps insuring investors against losses on bonds and loans fell 27% to cover $41.9 trillion of debt.

• General Electric Co (NYSE: GE) Chief Executive Officer Jeff Immelt said yesterday (Tuesday) has already borrowed all the money it planned to raise on debt markets for 2009 and may reach funding goals for 2010 before the year is out.  “From a funding standpoint, 2009 is already done,” the head of the largest U.S. conglomerate told an investor conference in Florida, Reuters reported. “We’re going to pre-fund a lot of 2010 in 2009, maybe the whole thing.”

• The United Auto Workers and General Motors Corp (NYSE: GM) still have a “long way to go” to reach an agreement that local labor leaders could vote on, UAW President Ron Gettelfinger said after a union-sponsored forum at the U.S. Capitol, according to Bloomberg. GM’s decision to shut 16 U.S. plants and boost the number of cars it imports to 7% of North American sales has emerged as a sticking point in talks on a new UAW contract.  GM has a June 1 deadline to complete a restructuring plan or enter bankruptcy.

• Home Depot Inc. (NYSE: HD), the world’s largest home improvement chain reported higher-than-expected quarterly earnings as massive cost cuts offset weak sales. But investors found the results disappointing in comparison with those of smaller rival Lowe’s Cos Inc. (NYSE: LOW) and shares fell.  On Monday, Lowe’s reported better-than-expected quarterly earnings.  Home Depot affirmed its fiscal-year outlook, Reuters reported.

Investment News Briefs Wednesday, May 20, 2009

After yesterday’s major Social Security and Medicare announcement, today we have to ask (again): Can the U.S. hold onto its AAA credit rating?

“The U.S. government has had a triple-A credit rating since 1917,” answers former U.S. comptroller general and I.O.U.S.A. protagonist David Walker, “but it is unclear how long this will continue to be the case. In my view, either one of two developments could be enough to cause us to lose our top rating.

“First, while comprehensive health care reform is needed, it must not further harm our nation’s financial condition. Doing so would send a signal that fiscal prudence is being ignored in the drive to meet societal wants, further mortgaging the country’s future.

“Second, failure by the federal government to create a process that would enable tough spending, tax and budget control choices to be made after we turn the corner on the economy would send a signal that our political system is not up to the task of addressing the large, known and growing structural imbalances confronting us.”
Of course, we must note that the whole credit rating biz is… well… corrupt. The agencies that are responsible for dishing out sovereign credit ratings (S&P, Fitch and Moody’s) are the same ones that left us all out to dry in 2007. (Of course, mortgage-backed securities get a AAA… housing prices never fall!) Rest assured, if Wall Street can buy its way into AAA, Uncle Sam surely can too.

But even Moody’s is starting to hedge their bets. They recently created three subdivisions within their AAA rating: resistant, resilient and vulnerable… a corporate way of saying the good, the bad and the ugly. While the U.S. isn’t in the worst of the bunch, it’s certainly not the best.

Not the best time to be Ireland or Spain, eh? S&P has already downgraded both nations, and just this morning Spain unveiled its worst recession in over 40 years. GDP shrank 1.8% there in the first quarter, after a 1% drop in the last three months of 2008. From a year earlier, GDP is down 2.9%, the worst annual contraction since at least 1970, when Spain’s National Statistics Institute started keeping track.

Since we started today’s issue with a tough question, how about another: How much further can Spain and Ireland fall (Greece too) before the euro enters crisis mode?
Stocks suffered Wednesday, as the Dow shed 2.2% and S&P 500 lost 2.7%. Traders looking for a reason to take profits found their excuse in the worse-than-expected retail sales number.
“I’m very encouraged by this pullback,” our resource trader Alan Knuckman told CNBC this morning. “We’re coming back to a breakout point in the S&P 500. 875 is a pretty important level. Once we got through that, we had a nice acceleration, so we’ll see if that can hold.

“Regardless, the pullback is healthy for the overall market. It’s something that markets often do. It’s important to see how we recover after a big sell-off, which we haven’t really had yet. I need to see a day where everyone has negative opinions again. I want to see how the market reacts to a BIG push to the downside….”

When that big sell-off comes (and believe us, it will), Alan says, “Watch the next day or two. Will that pessimism overwhelm people again, or will people look at that as a buying opportunity? That will be more of a (market) indicator than anything.”

To get Alan’s full take on today’s market, you can check out his CNBC interview here. But for his priceless trading advice, there’s only one place to look — Resource Trader Alert.
Buyers are drifting back into the market today after yesterday’s decline. The Dow and S&P opened up about 0.5%.
Two worse-than-expected data releases have tamed today’s equity buyback.

First, producer inflation inched up 0.3% in April, says the Dept. of Labor. Contrary to everything you might have heard from the Federal Reserve, inflation can exist in this market.

Second, unemployment claims rose by 32,000 last week, to 637,000, about 20k more than Wall Street was anticipating. Continuing claims, people filing for unemployment for more than one week, climbed 6.56 million. That’s the 15th consecutive week of record highs.
Financials beware: The Obama administration formally announced its intention to regulate the derivatives market today.

“The financial crisis was caused by — and exposed – significant gaps in oversight,” opined Treasury Secretary Geithner. “We are committed to working with Congress to create a more comprehensive system.”

No firm plans yet, but at the core of the government’s scheme is the creation of a centralized clearinghouse for derivatives. Credit default swaps and other derivatives are very much an over-the-counter matter currently, and the Obama team wants to, essentially, create an NYSE for these complicated contracts. We’ll let you know if it comes to fruition.
“Sell Chinese banks, buy Chinese commodities,” declares Chris Mayer, armed with your pair trade of the day.

“China’s banks are hiding more bad loans than the Appalachian Mountains hide moonshiners. Yet the stock prices seem to say Chinese banks are perfect. China’s banks make up 18% of the market of global banking stocks, but hold only 5% of the assets. Further, as a percentage of deposits, the market caps of Chinese banks are four times higher than Japan’s and 60% above the global average.

“As economic woes continue to linger, these outliers won’t likely hold up. Chinese bank stocks are for selling at today’s prices. ‘When these banks crack and come clean,’ says Chris Burn of Goshen Investments, ‘it will be one of the last phases of the [current] cycle.’

“On the other hand, there’s China’s massive urban migration. I can’t emphasize this enough. There is a migration of hundreds of millions of people from China’s rural areas to its budding cities. Just within the next 15 years, China will add some 60 new cities with between 1.5-5 million people. The U.S. doesn’t even have 10 cities today with a million people in them.

“The financial crisis will not undo this migration. It is bigger than that. It is a history-making event and the world will probably never see anything like it on this scale again. As China builds out these cities, it will consume great amounts of commodities — for roads, power systems, houses and more.

“Don’t let the nasty crater that was 2008 take you off the scent of commodities. China is still as big and voracious as ever in the commodity world. There is certainly a pause here, just as that old Chinese saying points out that every meal must end. But every ending also has a new beginning. China will be back for lunch, so to speak.”
Commodities are starting to feel the pinch of the recent stock decline. Oil had been holding steady, but over the last 24 hours, it has succumbed to renewed pessimism on Wall Street. The front-month contract fell from a 2009 high of $60 a barrel to $57 today.

Copper has it even worse. It fell through the $2 mark early this morning, and now at $1.96 a pound, it’s down almost 10% from last week’s high.
Gold is the exception (heh, isn’t it always?). The spot price hit $925 Tuesday and has flat-lined since. That’s a six-week high.
After a nearly full-point rise yesterday, the dollar index is holding steady at 82.8, waiting for the market’s next move. The euro dropped a penny Wednesday, and rests at $1.35 as we write. Ditto the pound, at $1.51.

The yen is the outlier of the bunch, growing stronger all week long as the world’s appetite for risk fades away. It’s at 95 today, nearly a two-month high.
“Do you remember when the Internet was viewed as interesting, but with little financial potential?” asks our technology adviser, Patrick Cox. “That’s where the robotics industry is now.

“Already, low-end robots like Roomba are exploding into new markets. Even as consumers cut back dramatically last quarter, Roomba sales were up 69% compared with the first quarter of 2008. This trend will continue. Within a few years, truly sophisticated consumer robots will be common in high-income households. Before you know it, incredibly capable general-purpose robots will be seen as essential appliances.

Don’t snicker… fortunes have been made with far less

“Moreover, military spending on robotics continues to expand and buoy the industry. The proposed Obama budget increases funding for the DoD programs that move robotics forward. The trend toward unmanned robotic weaponry is unstoppable. Military conflict will not go away, and robots offer many developed nations a way to reduce battlefield casualties.

“As Moore’s Law continues to improve computer technologies, the decision to risk robots, rather than humans, will be easier and easier to make. Regardless of consumer spending trends, we will see far more advanced robots in the battlefield and on crime scenes. Those advances will, in turn, accelerate the domestic and industrial robotic industries.

“Believe me. You want to own robots.”

Of course, Patrick’s readers have a robotics play, which you can get here. That’s just one of the transformational opportunities he’s expecting soon… for more, be sure to check out today’s P.S.
“Let’s see,” a reader begins, “we can put billions toward shoring up banks, stock brokers, auto companies and their suppliers, but there’s no money for Social Security or Medicare??

“What does that say about our government’s concern for the ‘common man’? I thought Obama was a man of the people.”
“Isn’t government, especially Social Security” a reader asks, “the biggest Ponzi scheme of all time?”

The 5: No. In a scheme, the victim has to choose to hand it over. SS is more like a Ponzi stickup.
“All the focus on Social Security and Medicare shortfalls,” writes the last, “has allowed another ‘balance of payments’ issue to slip under our radar. What will happen to the stock markets as the same baby boomer generation draws down their collective 401(k)s and the like without a countering infusion from new investors? I’m definitely out of that trust-the-market-to-make-you-a-million-for-retirement fraud!

“Thanks for the great insights!”

Source: The Mighty AAA, A Pair Trade, More Gov. Intervention, Buy This Future Tech and More!

And in the latest addition to his Obamanomics plan, the president-elect has also proposed a massive stimulus package of as much as $775 billion over the next two years as part of a historic infusion that’s aimed at overhauling America’s infrastructure, schools, broadband networks and energy use, a Congressional source told MarketWatch.com yesterday.

But making the Schapiro nomination official was considered a key move. In its Thursday morning issue, Money Morning reported that Schapiro had been chosen and that an official announcement would be made later in the day. And that’s just what happened.

Obama named Schapiro as his choice for the top SEC post and nominated former Treasury undersecretary Gary Gensler to run the Commodity Futures Trading Commission (CFTC), which regulates trading in the commodities markets, and called for an overhaul of the U.S. financial-regulatory system in the wake of the credit and economic crisis.

“My priority is to create a regulatory structure that stops future problems in the financial system,” Obama said at the press conference where he announced the identities of the two latest nominees for his team. “Financial regulatory reform will be a top priority of mine.”

In a move that helps further define the Obamanomics platform, the incoming president indicated that a key mandate for both Schapiro and Gensler would be to reign in the multi-trillion-dollar derivatives market, which functions largely outside of the traditional equities market and is mostly unregulated.

“There is a huge amount of money sloshing [around] outside of banks and that is a problem,” Obama said.

A Merger in the Works?

Schapiro, 52, may have one of the toughest jobs in the new Barack Obama administration, for the SEC has come under increasing fire for allegedly failing to demonstrate much initiative in attacking the current financial crisis.

Currently, Schapiro is the chief executive of the Financial Industry Regulatory Authority (FINRA), the largest non-governmental regulator for all securities firms doing business in the United States, MarketWatch reported. FINRA was created in July 2007 through the merger of the National Association of Securities Dealers (NASD) and the member-regulation, enforcement and arbitration functions of the New York Stock Exchange.

Schapiro is also a former head of the CFTC and former member of the SEC. She has been appointed to top finance-related government posts by two Republicans presidents and – now – two Democratic chief executives.

If confirmed by the Senate, Schapiro would take over as head of an agency that has been roundly criticized for failing to detect signs of trouble on Wall Street, where enormous derivatives losses have led to the collapse of the investment banking sector, caused a near collapse of many top commercial banks, and forced the U.S. government to engage in a bailout effort that will end up costing taxpayers trillions of dollars.

Because Schapiro has experience in merging regulatory organizations, and because she’s held posts with all the key players, many observers believe that her nomination signals that the incoming administration is serious about merging the SEC and the CFTC. In fact, outgoing Treasury Secretary Henry M. “Hank” Paulson Jr. has called for the two regulatory agencies to be combined as an interim step in his “blueprint” for a regulatory reorganization in Washington.

Interestingly, Schapiro has publicly supported that “blueprint” for overhaul, both in speeches to organizations, and in testimony in Washington. She is well known for being a strong advocate of the rights of individual investors.

“If the Obama administration decides to merge the SEC and CFTC, Schapiro has the experience at both the agencies to make that transition happen,” Barbara Roper, director of investor protection at the Consumer Federation of America, told MarketWatch.

But Schapiro’s insider experience and knowledge of key regulatory players may also make it more difficult for her to make the tough decisions that will be required if the merger strategy is called for, Roper noted.

“Even though she has a great deal of policy expertise at both the CFTC and SEC, I’m not sure she will be prepared to bring in the broom that the agency needs. She has long years of relationships with people at this agency,” Roper said.

A Solid Resume

Schapiro has plenty of operational, management and regulatory experience. Before FINRA was formed, she had most recently served as chairman and chief executive officer of the NASD, an appointment that took effect in December 2006. Before her appointment as chairman and CEO, Schapiro had spent five years serving as the vice chairman of the NASD and president of its regulatory and oversight division. She’d been with the NASD since 1996.

According to some reports, because the NASD was an industry group, there were often accusations that it overlooked instances in which broker/dealer abuses trampled individual investor rights. Given the more-retail-oriented focus many markets have taken in recent years – with a majority of U.S. workers actually owning stocks via mutual funds or through their employer retirement plans – many industry insiders felt that a new organization was needed, especially one that would view protection of the public as paramount. The creation of FINRA was one offshoot of this push for increased indvidual-investor protection.

In a speech in June, Schapiro talked about the growing complexity of the financial markets and warned that highly sophisticated new products will only make matters even more challenging for individual investors. The upshot: bankruptcies and home foreclosures could jump, and many investors could find themselves facing a future in which they have little in the way of a financial cushion.

“In tough financial times, many investors feel pinched for cash – and some may search for different, often-risky ways to make ends meet, or to maintain a certain lifestyle,” Schapiro told listeners at a “Women in Housing and Finance” conference in Washington. “Troubling trends include investors leveraging or prematurely depleting their retirement savings, trading in their insurance policies in transactions known as ‘life settlements,’ and tapping their home equity through reverse mortgages. We are concerned that some investors may be risking their most valuable assets in an effort to raise cash—including those in or near retirement, who may not have time to recover their losses.”

And the other unfortunate part of that problem, Schapiro said, was that “some unscrupulous financial professionals—many of them unregistered—feed into this investor anxiety, pushing strategies and products that promise to provide balance and safety, but that often end up haunting an investor for a lifetime.”

Schapiro will bring skills – as well as experience – to her new post as head of the Securities and Exchange Commission.

In late 2006, at the time of her appointment as NASD chairman, Richard F. Brueckner, the presiding governor of the NASD’s Board of Governors, described Shapiro as a “highly respected and effective regulator who has proven herself time and again to be a strong investor advocate.”

“She is a proven leader and is uniquely qualified to take over as the head of NASD as it continues to execute its vital mission of protecting investors and ensuring market integrity,” said Brueckner, who was also the CEO of financial-technology provider Pershing LLC.  “I am confident the securities industry will work closely with Mary and support NASD’s efforts to make regulation both more efficient and effective.”

A Career Regulator

Schapiro joined the NASD in 1996 as president of NASD regulation and was named vice chairman in 2002.  As head of NASD’s Regulatory Policy and Oversight Division, she served as the primary regulator of 5,100 securities brokerage firms and the nearly 700,000 registered brokers who were doing business with the public.

The division was responsible for writing rules that governed the conduct of virtually all aspects of the securities industry, including sales practices and financial and operational integrity; examining firms for compliance with those rules; and enforcement of NASD rules as well as those of the Municipal Securities Rulemaking Board and federal securities laws.

At that time, the NASD also had regulatory responsibility for The NASDAQ Stock Market, the American Stock Exchange and the International Stock Exchange.

Before joining the NASD, Schapiro was the chairman of the CFTC, a post to which President Bill Clinton had appointed her in 1994.  The CFTC is the federal agency responsible for regulation of the U.S. futures markets, including the financial, agricultural and energy markets.

As chairman, Schapiro participated in the President’s Working Group on Financial

Markets with the U.S. treasury secretary and the chairmen of both the U.S. Federal Reserve and the SEC.

Prior to her time with the CFTC, Schapiro served for six years as an SEC commissioner. She was appointed in 1988 by President Ronald W. Reagan, reappointed by President George H.W. Bush in 1989, and was named acting chairman by President Clinton in 1993.

At one point, Schapiro was an active member of the International Organization of Securities Commissions (IOSCO) and was elected Chairman of the IOSCO Consultative Committee in 2002 and 2004.

Schapiro currently serves as the “lead director” of Kraft Foods Inc. (KFT), and has been a board member since last year. She’s also a director of Duke Energy Corp. (DUK), a post she’s held since 1999.

Schapiro is a trustee of Franklin and Marshall College.

Obama Stimulus

In discussions with Congressional leaders, President-elect Obama has outlined the basics of a stimulus package worth in the range of $675 billion to $775 billion over two years to Congressional leaders, the published reports state. Obama talked to House and Senate officials Wednesday, but it’s believed the package will likely grow in size.

The package does not consist of another rebate for taxpayers, Congressional sources say. Instead, a number of other programs – such as infrastructure, schools, energy efficiency and health care – will be targeted.

States also will receive aid, and the package would assume more of the cost of Medicaid – perhaps even as much as $100 billion.

Obama transition team officials have declined comment on the financial plan, but Congressional leaders already are calling for a passage of the package. House Majority Leader Steny Hoyer, D-Md., said a package similar to what Obama proposes was needed in light of the Labor Department’s report yesterday that another 554,000 Americans filed for unemployment benefits.

“This package must renew our infrastructure, stimulate our economy by extending unemployment insurance, invest in new energy technologies, and help cash-strapped states protect vital services like education and health care from damaging cuts,” Hoyer said in a prepared statement.

The Wall Street Journal reported there is concern the package could expand to as much as $850 billion as it works its way through Capitol Hill. But Obama is trying to keep the stimulus below $1 trillion, an important psychological barrier, as those on Capitol Hill and Wall Street would be wary of what one insider referred to as the “Dreaded T Word.”

Obama has said that the stimulus needs to be just that – a stimulus, and one that’s actually big enough to “jolt” the wheezing U.S. economy and put it back on a path to growth. Since the just-declared recession actually began back last December, almost 2 million workers have lost their jobs, and more than 500,000 jobs were shed in November alone, according to government data.

Passage would allow Obama to knock out a number of problems with a single blow. The president-elect wants to jump-start the economy on one hand while fulfilling a number of campaign promises with the other. In an ideal world, Obama would like to be able to sign the legislation immediately after he’s sworn in. The Republicans, however, have apparently been quite dismissive of such a time frame.

Obama actually hopes to get lawmakers to assemble a package that could be put before both the House and Senate when the 111th Congress convenes Jan. 6. The president-elect is to be inaugurated on Jan. 20.

“Congressional Democrats urge President Bush to drop his opposition to the recovery package; but if he does not, Congress will ensure that President-elect Obama can sign it soon after taking the oath of office,” Hoyer, the House majority leader, said in his statement.

Source: Obamanomics: President-Elect Taps Career Regulator Mary Schapiro to Head SEC, Proposes $775 Billion Stimulus

One such figure came up yesterday. The total ‘value’ of global derivatives – financial instruments which are priced on the back of the underlying assets that they track – has now reached a breathtaking $596 trillion, after a mammoth rise over the previous twelve months.

That started the warning lights flashing…

So what, apart from containing more noughts than a normal human being can cope with, is this titanic number all about?

Let’s start by putting it into context. We can do this by checking out what the world actually made last year. The overall value of goods and services produced is measured by Gross Domestic Product (GDP). And for 2007, GDP for planet earth was reckoned by the International Monetary Fund to be just shy of $65 trillion. No less an organization than the CIA has come up with a similar estimate, at £65.8 trillion, so it must be about right.

So when the Bank for International Settlements (BIS) tells us that last year the total derivatives market grew by 44%, its fastest pace since the Basel-based bank started keeping records just over ten years ago, up go the antennae straightaway. And when that figure of $596 trillion crosses the radar screen, equivalent to more than nine times world GDP, the numbers are looking quite scary.

The money at risk is equivalent to a quarter of world output

Of course, the $596 trillion is a ‘notional’ amount. It’s the nominal value of all the underlying assets against which bets have been placed. But the actual amount of ‘real’ money at risk is still a massive $15 trillion, equal to almost a quarter of world output.

And within the individual areas there’s one even more eye-catching statistic. The value of contracts in credit default swaps (CDS) – a form of market insurance that investors can buy to protect themselves against corporate bond defaults – more than quadrupled last year to $2 trillion, covering a notional $58 trillion of loan debt.

The very size of all these numbers is just about enough to give the jitters to anyone, on the basis that when things can go wrong, they probably will.

When I wrote on this subject before, one respondent claimed that the topline numbers aren’t important because derivative markets are beautifully balanced. His theory was that if every derivatives position were hedging a risk relating to a specific transaction or asset, then derivatives would actually stabilise the world economy. All those noughts would be good news.

Sounds a bit too good to be true. And there are three reasons to be sceptical about this optimistic line of thinking.

Three reasons to be worried

Firstly, what we can call knowledge risk. That’s when derivatives players don’t know what they’re getting into.

A story on Bloomberg at the end of April summed this up pretty well. The chief finance officer of an Indian company was persuaded by his bank to start dabbling in the currency derivatives market. Although the CFO explained to the bankers that he didn’t understand how these products work, apparently they chauffeured him round and bombarded him with charts showing how his company could make a profit with a zero investment.

Too good to be true? Clearly it was. Three months later, two of the contracts had turned sour, incurring losses of $1.5 million and prompting the bank to issue a bankruptcy notice to recover the cash. Meanwhile, our poor CFO had no idea that these derivative bets could go so wrong. But he’s not alone. Indian companies could lose up to $4bn on derivatives, according to Hong Kong-based brokerage CLSA Ltd. Naïvety? Maybe. But we’re all good at repenting at leisure.

Which brings us onto the next potential problem, counterparty risk. That’s when the deal you’ve just done comes unstuck because the people on the other side of the trade can’t settle their side of the deal. A bit like backing the Derby winner, then finding the bookie can’t pay up because he’s run out of money.

Indian banks may lose up to $400m if they can’t enforce derivatives contracts they’ve set up with smaller companies, says CLSA. This is because 10% of these smaller companies may renege on their agreements because they haven’t the cash to settle the deals.

And this is just one country. BNP Paribas analyst Andera Cicione believes that total world CDS losses could hit $150bn. As the CDS market is unregulated, there are no public records showing whether sellers have the assets to pay out if a bond defaults. George Soros himself has warned this week that CDS counterparty risk is “a Damoclean sword waiting to fall.”

What’s worse – and here we come to the third problem – some buyers have now found out that the derivatives they’ve bought haven’t matched up to “what it said on the tin”.

The ratings agency Moody’s has just admitted awarding incorrect ratings to $4bn worth of debt instruments because of a bug in its computer models. Some ultra-complex derivative products, known as “constant proportion debt obligations” and thought up at the height of the credit bubble, incorrectly received over-optimistic triple A – i.e. top notch – ratings. And it took Moody’s nearly a year to find the problem.

As the derivatives market gets bigger and bigger, stories like these only make us ask: do the people who play around in it really know what they’re doing?

Source: Why Derivatives are Getting Much More Dangerous