That someone was AIG. It was the biggest in insurance. Insurance was its cup of tea. And so credit default swaps were born. They were incredibly profitable. You got fees ( aka premiums) to insure something that had never gone bad. Not once. Moreover since you had a triple-A rating, you didn't need to set aside reserves for a rainy day. So, your fees were your profits. And the more profits, the more you could pay your employees. All this was good for AIG and all the banks. So you wrote more "business." You insured anything and everything -- from business loans to bundles of the worst subprime mortgages.

The ironic twist to the whole pack of cards was that it wasn't AIG that paid out when the loans soured, it was the Federal Government that saved AIG who then paid its customers, including Goldman Sachs. Meantime, the AIG employees and others had taken their bonuses and there is apparently no way to "claw them back."

Of course, things are different now. All the investments and loans on the financial companies' books are recorded at what they're worth today.

Nah! Virtually all loans and investments are carried on the books at their cost. Which means the loans are written down only as the loans are repaid, or if they go into arrears or default.

A friend is writing a paper in which he quotes the last annual reports of companies like Citigroup, AIG, Goldman, Lehman Brothers, Bear Stearns before the proverbial dodo hit the fan. He told me all the annual reports have sections from management assuring stockholders that the company understood "risk" and had made more than sufficient provision for anything going wrong. And they meant anything going wrong.

Of course, things are different now, Goldman, Citi, BofA and others are reporting great earnings. Their stocks are flying, and will fly more -- if you believe the old mantra about buying financials first as we emerge out of a recession.

Why am I so cynical? Or wary?

Clearly, it hurts to have missed the March Rally.

Should we all be edging more in?

The simple answer is Yes. The chance of the market re-testing its March 6 lows seems increasingly remote -- and each day it rises, it seems even more remote. Look at the chart.

Now ead Doctor Gloom. The rule is get into the market nine months before the economy turns. By this rule, now is right -- perhaps even a little late:

Dr. Gloom, Professor Nouriel Roubini

From Roubini's RGE Monitor:

“It has been widely reported today that I have stated that the recession will be over “this year” and that I have “improved” my economic outlook. Despite those reports - however – my views expressed today are no different than the views I have expressed previously. If anything my views were taken out of context.

“I have said on numerous occasions that the recession would last roughly 24 months. Therefore, we are 19 months into that recession. If, as I predicted, the recession is over by year end, it will have lasted 24 months with a recovery only beginning in 2010. Simply put I am not forecasting economic growth before year’s end.

“Indeed, last year I argued that this will be a long and deep and protracted U-shaped recession that would last 24 months. Meanwhile, the consensus argued that this would be a short and shallow V-shaped 8 months long recession (like those in 1990-91 and 2001). That debate is over today as we are in the 19th month of a severe recession; so the V is out the window and we are in a deep U-shaped recession. If that recession were to be over by year end – as I have consistently predicted – it would have lasted 24 months and thus been three times longer than the previous two and five times deeper – in terms of cumulative GDP contraction – than the previous two. So, there is nothing new in my remarks today about the recession being over at the end of this year.

“I have also consistently argued – including in my remarks today - that while the consensus predicts that the US economy will go back close to potential growth by next year, I see instead a shallow, below-par and below-trend recovery where growth will average about 1% in the next couple of years when potential is probably closer to 2.75%.

“I have also consistently argued that there is a risk of a double-dip W-shaped recession toward the end of 2010, as a tough policy dilemma will emerge next year: on one side, early exit from monetary and fiscal easing would tip the economy into a new recession as the recovery is anemic and deflationary pressures are dominant. On the other side, maintaining large budget deficits and continued monetization of such deficits would eventually increase long term interest rates (because of concerns about medium term fiscal sustainability and because of an increase in expected inflation) and thus would lead to a crowding out of private demand.

“While the recession will be over by the end of the year the recovery will be weak given the debt overhang in the household sector, the financial system and the corporate sector; and now there is also a massive re-leveraging of the public sector with unsustainable fiscal deficits and public debt accumulation.

“Also, as I fleshed out in detail in recent remarks the labor market is still very weak: I predict a peak unemployment rate of close to 11% in 2010. Such large unemployment will have negative effects on labor income and consumption growth; will postpone the bottoming out of the housing sector; will lead to larger defaults and losses on bank loans (residential and commercial mortgages, credit cards, auto loans, leveraged loans); will increase the size of the budget deficit (even before any additional stimulus is implemented); and will increase protectionist pressures.

“So, yes there is light at the end of the tunnel for the US and the global economy; but as I have consistently argued the recession will continue through the end of the year, and the recovery will be weak and at risk of a double dip, as the challenge of getting right the timing and size of the exit strategy for monetary and fiscal policy easing will be daunting.

RGE Monitor will soon release our updated U.S. and Global Economic Outlook. A preview of the U.S. Outlook is available on our website: www.rgemonitor.com”

Why am I not surprised -- 1. From the New York Times:

The nation’s largest public pension fund has filed suit in California state court in connection with $1 billion in losses that it says were caused by “wildly inaccurate” credit ratings from the three leading ratings agencies, The New York Times’s Leslie Wayne reported.

The suit from the California Public Employees Retirement System, or Calpers, a public fund known for its shareholder activism, is the latest sign of renewed scrutiny over the role that credit ratings agencies played in providing positive reports about risky securities issued during the subprime boom that have lost nearly all of their value.

The lawsuit, filed late last week in California Superior Court in San Francisco, is focused on a form of debt called structured investment vehicles, highly complex packages of securities made up of a variety of assets, including subprime mortgages. Calpers bought $1.3 billion of them in 2006; they collapsed in 2007 and 2008.

Calpers maintains that in giving these packages of securities the agencies’ highest credit rating, the three top ratings agencies — Moody’s Investors Service, Standard & Poor’s and Fitch — “made negligent misrepresentation” to the pension fund, which provides retirement benefits to 1.6 million public employees in California.

The AAA ratings given by the agencies “proved to be wildly inaccurate and unreasonably high,” according to the suit, which also said that the methods used by the rating agencies to assess these packages of securities “were seriously flawed in conception and incompetently applied.”

P.S. It was only when the rating agencies downgraded AIG from a triple-A to a double-A that their world fell apart. They now had to set aside reserves against all that delicious insurance (also called credit default swaps). They couldn't. They simply didn't have the money.

Why am I not surprised -2? Beijing says Rio Tinto bribed virtually every major Chinese steel maker -- 16 in total -- to buy its iron ore. China's iron and steel business is thoroughly corrupt helped along by weird Chinese government pricing rules. Big makers pay less for iron ore than little companies. For more, click here.

China's stockmarket on a tear.

Comments by Chart of the Day:

With much of the global economy under severe stress, today's chart focuses on one pocket of strength – China. In the midst of what is one of the most severe economic downturns of the past century, China's economy managed to grow by 7.9% for the year ending in Q2 2009. For some perspective, today's chart focuses on Chinese stocks and presents the current trend of the iShares FTSE/Xinhua China 25 Index (FXI). As today's chart illustrates, Chinese stocks have endured what amounts to an extremely wild ride since 2005. The FXI trended upward at an ever accelerating rate (i.e. parabolic) from 2005 to Q4 2007. As the credit bubble began to unravel, so too did Chinese stocks with the FXI trending downward at an ever accelerating rate from Q4 2007 to Q4 2008. However, Chinese stocks found their footing and have surged over 100% since their 2008 trough (8% GDP growth will do that for you) and are currently trading near the upper end of a nine-month trend channel.

Cheap eyeglasses -- Part 2: From reader Charlie McChesney,

Harry,
I suggest that your readers try ennioptical.com. if they want to see rock bottom prices. After an extended go round with my local Target store optical department, I tried these guys. I am wearing the pair I bought, They work well and I am very satisfied with them. The scuttlebutt on the web is equivocal, some love them and some hate them, but at the prices they charge, you can buy a pair of $8 glasses and if they are not OK, you do not lose much...

My progressive, impact resistant, photochromic polycarbonate lenses with an anti-reflective coating and a full rim frame cost about $75 delivered to me vs. the price at Target's optical department of over $300. A pair of single vision anti-reflective coated glasses costs $18 including shipping.

This company is apparently getting the optical work done in China so the waiting time is about 2-3 weeks for single vision pairs and for bifocals and progressive pairs 3-4 weeks.

For my Canadian friends. You Know You're Canadian When:

+ You design your Halloween costume to fit over a snowsuit.

+ You have more miles on your snow blower than your car.

+ Driving is better in the winter because the potholes are filled in with snow.

+ The local paper covers national and international headlines on two pages, but requires six pages for hockey.

+ Your town buys a Zamboni before a bus.

+ You use a red pen on your textbooks and fill in the missing u's from labor, honor, color, etc..

Favorite recent New Yorker cartoons:

This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads on this site. Thus I cannot endorse, though some look interesting. If you click on a link, Google may send me money. Please note I'm not suggesting you do. That money, if there is any, may help pay Michael's business school tuition. Read more about Google AdSense, click here and here.