What’s not to love? Well, just about everything. If the S&P 500 goes up only 5 percent, part of the fund’s collateral would get wiped out, likely causing a rating downgrade. A 10 percent drop the year after that would essentially crash Sophisticated LLC. My equity investors would suffer a 75 percent loss, and prices on the bonds would most likely plunge as well.
That’s just off the top of my head, and it’s not an implausible example. I don’t spend my days trying to come up with esoteric investments. The point is there are people who do, and then they peddle their creations to the unsuspecting townspeople. It’s usually only a matter of time before the torches and pitchforks have to come out.
Stephen Gandel is a Bloomberg Opinion columnist covering banking and equity markets. He was previously a deputy digital editor for Fortune and an economics blogger at Time. He has also covered finance and the housing market.