The Bomb That Blew Up in 2008? We’re Planting Another One
Collateralized loan obligations may look safe, but they pose risks that are poorly appreciated.
Investors are blinded by higher returns.
Photographer: Adrian Dennis/AFPFinancial markets have short memories. Of late, they’ve convinced themselves that collateralized loan obligations (CLOs) are much safer instruments than the collateralized debt obligations, or CDOs, on which they’re based and which helped precipitate the 2008 crisis. They’re wrong — and dangerously so.
Current CLOs outstanding globally total around $700 billion, with annual new issues of over $100 billion. That’s broadly comparable to subprime CDO volumes in 2008. Both Bank of England Governor Mark Carney and former Fed Chair Janet Yellen have warned about potential risks, and the Financial Stability Board now says it will look into them as well. Regulators in Japan, where banks have been big CLO buyers, may announce new rules as early as next week.