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> The leveraged loans are now being packaged into collateralized loan obligations and sold to investors. Sound familiar? And the CLO market has grown to match t

by darawk 8y ago

> The leveraged loans are now being packaged into collateralized loan obligations and sold to investors. Sound familiar? And the CLO market has grown to match the size of the CDO market at its pre-crisis peak. Yet one major difference makes the CLOs of today less scary: The loans that comprise them are backed by collateral, and if one of the companies in the mix defaults, an investor can find recourse through the sale of that collateral. Pre-crisis CDOs built on mortgage-backed securities had no such backstops. Maybe this is just my ignorance of the terms of CDO agreements...but weren't they collateralized by the homes? I mean, it's in the name: Collateralized Debt Obligation. And wouldn't that make this CLO market exactly identical to the CDO market?

travisoneill1 8y ago
Yeah, that doesn't make any sense. The reason CDO's were underwater is because the price of housing dropped and left the collateral worth less than the principal of the loan. Loans to companies follow the same principal. If the value of companies suddenly drops same thing. It's a weird statement and is directly contradicted by the next paragraph in the article.
- deleted 8y ago
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topspin 8y ago
> but weren't they collateralized by the homes? Much exaggerated in value homes, yes. > And wouldn't that make this CLO market exactly identical to the CDO market? The mortgage debt market is backed by GSEs. When the bubble popped Fannie and Freddie held over $5 trillion in mortgage securities. They are the market maker -- the buyer of last resort -- that makes the whole mortgage securities market liquid. CLOs don't have such a market maker. There are certainly market makers, but they aren't US GSEs with multiple trillion dollar balance sheets backed by the US Treasury. This limits the degree to which the CLO market can overextend. Not that corporate debt can't grow to disruptive proportions. Problems with corporate debt is how the term 'junk bonds' emerged as a household word in the 80's. Now that we're rolling BBB quality debt into CLOs (as of last April, apparently) the clock is ticking once again.
- darawk 8y ago
  All true. But my point is that the factual claim made by this article - that CLOs have backing collateral and CDOs do not, is false, and a pretty egregious error for a publication like Bloomberg to make.

by darawk 8y ago

travisoneill1 8y ago

Yeah, that doesn't make any sense. The reason CDO's were underwater is because the price of housing dropped and left the collateral worth less than the principal of the loan. Loans to companies follow the same principal. If the value of companies suddenly drops same thing. It's a weird statement and is directly contradicted by the next paragraph in the article.

deleted 8y ago
[deleted]

topspin 8y ago

> but weren't they collateralized by the homes? Much exaggerated in value homes, yes. > And wouldn't that make this CLO market exactly identical to the CDO market? The mortgage debt market is backed by GSEs. When the bubble popped Fannie and Freddie held over $5 trillion in mortgage securities. They are the market maker -- the buyer of last resort -- that makes the whole mortgage securities market liquid. CLOs don't have such a market maker. There are certainly market makers, but they aren't US GSEs with multiple trillion dollar balance sheets backed by the US Treasury. This limits the degree to which the CLO market can overextend. Not that corporate debt can't grow to disruptive proportions. Problems with corporate debt is how the term 'junk bonds' emerged as a household word in the 80's. Now that we're rolling BBB quality debt into CLOs (as of last April, apparently) the clock is ticking once again.

darawk 8y ago
All true. But my point is that the factual claim made by this article - that CLOs have backing collateral and CDOs do not, is false, and a pretty egregious error for a publication like Bloomberg to make.