Are we heading for another financial crisis? asks Frank Partnoy in The Atlantic. Readers will remember collateralised debt obligations (CDOs) from 2008. These securities, which packaged together US mortgages, caused billions of dollars in losses at banks. Now we have the CLO, or collateralised loan obligation. A CLO “walks and talks like a CDO”, but instead of home loans they are backed by business loans. In the place of “subprime mortgages”, we have “leveraged loans” made to “troubled businesses”. The CLO market is bigger now than the CDO market was in 2007.
About half of borrowing in the $2trn US corporate leveraged loan market has been securitised as a CLO, says Telis Demos in The Wall Street Journal. Most are structured defensively and senior holders would be unlikely to lose principal on even the most pessimistic forecasts. The products seem unlikely to trigger serious losses for banks. “Triple-A rated CLOs have famously never defaulted,” says Brian Chappatta on Bloomberg. There are legitimate concerns about the sustainability of US leveraged loans, but talk of a coming banking system collapse is fanciful. For instance, Wells Fargo’s $29.7bn CLO exposure sounds large until you see that it is only 1.5% of its total assets. We have many problems, but a repeat of the 2008 financial collapse caused by securitised debt “isn’t one of them”.
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
-
Review: Luxury hotel Gundari in the Greek island FolegandrosNicole García Mérida stayed at Gundari, a luxurious hotel on Folegandros, one of the lesser-known islands in the southern Cyclades in Greece
-
MoneyWeek’s gold quiz: How much do you know about yellow metal?Quiz Gold is one of the world’s most popular safe haven assets, with investors often pouring their money into it during times of turmoil. Test your knowledge of the yellow metal in our quiz.
-
Nobel laureate Philippe Aghion reveals the key to GDP growthInterview According to Nobel laureate Philippe Aghion, competition is the key to innovation, productivity and growth – here's what this implies for Europe and Britain
-
'Investors should brace for Trump’s great inflation'Opinion Donald Trump's actions against Federal Reserve chair Jerome Powell will likely stoke rising prices. Investors should prepare for the worst, says Matthew Lynn
-
The state of Iran’s collapsing economy – and why people are protestingIran has long been mired in an economic crisis that is part of a wider systemic failure. Do the protests show a way out?
-
Hiring new staff for your business? Help is availableHiring more employees is a costly business, but help is available from the government, says David Prosser
-
'Expect more policy U-turns from Keir Starmer'Opinion Keir Starmer’s government quickly changes its mind as soon as it runs into any opposition. It isn't hard to work out where the next U-turns will come from
-
Why does Donald Trump want Venezuela's oil?The US has seized control of Venezuelan oil. Why and to what end?
-
Britain heads for disaster – what can be done to fix our economy?Opinion The answers to Britain's woes are simple, but no one’s listening, says Max King
-
Vietnamese stocks are charging ahead – what to buyVietnam has been upgraded from a frontier to an emerging market. It remains a promising pick, says David Prosser
