Collateralised debt: will it be 2008 all over again?

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

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Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.

Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.

He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.

Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.