2019-03-19 —

Just as they did in much of 2007 and 2008, before the markets exploded in a crisis of epic proportions, investors in the debt market, which is even larger than the equity market, are feverishly chasing higher yields and are too eagerly buying up the risky securities that will deliver those yields without demanding the proper premium for the risks being taken. A decade ago, the high-yield investment du jour pushed by Wall Street was mortgage-backed securities -- home mortgages that had been packaged up and sold as "safe" investments all over the world. Nowadays bankers and traders are pushing another form of supposedly "safe" investment, the "collateralized loan obligation," or C.L.O.


C.L.O.s are nothing more than a package of risky corporate loans made to companies with less than stellar credit. The big Wall Street banks make these loans to their corporate clients and then seek to move them off their balance sheets as quickly as possible, in the same way that a decade ago they packaged up and offloaded risky mortgage securities. Just as with mortgage-backed securities, to move the loans out the door the banks have been counting on the nearly insatiable demand for higher yields ... This is not a tiny slice of the market. Of the trillions of dollars of corporate loans outstanding in the United States, roughly $1.2 trillion of them are considered "leveraged loans," or loans to companies considered bigger credit risks.

In a speech before the Economic Club of New York in November, Mr. Powell said he thought that investors in C.L.O.s would bear the brunt of an uptick in corporate bankruptcies, rather than the big Wall Street banks. Those investors include Japanese banks as well as investors in hedge funds, mutual funds and pension funds (in other words, you and me).

Janet Yellen, Mr. Powell's predecessor, aired the same concern in December, in a conversation with the Times columnist Paul Krugman. Ms. Yellen said she worried that corporate indebtedness was "quite high": it's now more than $9 trillion, up from $4.9 trillion, in 2006, according to the Securities Industry and Financial Markets Association. "I think a lot of the underwriting of that debt is weak," she said. "I think investors hold it in packages like the subprime packages," which became so popular before the 2008 crisis. "The same thing has happened. It's called C.L.O.s, or collateralized loan obligations."


After a brief moment of sanity in December, the loopy demand for high-risk debt has once again heated up. More than $13 billion of leveraged loans were sold in February, and they will soon worm their way into the financial markets as C.L.O.s. The existential question remains: Why do investors fail to learn the harsh lessons about risk, even though the consequences of them still remain so fresh?

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