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On Wall Street: Record-Setting Volumes of Collateralized Loan Obligations, and Wild Leveraging

Oct. 23, 2017 (EIRNS)—The curent volume of issuance of CLOs—Collateralized Loan Obligations, which were shown to become easily illiquid in the 2008 financial meltdown—is now at record levels. Today’s Wall Street Journal gives front-page coverage of the dimensions, showing that this year’s rate of issuance, which is at $247 billion for three quarters, has already exceeded the level of former peak year 2006, which was $136 billion. The CLO activity started to pick up in 2014, then soared. This year may even triple the folly of 2006.

CLOs are the equivalent for leveraged corporate loans, to what MBS (mortgage backed securities) and CDS (collateralized debt obligations) are for mortgage loans. "The demand for things like CLOs is extraordinary," according to a BlackRock, Inc. officer, quoted by the Journal.

And just as it was in 2005-07, the explosion of CLOs is creating the demand for an explosion in leveraged loans to stuff into them. Leveraged loan issuance this year will approximate $350 billion, also exceeding the record, set in 2007. Much of this loan activity is leveraged buy-outs.

The investors are pension and mutual funds; they have bought $206 billion in CLOs this year so far, and the "prices" of the CLOs have boomed. "Leveraged CLOs" are also appearing this year, although the Journal assures readers that the use of leverage (on leverage) is just a fraction of what it was in 2007.