Are CLOs the Mortgage Loans of today?

The big problem of The Great Recession was mortgage-backed securities. They were highly in demand because of their high yields. But many of the companies that issued them had trouble redeeming them, to the detriment of those seeking higher yields than those offered for safer securities. It looks like Collateralized Loan Obligations (C.L.O.s) have a similar issue. 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.

And, as with the mortgage-backed securities, we're not talking 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. Some of those companies will not be able to handle the high level of debt they have taken on, and when they reach the breaking point, corporate bankruptcies will again begin to rise.