While most people do not remember how scary things were ….
Some of us do….
A LOT of safety measures were enacted to make sure the country and the world doesn’t experience what the economy went thru during 2008/2009….
Some worry that quietly Republicans in Congress are abandoning economic caution and could be putting the nation in danger….And new ways of loan’s* have been born that increase risk….
A financial assembly line that went haywire a decade ago and contributed to an economic crisis is gearing up again on Wall Street.
Back then, one of the products the banks churned out — bondlike investments based on thousands of mortgages — proved far riskier than most banks, investors and regulators had expected when many borrowers couldn’t pay. The banking system froze, a financial panic ensued, and the country experienced its worst recession in decades.
This time around, a similar kind of investment, called C.L.O.s, are at the heart of the boom. And that’s not the only parallel: The loans are being made to risky borrowers, lending standards are dropping fast, and regulators are easing the rules.
While it isn’t necessarily destined to end in a 2008-style collapse, the situation today is eerily familiar. Even top Federal Reserve policymakers cited the surging growth of this market as a reason to “remain mindful of vulnerabilities” and possible risks to the financial system…..
*Collateralized loan obligation….
CLOs were created because the same “tranching” structure was invented and proven to work for home mortgages in the early 1980s. Very early on, pools of residential home mortgages were turned into different tranches of bonds to appeal to various forms of investors. Corporations with good credit ratings were already able to borrow cheaply with bonds, but those that couldn’t had to borrow from banks at higher costs. The CLO created a means by which companies with weaker credit ratings could borrow from institutions other than banks, lowering the overall cost of money to them….