by John Rubino
Dollar Collapse
The “Everything Bubble” has jumped from hyperbole to literal truth in just a couple of years, as more and more assets enter “crazy expensive/extremely reckless” territory. The latest addition to the list is collateralized loan obligations (CLOs), which are created when a bank lends money to a less-than-creditworthy company and then bundles that loan with a bunch of similar loans into bonds for sale to yield-starved pension funds and bond funds.
There’s a legitimate place in the market for this kind of security, as long as everyone understands the risks. But in financial bubbles, banks’ insatiable hunger for fees combines with bond buyers’ desperate need for income to cloud everyone’s judgment. Lending standards slip, bond quality declines, credit rating agencies look the other way to keep the deals flowing, and buyers keep buying because they have no choice.