Treasury Warns Congress (and Investors): This Financial Creature Could Sink the System
by Wolf Richter
WolfStreet.com
December 8, 2014
Office of Financial Research slams Leveraged Loans
In its 2014 Annual Report to Congress, the US Treasury’s Office of Financial Research, which serves the Financial Stability Oversight Council, analyzed for our Representatives the “potential threats” to the US financial house of cards. Among the biggest concerns was a financial creature that has boomed in recent years. The Fed, FDIC, and OCC have warned banks about it since March 2013. But they’re just too juicy: “leveraged loans.”
Leveraged loans are issued by junk-rated corporations already burdened by a large load of debt. Banks can retain these loans on their balance sheets or sell them. They can repackage them into synthetic securities called Collateralized Loan Obligations (CLOs) before they sell them. They have “Financial Crisis” stamped all over them.
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