Collateralized Loan Obligations (CLOs) Explained in One Minute: Mortgage-Backed Securities 2.0?
Вставка
- Опубліковано 21 бер 2020
- Quite a few economists have expressed their concerns regarding so-called Collateralized Loan Obligations or CLOs, stating that we haven't learned enough after the Mortgage-Backed Security fiasco and that this time, we are making similar mistakes: not when it comes to mortgages but rather corporate debt.
Simply put, Collateralized Loan Obligations are CDO types, just like Mortgage-Backed Securities, with the main difference being represented by the fact that another type of debt (corporate debt) is in the spotlight.
In the years that followed the Great Recession, the corporate sector had access to unprecedented levels of cheap as well as relatively easily-obtainable capital and as such, a lot of companies went overboard when it comes to taking on debt.
CLOs ended up therefore becoming more and more popular as time passed, with various tranches that investors can opt for based on their risk tolerance. Is there a Collateralized Loan Obligation bubble that is about to explode and if so, what should we know about these CLOs? Let's find out.
GiganticWebsites.com is a project through which I make it possible for people to build truly gigantic websites (thousands of articles each!) at ridiculously low prices. If you have a great domain you want to turn into an amazing website or an existing site you'd like to upgrade/scale, visit our website or check out the One Minute Economics presentation video below:
ua-cam.com/video/gE8yEOQFMvo/v-deo.html
Please note that this comment is not an ad for a third-party service provider. GiganticWebsites.com is my baby 100% and I will personally be involved in each and every project so as to ensure the website turns out great :)
Thanks for explaining that in a simple and succinct way! I DID get a general understanding of CLOs in less then 2 minutes!
Awesome, glad to hear that Craig! :)
Love your videos! More power!
Thanks a ton for the support, really appreciate it :)
What are these called in the automotive industry or do they have a term? Is there anywhere I would go to learn more about that and what the banks are doing in different markets with CDOs?
Hi Ryan, calling them CDOs broadly speaking is a fairly safe approach or if we're referring to corporate automotive loans exclusively (rather than let's say auto loans taken out by the average individual, a lot depends on which type of loan we are referring to), CLOs as a more specific term :)
Quick note, in case you were wondering why your comment no longer appears: I've deleted the initial video and uploaded a slightly different version :)
Serious question: Why is this considered an acceptable way to do business? Risky debt for sale? Again? It's as if the financial world lives in another universe. Given what happened with the last global fiasco, I genuinely don't understand how these transactions are accepted with a straight face.
... aaaaaand it's gone :( The fact that we are so blatantly disregarding the lessons of the Great Recession baffles me as well
Anything to make money it's called greed @@OneMinuteEconomics
You are thinking of CDOs
what is the collateral of these securities? what gets liquidated in the case of a default?
Would recommend watching my CDO video when you get a chance to, I've explained in a bit more detail how tranches work: ua-cam.com/video/2oyXK-G7GiI/v-deo.html
@@OneMinuteEconomics can you explain here what gets liquidated? I watch the other video and did not see what gets liquidated just who gets the first dibs on the liquidation (senior tranches)
@@bretclaar1663 the underlying collateral are the syndicated bank loans. In the event of default these would be either sold or paid off(loan pay down) and distributed down the waterfall to the various tranches.
Investment banks / managed funds buy these loans and repackage them as investment products. Then investors buy them. The investors return on principal is basically tue interest the corporations pay on the debt they sold. If tue corporations stop paying or go bankrupt the loan defaults and the investors lose their principal. It’s so dumb and simple.
Good question because we're again seeing collateral shortage in CLOs, welcome to 1929 2.0.
Its actually scary, sounds like same shit all over again
The more you learn about the current financial system, the harder it is to fall asleep. That being stated, who knows, what will "break" so as to trigger the next financial crisis? Could CLOs be it? Maybe, with the Federal Reserve's recent bond purchase-related decision speaking for itself. But then again, it could be something completely different, which is why I always tell people: never bet on just one horse, be sure to at least try to have all of your bases covered ;)
Here before the CLO crash of 2024/25.
Hi Lucas, what is your baseline scenario and why?
I've been too 😛
ITS SHORTING TIME BOYS
Be careful out there because even if you'll eventually be proven right, the market has its ways of triggering stop-losses or even liquidations before proving shorters right :D
If you liked this video, I think you'll love The Age of Anomaly, my Wall Street Journal and USA Today best-selling book about preparing for financial calamities (whatever they may involve). You can buy it over at:
1) Amazon: www.amazon.com/Reasonable-Case-Bitcoin-Andrei-Polgar-ebook/dp/B09G6Z45QB
2) Barnes & Noble: www.barnesandnoble.com/w/the-age-of-anomaly-andrei-polgar/1127084693?ean=2940155383970
3) Apple Books: books.apple.com/us/book/the-age-of-anomaly-spotting-financial-storms-in/id1331704265
4) Kobo: www.kobo.com/ww/en/ebook/the-age-of-anomaly-spotting-financial-storms-in-a-sea-of-uncertainty
One Minute Economics needs your help! Please give me a minute (heh) of your time by watching the following video if you find the channel useful, literally anyone can help (either financially or by spreading the word about my work): ua-cam.com/video/io04ckq1X1M/v-deo.html
A CDO is a type of MBS, not vice versa
Nope :)
The name itself is a helpful indicator. Collateralized Debt Obligations can contain a wide range of assets. Thus, how could Collateralized Debt Obligations be a *Mortgage*-Backed Security type?
@@OneMinuteEconomics I understand your confusion - allow me clarify.
An MBS is simply a security backed by mortgages, yes? A CDO backed by mortgages is also a security backed by mortgages - however, it has a notable tranche structure. Therefore, if you have a security backed by a pool mortgages, which is then divided into tranches with different priority - you have a special type of MBS, known as a CMO (so a CMO is basically an MBS with a CDO structure). And then again, a CMO is a specific type of CDO.
The explanation pertaining to the differences between the two is accurate, but how can you reconcile calling a CDO a type of MBS with the fact that CDOs don't necessarily have to contain mortgages?
Why are all the youtube videos preceeded by Democrat ads. Where are the Trump ads? Is Google manipulating us?
Hi Jerry, I'm politically agnostic for what it's worth. When it comes to ads, the algorithm decides what gets served, don't know all that much about the specifics unfortunately :(