This is No Big Short: Why clos are Different to the Product that sparked the GFC
The following was produced and published as part of Livewire's The Pitch on 12 June 2024.
Michael Burry and Steve Eisman were among the few investors who spotted the rotten state of CDOs. But CLOs are, thankfully, different.
In the beginning, the Collateralised Debt Obligation (or CDO), was a humble and diversified vehicle by which a slew of mortgage-backed securities (read: housing debt) could be bought and sold among sophisticated investors. But by 2006, that collateral had become dominated by high-risk – or sub-prime – mortgages. It is these assets that caught the eye of such names as Michael Burry, Steve Eisman, and Meredith Whitney and caused them to believe that the American housing market was about to blow up.
For those of you who were too young to remember this, there’s always The Big Short, a blockbuster film starring Steve Carell, Brad Pitt, and pre-Barbie Ryan Gosling among others.
But for those with long memories, CDOs leave a bitter taste in many investors’ minds. Fast forward to 2024 and the market has changed dramatically. One of the ways the market has changed has been in the rise of a similarly named – but very different – product called CLOs. These collateralised loan obligations are, according to Ares’ Teiki Benveniste, underpinned by different products and are more transparent. But are they safe to invest in?