The Wall Street Journal, Greenspan, Milken, and the Next Bubble
Today’s Wall Street Journal has a good article regarding Collateralized Loan Obligations, which are bundles of loans which are then divided up according to the degree of risk. The CLOs allow companies taken over by private equity operators to float the enormous debt that makes the deals work.
The most risky parts of the securities pay very high interest rates, which make them appealing to pension funds that want to register high rates of return — the problem is they’re very risky. My own pension fund, California’s Public Employee Retirement System, which has a very good record, is putting money into these very risky investments. I assume it is not a major portion, but it lost a bundle on Enron.
The article cites two authorities supporting the CLOs:
“CLOs have been lauded by former Federal Reserve chairman Alan Greenspan and others for dispersing risk. Michael Milken, whose underwriting of junk bonds at Drexel Burnham Lambert Inc. during the 1980s ignited that decade’s buyout boom, has said that CLOs are among the most important financial innovations of the past quarter century.”
Milken, of course, went to jail for his shenanigans, but remained a billionaire. Greenspan for all his supposed genius earned $40,000 for writing a letter in support of Charles Keating’s Lincoln Savings and Loan. He also recommended variable-rate mortgages as beneficial for consumers — some of which no doubt have lost their homes.
So, perhaps we should take Journal’s warning to heart, and be leery of the impending consequences are bursting bubble.
Ng, Serena and Henny Sender. 2007. “CLOs Spark Worries of Volatility and Risk; Loan Standards Loosen.” Wall Street Journal (26 June): p. A. 1