When will they ever learn? (The CDO is back)


The FT reports (with its usual light touch ) that the collateralized debt obligation is back and being used by Global Pension Funds (and hedge funds) as an alternative to junk bonds. I question whether in its “authentic” (CLO) or synthetic (CDO) form, the packages of toxic alchemy that fuelled the 2008 crash were anything but “junk”.





 The sale of collateralised loan obligations — bonds that group together leveraged loans made to companies — has already past $100bn of new issuance for 2017, well ahead of the $60bn sold over the same period in 2016 and approaching the post-crisis record of $124bn set in 2014.

(FT (Nov 28 2017)

There is of course an alternative to junk, it is called patient capital. In a world where pension funds paid pensions rather than obsessed about mark to market valuations, then the need for high yield bonds would be minimal. But in the Alice in Wonderland world that has been created for us by the banking industry, we have to listen to Tracy Chen, head of structured credit at Brandywine Global Investment Management

 “Investors need return, they need yield, with junk bonds at such low yields where else can you go? It pushes investors into the securitised world.”

It” is grammatically the “need”  for return and yield. It cannot be achieved through patient investment of productive capital but must be achieved by using “structured credit” – that is what the bankers tell us and the bankers are running the show (again).


Need generation


Is this what we want?

I don’t address this question to the people who are involved in creating structured banking products to help out pension trustees, I address this to the trustees and especially to trustees who still talk to members.

What would your members say if you told them that you were considering using collateralized loan obligations and collateralized debt obligations (synthetic or otherwise)? And what would they say if – as happened in 2008 – these CLOs and CDOs failed as a result of their alchemy?

In the 10 years since the banking crisis, the people of this country have paid a high price for the failure of the banks and the mis-purchasing of these financial instruments. These failures have impacted wages and the services we receive out of general taxation. With little economic growth and with the debt burden taken on to bail out the banks, Government has decided to close basic services like libraries. This is the impact of CDOs and CLOs on ordinary people.

If any trustee of a pension scheme (global or otherwise) is thinking of investing in opaque banking instruments that promise a higher yield than ordinary bonds through these structures, can they stop and think about the damage that has already been done.

Remember Einstein’s definition of insanity and learn from it. We fought two world wars, we don’t need to fight two banking crisis’.


Stop it – right now!

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in economics, investment, pensions and tagged , , , , , , , . Bookmark the permalink.

2 Responses to When will they ever learn? (The CDO is back)

  1. Paul Lavin says:

    Get with the program Henry! Financial innovation creates real world value. The hidden hands of competition and arbitrage means what you call short term ‘alchemy’ transposes to long term patient capital in the most efficient way.

    The klepto-professional class(https://medium.com/@mojomogoz/sinking-in-the-klepto-professional-reign-23fd3d02db61) keep the future safe through their selfish dynamism. They are absolutely not a bloated society leeching new rentier class. What would Adam Smith say?

  2. John Mather says:

    The off balance sheet debt issue is closer to home with
    1)the car loan market.
    2) December 8th will be an interesting time for the US with no Democrats at the discussion table and Warren on the case again with Trump.
    3) In the UK we need to watch the IDS of March as the wheels fall off the Brexit train wreck where did they find the £40bn money tree?

    Hope that make the lunch on Monday

Leave a Reply