A decade ago, collateralized debt obligations (CDOs) were thrust into the spotlight as one of the failed financial products that crushed investors and drove the country into a severe financial crisis. Once referred to by Warren Buffett as “financial weapons of mass destruction”, CDOs have slowly fallen out of favor with investors.
As the market for CDOs continues to shrink, the market for a similar financial product — the collateralized loan obligation (CLO) — is booming. As reported by The New York Times, the total value of CLOs in the United States has exploded from $275 billion in 2013 to more than $600 billion in 2018.
While the heavy hitters of Wall Street may love CLOs, there are many different reasons why investors should be cautious. Here, the securities fraud attorneys at Sonn Law Group offer an overview of the most important things that investors need to know about collateralized loan obligations.
What are Collateralized Loan Obligations?
A collateralized loan obligation is a security that is backed up by a pool of debt. With a CLO, the investor receives the debt payments from the collection loans, while also taking on the risk should any of the loans default. As with other types of complex financial product, the devil is ultimately in the details. CLOs are only as reliable as the underlying debt. And in many cases, CLOs are backed by relatively low-rated, risky corporate loans.
Why are CLOs So Popular on Wall Street?
Much like their now infamous cousin — the collateralized debt obligation — collateralized loan obligations are popular on Wall Street because they bring in the potential for new profits, in the form commissions attached to the sale of an exotic financial product, and because they allow banks and other large financial institutions to shuffle around risk. Investors buy the right to assume the risk. If these loans go bad, the investor is left holding the bag.
Be Weary: Why Collateralized Loan Obligations are Risky Investments
When considering putting money into CLOs or any other complex investment products, investors must carefully weigh the risks and they must carefully assess their unique individual financial situation. CLOs are inherently risky investments; they are simply unsuitable for the vast majority of investors. Everyday investors, who are often at the end of the line in getting into CLOs, are generally stuck holding the highest-risk loans.
It is notable that collateralized loan obligations often include low-graded debt. For example, Sears, which recently filed for bankruptcy, is a typical example of a large company that obtained loans through issuing CLOs. As always, investors should ensure that their portfolio is properly diversified. If you sustained losses in CLOs due to the negligent recommendations of your financial advisor or brokerage firm, you may be entitled to compensation for your losses.
Contact Our Investment Fraud Attorneys Today
At Sonn Law Group, our top-rated securities fraud lawyers are committed advocates for investors nationwide. If you or your loved one lost money in collateralized loan obligations (CLOs) or any other related financial product, we can help.
For a free consultation, please contact our law firm today. We handle all investment fraud and broker negligence claims on a contingency basis — we only get paid if help you recover financial compensation for your losses.