At the heart of the 2008 U.S. financial crisis and the 1997-1998 Asian financial crisis was sub-prime loans. Leveraged loan volumes are now nearing $1.4 trillion, surpassing the $1.3 trillion high yield bond market according to Mark Zandi, chief economist of Moody’s analytics. Zandi writes that it’s “much too early to conclude” that the non-financial businesses receiving leveraged loans “will end the current cycle in the way subprime mortgage borrowers did the previous one,“ in the latest outlook report from Moody’s Analytics. There are significant differences between these two loan types but the “the similarities are eerie,” says Zandi. And though life insurance companies may be taking on a little more investment risk than they have historically, the leveraged loans and collateralized loan obligations (CLOs) are not a cause of concern as Life Insurers’ Investments Look Fine: Moody’s. The rating agency says even the modest amount of money in CLOs looks safe
The Big Shortis a good movie that provides a good overview of how leveraged loans work and why they created one of the worst financial crises.
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