This Is What Could Cause the Stock Market to Collapse
The hidden “CLO” problem in financial markets, according to former investment banker Raoul Pal.
The health crisis seems to be the common reason people are arguing over whether the stock market will go up or down.
There’s a hidden problem in financial markets that many people can’t see and don’t understand.
I am going to give you a simplistic overview after working in finance for so many years and being determined to make the complex, understandable.
The 2008 financial crisis was caused by CDOs (Collateralized Debt Obligations). Investopedia describes this complex financial product nicely:
A CDO is a box into which monthly payments are made from multiple [home] mortgages. It is usually divided into three tranches, each representing different risk levels.
When the homeowners had issues repaying their mortgages, the CDO product, along with mortgage-backed securities, blew up and caused The Great Recession of 2008. The issue was that the home mortgages were examined by ratings agencies who gave them a rating. They were also incentified to fudge those ratings for a fee.
