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April 21, 2014

Banks Cling to Bundles Holding Risk

“The Volcker Rule doesn’t go into effect until 2015, but that hasn’t stopped big bankers and their supporters in Washington from trying to undermine it.

“The latest fight involves another complex Wall Street creation, a financial instrument known as a collateralized loan obligation. Big banks want to be allowed to own them but regulators say such holdings can be hazardous and may allow the banks to evade the Volcker Rule’s prohibition on risky trading.

“There have been countless battles over the Volcker Rule since it was first conceptualized in the Dodd-Frank law in 2010. Paul A. Volcker, the former Federal Reserve chairman for whom the rule is named, hasn’t talked about most of these fights, but this one is important enough that he has come forward to discuss it.

“What are collateralized loan obligations, or C.L.O.s? Translated into simple English, they are bundles of mostly commercial loans that are sold in various pieces to investors. They are similar to collateralized debt obligations, or C.D.O.s — those instruments that imperiled so many institutions in 2008 — but C.L.O.s are simpler and in some cases less risky. The loans in C.L.O.s provide money to companies, many of them subject to leveraged buyouts, that might not receive bank funding.”

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Read full NY Times article here.

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