Collateralized Loan Obligations: A Historical Analysis of a Modern Narrative

Abstract

This paper investigates the current narratives surrounding collateralized loan obligations using a theoretical approach to narrative analysis directed by literature from Magnussen and Hansen. The first portion of the paper gives an introduction to the assets that are relevant for analysis of the narrative, such as various types of CDOs including CLOs and synthetic variations. Securitization and how it relates to these products is also discussed. The evolutions and supply chains that serve to create these assets are also included as they provide crucial context and components to be used in the analysis sections. The first analysis section utilizes the three levels of analysis to be used in understanding narratives as presented by Magnussen. The first isolates what the narrative surrounding CLOs actually consists of. In summary, there is currently a narrative that collateralized loan obligations are simply a rehash of pre crisis CDOs, and are therefore destined to end in the same turmoil. The historical level analysis takes a departure from Magnussen's method, as the narrative at hand in this paper is one which describes the future, rather than the past. Therefore the paper looks at the roots of the narrative instead and considers the role of CDOs played in the Global Financial Crisis. The final level of this analysis looks at what the narrative is used for, what is left unsaid, and what conclusions can be drawn from it. The second analysis contained within this paper evaluates the narrative to determine to what degree the narrative makes sense. The findings of this paper are that there are similarities between pre crisis CDOs and modern CLOs, but the narrative as purported by many of its commentators is often imprecise and plagued by a lack of a deeper understanding of structured finance. With this in mind, clear similarities between pre crisis CDOs and modern CLOs certainly do exist. Within this paper are two seperate methodological approaches, as required by the two different styles and requirements of the two analysis sections. The first analysis using Magnussen’s directives are constructivist in nature, while the second analysis that seeks to determine how credible the narrative is uses a realist approach.