CLO Downgrades Will Make Oil Crash Seem Minor in Comparison

Credit is the real pillar of the stock market - not oil or tech stocks. A systematic downgrade will result in forced selling and margin calls as investors (institutions) are forced to dump to chase the quality upwards.

The Fed can go out to buy even junk grade bonds (eg the underlying collateral in the CLOs) but that is limited in number and does not cover the entire tranche. These products can get pretty sophisticated and the Fed will probably bail them out too in another form of giant receivership. But to do so they will have to extend and amend the program which may or may not require Congressional approval. Please also note that the Fed CANNOT (currently) buy CCC rated bonds.

"recall that the expanded Term Asset-Backed Securities Loan Facility (TALF) announced by the Fed last Thursday only buys AAA-rated bonds of CLOs, which after the coming tsunami of CLO downgrades is complete, will not only collapse in nominal size but will mean that any further attempts to stabilize the CLO space will require yet another Fed backstop of even riskier - i.e., rated AA and lower - structured products."

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