This Atlantic article, written by Professor Frank Partnoy of UC Berkeley, describes at length how CLOs—complex securities comprised of risky loans issued to highly indebted companies—pose a significant threat to the financial system.
The article includes a quotation, reproduced below, from Dr. John Griffin, President of Integra, regarding research he and Dr. Jordan Nickerson have done to analyze the credit ratings of CLOs.
Even before the pandemic struck, the credit-rating agencies may have been underestimating how vulnerable unrelated industries could be to the same economic forces. A 2017 article by John Griffin, of the University of Texas, and Jordan Nickerson, of Boston College, demonstrated that the default-correlation assumptions used to create a group of 136 CLOs should have been three to four times higher than they were, and the miscalculations resulted in much higher ratings than were warranted. “I’ve been concerned about AAA CLOs failing in the next crisis for several years,” Griffin told me in May. “This crisis is more horrifying than I anticipated.”
The full article by Professor Partnoy can be found at the Atlantic at the this link.