SEC Probes Collateralized Loans

The Securities and Exchange Commission is investigating one of Wall Street's latest investment trends. They're complex debt instruments called collateralized loan obligations, or CLOs. They are used to channel capital to businesses and other borrowers. Some analysts are worried that the spread of CLOs could put the economy at risk.

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The Securities and Exchange Commission is investigating one of Wall Street's latest investment trends. They are complex debt instruments called collateralized loan obligations, or CLOs. If you're wondering why you need to understand them, consider this: Some analysts are worried that the spread of CLOs could put the economy at risk.

NPR's Jim Zarroli explains.

JIM ZARROLI: All five SEC commissioners showed up for a hearing held by the House Financial Services Committee. At one point SEC Chairman Chris Cox was asked about the growth of this relatively new form of investment. A CLO is a debt instrument that pulls different loans together and then divides them up among a lot of investors. They've become increasingly popular in recent years, especially among sophisticated investors such as hedge funds.

Some critics say that CLOs make it too easy to extend loans to shaky companies, which could increase volatility if the economy slows. Cox said the agency was already addressing the issue.

Mr. CHRISTOPHER COX (Chairman, Security and Exchange Commission): Our enforcement division currently has opened about 12 investigations focused on issues such as this.

ZARROLI: Cox gave no details about who was being investigated or what they allegedly did. He responded to a question from Democratic Congresswoman Carolyn Maloney of New York, who said she was concerned about the impact of these loans on the economy. She also suggested that these products should be made more transparent so investors could have a clearer sense of the kinds of loans being made.

Jim Zarroli, NPR News.

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