My assessment is that, despite profound economic shocks, the Federal Reserve – led by Chairman Bernanke – has successfully met its price stability mandate through its lending programs and through innovative forms of monetary accommodation. These actions also helped keep the unemployment rate from rising even higher. As part of its accommodative policy, the FOMC has greatly expanded its balance sheet.
A CLO structure does not in and of itself convert a pool of low-rated securities into tranches of high-rated securities through some form of alchemy. Rather, a class of investors must be willing to hold the most concentrated risks as residual claimants. Today, that role appears to be tailor-made for hedge funds, and sometimes the trading desks at leading investment banks.