A financial assembly line that went haywire a decade ago and contributed to an economic crisis is gearing up again on Wall Street.
Back then, one of the products the banks churned out — bondlike investments based on thousands of mortgages — proved far riskier than most banks, investors and regulators had expected when many borrowers couldn’t pay. The banking system froze, a financial panic ensued, and the country experienced its worst recession in decades.
This time around, a similar kind of investment, called C.L.O.s, are at the heart of the boom. And that’s not the only parallel: The loans are being made to risky borrowers, lending standards are dropping fast, and regulators are easing the rules.
While it isn’t necessarily destined to end in a 2008-style collapse, the situation today is eerily familiar. Even top Federal Reserve policymakers cited the surging growth of this market as a reason to “remain mindful of vulnerabilities” and possible risks to the financial system.
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