The future of CLOs should be rational, not regulatory
There are plenty of reasons why collateralised loan obligations should exist. But the reasons why they existed in the past, and the reasons why they might exist in the future, are the wrong ones — functions of misdirected regulation, not underlying flows of capital.
Efficient markets close arbitrage opportunities, right? Thats what many bankers learned in university, and sometimes, it works. If theres enough liquidity around, CDS track the underlying pretty closely. Our robotic friends in the high frequency trading community try to squeeze arbitrage from exchange traded markets at ever-increasing speeds.
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