[o_nate]

These are good points. I would add that generally there's not a problem with having lots of risky debt in the system, as long as it's held by investors who are aware of and can handle the risk. The reason that CDOs led to the financial crisis, was that there was lots of risky debt being packaged as AAA and held by investors (i.e. systemically important banks and insurance companies) who couldn't handle losses on it. So the big questions about CLOs should be: who's buying the AAA debt, is it being mis-rated, and if so, can the holders handle losses on it. In general, I think the rating companies reacted to their vast and obvious failings in 2008 by tightening rating criteria across the board, even in structures such as CLOs which did okay during the crisis. Is it possible they're still being too optimistic? The thing about the rating models is that they're very sensitive to correlation assumptions that are difficult to observe empirically. Also, they tend to have a blind spot about things like fraud. Is it possible that junk-rated corporate defaults could end up being much more highly correlated than the models assume? There are transmission mechanisms that can cause high correlation. For example, an uptick in defaults in one sector could lead to a tightening of credit standards across the board that could lead to rollover risk. (Most of these companies are highly dependent on being able to rollover maturing debt.) Or fraud in underwriting standards could be much more pervasive than assumed. (This one seems unlikely, but who knows.)