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ALL IN 

refinanced in early  into loans paying just  percentage points over that same
rate. During the peak of the recent leveraged buyout boom, leveraged loans were fre-
quently issued with interest-only, “payment-in-kind,” and “covenant-lite” terms. 
Payment-in-kind loans allowed borrowers to defer paying interest by issuing new
debt to cover accrued interest. Covenant-lite loans exempted borrowers from stan-
dard loan covenants that usually require corporate firms to limit their other debts
and to maintain minimum levels of cash. Private equity firms, those that specialized
in investing directly in companies, found it easier and cheaper to finance their lever-
aged buyouts. Just as home prices rose, so too did the prices of the target companies.
One of the largest deals ever made involving leveraged loans was announced on
April , , by KKR, a private equity firm. KKR said it intended to purchase First
Data Corporation, a processor of electronic data including credit and debit card pay-
ments, for about  billion. As part of this transaction, KKR would issue  billion
in junk bonds and take out another  billion in leveraged loans from a consortium
of banks including Citigroup, Deutsche Bank, Goldman Sachs, HSBC Securities,
Lehman Brothers, and Merrill Lynch. 
As late as July , Citigroup and others were still increasing their leveraged loan
business.  Citigroup CEO Charles Prince then said of the business, “When the mu-
sic stops, in terms of liquidity, things will be complicated. But as long as the music is
playing, you’ve got to get up and dance. We’re still dancing.” Prince later explained to
the FCIC, “At that point in time, because interest rates had been so low for so long,
the private equity firms were driving very hard bargains with the banks. And at that
point in time the banks individually had no credibility to stop participating in this
lending business. It was not credible for one institution to unilaterally back away
from this leveraged lending business. It was in that context that I suggested that all of
us, we were all regulated entities, that the regulators had an interest in tightening up
lending standards in the leveraged lending area.” 
The CLO market would seize up in the summer of  during the financial cri-
sis, just as the much-larger mortgage-related CDO market seized. At the time this
would be roughly  billion in outstanding commitments for new loans; as de-
mand in the secondary market dried up, these loans ended up on the banks’ balance
sheets. 
Commercial real estate—multifamily apartment buildings, office buildings, ho-
tels, retail establishments, and industrial properties—went through a bubble similar
to that in the housing market. Investment banks created commercial mortgage–
backed securities and even CDOs out of commercial real estate loans, just as they did
with residential mortgages. And, just as houses appreciated from  on, so too did
commercial real estate values. Office prices rose by nearly  between  and
 in the central business districts of the  markets for which data are available.
The increase was  in Phoenix,  in Tampa,  in Manhattan, and  in
Los Angeles. 
Issuance of commercial mortgage–backed securities rose from  billion in 
to  billion in , reaching  billion in . When securitization markets
contracted, issuance fell to  billion in  and  billion in . When about