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distraction: What's a CDO?
CDO stands for collateralized debt obligation.
To understand what that means, start with something simple like a mortgage or an auto loan. The good news for a lender is that he earns a profit — the interest rate — on the money leant out. The bad news is that the borrower may default.
So now imagine you had ten roughly similar loans. A person who owned-one tenth of each of those loans would earn the same interest rate as someone who owned a single loan, but the odds of all ten loans defaulting simultaneously are low. A package that consisted of one-tenth of ten separate loans would be a very simple form of collateralized debt obligation.
The same principle can be applied, however, to create very complicated securities. Investment banks did a lot of this during the pre-crisis years, and belief that these securities were very safe fueled a lot of lending activity.
http://www.vox.com/2014/4/11/5602188/the-secs-just-been-caught-colluding-with-the-banks-its-supposed-to
Printed copy · Anthology Volume 8, page 550
