Collateralized Debt Obligation (CDO)

Posted by admin on Sunday, January 17, 2016

Collateralized Debt Obligation (CDO): a type of structured asset-backed security (ABS). CDO’s were developed for corporate debt markets, but then evolved to include the mortgage-backed security (“MBS”) markets. In the early 2000s, CDOs were generally diversified, but by 2006–2007—when the CDO market grew to hundreds of billions of dollars—this changed. CDO collateral became dominated not by loans, but by lower level (BBB or A) tranches recycled from other asset-backed securities, whose assets were usually non-prime mortgages, and are known as Synthetic CDO. These CDOs have been called “the engine that powered the mortgage supply chain” for nonprime mortgages, and are credited with giving lenders greater incentive to make non-prime loans leading up to the 2007-9 subprime mortgage crisis[1].

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