What?
Collateralized debt obligations (CDOs) and its more specific siblings, collateralized bond obligations (CBOs) and collateralized loan obligations (CLOs), are a successful application of sophisticated securitization techniques originally developed for collateralized mortgage-backed securities (CMBS) to facilitate the resolution of the Savings and Loan crisis in the United States of America (US) in the 1980s. According to Moody's, there were over $120 billion of CDOs in 2000, making CDOs the second largest type of asset-backed security (ABS) after credit card ABS.
The core concept of CDOs is that a pool of defined financial assets will perform in a predictable manner (that is, with default rates, loss severity/recovery amounts and recovery periods that can be reliably forecast) and, with appropriate levels of credit enhancement applied thereto, can be financed in a cost-efficient fashion that reveals and captures the arbitrage between the interest and yield return received
