CD'oh

Yesterday, I was talking to my father-in-law, a retired corporate lawyer and strong contender for smartest-guy-I-know honors, and I mentioned that I was thinking about writing something about CDOs (collateralized debt obligations). "What's that again?" he asked, "I hate that kind of jargon. It just makes my mind go blank." I made a couple of jokes about the redundancy of CDO - aren't debts obligations?

But the more I thought about it, the more it seemed that this lack of clarity might not be entirely unintentional. Words like "collateralized" gave a gloss of stability to investments that were anything but.

The entities that issued CDOs were special purpose vehicles like those discussed in this post, except instead of buying mortgages, they bought mortgage-backed securities issued by other SPVs. At the big housing-bubble banquet, the CDOs were the dog under the table. By the time the people at the table started to feel hungry, the dog was dead.