Collateralized Debt Obligation

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Collateralized debt obligation ( CDO ) is a generic term for the financial instruments , to the group of the securitized ( English asset backed securities ) and structured credit belong. CDOs consist of a portfolio of fixed income securities . These are divided into several tranches , which are usually referred to as senior, mezzanine and equity in descending order of their creditworthiness. The default risk increases - due to the subordinate service in the event of a default - with a falling rating, which is why the equity tranche offers the highest interest as compensation. CDOs are financial products (such as investments in conduits ) and an important means of refinancing for banks on the capital market . In the course of the financial crisis from 2007 onwards , they came under fire because, through their use, high-risk loan receivables were placed on the capital market as supposedly safe investments.


CDOs vary in construction and the underlying portfolio, but the basic structure is always the same.

  • A SPV ( English special purpose vehicle , SPV ) acquires a portfolio of debt securities, such as mortgage-backed securities or high yield .
  • The SPV is different rated (rated) classes of bonds, and the revenue from these will be the acquisition of the loan portfolio used. The various bonds entitle the holder to withdraw the cash flow from the portfolio of the special purpose vehicle. The distribution depends on the ranking of the bonds. Senior tranches are serviced before the mezzanine and this before the equity tranche. Losses are therefore borne by the equity tranches first. The individual tranches thus offer very different risk and profit profiles, although they are all based on the same underlying portfolio of credit instruments.
  • Losses are distributed in the reverse order of the rating. The tranche with the best rating is thus protected by the tranches with poorer ratings. The equity tranche bears the highest risk of default and offers the highest coupons to compensate for the greatly increased risk.

The basic point is that the special purpose vehicle does not resell the securities themselves (they remain in their possession). Cash flows (such as interest and principal payments) from these securities are sold. As a result, securities that are difficult or impossible to trade are converted into tradable products.

So-called “synthetic” CDOs are a special form: The special purpose vehicle does not own mortgage-backed securities or bonds, but financial derivatives, usually so-called credit default swaps (CDS). These act as a kind of credit default insurance. The owner of such a synthetic CDO is thus a buyer of risks and a seller of guarantees (English protection seller ). Mixed forms of normal and synthetic CDOs are also possible. The synthetic CDOs in particular were responsible for the fact that when the financial crisis broke out, the mortgage insurance market was around 20 times as high as the actual mortgage market. That means an average of 20 insurances, or bets, were taken out on each mortgage, which had a devastating impact on the global economy.

The CDO manager, typically an investment bank or asset manager, earns a commission and management fee on the issue over the life of the CDO.


The media and academics blame the complexity of CDO products, the lack of transparency of the products, the failure of the rating agencies to correctly evaluate these instruments and the lack of supervision by state bodies for the financial turmoil of the financial crisis from 2007 onwards. The CDOs with a high ranking also largely consisted of so-called subprime loans, i.e. loans to low-income social classes with variable interest rates. So the banks mixed safe mortgages with high risk ones and then resold them, with a top rating from the rating agencies. The failure of rating agencies such as Moody's or Standard & Poor's to rate these CDOs still raises questions today.

See also


  • Marco Niehaus: Effects of the Subprime Crisis on the Financing of Public Takeover Bids - Renaissance of Secondary Financing Instruments? . In: M&A Review 2008, pp. 457–462.
  • Dorothea Schäfer: Agenda for a new financial market architecture . In: DIW weekly report of December 17, 2008, p. 810f. Presentation of the construction of asset-backed securities and their role in the financial crisis from 2007 PDF

Web links

Individual evidence

  1. See Hans-Werner Sinn : The casino capitalism . Econ-Verlag, 2009, ISBN 978-3-430-20084-4 , p. 308.