Friday, December 28, 2007

CDO

Felix Salmon overview of CDO creation with over-collateralisation.

But what happened over the past few years was that demand for those AAA-rated CDO tranches went through the roof, and it became harder and harder to find a nice diverse universe of BBB-rated bonds to throw into the cauldron. As a result, the ingredients getting thrown into the cauldron started getting less and less diverse, until it reached the point that all, or nearly all, of them were, in some way or another, ultimately reliant on subprime mortgage payments.

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