Ask the Piggy Bank: What are CDOs?
November 28, 2007 by Miranda Marquit
Filed under Finance
Yesterday’s post on the financial sector prompted a comment about some of the confusion coming from financial sector jargon, more specifically, CDOs. Indeed, Jean’s comment was not the only question I received about these products that can sap a financial sector company of earnings when they head south. So I thought it would be a good idea to address them.
CDO: Collateralized Debt Obligation
A CDO is basically an investment that is backed by debt. This debt can include one or more of the following sources: bonds, loans and other assets that have collateral. Mortgage loans (including subprime loans) have been popular inclusions in CDOs for a number of years.
Financial institutions invest in them to generate more cash. Unfortunately, like all investment, CDOs come with risk. And that is what is getting some in the financial sector into trouble.
Instead of fully disclosing what kinds of investments they had, some banks glossed over the details of CDOs. When the full impact of losses came to light in terms of earnings, well, investors were disappointed to see the results.
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Check out what others are saying about this post...[...] and underdisclosed risk. One of the investment products that carries this risk is what is known as collateralized debt obligation (CDO). I’ve received some questions about these CDOs, and thought I’d take a minute to [...]