Credit · Core
Collateralized Debt Obligation
A CDO is a securitization of debt (or of other securitizations) into tranches — correlation and a waterfall, not a simple bond.
Definition
A manager or a static pool of bonds/loans/ABS; liabilities in tranches. Equity eats first loss; seniors need a correlation and recovery story. CDO-squared is the same idea on CDO mezz — leverage on a model.
Why it matters
2008 made the word infamous. The reusable object is tranche correlation: seniors are short a correlation jump.
Case
Mezz ABS CDOs that were ‘AAA’ because the model said housing residuals were diversified. They were one factor. The rating was the model.
How to read it
What’s in the pool, attachment/detachment, and the correlation assumption. If you cannot name those, you do not own a CDO; you own a story.
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