CDO's, or Collateralized Debt Obligations, are sophisticated financial tools that repackage individual loans into a product that can be sold on the secondary market. These packages consist of auto loans, credit card debt, or corporate debt. They are called collateralized because they have some type of collateral behind them.
CDO's are called asset-backed commercial paper if the package consists of corporate debt, and mortgage-backed securities if the loans are mortgages.
CDO's were created to provide more liquidity in the economy. It allows banks and corporations to sell off debt, which frees up more capital to invest or loan. However, the downside of CDO's is that it allows the originators of the loans to avoid having to collect on them when they become due, since the loans are now owned by other investors. This may make them less disciplined in adhering to strict lending standards.
Source: Google search (source wasn't recorded at time of reading)
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