Collateralized Debt Obligations (CDOs) Explained in One Minute: Definition, Risk, Tranches, etc.

Quite a few people who aren't necessarily economists know what Mortgage-Backed Securities are in light of the fact that after the Great Recession, they've received extensive coverage, to the point of becoming (in)famous.

But Collateralized Debt Obligations or CDOs... less so. Unfortunately, this means that people ended up having a superficial understanding of the entire mortgage debacle at best in light of the fact that if you don't know what Collateralized Debt Obligations are and how they work, you aren't even scratching the proverbial surface.

To keep it simple, think of Mortgage-Backed Securities as a specific Collateralized Debt Obligation type, where only mortgages are used, as the name suggests. When it comes to CDOs, we are therefore dealing with a broader term that encompasses a wide range of different debt types, from personal loans to corporate debt.

From definition to specifics, this video explains what CDOs are and how they work. We'll be covering the risk dimension as well, including the tranches those in movies such as The Big Short have tried to explain. Fortunately, as complicated as Collateralized Debt Obligations are, it's not that difficult to wrap your head around how things actually work... if the right economist offers to explain the process ;)

[OneMinuteEconomics]

GiganticWebsites.com is a project through which I make it possible for people to build truly gigantic websites (thousands of articles each!) at ridiculously low prices. If you have a great domain you want to turn into an amazing website or an existing site you'd like to upgrade/scale, visit our website or check out the One Minute Economics presentation video below:


Please note that this comment is not an ad for a third-party service provider. GiganticWebsites.com is my baby 100% and I will personally be involved in each and every project so as to ensure the website turns out great :)

[OneMinuteEconomics]

Quick note, as always, in light of the difficult times many of you are surely going through: first and foremost, stay safe out there and don't expose yourself unnecessarily. But since you are home, please don't waste your entire day watching Netflix and instead, pay attention to the economic dimension of what is happening as well. More specifically, think about what the economy we will be returning to will look like when all is said and done. For the foreseeable future, I will try to exclusively publish videos which help with just that (videos about the financial system, risk factors it makes sense to be aware of and so on... there is a reason why I have published a video about Mortgage-Backed Securities, followed by one about credit rating agencies, followed by one about Collateralized Debt Obligations, with one about Collateralized Loan Obligations coming on Sunday). If you are in need of assistance or simply just a sympathetic ear, I'm here for you and can be reached at andrei at one minute economics dot com :)

[OneMinuteEconomics]

If you liked this video, I think you'll love The Age of Anomaly, my Wall Street Journal and USA Today best-selling book about preparing for financial calamities (whatever they may involve). You can buy it over at:

[youshallreceivepower]

thank you for explaining this so clearly

[rigrag]

First of all I love the channel and as you said I think now is a good time to try and increase my knowledge rather than wasting these months doing nothing.
I have a few questions. So Mortgage Backed Securities are a type of CDO? From watching The Big Short I thought that CDOs were often used as a way to use up all the rubbish mortgage bonds that nobody would initially buy due to their poor credit ratings. So was the main reason why CDO's had such a catastrophic impact in the financial crisis because the rating agencies gave these 'junk' mortgage bonds high ratings that they didn't warrant? Were CDO's largely used to mask worthless Mortgage bonds and get a ridiculously high rating to screw investors?

[ryanhartigan]

Thanks for these videos! Super appreciate them!

A couple questions that came up during this time: do the investors have access to the individualized bureaus or at least credit scores of the people/companies involved in these CDOs? How much of it is based on trust of the investment bank? Does the investment bank have any incentive to not be honest with the ratings? Do the investors get paid on defaults, on successful payoff of the loans, or are there different CDOs that are based on different indexes?

[mohammedmansourr]

Does the CDOs are effected by interest rates when the Fed raise them ?

[turneaandrei]

It is happening all over again what happened in 2008.But now they call the instrument ""bespoke tranche opportunity""

[MajaroReal]

If you invest on this and people dont pay their loans what happens to your money? You just get it eventually but it takes more time if you are a junior investor or you could potentially lose your money?

[TheRobberyMilitia]

So basically we issue out securities for a asset backed loan and depending on the rating certain investors take on the risk or not which is why some people are denied loans due to the packaging of the asset back securities either too low or too high for the investors risk tolerance 🤔🤔

[themalcontent]

We are seeing this in the game industry. But i don’t know what it would be called.
Lots of high risk elements that are given low risk investment despite being very high risk.

[TruthFairy]

I'm trying to understand why the banks were willingly buying the worthless MBS's from investors who bought into them early into the start of what became the 2008 housing crash. When the collapse was imminent and investors had a limited window into unloading their worthless bonds, what incentive did the banks have by buying them when they knew they were completely worthless? Basically my question is who was left holding the bag?

[shogrran]

And while discussing these ratings and tranches... who tells the investors that the "AAA" loan is really an "AAA" loan.

[Ahmed-vsui]

Why are CDOs considered dogshit wrapped in catshit in The Big Short movie??

[phunwithphiphi]

The hierarchical organisational chart confused me why are mezzanine tranches subordinate to junior tranches?

[GiangNguyen-vriv]

I'm not a native speaker and I feel so hard to understand what you said :((

[jockin]

I'm here because I need to write an essay on how the financial crisis from 2008 to 2009 began lol

[amelias.wodehouse]

Sir, nothing is hard to understand IF you have a good teacher so with that said because YOU think its hard to understand and say so then YOUR not a goid teacher for others! bye