THIS WAS THE cutting edge of debt – where advanced mathematical technology was creating a toolkit where the cashflows on any underlying assets could be pooled, tranched and distributed according to investors’ appetite.
CDOs were deemed a great mechanism for enhancing yield. Suppose you were an investor limited to buying triple-A-rated securities but finding the low single digits yields available on sovereign and supranational securities not sufficiently attractive. No problem: bankers had the technology and the underlying assets to build something that would perfectly suit your needs – in theory at least.
CDOs were always subject to a certain amount of mistrust because of their, often unnecessary, complexity.
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