What is a collateralized debt obligation (CDO)?

A collateralized debt obligation (CDO) is a complex structured finance product that is backed by a pool of loans and other assets and sold to institutional investors. A CDO is a particular type of derivative because, as its name implies, its value is derived from another underlying asset. These assets become the collateral if the loan defaults.

What are collateralized loan obligations (CLOs)?

Alternate name: Collateralized loan obligations (CLOs) are CDOs made up of bank debt. CDOs are called "asset-backed commercial paper" if they consist of corporate debt. Banks call them "mortgage-backed securities" if the loans are mortgages.

Are student loans a collateralized debt obligation?

Collectively, student debt totals over $1.6 trillion in 2020. As all of these people make payments on their loans, that money might not go to the company that approved the loan. Some of those student loans have been purchased by a collateralized debt obligation (CDO) and are included in asset-backed securities (ABS).

Who created the first collateralized debt obligations?

The first collateralized debt obligations were created by Drexel Burnham Lambert during the 1980s, when Wall Street was booming. The bank was well known for both its junk bond business and employed Michael Milken, who played a significant role in developing the junk bond market and later was jailed for violating securities laws.