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Crisis explainer: Uncorking CDOs

Marketplace Senior Editor Paddy Hirsch gives a bubbly explanation of the intricacies of "collateralized debt obligations" -- those financial instruments that got us into this financial mess.

About the author

Paddy Hirsch is a Senior Editor at Marketplace and the creator and host of the Marketplace Whiteboard. Follow Paddy on Twitter @paddyhirsch and on facebook at www.facebook.com/paddyhirsch101
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Awesome explanation for the layman!

The video was good but not clear to the average watcher... the first set of glasses are just an ordinary mortgage backed security deal. The second set of glasses were the CDO structure.

I did not understand this. Why would anyone try making a security out of something that they know pays 0%? I think that those who say they understand understood before seeing this.

Im actually from Australia. But could you go on to explain how he companies insured against default and so made more money from buying risky assets than they would have made form secure assets

interested in opportunities

Why has there been no investigation as to why Moody’s and Standard & Poor’s gave these CDO’s such high ratings? Was it their stupidity or was there some type of collusion or kickbacks involved. Could there have been ‘pressure’ from the government to get more people to buy homes? Some people understood the risk and bought the Credit Default Swaps. And, can we trust Moody’s and Standard & Poor’s to do a good job in the future?

Robert Cringely says that Wall Street has been able to put Collateralized Mortgage Obligations back together since they were first developed in 1973 (http://www.cringely.com/2009/03/the-not-so-bad-bank/).
Sounds sensible. But if he's right, why would I have first heard it from a technology writer?

Great! Thanks for the ease of understanding, Paddy! Maybe too good to upset the masses(or the Champaign Bottle) once more of us are clear of what's been going on and/or what continues to going on!

I went through all the videos. All them are very interesting. Your metaphor makes it easy to understand complicated financial terms. Over all very informative about the recent financial crises.

I think one important thing not covered in the video is that the CDO are used to enhance the credit of the assets in the tranche.
http://en.wikipedia.org/wiki/Securitization#Credit_enhancement_and_tranc...
http://en.wikipedia.org/wiki/Tranche

The regulators fail to properly asses the credit risk because they treat the assets in the CDO to have independent risk of failure when in fact they don't as the above video demonstrates.

The causality is also wrong. The top tranche doesn't get filled up first because it is the least risky. It is the least risky because it gets filled up first. Good video though.

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