Collateral Debt Obligation (CDO) is the cause of the sub-prime crisis and recession. European banks and investors bought sub-prime housing loan portfolios from original US lenders to diversify their investment portfolio before the sub-prime crisis. At that time, it seemed a lucrative investment avenue. These are known as Mortgage Backed Securities (MBS). Most of these loans were bought as part of CDOs. CDOs are just like mutual funds with two significant differences. Unlike mutual funds, in CDOs, all investors do not share risk equally and every participatory group has different risk profiles. Compared to mutual funds, which normally buy shares and bonds, they usually buy securities that are backed by loans. Later on, CDOs became toxic assets for these banks and investors.
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