CDOs And CDSs
Back to Goldman. In the early '90s, I recall, Collateralized Debt Obligations or "CDOs" were taking off on the continuation of mortgage bond market pioneered by Lewie Ranieri the mighty First Boston in 1987 or '88. Back then, "jumbos" and "subprime" strange words but not evil. CDOs are, in theory, an investment-grade security backed up by a 'pool' of low-risk bonds or loans or other assets of different maturities and credit quality. The pool generates cashflows from principal and interest payments, which can be chopped (or tranched) allowing investors various exposures to different risks and returns. The originator, like bank or thrift, could efficiently move the asset, such as a mortgage, from its balance sheet reducing the need to reserve cash to offset a possible default. This new market offered unheard of liquidity benefitting companies and home-owners alike.