When the housing bubble burst and subprime borrowers went into default at high rates, the CDO market went into a meltdown. This caused many investment banks to either go bankrupt or be bailed out by the government. Despite this, CDOs are still in use by investment banks today.

Collateralized debt obligations (CDOs) are a type of structured investment finance product that contain various assets and loan products. Investment banks package bank loans, mortgages, and other assets into collateralized debt obligations—similar to funds—for institutional investors to buy.

In 2007, this market and other credit markets froze because of fears that many MBSs and CDOs contained mortgages that had been granted to subprime borrowers – that is, people with a poor credit-rating history who were unlikely to be able to repay the loans. Within a matter of weeks, Northern Rock was in deep trouble.

What is a collateralized debt obligation? 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. Essentialy, they are bundled debt resold to to investors.