A synthetic collateralized debt obligation, or synthetic CDO, is a transaction that transfers the credit risk on a reference portfolio of assets. The reference portfolio in a synthetic CDO is made up of credit default swaps. Thus, a synthetic CDO is classified as a credit derivative.

While the underlying assets of regular CDOs are traditional fixed-income assets, such as loans, mortgages, and bonds, synthetic CDOs use non-cash assets as the underlying asset, such as credit default swaps, options, and other such contracts. Synthetic CDOs typically offer higher yields than traditional CDOs.

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. Tom Nicholas and Matthew G.

Synthetic CDOs have been criticized for serving as a way of hiding short position of bets against the subprime mortgages from unsuspecting triple-A seeking investors, and contributing to the 2007-2009 financial crisis by amplifying the subprime mortgage housing bubble.