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.

A Collateralized Debt Obligation (CDO) is a synthetic investment product that represents different loans bundled together and sold by the lender in the market. The holder of the collateralized debt obligation can, in theory, collect the borrowed amount from the original borrower at the end of the loan period.

CDOs came into existence in order for banks to sell off their loans, creating room on their balance sheets, so that they could take on more loans. It is a way to generate more profits by (1) selling off current loans and (2) making money from new loans.

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.