CDOs backed by risky subprime mortgages were one of the causes of the financial crisis between 2007 and 2009. Though risky and not for all investors, CDOs are a viable tool for diversifying risk and creating more liquid capital for investment banks.

If the loans within a CDO are mortgage loans, the product is often referred to as a mortgage-backed security (MBS). If the mortgage loans in the CDO were made to borrowers with less than stellar credit or no credit history, they're called subprime mortgages.

So, a collateralized debt obligation is a type of debt that is backed by an asset. The asset can be anything of value, but it is typically something that can be easily sold or used as collateral if the borrower defaults on the loan. For example, a collateralized debt obligation might be backed by a pool of mortgages.

What Is the Difference between Collateralized Debt Obligations (CDOs) and Mortgage-Backed Securities (MBS)? MBS are investments marketed as securities, which entails bundling a set of mortgages. CDOs are investments marketed as securities, which includes a bundle of assets such as bonds, loans, and mortgages.