Collateralized debt obligation & mortgages question?

Question

I am curious as to the history of CDO's. I have heard talk of the 'good old days' when mom and pop s&ls kept mortgages in house, and then at some point in time mortgages started to be securitized. my question is when did CDO's become the defacto vehicle to securitize mortgages, and was there any legislation that prompted the change or was it simply market forces?

Answer 1

CDO's were fist issued in 1987.  But they became popular only after 2001 partly due to the development of a mathematical formula that made pricing CDO's quick and easy and also due to the profitability of packaging and selling CDO's to various investors.

http://en.wikipedia.org/wiki/Collaterali...

The government played an indirect role in making CDO's popular among investors.   A government regulatory agency by the name of SEC has endorsed a few rating agencies as being the best in the business.  And most investors believed the government.

But these rating agencies had many conflicts of interest.  And they basically gave falsely high ratings to CDO's in order to make money for themselves.  And the govenment regulatory agency didn't do anything about it.

http://money.cnn.com/2007/09/28/news/com...

http://www.moneyandmarkets.com/services/...