CDO, CDS, what does all this jargon means ?

Let’s just explain, because I think I can remember, the difference between CDO and CDS (CDO = Credit Debt Obligation and CDS Credit Default Swaps). Given what I learnt, I remember that CDS are a kind of insurance policy like the role of AIG in the US for American banks which were gambling a lot and needed to cover all their bets.

CDO are more a kind of derivative. Mostly a way to bundle different kind of debt (Credit card debt, student debt, consumption debt, and mortgages) into complex financial products intended to be sold abroad. These CDO were rated by credit rating agencies (Moody’s, S&P, Fitch) and they were most of the time given the highest possible rating mostly because banks were paying hundred of billions of USD to rate them. Quite difficult to say to your clients, and by the way to the hand which is feeding : all your CDO are junk complex products !

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