Question

did the CDO market increase the share of securities thay received the highest credit rating, relative to its share prior to the existsnce of CDO?

Answer 1

Collateralized Debt Obligation (CDO) is an instrument that is a repackage form of the pool of money from the mortgages, credit card debt or corporate debt. CDO is a product that is sold to investors in the secondary market. CDOs value are derived from the collateral of the loan given to the borrowers.

Credit Rating Agencies like Moody's, Standard and Poor's and Fitch gives rating to securities. They gave AAA ratings to subprime mortgage based securities with poor quality that leads to subprime crisis. Subprime mortgages are those mortgages which are given to those borrower with low creditworthiness. Thus, when borrower stopped making the payment and started getting default, the market collapsed in 2008 recession as most of the investment institutions invested in these CDOs which were backed by subprime mortgage based colleteral.

Thus, CDO market increase the share of securities they received the highest credit rating, but if the mortgage borrowers gets default in making payments, it will adversely effect these securities to large extent as they are backed by the collateral of these subprime mortgages.