Just come across a nice video on YouTube that illustrates what CDOs (collateralized debt obligations) are:
A CDO is a very complicated way to spread risk and many people in the financial industry didn’t fully understand the risk until it was too late. More and more companies are starting to get hit by toxic credits, earlier today I read a Belgian lingerie maker named Van de Velde had to take a 2.25 million EUR writedown on 3.45 million worth of CDOs they had listed under cash & equivalents on their balance sheets.
A similar thing happened to Belgian-based semiconductor maker Melexis, they confessed last week that they lost 4.25 million EUR on a packet of CDOs they bought for 15 million EUR.
Like many other companies, these firms were advised by their bank to invest some of their cash in CDOs and likely had no clue about the real risk level of these financial products. They thought they were investing in something safe with a high return, but that wasn’t exactly the case..