Thought you were the only one who really doesn’t understand collateralized debt obligations or, better yet, CDO-Squareds?
Rest easy. No one really does.
To illustrate, consider an investor conducting due diligence on a set of financial claims: RMBS, ABS CDOs and CDO^2. How many pages of documentation would a diligent investor need to read to understand these products? Table 2 provides the answer. For simpler products, this is just about feasible – for example, around 200 pages, on average, for an RMBS investor. But an investor in a CDO^2 would need to read in excess of 1 billion pages to understand fully the ingredients.
End-investors in these instruments were no more likely to know the name of the companies in their portfolios than the name of the cow or pig in their exotic hot dog.
Sausage analogies are about right.
(h/t Felix Salmon)