"If Bear had failed," the senior official went on, "all these money-market mutual funds, instead of getting their money back on Monday morning, would have found themselves with all kinds of illiquid collateral, including C.D.O.s" — collateralized debt obligations — "and God knows what else.
But it's easy to point to other innovations that serve little purpose or that blew up and caused a lot of collateral damage, such as auction-rate securities and collateralized debt obligations.
In dealing with problems affecting arcane new financial products, including "collateralized debt obligations," "credit default swaps," and "tri-party repos," Bernanke and his colleagues have had to become expert in market transactions of baffling intricacy.
Why were collateralized debt securities bundling reckless subprime mortgages "mis-priced," as Greenspan would have it?
But what is filibuster abuse other than the Senate's version of a synthetic collateralized debt obligation, a clever manipulation of the rules for the narrowest possible ends?
In the late nineteen-nineties and early two-thousands, the financial-services industry innovated by selling products like subprime mortgages, collateralized debt obligations, and mortgage-backed securities, some to a previously untapped customer base.
If Merrill Lynch sets up a hedge fund to invest in collateralized debt obligations, or some other shiny new kind of security, Morgan Stanley will feel obliged to launch a similar fund to keep its wealthy clients from defecting.
The S.E.C. ignored warnings when Wall Street inflated the credit bubble with dubious "synthetic" securities known as collateralized debt obligations.
But the third pig purchased a basket of collateralized debt obligations tied to subprime mortgage-backed securities and then got out of the market just before housing prices collapsed because of all the money the F.H.A. had foolishly lent to pigs who had no business buying houses in the first place.
The case turns on whether Goldman had a legal obligation to disclose Paulson's involvement in its subsequent issuance of a complicated derivative security known as a "synthetic collateralized debt obligation," whose value was tied to dozens of subprime-mortgage bonds.
Out of the shadows, he explains how such bizarre instruments as collateralized debt obligations (C.D.O.s) quieted the normal skepticism of investors.
