Your analogy falls apart because a CDO is, by definition, a collection of rotten bananas. They all were, and anyone who was betting on them should have known th

Your analogy falls apart because a CDO is, by definition, a collection of rotten bananas. They all were, and anyone who was betting on them should have known that. It's the worst-performing (in hindsight too) tranches of bonds backed by mortgages that get into a CDO. Nobody needed to repackage the higher tranches because they were assumed to be risk-free and given the same rating as US Treasuries so they were just sold as bonds. Synthetic CDOs were all built to effectively wager against credit default swaps, which were all hand-selected by investors (mostly hedge fund managers). If you purchased synthetic CDOs then of course they were hand-selected rotten bananas, but you were wagering (incorrectly) that the rating models used by S&P and Moodys were correct in assuming that if you got enough rotten bananas together, you were left with 80% good bananas and 20% really rotten ones.