Again, only true for regular (non synthetic) CDOs - this is where the issuer is a dumb (or managed) vehicle that buys loans and tranches them up. The best examp

Again, only true for regular (non synthetic) CDOs - this is where the issuer is a dumb (or managed) vehicle that buys loans and tranches them up. The best example today would be Mortgage Backed Security (MBS) tranches / Asset Backed Security (ABS) tranches. AS you say, if the intermediary is suspect the structure can become suspect - but this can be fixed by appropriate structuring and security. In a synthetic CDO the cash raised from CDO issuance is invested in collateral (more often than not, chosen for highest return rather than real safety), and the investment return is generated by selling protection on CDS - the terms of this CDS may not always be very clear. If you have sold protection to Lehman for example and they go bust, your structure is in limbo, without a single underlying having defaulted.