Please use collateralized debt obligations (CDOs) as an example to answer whether financial intermediaries always help reduce the exposure of investors to risk. If not, what lesson we have learned out of this?
Research does not show that financial intermediaries are helping to reduce the exposure of investors to risk. Collateralized debt obligation (CDO) is found to be, "a pool of debt contracts housed within a special purpose entity (SPE) whose capital structure is sliced and resold based on differences in credit quality. In a "cash flow" CDO, the SPE purchases a portfolio of outstanding debt issued by a range of companies, and finances its purchase by issuing its own financial instruments, including primarily debt but also equity.
In a "synthetic" CDO, the SPE does not purchase actual bonds, but instead enters into several credit default swaps with a third party, to create synthetic exposure to the outstanding debt issued by a range of companies. The SPE finances its
purchase by issuing financial instruments to ...
Almost 500 words use collateralized debt obligations as an example of whether financial intermediaries reduce risk exposure.