I know vaguely that they are some kind of insurance that the investment banks buy on mortgages that they buy from the mortgage lenders.
They bundle these individual mortgages and sell them as collateralized debt obligations (CDOs) to other investors wanting to invest in the US.
What I don’t understand now is that why would investment banks try to get insurance on these collateralized debt obligations?
Is it because of the risks involved in them- the homeowners might default on their mortgages and not pay their interests anymore?
Or is it because it is easier for them then to get higher ratings from the Credit Rating Agencies (CRAs)?
In any case guys, do let me know.