Collateralised debt obligation
A security backed by a pool of loans and sliced into tranches with different priority of payment.
How to read the number
The senior tranche earned the top rating from its priority, not from the quality of the loans: losses were assumed never to reach it. That holds only if the loans do not sour together.
When the metric lies
Valuing a tranche rested on an assumption about how defaults correlate — an unobservable quantity, and an error in it changed the answer more than the loan quality did.
Also known as: cdo tranche