Check out the project here "What happened in 2008? introduction"
It is a bundle of debts, or you can say obligations, namely loans, bonds and mortgages, which you can have a part of the bundle and earn a part of the interests.
The idea of CDO is brilliant, but in 2008, it partly caused the disaster.
Housing prices
People believed housing prices to increase stably, and perhaps they thought that the trend would continue forever.
A significant amount of CDOs with subprime loans* were sold because subprime loans, on paper, yield better returns. What is more, those CDOs were secured by the collaterals, namely real houses and assumed to be a powerful asset as the prices had been increasing continuously. Therefore, CDO was seemingly a great option to invest in.
Disaster
The strong demand for CDOs motivated banks to make more mortgages, which led to increased subprime loans. The scale of subprime loans expanded much further than the healthy level while great investment banks, including Lehman Brothers, invested a large amount of capital with leverage on CDOs. That particularly worsened and amplified the disastrous result of the housing market's collapse.
*Subprime loan is a loan for those who cannot meet the lending requirements. A subprime loan generally yields more interest than a decent loan because it has to compensate for its more significant risk. The extra interest is called the risk premium.
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