Toxic waste.

Collateralized debt obligations (CDOs) are a clever way of exploiting anomalies in credit ratings. A number of loans or debt securities payable by various companies are put into a pool, and new securities are issued which pay out according to the pool's collective performance. The new securities are divided into three (or more) levels of risk. The lowest, equity tranche takes the first loss if any companies in the pool default. If enough losses eat that up, the next, mezzanine level suffers. The most-protected level, the senior tranche, should still be safe, unless the collective pool has severe losses. Given the poor performance of companies in America and Europe over the past three years, and some spectacular defaults and frauds at once highly-rated companies, it is hardly surprising that many CDO debt pools have suffered. It takes only a couple of defaults in a pool of 100 companies to destroy the equity tranche. Many insurance companies that invested in CDOs, or sold guarantees to enhance the rating of the senior tranches, have had a rude shock. In America, insurers have for the first time had to mark-to-market paper losses on their CDO portfolios. The investment banks that constructed these CDOs, and the rating agencies that gave them their initial high ratings, are feeling defensive. This is now a huge business. There may be $1 trillion of CDOs outstanding. Securitization of credit is one of the few bits of investment banking that continues to generate big fees--for arranging deals and for managing the pools of assets.