Questions for Banks That Put Together Deals

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They were the black boxes of the subprime era, byzantine creations of the brightest minds on Wall Street that made — and then lost — vast fortunes.

But now, after so much financial pain, Wall Street is nervously tallying the potential legal costs from its misadventures in collateralized debt obligations, known as C.D.O.’s, among the most toxic financial instruments ever devised.

C.D.O.’s, which produced much of the financing for the mortgage explosion, are at the heart of the Securities and Exchange Commission’s civil fraud case against Goldman Sachs — as well as a broader S.E.C. investigation of sales and disclosure practices at many Wall Street firms.

Until the bottom fell out, these instruments also powered an age of riches on Wall Street. Initially, bundling mortgage bonds into C.D.O.’s helped open the spigot of easy money that allowed Americans to buy more house than they could afford.

But Wall Street, as it is wont to do, took the concept to another level, creating securities that allowed investors to make side bets on the housing market. Known as synthetic C.D.O.’s, they did not raise money for home loans or serve any other broad economic purpose.

http://www.nytimes.com/2010/04/21/business/21cdo.html?th&emc=th