CDO-Squared is an investment in the form of a special-purpose entity (SPE) with securitization payments backed by collateralized debt obligation tranches.
A collateralized debt obligation is a product structured by a bank in which an investor buys a share of a pool of bonds, loans, asset-backed securities, and other credit instruments.
Payments resulting from those bonds, loans, asset-backed securities, and other instruments are then passed on to the holders of the shares of the collateralized debt obligation.
Merrill Lynch was a big producer, creating and selling 11 of them.
[3] The collapse of the market for collateralized debt obligations and CDO-Squared contributed to the 2008 subprime mortgage crisis.