[yummyfajitas]

Synthetic CDOs are actually more clever than that.

They solve the problem of me wanting mortgage bonds, and you wanting insurance on loans. We both want to take opposite positions (me long, you short). Without a synthetic CDO, we are unable to trade - I'll be trying to buy home loans from WaMu and you'll be talking to the AIG sales desk.

[loewenskind]

The problem with synthetic CDOs is that they're over the counter. You can have more people betting against loans than actual loans and since they weren't controlled the one who was supposed to pay out [1] might not be able to.

Speaking to the gambling point, I believe it was Deutsche bank who went to the government to make sure synthetic CDOs wouldn't be classified as gambling before starting to sell them.

[1] I can't say "issuer" because these were sold around.