Balance sheet and arbitrage CDOs
Balance sheet CDOs, popular during the early days of the market, use assets already held by the originator. But with arbitrage CDOs, originators ramp up the assets over time, enabling them to grow their portfolios
The majority of the CDOs structured in the early stages of the market's development were known as balance sheet transactions. These structures were viewed as a natural extension of classic securitisations that were aimed at transferring the credit risk embedded in loans to capital market investors as a means of freeing up regulatory capital.
While securitisations had tended to package very homogenous and sometimes even indistinguishable pools of assets, however - such as residential mortgages
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