Collateralized debt obligations invest in a wide array of securities and then tranche them out to investors. Synthetic CDOs do not invest in the bonds themselves but rather credit derivatives. These CDOs became popular as a hedge tool. But now, the risks are mounting to both cash CDOs and synthetic CDOs. Standard & Poor's last month placed 32 of 1,500 European synthetic CDO tranches on credit watch. The culprit in all this of course is the uncertainty over subprime related asset-backed securities. The turmoil coincides with a rush to the lower-rated portions of the market in a bid by buyers to get better returns. It's unclear if there will be a strong ripple effect through the synthetic CDO market. For now, there is a lot of nervousness. Which may be a good thing.

For more:
- here's an article from Financial News Online