CDO, or Collateralized Debt Obligation, is a financial instrument that pools together various types of debt, such as mortgages, credit card debt, and loans, and then sells them to investors as securities. These securities are divided into different levels of risk, known as tranches, with the riskiest tranches offering higher returns. CDOs played a significant role in the 2008 financial crisis, as the underlying debt often turned out to be riskier than initially thought, causing massive losses for investors. However, when used responsibly, CDOs can provide diversification and potentially higher returns for investors.