The recent crisis has focused attention on the problems and complexity of structured products in the form of collateralized debt obligations, which carved up the credit risk of underlying assets into various tranches – a product that, it turned out, too few investors understood.
But similar lessons were learned with regard to interest rate risk management in the early 1990s when many institutions purchased various types of structured collateralized mortgage obligations (CMOs) with embedded interest-rate options that were not fully understood – and then incurred substantial and unexpected losses when interest rates rose in 1994.