The pros and cons of CDO diversification has attracted a lot of attention.

In his opening comments at the Bond Market Association's CDO conference last month, Merrill Lynch's Chris Ricciardi noted diversification had offered little in the way of stability for collateralized debt obligations. Prevailing market theory has followed the don't-put-all-your-eggs-in-one-basket approach, believing that a well-diversified structure would help mitigate downgrades. In the wake of record-breaking downgrades over the last 24 months, Ricciardi stated the CDO diversification play was essentially dead.

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