Synthetic CDO's

[The Big Ease]

I am not sure I get this concept.
My understanding is that there is no underlying security for this derivative (hence the "synthetic" nature), but is merely matching two parties who want to take opposite views about a particular security, with neither owning said security.

That sounds too much like a financial bookmaker.
What economic purpose does this have?
How can it continue to be legal?

[Yossarian]

just like most CFDs, isn't it? Not uncommon.

It is essentially a gamble.

[gazprom1]

My understanding is that most CFD's will have an underlying security. When I trade a CFD, in say NZ Oil and Gas, the financial institution that I am dealing with will net off my long/ short position in the market with the underlying security.

Re synthetic CDO's, I cannot see why it should be illegal just because it has no economic purpose. Just like if bet you on a toss of a coin. It has no economic benefit per se but you will have a verbal contract to pay if you lose and receive the winnings if you are correct. However, I have never traded a synthetic CFO so I stand to be corrected.

[The Big Ease]

your toss of the coin won't bring the economy down...