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But Wall Street's hunger for high-yielding complex financial instruments, that alphabet soup of CDOs and CMOs and countless other inscrutable derivatives
Andrew:
It wasn't a hunger for yield that lead to the proliferation of CDOs and the like--it was the hunger for AAA-securities. Lots of institutions get to count as capital (banks) or have to hold (some pension funds) AAA securities. CDOs, CMOs, CLOs, etc. package non-AAA instruments/securities and create a tranche of AAA securities.
Only small pieces of CDOs were "high-yielding" and the risk tolerant buyers of the junior pieces were not the driving force behind the frequent use of the structure. You simply have the motivation backward.
Of course, it turns out a lot of those AAA tranches were a lot bigger than they should have been (i.e., 90%+, when 50% might have been reasonable), especially in CDO-squared structures. And that's a fundamental source of the major problems banks are having.
