Collateralized debt obligations were never the main avenue for the sale of banks' trust-preferred securities. But it's on such credit-market side streets where their buyers — fellow banks, especially small ones — have gotten mugged.

During the boom years, few innovations expanded credit to smaller banks more aggressively than the pooling of so-called TruPS. For as little as 130 basis points above the London interbank offered rate, banks and insurance companies overlooked by the capital markets blended more than $40 billion in unsecured, unrated issuances and sold them as collateralized debt obligations.

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