Slicing and dicing *spreads* risk but from the point of view of the overall economy it *increases* risk because the resulting debt instruments are harder to evaluate, reducing the ability of investors to make correct and informed investment decisions. The current catastrophe demonstrates the informational disadvantage with current systems vastly outweighs any risk-spreading advantages. Until improved CDOs can be developed that substantially ease the difficulty of evaluating their underlying risks CDOs will remain a detriment to good market function. Almost certainly as long as privately insured bonds are involved it's impossible because evaluating the risk of the CDO then requires evaluating the insured bond risk, which in turn requires knowing the risk of all bonds covered by that insurer, including correlations in the event of a black swan credit problem. No way.
The requisite improvements may be impossible.
