It's a combination of loans. The idea is let's say I have 100 identical loans I made (in reality, there are averages). Further, we agree 5-15% are likely to default. I'm going to get paid 85-95% of the interest + principle. But I want that money now. You want to invest in future cashflow, so I want to sell you a loan. Buying one from me is kinda risky, you may get back 100% or 0% of the interest + principle you expect. So instead I sell all 100 as a lump sum, and you and 99 other people each get 1%.
But, CDOs go a step further. You may have more or less risk tolerance. So we chop it up. You can buy something that gets paid back if 70% of the loans are good, or only if over 70% or over 80%, or even over 90%. The less likely you are to get paid back, the more you make.
So the person who absolutely wants to get paid back gets a small interest rate. The person who only gets paid back if literally every loan pays off gets a much higher rate.
In 2008, what happened is all those people buying the "very safe" 75-85% failure rate sections also were getting wiped out.
Collateralized Debt Obligation, sort of like a bond that's composed from many loans on something you can repossess, like houses or boats. They're notorious because they were involved in the 2008 financial crisis.
The Big Short also has an earlier explanation of a non-synthetic CDO ("we just repackage it [low-quality risky debt] along with a bunch of other shit that didn't sell and put it into a CDO"):
You take a bunch of loans and bundle them together and securitize the bundle to sell to the public. Mortgage CDOs crashed the global economy in 2007-8.
