I've read this post, what they do is clear and makes sense to me.
Most of all it preservers "if the student doesn't get the job, LambdaSchool fails" property. This alignment of incentives is really the only thing that matters and it lacks in traditional colleges (which is why Lamda will either fail or, in the long term, will kill traditional colleges or force them to change).
Comparing what they do to CDO is done to make a negative association. "CDO are bad, this shares some similarity of CDO, this is bad".
The bad aspect of CDO was that it was used to hide bad investments by packaging them together and re-selling as a better investment.
What Lambda is doing is more like pooling of risk used in insurance: if you (as an investor) bet on ISA of a single student, you have a high-risk, binary outcome (loose all your money or get some reward).
If you bet on 1000 students as a group, you significantly de-risk the whole thing while only reducing potential reward a little bit.
As far as Lambda's management/culture situation, I've heard it's turbulent, but that's also par for the course with most startups, especially in growth mode. This will always be hard because student outcomes can sometimes feel this turbulence, but it's not like the students think this is a sure thing.
>If you bet on 1000 students as a group, you significantly de-risk the whole thing while only reducing potential reward a little bit.
Risk is surely part of it, but I think cash flow is a big issue as well. Very hard to run a business where you provide a service now and get paid over a couple years starting ~6 months from now. Better the split the company into the entity that provides the service and another that provides the financing.
The core of their business should be educating the students. The financing and loan servicing are secondary concerns that are probably better off done by a different entity.
If Lambda school worked, their ISAs would be paying off at this point, they'd be seeing a profit from their first cohorts and so not only would they have fresh cash to invest, but VCs would see the ROI and growth and throw down some cash. It seems very clear to me that they've failed to demonstrate the business model. So they hand off the core of their business (taking the risk students don't pay off) to a 3rd party and try to just spin some cash from the classes. If I were them I'd be looking for an exit, quick.