His StoneCastle Financial is among the hedge funds that are reviving the collateralized debt obligation, or CDO.

CDOs stuffed with mortgages and their derivatives caused billions in losses around the world during the 2008 crisis. The CDO that StoneCastle put together is a little different. It's backed by subordinated debt issued by about 35 community banks, some of them so small they don't have credit ratings. Subordinated debt is paid off last in a bankruptcy, so issuers typically compensate buyers with higher yields than on other borrowings.

Citigroup Inc., which completed the $250 million deal for New York-based StoneCastle this month, calls it a collateralized loan obligation, but it's a structured security that walks and talks like a CDO. Moody's Investors Service plans to give it a rating of A3, six grades below Aaa, according to people with knowledge of the deal. Bank bonds rated A typically yield 2.5 percent. Through the wonders of financial engineering, StoneCastle's Community Funding CLO yields 5.75 percent.

"A CDO is just another word for financing," Siegel said in an e-mail. "What matters are what assets are being financed."

This isn't the first time Siegel pooled small-bank debt into a structured financial product. At Salomon Smith Barney in the late 1990s, he proposed bundling banks' trust-preferred securities, a predecessor to subordinated debt, into so-called TruPS CDOs.

Geographic Diversity

In a 2001 research report, Siegel divided the U.S. into five regions and wrote that the geographic diversity of the banks whose TruPS he used -- picking debt from different areas -- would make the CDOs safer.