WaMu to Have 'Significant' Effect on CDOs

By Shannon D. Harrington

Sept. 26 (Bloomberg) -- The failure of Washington Mutual Inc. will have a ''significant'' effect on collateralized debt obligations that made bets on the lender's creditworthiness, Standard & Poor's said.

Pieces of 1,526 synthetic CDOs worldwide sold default protection on Seattle-based WaMu, S&P said in a statement today. WaMu was seized yesterday by regulators after customers withdrew $16.7 billion over the past 10 days. After JPMorgan Chase & Co. bought WaMu's bank branch business, the holding company is likely to file for bankruptcy protection, S&P analyst Victoria Wagner said in a separate statement today.

Sellers of credit-default swap protection must pay the buyer face value in exchange for the underlying securities or the cash equivalent after a bankruptcy filing.

Synthetic CDOs already have been roiled by last week's bankruptcy of Lehman Brothers Holdings Inc., which was included in 1,889 deals globally, and the government's takeover of American International Group Inc., which was downgraded three grades to A-. S&P said 1,619 CDOs made bets on AIG.

Many of the deals also will lose payments and loss cushions from contracts linked to Fannie Mae and Freddie Mac, the mortgage-finance companies seized by the government this month. The takeovers triggered a technical default on the credit swaps.

Of the CDOs that sold WaMu default protection, 514 were in the U.S., 752 were in Europe, 122 were in Japan and 138 were elsewhere in the Asia-Pacific region.

The CDOs sell notes to investors that are repaid using the proceeds of credit-default swap premiums. Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt.