CDOs imperiled by failure of Iceland's lenders

Iceland's collapsed banks pose a "substantial" risk to collateralized debt obligations that made bets on corporate debt, according to Standard & Poor's.

Kaupthing Bank hf, Landsbanki Islands hf and Glitnir Bank hf were included in 376 CDOs worldwide, S&P said. Another 297 made bets on two of the three banks. The CDOs packaged credit-default swaps that pay investors if there is a default, and the government's placement of the banks into receivership triggered a settlement of the contracts.

Because the so-called synthetic CDOs also bet on Lehman Brothers Holdings Inc, which filed for bankruptcy on Sept 15, and Washington Mutual Inc, the bankrupt holding company of the largest US lender to fail, the "impact of these exposures is likely to be significant", S&P said in the statement on Wednesday.