CIT- The Synthetic CDO World's Hail Mary Pass

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The synthetic CDO naysayers are gearing up for yet another rally in the wake of CIT's rapid fall from grace. Assuming CIT does default, it would impact 66% of the 1,053 currently outstanding synthetic CDOs in Europe alone. There is no doubt the government will be tempted to use CIT as a line in the sand to show everybody that it still has a pair and can let somebody other than Lehman fail. But if the government provides a crutch and CIT's 5y CDS spread does the unthinkable by tightening to the point where it trades on a running basis instead of upfront, it would be simply priceless to hear the reaction from the synthetic CDO firing squad when banks report write ups.
European CDOs would suffer widespread hit from CIT [Reuters]

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