While the tangible effect of actual losses in CDO portfolios due to the presence of Refco Inc. loan and bond collateral is in large part minimal, perhaps the largest losses to be faced within the CDO market stem from what could trigger a turn in investor confidence.

Lehman Brothers, among the most vocal proponents of this idea, called the Refco situation "the most significant event to hit the cash CDO market since early 2003, when the current rally in tranche valuation started in earnest." According to Lehman analysts Claude Laberge and Lorraine Fan, a trio of bankruptcies in just one month's time - Delta Airlines and Northwest Airlines on Sept. 14 and auto parts maker Delphi on Oct. 8 - will lead to a market perception of increasing default rates and lower recoveries to come, causing wider, more volatile cash CDO spreads.

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