What You Need to Know About SIVs

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What is a SIV? Does the SEC regulate SIVs? -- R.P.

Recently, everyone's been talking about SIVs. So what are they all about and what's the big deal?

The letters S-I-V stand for structured investment vehicle. SIVs have been in the news a lot in connection with the credit crunch and subprime mortgage blowup.

SIV Defined

An SIV is a type of complex bond market investment, which was originally created to help banks finance low-risk assets such as credit card loans, explains Ken Hackle, managing director of fixed-income strategy at Greenwich Capital in Greenwich, Conn.

To set up a SIV, banks borrow cash by selling commercial paper to investors and then use the proceeds to purchase bundles of high-quality loans. Commercial paper is like a Treasury bill in that investors buy it at a discount from its face value and expect to hold it for 30, 60 or 90 days, at which point the investor gets back the full face value of the note .

Historically, since the underlying assets of the SIV -- the credit card balances, home mortgages, car loans and student loans -- were relatively low-risk , they also had very low profit margins . And because of the low profitability relative to assets , banks wanted to keep the loans off their balance sheets , Hackle says.

Citigroup(C), Bank of Montreal(BMO) and HSBC(HBC) were just three of the big issuers of SIVs.

The Rise and Fall of SIVs

Some bankers decided the low profit margins of SIVs were inadequate and looked for ways to boost returns . One way to do that was to buy riskier borrowings, such as home-equity loans . And for a while, it worked.