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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
investment vehicle. SIVs have been in the news a lot in connection with the
subprime mortgage blowup
An SIV is a type of complex
market investment, which was originally created to help banks finance low-risk assets such as credit card loans, explains Ken Hackle, managing director of
strategy at Greenwich Capital in Greenwich, Conn.
To set up a SIV, banks borrow cash by selling
to investors and then use the proceeds to purchase bundles of high-quality loans. Commercial paper is like a
in that investors buy it at a
and expect to hold it for 30, 60 or 90 days, at which point the investor gets back the full face value of the
Historically, since the underlying assets of the SIV -- the credit card balances, home mortgages, car loans and student loans -- were relatively low-
, they also had very low
. And because of the low
, banks wanted to keep the loans off their
, Hackle says.
(C - Get Report)
Bank of Montreal
(BMO - Get Report)
were just three of the big
The Rise and Fall of SIVs
Some bankers decided the low profit margins of SIVs were inadequate and looked for ways to boost
. One way to do that was to buy riskier borrowings, such as
. And for a while, it worked.