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 DefinedAn 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.
The Rise and Fall of SIVsSome 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.
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