What You Need to Know About SIVs

But then came this year's housing slowdown, thanks in large part to the emergence of problems with home loans made to borrowers with dodgy credit, the so-called subprime sector. As some borrowers stopped making their house payments, the asset-backed securities holding the loans started to underperform. What were previously considered to be almost risk-free investments were turning out to be a lot more risky than first thought.

Typically, when the borrowing period for the commercial paper ends, the lender roll overs its funds and reinvests in the same product. But as the problems with subprime emerged, that process broke down.

"The investors got very concerned [about the subprime situation] and refused to roll over their investments," says Hackle.

SIVs and the Small Investor

Because SIVs and their underlying assets are very complex things, small investors aren't usually allowed to buy them.

"A lot of these vehicles are unregistered with the Securities and Exchange Commission and are primarily intended for sophisticated individual investors and institutions ," says Kingman Penniman, president of KDP Investment Advisors in Montpelier, Vt.

That means that SIVs can only be sold to so-called "qualified investors." In simple terms, qualified investors are funds run by specialized money managers or individuals who are rich enough to be designated "qualified" (see institutional investor ).

But that doesn't mean small investors are immune to the problems that SIVs are having in the credit markets, Penniman says. That's because many money market mutual funds and exchange-traded funds have bought SIVs as a way of boosting their yields , so providing better returns for their customers (see "Money Market ETF Not as Safe as It Appears" ).

To learn more about SIVs, check out these stories on TheStreet.com:

• "Paulson Dons His Cape"
• "Moody's Downgrades SIVs"
• "A Big Bank Bailout May Be Worth a Try"
• "Citi Puts Lipstick on Asset-Backed Pig"

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