Citi to Rescue SIVs

Two weeks ago, Moody's Investors Service also downgraded or placed on review some 20 SIVs, reducing its estimate of current net asset value of all SIVs by 10% to 15%. The rating agency also said earlier this week that it would take more time to further review other SIVs and could make additional moves as early as next week.

SIVs are entities set up by banks and investment firms that generate returns by issuing low-yielding short-term debt instruments and purchasing longer-term paper in student loans, credit cards and mortgage debt. Growing skittishness in the credit market, tied to the collapse of the subprime mortgage market, has had ripple effects in securities that hold bad mortgage paper, including esoteric collateralized debt obligations, or CDOs, and SIVs. As a result, SIV managers face the sticky problem of being forced to sell assets at fire sale prices.

Citi's move may prevent forced sales of assets, but places added pressure on its balance sheet. CIBC analyst Meredith Whitney has repeatedly questioned Citi's capital ratios, noting that it may have a shortfall of about $30 billion. She also has said a $7.5 billion cash infusion from the Abu Dhabi Investment Authority would not be sufficient to address the banks Tier 1 capital ratios -- a measure of a bank's financial health.