
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) - Get Report
,
Bank of Montreal
(BMO) - Get Report
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.
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"









