Below is a list of SIVs sponsored and run by major banks:
• AIG manages Nightingale Finance
• Bank of Montreal manages Parkland Finance and
Links Finance
• Citigroup manage a number of SIVs including
UNDERSTANDING SIV’S
Beta Finance, Centauri Corporation, Dorada
Finance, Five Finance Corporation, Sedna
Finance, Vetra Finance and Zela Finance
& their impact on the
• Citigroup and Rabobank jointly manage Tango
Finance
• Dresdner Kleinwort manages K2 Corporation
CREDIT MARKET
• HSBC manages Asscher Finance and Cullinan Finance
• HSH Nordbank manages Carrera Capital Finance
• IKB managed Rhinebridge
By Bryan Johnston
• MBIA manages Hudson-Thames Capital
• Societe Generale manages Premier Asset Collateralized
Recent headlines in the media have cast a spotlight on previously little-
Entity (PACE)
• Standard Chartered Bank manages Whistlejacket Capital
known entities that are playing a key role in the credit market crisis that
and White Pine Corp
• WestLB manages Harrier Finance
has been spreading throughout the financial markets. These entities are
SIVs can earn good profits for sponsoring banks when the credit markets are prop-
known as structured investment vehicles.
erly functioning, but they are exposed to a liquidity squeeze if the asset backed com-
First created in 1988 by Citigroup, structured investment vehicles (SIVs) are investment companies engaged in
mercial paper market shuts down. This is what took place beginning this past summer.
a type of “carry trade.” They borrow money using short-term asset-backed commercial paper issued at a rate
SIVs have struggled in recent months with selling debt because a portion of their
closely approximating LIBOR interest rates. This asset-backed commercial paper typically is carried anywhere
assets are backed by faulty US sub-prime mortgages that no one wants to buy.
from a few days to a few months before needing to be refunded. SIVs then turn around and use the proceeds to
Normally, risk-averse investors such as money-market funds, municipalities,
purchase longer-term, illiquid, higher yielding bonds. About 70-80% of the bonds typically bought by a SIV are
and pension funds buy SIV debt. However, when these institutional inves-
AAA/Aaa rated Mortgage-Backed Securities (MBS) and Asset-Backed Securities (ABS). The remainder are usu-
tors stop buying and the short-term commercial paper debt comes due,
ally lower-rated, higher yielding assets such as sub-prime mortgages blended in to boost overall performance.
serious liquidity problems develop. When this happens, prices of long-term
Thus, SIVs can be thought of as funding sources for mortgages, credit cards, student loans, and similar credit
debt investments fall and when SIVs suddenly experience an inability to sell
products. SIVs do not need to be displayed on a bank’s balance sheet and are not transparent to the majority of
their long term assets, major losses and write-downs can result.
the investment community. Since SIVs are kept “off the books,” they can operate with little regulation and can
At the present time there is an estimated $400 billion in SIVs outstanding
become highly leveraged. Sponsoring banks use them as a loophole to use more leverage than they otherwise
with HSBC SIV affiliates chalking up $35 billion in debt while Citigroup
would legally be allowed to. Citicorp once noted that the leverage in one of their particular SIVs, Beta Finance,
affiliated SIVs try to cope with write-downs on $80 billion in assets.
is “only leveraged 14.24 times.” When investments perform well, leverage is wonderful as earnings are greatly
multiplied, when they go sour; leverage is a back-breaker as losses are equally multiplied.
Sponsoring banks have already announced over $60 billion worth of losses
as many of the mortgage bonds backed by sub-prime mortgages have
SIVs seek to earn more on the longer-term securities they purchase than they have to pay out in interest and
declined in value. These losses may be the tip of the iceberg as many banks
principal on the short-term commercial paper they issue. In other words, the goal of the SIV is to earn a net
have concealed their holdings of sub-prime mortgages within the SIVs they
spread between the yield on its asset portfolio and its funding costs while also generating fee income for the
have sponsored. Although the banks say they do not own these SIVs, and are
investment manager.
therefore not technically liable for their losses, they may be forced to cover any
Currently there are approximately 36 SIVs in existence, with total assets of about 400 billion dollars. Most SIVs
losses that may take place. If a further melt-down takes place within SIVs, we could
are run or sponsored by banks, however several are managed independently.
see the liquidity crisis persist within the credit markets and this could have a negative
effect on mortgager loan funding as well as other credit products.
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