Smart Borrower Blog

The Problem With SIV’s

Oct 20th, 2007 @ 4:44 PM by Alden Smith

I had no idea until today what a “structured investment vehicle” was.   I am of course not a banker or mortgage lender, so I just felt that it was just one of those things I didn’t know about nor had much use knowing.   It really came as a surprise to me to learn that many bankers aren’t aware of them either.   Let me get a little more specific - recently, there was meeting of bankers initiated by the Treasury Department.   At that meeting was Nazareth Festekjian, a 15-year Citigroup veteran.   Mr. Festekjian was a part of the restructuring of Iraq’s debt in 2005. Mr. Festekjian hadn’t known what an SIV was until he received a call several weeks earlier from a government contact asking him to work on a solution.   So I sit here thinking if a man like Mr. Festekjian, a veteran of Citigroup, doesn’t know what an SIV is, then I guess I am not so far out of the loop as I thought.

What an SIV Is

An SIV, or “structured investment vehicle” is nothing more than a group that borrows short and invests long.   Think of them as virtual banks.   Their structure is based on the London Interbank Offered Rate, or LIBOR.   Money is handled through commercial paper.   The structure is too lengthy to discuss here, but the crux of the situation is they are based on Asset Backed Securities (ABS).   This means that their money is in mortgages, credit cards, student loans and other similar product.

What That Tells Us

Because of their nature, SIV’s are not exactly the way to go in the current market condition.   We are looking at billions of dollars of loss this year due to Alt-A and sub prime loans.   Figures show that September housing starts were down 10% from August and 30% from a year earlier to the lowest level since 1993. The market is facing a serious loss due to foreclosure, tight credit rates, and lower housing prices.   It stands to reason that if you are invested like an SIV is, someone is going to lose a very large amount of money. Word on the street is that SIV assets will be kept off the books of the affiliated banks and won’t be marked down to real market values. Why make it look any worse than it is?

Is There a Solution?

This early it is hard to tell.   The market remains in flux and will not correct easily.   Predictions are saying that this mortgage market problem is going to carry over into 2008.   And if that is the reality, then I think we are going to see things get a great deal worse than they already are.   Possibly truth in lending will bring the nature of the SIV into a context that the general public understands, and we can get a better idea of where the market really is.