Wednesday, September 19, 2007

SIVs, ABCP, and the Credit Crisis

In case you haven't run across these terms (and there was little discussion of them until a few weeks ago), banks and other financial institutions created conduits. These conduits, under a variety of names (including Structured Investment Vehicle), were created as separate entities. They purchased CDOs and other asset-backed securities and were funded, primarily, through the issuance of Asset-Backed Commercial Paper.

It was concerns about the value of the conduits' assets that led to a freeze in the commercial paper market; and the possibility that the conduits' bank sponsors would have to bail out the conduits that led to problems in the inter-bank market.

There were other factors, but it seems that these conduits were at the root of the recent liquidity crisis (together with mortgages, again).

This opinion piece from last week's Financial Times gives a good explanation of how increased opacity has led to risk concerns and troubles in the inter-bank markets. Bill Fleckenstein's commentary from Monday is also worth reading for a further discussion of off-balance sheet conduits and how they have contributed to the turbulence.

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