Monday, January 21, 2008

How do SIVs work?

This multimedia feature, from the web site of Condé Nast Portfolio, gives a good explanation of how Structured Investment Vehicles (SIVs) work(ed).

A number of SIVs did make sense. Commercial banks offered their corporate customers the chance to finance their receivables through SIVs. In those cases, the bank was able to earn a fee for managing the SIV, the companies were able to retain more of the value of the receivable, and the bank didn't need to include the funding provided to their clients on their balance sheet (they were able to effectively work with no capital requirement).

The companies would sell their receivables to the vehicle. The funds would be provided by the jointly owned SIV (which would have little, if any equity). The SIV would be funded by issuing asset backed commercial paper (ABCP). The receivables, however, would generally have similar maturities to the paper backing it; so if the ABCP market dried up, the assets could be quickly run off to liquidate the SIV.

The first SIV was structured by Citi in 1988. Since then the structure became more popular and morphed into the structure shown by Portfolio.

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