December 04, 2008

Saying goodbye to SIV's

First off, anyone who refers to an investment security as toxic is really quite clueless. Over here is the article about Citi unwinding the last of their Structured Investment Vehicles. The SIV was a creature of an easy credit environment but their overall business plan was not unlike that of banks for hundreds of years. Basically, you hold money from depositors and agree to pay them a small amount of interest for their business. Then you lend it back out at higher rates. The difference you get to keep.

The problem with SIVs is that rather than use relatively stable deposits, they used short term borrowing in the form of, for instance, commercial paper which had to be refinanced on terms of 30, 60 or 90 days. When that money dried up, there was no cheap replacement capital and as they had to pay off what were essentially IOU's, they eliminated their equity. And then began an asset firesale which dropped the value of the assets held still further.

I can not write this too many times... there is no such thing as a toxic security. There are only toxic prices.

Posted by mcblogger at December 4, 2008 09:24 AM

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