Remember SIVs, financial public enemy number one of late 2007? Henry Paulson spent a lot of time failing around trying to come up with a remedy that involved only the government knocking heads together. That was a resoudnig Then it appeared that everyone shrugged their shoulders and decided this wasn’t such a big deal after all.
I’m left mystified on a couple of points:
1. Why these things existed in the first place (as in why they were deemed preferable to securitization)
2. How much of a role they played in the crisis
To point one, I can come up with some advantages, and they don’t strike me as compelling, so clearly I am missing something important. In a securitization, you can created different risk classes, so the “targeting particular investors” argument does not seem a particular advantage UNLESS SIVs appealed to a particular type of investor who was not keen on normal securitizations of bank assets.
To that issue, SIVs did seem to target shorter-lived asset than other securitizations. Or did they? They were funded largely with commercial paper, so was this simply a yield curve arbitrage strategy with a bit more leverage than a normal commercial bank? SIVs were leveraged typically 10-15x, so this does not appear to be driven primarily by the ability to obtain higher gearing (yes, presumably the leverage was higher since drecky SIV assets presumably not as highly geared on balance sheet).
SIV managers also took ongoing fees, but I am not certain how important this factor was in terms of overall economics. An SIV may have been cheaper to set up than an asset backed security.
It would be helpful if anyone could describe or provide a link to the economics from the bank’s perspective of the economics of an SIV versus an ABS to see why and when SIVs were preferable.
To the point #2, SIVs went in, as far as the media was concerned, from a huge issue to a non-issue. Yet the “we need to get rid of the toxic waste on bank balance sheets” theme reflects in part SIV assets presumably taken back on bank balance sheets (ro at least that was the plan as of early 2008).
This was a $400 billion market at its peak. Citi was the biggest player, and UBS and apparently Merrill were involved in a meaningful way. Does anyone know, ex Citi, if SIV paper caused meaningful indigestion at any big bank?
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