SIV defined

edited October 2007 in The Economy
SIV is an acronym that has been appearing in recent news frequently. It stands for Structured Investment Vehicle. Until recently I had no idea want it meant. At the unintentional risk of insulting some reader's intelligence, I've provided a definition here:

SIV

A structured investment vehicle (SIV) is an evergreen credit arbitrage fund, similar to a CDO or Conduit. They are usually from around $1bn to $30bn in size and invest in a range of asset-backed securities, as well as some financial corporate bonds. An SIV is formed to make profits from the difference between the short term borrowing rate and long term returns. The risk that arises from the transaction is twofold. First of all, the solvency of the SIV may be at risk if the value of investments falls below the equity part. Secondly, there is a liquidity risk, as the SIV borrows short term and invests long term, that is the debt comes due before the asset falls due. Unless the borrower can refinance short-term at favorable rates, he may be forced to sell the asset into a depressed market......

okay - so what's an "evergreen credit arbitrage fund"? Sounds like it should be good for the environment. :?

Comments

  • Classic borrow short to invest long. These all work the same way:

    The are "evergreen" until the fire comes and burns them down.
  • I don't understand how smart people (high I.Q. at least) are convinced to buy into these things. I think I understand the play: you use cheap short term money to fund long term lending activity, making a nice spread. This can work for a while until market conditions change and you're stuck holding the bag. It's happening now with SIV's, just like it happened with the S&L mess.

    Why do people keep thinking this is an arbitrage play when it is not? It is speculation. I suppose evergreen credit speculation fund doesn't have the same ring to it.
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