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Wednesday, November 28, 2007

What are SIVs

SIVs (Structured Investment Vehicles) are typically offshore companies created by banks and other firms to sell short-term debt to buy mortgage securities and finance company bonds with higher yields. They profit on the spread between the two. Unlike securitisation vehicles, SIVs sit off the balance sheets.

SIVs finance themselves by selling asset-backed commercial paper, or short-term loans backed by collateral such as mortgages. When the subprime debt market blew up in August, investors stopped buying SIV commercial paper. As a result, in September and October, some SIVs didn't have the cash to pay debt holders thus resulting in many losses.

Yesterday, HSBC decided to put US$45 billion of SIVs onto its balance sheet to end uncertainty as a result of the credit squeeze. Will the other banks like Citigroup, etc, follow suit?

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