Can anyone please provide a brief description of the exact difference between a SIV & SPV? Are they the same thing, and simply called different things between the States & Europe or different structures altogether? Thanks
I may be wrong, but it sounds like SIVs is a category of SPV
In my understanding… SIV - Structured Investment Vehicle – is a type of structured products. Idea is to issue a short term debt in order to invest the proceeds in a longer term and higher yielding securities. SPV – Special Purpose Vehicle – is an element of the CDO structure. It’s a legal entity created to separate the assets from the issuer.
A SIV is a type of SPV, most commonly associated with having CDO and other longer-termed assets. The main benefit of them is that you make a rate play, using higher-rate assets funded by short-term, lower rate, liabilities. SIVs aren’t to be confused with traditional conduits, which have liquidity agreements and lines of credit (commonly known as LIQ/LOC agreements), which means the host banks support them either through funding of good assets (LIQ) or bad ones (LOC). SIVs usually do not have that support, but with recent events SIVs have been supported by the banks. Both SIVs and traditional conduits are SPVs, but the CP market that funds them accounts for the lack of SIV bank supports by charging the issuer more spread for the CP issued, especially now. SPVs are the broad category of vehicles that can qualify as on balance-sheet, or off. Off balance sheet SPVs are usually Qualified SPV(E) vehicles, governed by FAS140. Not all SPVs are QSPV(E)s, they have to qualify under certain circumstances to be eligible for FAS140. SPVs are used for a broad range of items, from term securitization issuance, conduit securitization issuance, and other entities. They are most infamously known for Enron using them to hide derivatives, liabilities, and manipulating earnings. FAS140 has been in a “rework” mode for the past 3 or so years. FASB is planning on changing the structure of the QSPE to bring it more in alignment with international accounting standards and also eliminate some of the trickery.
I may be a little off, but essentially, a SIV tries to Arb out the spread between prime lending rates and AAA bonds, typically buying structured products. The risk comes from the fact that they’re creating short term liabilities through borrowing and investing in long-term assests, so when the Sh!t hit the fan and no one would show you a bid on the bonds you bought, so you couldn’t sell anything to cover your debt. One thing that people don’t seem to talk about as much with regard to the current credit crunch, is the problems that arose when short term players went after long term trades. This is only one example. There are plenty of other examples that result from CDS trades; however, this only magnifies the credit issues that plague the market for RMBS, it didn’t cause the problems.
aren’t SIVS and SPVs those things where: - some clown investment banker sets them up for an enormous fee - they are supposed to be off balance sheet - they are supposed to be non-recourse - so the lender can wash their hands of it if things go wrong - but what could possible go wrong? they’re off balance sheet, aren’t they? - they are based in some dodgy tax haven so investors can’t find them - they have boards made up of faceless nominee lawyers hiding behind more shelf companies in more dodgy tax havens - so you can’t find them either - they pay rating agencies a fortune to give them nice AAA ratings, which is higher than keeping them on balance sheet (and higher than soverign debt of most countries) - so funding costs are lower than keeping them on balance sheet - and where they have the risks sliced up into nice little strips that are distributed all around the world - so markets are nice and efficient and risk are diversified away completely - and the paper is sold by more clown investment bankers who take more fees to sell them - and for the paper they can’t offload to people who don’t know any better, they say “here let me lend you some money to buy this worthless, sorry “valuable” stuff because we can’t get rid of it any other way” - and where the paper is bought by hedge fund managers with PhDs in Finance, saying “gee, this paper pays 10% and is AAA rated - must be good - why don’t we borrow a few billion and do a simple carry trade? aren’t we clever???” - I think we deserve more fees for thinking of this. - and “Hey, my calculator’s bigger than yours - mine can calculate a 25th standard deviation event - bet your’s can’t! I think that deserves another nice fee and maybe another Bentley” . - then when the people to whom the lender should never have lent them the money in the first place, realise they never should have borrowed the money in the first place, and don’t actually have any money to pay it back (surprise, surprise) - - we discover that we have to pay more clown investment bankers to get them back on balance sheet - we discover that it in not non-recourse after all - we have to inject our own shareholder’s money into these things so we don’t look too silly (don’t ask the shareholders first - it’s only their money!) - then we still have to beg the Singporeans, Chinese, Russians, Arabs for money (aren’t they supposed to be 3rd world?) so we can stay solvent and pay our nice fees… …you mean those SIVs and SPVs? - now, where’s that clown investment banker we paid all those fees to? - oh, he’s on his new yacht in the Bahamas! and look, he’s with the rating agency guy… .and …
Thanks for that spierce & ahahah.
I thought spierce’s answer was particularly impressive - thanks!