S(p)IVs for beginners

With SIVs exploding like fireworks over the East River on July 4—and special congratulations to Standard & Poo for knocking six clicks off London-based Cheyne Capital a day or two ago, just two weeks after it had reaffirmed its ratings and that of 29 other vehicles “weathering the recent storm”—a question arises.

What is a SIV? David S. Products writes:

I completely forgot about the conduits.  Ah yes, one of the craziest things I viewed in my days working for Global Megabank (I can't share any names but this bank moved its headquarters from San Francisco to Charlotte, NC., after a big merger and currently has >10% of US checking accounts and 49.9% of US credit cards—PLEASE don't beg me for any more clues, my lips are sealed).  That is where I learned about conduits.

Conduits are the craziest thing I've ever seen.  They make synthetic CDO^2s look simple by comparison (I'm serious).

Basically, the bank has ‘assets’ (i.e. piles of loans) and instead of booking them as assets on the balance sheet, they ‘sell’ them to ‘independent’ conduits thus removing them from the balance sheet.  Why not on the balance sheet?  Because a bank with too many assets has a lower return-on-assets measure and assets attract regulatory capital requirements which keep the bank from having enough assets to buy other banks.

Anyway, it is mind-bogglingly complex as these conduits have to fit into tax, GAAP, Fed and Basel II regulatory frameworks.  But they work like magic. 

As long as nothing bad happens.

Why is Mr. Cahill not returning my call? Has anyone seen him?

'Conduits' in Need of a Fix [$$]
Subprime Hazards Lurk In Special Pipelines
Held Off Bank Balance Sheets
By David Reilly and Carrick Mollencamp
The Wall Street Journal Aug. 30 2007

S&P says monitoring all SIV ratings, valuations
by Richard Barley
Reuters Aug. 29 2007

SIV managers dig out their manuals [$$]
by Paul J. Davies
The Financial Times Aug. 30 2007