Monday, October 22, 2007

What is an SIV and Why should you Care?

An SIV is a Simian Immunodeficiency Virus. This is a virus that is very closely related to the AIDS virus HIV.

But this is NOT the type of SIV I am referring to.

The new type of SIV is potentially much more dangerous than any strain of virus. The new SIV is a Structured Investment Vehicle.

Structured Investment Vehicles are a funny name for "derivatives". Derivatives are financial instruments that derive their value from the value of something else.

Why should you give a rats ass about SIV's? Because they are the cause of all of the financial madness now occuring in the market place regarding credit problems, freezing of commercial paper markets, subprime losses at banks and hedge funds related to subprime loans, bailouts of banks and other businesses and much more.

The problem with SIV's is three fold.

Number one, they are huge in size. Estimates range from 20 trillion to 450 trillion dollars of them sloshing around on or off balance sheet across the globe.

The second problem is that they are not regulated and do not have a liquid market if any market at all.

The third problem is that they are valued using a process called "mark to model". This simply means that the institution that owns the SIV can claim whatever value their "model" assumes they are worth. This is all well and good until the entity tries to sell them. That is when the model breaks down as there are no buyers willing to purchase them at the model price.

What happens next is the realization that they have no value at all. This inevitably leads to massive financial trouble and the dreaded SIV takes the institution down the drain.