Structured investment vehicle

Financial Weapons of Mass Destruction™ A guide to the tools of our trade. →Go uptown Top Trumps®Financial Weapons of Mass Destruction® SIV “You give me that “Duration-My-Mismatch” crap, you can cram it your ass.” Docs Fund constitutions, prospectuses, commercial paper programmes, IMAs, subscription agreements, redemption gates: documentation galore, though none of it makes a damn of difference when the market won’t roll your paper. 7 Amendability Nope. It’s CP. If you don’t like it, don’t roll it. 0 Collateral Yeah well here’s the problem. Portfolios of mortgages. Secured, collateralised, diversified... and as illiquid as hell. Extra points for looking safer than it was. 8 Transferability Some, in theory, but it is CP. It redeems in a month. Why transfer it? Just let it roll off. 5 Leverage Not levered, as such, but a means of providing leverage. When you most want your money back, fast, you are least likely to get it. 8 Fright-o-meter Before 2007: We have allocated risk to those in the market best placed to bear it. After: ARMAGEDDON. 10 Index: Click ᐅ to expand: FWMD Master Agreements Tell me more Sign up for our newsletter — or just get in touch: for ½ a weekly 🍺 you get to consult JC. Ask about it here.

Structured investment vehicle
/ˈstrʌkʧəd ɪnˈvɛstmənt ˈviːɪkl (/n.)
A clever way of financing long-term assets with extremely short term liabilities. “Clever” in the same way that running head-first at a brick wall is a clever way of getting out of having to do P.E.

A structured investment vehicle (“SIV”, also called a “conduit” or “CP conduit”) is an espievie that issues commercial paper and uses the proceeds to buy long-dated investment assets.

The idea is thus to profit from credit spreads between short-term debt and long-term structured products like CDOs and asset-backed securities.

That is, it has to pay interest predicated on short-term nature of commercial paper, where the holder has credit risk only for a couple of months, and therefore credit spreads are tighter (it being less likely that a borrower will go bust in period measured in months than over ten years), but it invests in long-term assets — like 25-year mortgages — where the lender is locked in for very long periods, and the borrower therefore pays wider credit spreads, and more interest.

This all only works, of course, as long as people remain prepared to buy your commercial paper when it rolls every month. In times of plenty, when markets are steady, they generally will, because a SIV will generally pay better interest than normal commercial paper issuers, because of the assets it invests in — but when, as it periodically does, the market blows up, no-one will want to buy your crappy CP when it rolls, backed as it is by second mortgages of fourth homes of Las Vegas strippers, and you will find yourself lacerated by shards of hot twisted metal in the pit of a very deep, very smoking, crater. This happened in 2008. The problem is called “duration mismatch”. It is one the crypto-world is re-discovering all by itself in 2022.

See also

• FTX