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"superSIV goes well, and buys the big banks time to wait for the CP markets to heal, then that's a good sign that we may have a softer landing. If the CP markets close up again and the banks have a hard time rolling over their SIV debt, then we may be in for major turbulence. "


that's a quote from an article I just read in Fool.com
I need to know what these terms mean:


CP markets
superSIV and SIV

Can anyone lend me a clue here?

Thanks so much!
Dari
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Dari,

SIV - structured investment vehicle
CP - commercial paper

The superSIV is a pool that the treasury department is trying to establish via BofA and JPM (and others?).

Both abbreviations were defined in the opening paragraph. No question this is not a simple subject and hard to define. I'd be lying if I implied I really understand it well.

http://www.investopedia.com/terms/c/commercialpaper.asp


Zz
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Well, I read the Investopedia info and re-read the article...sniffle... I'm lost! But, that's okay I always have my DSPs.
They keep me busy. :-)
Thanks for taking time to answer me.
Dari Justice
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Dari,

I'll give this a shot, though I am by no means an expert.

A Structured Investment Vehicle is a way for a bank to invest money in (usually) risky ventures that it doesn't want to carry on its balance sheet due to capital requirements or other issues. In a sense, it is set up as a wholely owned subsidiary with its own set of books. From what I have read, most of the SIV's borrow money short-term, (less than one year), at low interest rates and invest it long-term, (more than one year), at higher rates to take advantage of the point spread. For example, the SIV might sell Commercial Paper, (short-term IOU's), effectively borrowing the money at a 5% interest rate. Then they take the money they got for the IOU's and buy mortgages, (30 year fixed at 10% interest rate, for example). As long as the mortgages don't default, (which is a big problem right now), they earn 10% on the money they borrowed at a 5% interest rate and pocket the difference. The other problem is that they need to keep replacing the IOU's as they come due, which means that they need to sell new IOU's to replace the old IOU's so that they still have the money in the mortgages earning them their 10%.

Right now, the SIV's are getting hit by a double-whammy. The commercial paper market has virtually dried up, (people don't want to buy the IOU's from the SIV's any more), so the SIV's are having problems rolling over their debts. Normally, they could just sell the mortgages to somebody else to get their money back, (plus the interest they earned while they held the mortgages), pay off their IOU's and show a small profit on the interest they earned over the amount of interest they paid. The problem now is that a lot of the mortgages they bought for that 10% yield were subprime mortgages, which have increasing rates of default, so nobody wants to buy the mortgages from the SIV's. Thus the SIV's are in the position of having to pay back their IOU's, can't get new IOU's and can't sell their assets for enough money to pay off their IOU's. They are effectively bankrupt. This is what caused a couple of Bear Stearns funds to implode.

A lot of the banks are taking the assets of the SIV's back onto their books, (effectively buying the assets from the SIV at face value instead of depreciated market value), and paying off the SIV's IOU's. This has hurt the balance sheets of the banks as they are taking onto their books assets with a market price of maybe 1/4 of face value and having to pay off the IOU's at full market value. On top of that, the banks have to set aside reserves to cover the losses being experienced by the loans they bought from the SIV's, (due to capital requirements set forth by the Fed and the FDIC). This is causing the banks to experience their own double-whammy, (having to overpay their SIV's for bad assets and set aside additional money to bring their balance sheets up to Federally mandated capital requirements). The banks have to do this because they are held morally responsible for the SIV's that they set up, and if they didn't pay off the debts of the SIV's, then there might be a run on the bank, (in addition to nobody buying any other products from the bank, nobody being willing to loan them any money and nobody asking them to participate in any deals, (buyouts, IPO's, etc.), due to them being considered untrustworthy for not paying off the debts of their SIV's).

That is how I understand the whole situation anyway from what I have read. It's a big mess. Hope this helps explain it all. If I am wrong, I am sure somebody will correct any mistakes I have made.

Craig
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