SIV, RIP

An article in the Financial Times give a useful recap of what happened to the financial bugbear of days gone by, namely, the SIV, or structured investment vehicle. Henry Paulson’s failed plan to rescue these not-so-of-balance-sheet entities was front page news for most of the fourth quarter 2007. By the sound of it then, if SIVs didn’t get sorted out, Seriously Bad Things Would Happen, Particularly to Citigroup.

Well, guess what. Seriously bad things did happen, and Citibank indeed took more lumps than most, but SIVs paled compared to other financial threats.

And that bring us to a curious omission: Citi was the most exposed to SIVs, with about $100 billion in face amount out of a $400 billion market, but this story is silent on what happened to the bank’s toxic toys. I suspect its SIV assets were brought back on balance sheet (that was at least the plan), but I wonder how much the paper had to be written down. Oh, right, we don’t do writedowns here in the US, we prefer to allow banks to carry impaired paper at fantasy values.

From the Financial Times:

Almost all the $400bn of assets held in structured investment vehicles have now been disposed of,…

The attraction to investors had been the profits generated by the difference between cheap short-term funding and the income from higher-yielding but illiquid long-term holdings, including subprime mortgages. Once these benefits disappeared in the market convulsions, banks and other other SIV sponsors scrambled to rescue the vehicles.

Analysts at Fitch Ratings calculate that 95 per cent of the assets held in SIVs at the July 2007 peak have now been disposed of as the vehicles have been wound down – with much pain to investors, but without the wild market dislocation many feared.

Glenn Moore, of Fitch’s European structured credit team, said: “Although substantial, the asset disposals have been relatively orderly over the past two years.”…

Of the 29 SIVs, five have been restructured, 13 were consolidated onto the sponsoring bank’s balance sheets and seven defaulted on payments of their senior borrowings. Fitch estimates just four have unwound themselves, at least one of which did so without losses to senior investors.

SIVs that were consolidated or restructured accounted for two thirds of total SIV assets while the defaulting SIVs were worth 32 per cent. The three SIVs that successfully unwound themselves accounted for about 2 per cent of assets in the vehicles.

Investors are still struggling to recover their holdings in SIVs and in many cases have gone to court to push for a more equal sharing of whatever is left over. This may not be much; Ernst & Young, the receiver of Sigma Finance which ceased operations in October last year, only managed to raise $306m for assets with a face value of $2bn.