SIVs are dead, declares a Tuesday morning FT story.
About 95 per cent of the $400bn of assets held in the structured investment vehicles at their July 2007 peak, have now been disposed of according to ratings agency Fitch. Of the 29 SIVs, four have unwound themselves, five have been restructured, 13 consolidated onto bank’s balance sheets and seven defaulted.
But wait.
SIVs acted like a virtual (shadow) bank, borrowing money at a short-maturity and then lending money to buy long-term securities at a higher interest rate — stuff like ABS and corporate bonds. The structure allowed the parent bank to profit between the two, but it also allowed the banks to keep billions in assets off balance sheet, and freed them from regulatory capital requirements on those assets.
When the commercial paper market began to dry in the summer of 2007, however, SIVs were deprived of that vital short-term funding and their business model died. In fact, SIVs are even more dead now given that the FASB looks set to get rid of accounting rules allowing for qualified special purpose entities.
Fast forward to this week, when the FT reports securitisation is being “reinvented”:
Investment banks, including Goldman Sachs and Barclays Capital, are inventing schemes to reduce the capital cost of risky assets on banks’ balance sheets, in the latest sign that financial market innovation is far from dead. The schemes, which Goldman insiders refer to as “insurance” and BarCap calls “smart securitisation”, use different mechanisms to achieve the same goal: cutting capital costs by up to half in some cases, at the same time as regulators are threatening to force banks to increase their capital requirements.
BarCap’s structures involve the pooling of assets from several clients into a secured financial product that can be sold on to other investors and rated by a credit rating agency, potentially reducing the capital allocated against the assets by between 10 per cent and 50 per cent.
. . .
Separately, Goldman is working on what bankers said was a private-sector version of the UK government’s asset protection scheme. The goal would be similar — to reduce the capital that would need to be held against the assets — although Goldman has yet to find a balance between the risks and rewards that would be attractive to investors.
These aren’t SIVs, but they bear the hallmarks of them — capital and regulatory arbitrage, essentially trying to shift risk off balance sheet. BarCap’s “smart securitisation” in the above example basically sounds like a CDO, tranching up to get AAA ratings on the higher ones and perhaps selling the lower tranches off. CDOs are structurally different to SIVs of course, but they share do share a fundamental purpose: Reducing the amount of capital needed is essentially a leverage play.
That can only go one of two ways for the banks:
Related links:
CMBS deja vu – FT Alphaville
The management of banks’ off-balance sheet exposure – BIS paper
Small lessons from a big crisis – Andrew Haldane, BoE