Structured investment vehicles (or SIVs) are typically created by investment banks and can be a way to achieve ‘off balance-sheet finance’ – raising capital without having to record an associated obligation to repay it.
For example, after the retail arm of a big bank has issued $100m of mortgages to homeowners, the investment banking division might create and sell $100m of IOUs called ‘mortgage backed securities’ to an SIV – a separate company – for cash.
The SIV raises the money to buy these bonds by selling $100m of its own IOUs to other investors. These IOUs often take the form of short term ‘commercial paper’ because the SIV hopes that it will receive more interest from the bonds it owns (the mortgage backed securities) than it pays to these lenders.
The ability of an SIV to keep refinancing itself by selling more commercial paper depends on lenders having confidence in the only assets held by the SIV – its mortgage-backed securities. Otherwise, funding may have to be sought from the original bank.
