There’s Armageddon, and then there’s the alternative – a massive funding vehicle the banks have dreamed up to avoid a fire sale of financial assets. This $75bn-plus vehicle should allow US banks to avoid something seriously nasty. But that does not necessarily make it attractive. It all depends on the details.

The news of its imminent creation was somewhat surprising, given how well the asset-backed commercial paper market had seemed to recover its poise. But, in one – $400bn – corner, things were not looking so good. Structured investment vehicles are fancy names for the oldest financing trick in the book – a company, often sponsored by banks, that buys and holds financial assets (such as credit card and trade receivables, auto loans and, of course, mortgages) and funds this partly through the issuance of short-dated paper. SIVs, crucially, do not have the benefit of huge credit facilities from large banks. So in the event that senior debt cannot be rolled over, assets have to be sold. This represents a serious refinancing risk if the markets seize up and, because of this, the assets in the SIVs were meant to be high grade and high quality. But they did also have a sprinkling of subprime which, like shouting fire in a crowded theatre, meant investors have stampeded out of SIV paper, full stop.


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