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Structured investment vehicle

A structured investment vehicle (SIV) is a non-bank financial institution established to earn a credit spread between the longer-term assets held in its portfolio and the shorter-term liabilities it issues with significantly less leverage (10-15 times) than traditional banks (25-50 times). They are simple credit spread lenders, frequently ""lending"" by investing in securitisations but also by investing in corporate bonds and funding by issuing commercial paper and medium term notes, which were usually rated AAA until the onset of the financial crisis. They did not expose themselves to either interest rate or currency risk and typically held asset to maturity. SIV's differ from asset-backed securities and collateralized debt obligations in that they are permanently capitalized and have an active management team. They do not wind-down at the end of their financing term, but roll liabilities in the same way that traditional banks do.They are generally established as offshore companies and so avoid paying tax and escape the regulation that banks and finance companies are normally subject to. In addition, until changes in regulations around 2008, they could often be kept off the balance-sheet of the banks that set them up, escaping even indirect restraints through regulation. Due to their structure, the assets and liabilities of the SIV was more transparent than traditional banks for investors. SIVs were given the label by Standard & Poors -- Moody's called them ""Limited Purpose Investment Companies"" or ""LiPICs"". They are considered to be part of the non-bank financial system, which has two parts, the shadow banking system comprising the ""bank sponsored"" SIVs (which operated in the shadows of the bank sponsors balance sheets) and the parallel banking system, made up from independent (i.e. non bank aligned) sponsors.Invented by Citigroup in 1988, SIVs were large investors in securitisations. Some SIVs had significant concentrations in US subprime mortgages, while other SIV had no exposure to these products that are so linked to the financial crisis in 2008. After a slow start (there were only 7 SIVs before 2000) the SIV sector tripled in assets between 2004 and 2007 and at their peak just before the financial crisis in mid 2007, there were about 36 SIVs with assets under management in excess of $400 billion. By October 2008, no SIVs remained active.The strategy of SIVs is the same as traditional credit spread banking. They raise capital and then lever that capital by issuing short-term securities, such as commercial paper and medium term notes and public bonds, at lower rates and then use that money to buy longer term securities at higher margins, earning the net credit spread for their investors. Long term assets could include, among other things, residential mortgage-backed security (RMBS), collateralized bond obligation, auto loans, student loans, credit cards securitizations, and bank and corporate bonds.
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