John At The Center

Yves… the biggest difference is that a securitization is a static pool whereas an SIV is actively managed. That brings advantages and disadvantages. The advantages include the savings on cost (i.e., only one structure has to be set up and then can be used to cycle the arb continuously) and the ability to, like you point out, make a play on the yield curve (i.e., the SIV funds its long term assets with short term liabilities). The main disadvantage is the duration mismatch and in times of stress the inability to roll the liabilities at some rate less than that paid by the assets. In many ways, an SIV works very much like a bank… but as you say it is off balance sheet. Where your understanding I think misses the point is in your concept of leverage. The aggressive structure in Europe were levered closer to 25:1 or 30:1… hence the reasons banks like Citi moved into the market. This concept of ultra high leverage was supported structurally in that SIVs were typically only allowed to invest in AAA-rated, <2 yr WAL, floating rate securitized assets. Unfortunately, once the bid for these assets dropped below par on true credit concerns the game was up.

via naked capitalism: Some Open Questions on Structured Investment Vehicles.