From: Reuters
Published February 6, 2008 12:39 AM

Recovery for SIVs unlikely given Basel II rules-panel

By Neil Shah

LAS VEGAS (Reuters) - The troubled market for so-called structured investment vehicles (SIVs) is effectively dead and likely to stay that way given new international rules for matching banks' reserves to their risks, panelists at a bond industry conference said on Tuesday.

The new Basel II international accord, to be applied to U.S. banks with total assets of $250 billion or more, is likely to make investing through off-balance sheet SIVs less attractive for banks, which are the main sponsors of such vehicles, speakers at the American Securitization Forum conference in Las Vegas said.

SIVs are specialized funds that raise cash by issuing short-term debt and invest the proceeds in longer-dated and higher-yielding assets, including U.S. mortgages. The funds pocket the difference between what they make on their investments and the interest they pay out to investors.


The vehicles have been unable to fund themselves normally for many months amid the U.S. credit crisis and the market value of their investment portfolios has plummeted, prompting ratings downgrades and mass restructuring efforts.

But the market for SIVs may have eventually contracted anyway given the onset of Basel II, which has been seen as offering a way for banks to lower their capital reserves by linking reserve requirements to the credit quality of investments.

Banks will find it more efficient "to hold highly-rated assets on their own balance sheets" under Basel II, Dominic Swan, managing director at HSBC Bank, told Reuters after speaking on a panel at the conference.

HSBC, which is providing full support to its two ailing SIVs, is leaving the market, Swan said.

To be sure, full implementation of Basel II for U.S. banks is some way off.

Implementation begins in April with banks such as Bank of America Corp <BAC.N> and Citigroup Inc <C.N> simulating the new rules parallel to current capital standards.

Bank examiners may also look more carefully at how banks treat complex and illiquid securities given the recent U.S. mortgage turmoil, which has sparked waves of write-downs by financial institutions.

But many money-market funds and other traditional investors in SIVs have already left the market.

"The SIV market as we know it is certainly dead," said panelist David McCollum, managing director at MBIA, which has sponsored a vehicle called Hudson-Thames Capital. "The odds would be very long" for a recovery, he said.

Another participant at the conference said even if SIVs returned, they would have to pay investors very high yields, which could make them uneconomical for bank sponsors.

In the meantime, SIVs in the process of restructuring will probably sell more of their investments, though it is unclear when that will happen, according to panelist Jenna Collins, portfolio manager at Cairn Capital.

The SIV panel's moderator, Alex Roever, managing director at JPMorgan Securities -- which did not sponsor an SIV -- ended the session on a grim note:

"I'd say 'see you next year,' but I don't know if we will," he said.

(Editing by Jacqueline Wong)

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