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Did You Say SUV or SIV?

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Did You Say SUV or SIV?
Even a "Motley Fool" hadn't heard of the SIV -- the Structured Investment Vehicle -- as little as a month ago. Emil Lee writes for The Motley Fool:

Now I'm sweating buckets that the estimated $400 billion in SIVs outstanding might derail the capital markets. What happened, and what does it mean for the rest of us?

At the risk of oversimplifying, an SIV is an entity set up when a bank buys long-term assets and finances them by issuing short-term commercial paper (CP). The bank gets a fee for managing the SIV, but can keep the SIV's debt off the balance sheet because it doesn't take on the credit risk. However, many banks agreed to give the SIV a liquidity backstop -- meaning the bank ensures that the SIV will be able to refinance its short-term CP debt.

Whoops!

That liquidity guarantee is coming back to haunt the banks. Until very recently, it would have been almost laughable to predict that the commercial paper markets would come to a screeching halt. The CP markets are extremely deep and liquid.

However, these are not normal times, and the CP markets, especially the asset-backed CP markets, are very, very unaccommodating right now.

What now?

With many banks facing obligations -- based on contracts or their reputations -- to provide liquidity backstops to their SIVs, it's very important that the banks solve this problem. If the banks can't find CP buyers, they will have to fund the SIVs themselves -- no easy task given the amounts of money in play here.

There's an estimated $400 billion in SIVs outstanding, and according to The Wall Street Journal, Barclays (NYSE: BCS) recently injected $1.6 billion into one of its SIV affiliates, HSBC (NYSE: HBC) had an SIV affiliate with $35 billion in debt, and Citigroup (NYSE: C) manages SIVs with a whopping $80 billion in assets.

Not to worry! The government will bail everybody out! ("The government" being a polite shorthand for "Fuck you, taxpayers!") Here's another "Motley Fool," Seth Jayson, explaining Treasury Secretary Hank Paulson's idea of a solution:

Gotta be some way out of this other than the way we came...

Now, Paulson -- like all the other politicians in Washington -- is scrambling for a way to fix the mess without any pain for anyone. Obviously, this is absurd. Billions of dollars in fictional equity were created via the housing Ponzi scheme, and these guys are dead set on preserving as much of it as possible, no matter what the cost.

"We must help as many able homeowners as possible stay in their homes," Paulson said. "Foreclosures are costly and painful for homeowners."

Yeah, well, too bad. That's what happens when you allow people who make $50,000 a year to buy $500,000 homes on gimmicky loans that apply a pretend interest rate up front.

Now, Paulson says lenders should work with home owners to refinance these overpriced houses before the interest rates reset and they can no longer afford them. Surely, he knows that the funding for those loans was provided only on the condition that they would someday reset at rates that make medieval usurers look kind.

That's sleazy, but that's what naive, deluded, or greedy buyers signed on for. Take away that reset, and you take away the incentive to lend the money in the first place. If Paulson thinks he's got a credit crunch now, just wait and see what happens in a world that dictates new loan terms as soon as it's politically expedient. Lending will get even tighter and home prices will drop like rocks.

...Someone's gotta pay. And if it's not going to be the debtors leaving the homes, and if it's not going to be Hank's buddies on Wall Street, who does that leave?

Us. The responsible majority of Americans. Remember us? The people who didn't go out and do stupid things with our money?

And here's a great analogy, excerpted from Patrick.net:

SUV Bailout To Keep America Humming

Lawmakers in Washingon are near final agreement on a proposed $400 billion bailout of SUV buyers. The massive amount of debt taken on by drivers in an attempt to ensure that their vehicles are significantly bigger than their neighbors’ vehicles has resulted in millions teetering on the brink of bankruptcy. “We need to keep these people in their Hummers, at whatever cost to taxpayers” said Treasury Secretary Henry Paulson. Paulson is expected to announce details of the plan as soon as Wednesday, said sources familiar with the matter. With more than 2 million drivers facing higher interest costs and the possible loss of their oil-company-friendly vehicles if they cannot meet the payments, the future of US overconsumption is at stake.

Step right up for the "foreclosure bus tour"!

Patrick.net link via Consumerist