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Opinion

SIV sector: Concentrate!

The problems in the SIV sector are not only the result of funding and mark-to-market distress, but also because of sloppy structuring in the first place.

Lack of diversification killed the SIVs

Just because rating agencies have been the target of sustained criticism for months doesn’t mean that there is any compelling reason to stop. Moody’s has been widely ridiculed for publishing a report entitled "SIVs: an oasis of calm in the sub-prime maelstrom" on July 20, but nearly a full month later (on August 16), Standard & Poor’s was reassuring the market that "SIVs are weathering current market disruptions". Little more than two weeks later all the agencies were announcing negative rating watches and downgrades to SIV structures like there was no tomorrow.

And there is no shirking responsibility for this one. Closer inspection of the first two SIVs to come under pressure (Cheyne Finance and Rhinebridge plc) revealed that the much-vaunted asset diversity that these structures were supposed to embody was simply not there. Indeed, the figures are quite shocking: Rhinebridge had nearly 75% of its assets in US home equity loans and sub-prime. Even the Cheyne vehicle was approaching 50% sub-prime. SIV portfolios were never meant to be this concentrated – a look at the earlier vehicles shows that 75% was more likely to be the limit on exposure to the entire ABS market – not one (high-risk) sector.

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