User 124006

Shedding Light on SIVs

You can find information on two SIVs run my BMO on the LSE website

URL for info on Links Financial
www.londonstockexchang...

URL for info on Parkland Finance

www.londonstockexchang...

The docs don't shed much light on the composition of the assets but you can pretty much infer their strategy for making money.

Raise commercial paper, buy fixed rate assets, swap fixed into float via an asset swap. Spread between CP rate paid and LIBOR + earned on asset swap is 'arb proft'. This is split between the holders of the junior notes and the sponsoring bank as 'management and incentive fees'.

On $30 billion, it looks like BMO earned about $30 million (10bp) in 2005 in mgmt and incentive fess from one SIV. Not sure if this is a typical year.

The SIVs have touted their risk mgmt -- no interest rate or currency risk!

The funny part is the 'risk management'. The risk reporting to the ratings agencies (done for dramatic effect on a daily basis) only measusres changes in the level of rates. Given that both the assets and liabilities are mainly floating, it is easy to show that this 'risk' is close to zero.

The SIVs don't (and apparently the ratings agencies don't consider this material) show any sensitivity to changes in spreads or volatility! As the French policeman in that Bogart movie might say, 'I'm shocked, shocked' to read this.

The SIVs have no employees, the board members appear to part of a law firm retained by the sponsor. The address appears to be that of the law firm.

A second rate lawyer could have little difficulty showing that the SIV is nothing more than an arm of the sponsoring bank.