September 5, 2007
Yet Another Special Purpose Entity Scam??
Special Purpose Entities (or Vehicles, SPVs, for short) used for off-balance sheet financing were the focus of the Enron scandal and are back in the news again. Enron "transferred" debt to SPVs and took the debt off its balance sheet. The transfer is legit only if the SPVs are independently owned (not a sub of Enron). Enron officials concealed the identity of Enron as a true majority owner of its SPVs, hence the scandal. The new game is with "conduits" and SIVs (Structured Investment Vehicles). These "independent" investment vehicles, created by investment banks (most notably Citigroup), hold assets and sell asset backed commercial paper (among other forms of debt). Banks use the vehicles to issue commercial paper and use the proceeds to purchase long-term, often illiquid assets (receivables, auto loans, and home loans), all off the balance sheet and, therefore, not a problem with bank minimum capital requirements. They learned from Enron -- ownership is independent -- but the new game is in the bank's guarantees of default. Entitled "liquidity backstops" the banks in essence guarantee the vehicles against losses but technically skirt the definition of a legal "straight guarantee" (which would make them owners). These non-guarantee, guarantees have now put the true exposure of Citigroup to vehicle insolvencies on the table and investors are not sure they like what they do not know.
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