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Despite Citi's selloff, SIVs still safe

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We’ve been closely following the structured investment market in the wake of the subprime mess, and word comes this week that Citigroup has slashed the size of its struggling off-balance-sheet investment funds by more than $15 billion. According to the Financial Times, in the past two months it’s made quiet side deals with junior investors.

The move comes as the troubled bank scrambles for ways to offload assets from its structured investment vehicles without resorting to fire sales.

But remember, despite recent press, Morningstar’s Rachel Barnard assured us last week that SIVs are not the investment nightmares they’ve been made out to be.

An SIV is simply a fund that borrows money to invest in a portfolio of securities. The SIV borrows money for a short time and pays a short-term borrowing rate, then invests that money in securities that pay higher interest rates.

SIVs have been considered a safe bet since the late 80s, but the credit and liquidity risks involved have some investors nervous. If the securities invested in an SIV lose their value, the SIV may not be able to pay off its creditors, scaring off potential lenders, which in turn leads to liquidity problems. Once the lenders bail out, buyers could do the same, forcing investors to sell the securities for less than they’re worth.