HSBC has in effect pronounced the death of the structured investment vehicle (SIV) by offering $35bn (£16.9bn) in funding to take two SIVs on to its own balance sheet.
The bank said yesterday that it would repay investors in Cullinan Finance Ltd and Asscher Finance Ltd – SIVs which are both managed by HSBC – and give them the option to re-invest their money in one or more new vehicles set up and funded by HSBC. Investors will still bear the risk of defaults on the underlying assets but HSBC's support will stop the funds from having to sell quality assets because their market value has fallen.
SIVs have been at the heart of the credit crunch as panicked investors refuse to reinvest in the short-term debt that finances the funds, which often invest in sub-prime debt in the US.
By taking action, HSBC is opting out of attempts by Citigroup and other US banks to construct a "Super SIV" that would buy up the funds' assets until markets calm down. HSBC said the SIVs had funding in place to take them into next year and that its commitment represented only 1.6 per cent of group assets. A spokesman added: "The fact we can do this is a reflection of the company's financial strength. Not everybody can do this."
SIVs issue cheap, short-term debt called commercial paper and buy longer-term, higher-yielding assets such as mortgage-backed bonds to make a profit.
The commercial paper is backed by the assets in the fund but the values of these have plunged, triggering measures that forced SIVs to sell assets. The sell-offs forced some SIVs, including Cheyne Finance in the UK, into bankruptcy.
Stephen Green, the HSBC chairman, told analysts last week: "Some aspects of the capital markets are brought into question by recent developments. Asset-backed commercial paper at the structured end is going to be a shadow of its former self."
HSBC is the biggest manager of SIVs behind Citigroup. Its move is the first definite action taken by a bank to overhaul the SIVs it manages. Its abandonment of the fund structure is a major blow to those who hope confidence will eventually be restored.
"By doing it this way, HSBC has got control of everything rather than putting it into the Super SIV. Something like the Super SIV is going to take some time to be properly structured and set up," said Gordon Scott, a managing director in Fitch Ratings' financial institutions group. "There has been a repricing of risk and so it is difficult to see the SIV market coming back in its previous form."
Critics of the Super SIV have said giant risk-takers such as Citigroup and Merrill Lynch are trying to get smaller banks to bail them out. Alan Greenspan, the former chairman of the US Federal Reserve, has said that the Super SIV could do damage by delaying the inevitable losses that financial institutions must face from SIVs.