December 1, 2007 (LPAC)--In total, in the entire world, only about 30 of these "Structured Investment Vehicles," exist. SIV's, as they are commonly called, were invented by the world's major banks, primarily to keep worthless debt off their own accounting books. Now, their scheme is about finished, and threatens to take some state governments along with them.
SIV's sit in the middle, between lender and creditor, effectively shielding the banks from having to report their loans and losses, because, in reality, the banks are no longer really lending the bulk of commercial loans anymore, the SIV's do it for them. The banks, and others, including state funds (as we shall see), purchase "commercial paper" from the SIV's, effectively funding the SIV's lending operation to other commercial entities. So, let's recap: on the one side, the SIV has sold commercial paper to banks and others like state governments, and on the opposite side, they take this money raised from the sale of the commercial paper, and lend it to others: mortgages, commercial real estate deals, businesses, bond purchases, student loans (!), etc.
The scam is coming to an end; Much of the SIV's assets consist of poisonous sub-prime debt.
Now, the SIV's are no longer considered a safe investment. Surprise! That commercial paper you just purchased is worth less than the paper it was printed on (or the electrons that carried the deed of ownership through the "interwebs"). Moody's, the same agency that just several weeks ago had given these SIV's a investment-grade rating, has now downgraded 6 out of the 7 SIV's operated (technically: not owned), by Citigroup, after its review of $130 billion of SIV debt, some notes (paper) even being rated below investment-grade.
Florida is in the process of learning this tragic lesson. Last week, the state's investment pool received a huge pullout, $8 billion was removed (30%!), after various school districts discovered the pool held more that $700 million of defaulted debt. And, to make matters worse, by the end of the month over $13 billion had been withdrawn from the state run investment pool, prompting the state to freeze withdrawls from the fund to prevent an even larger run. Now, the Florida school districts are struggling to pay their own teachers, forcing the districts to look elsewhere for their short-term payroll funding.
If only this were an isolated incident; but not so. Montana has now suffered a similar fate, with a $15 billion dollar run on its own state run investment fund. Expect similar consequences for Montana.
These two states represent the worst cases, with many other states finding themselves in similar situations. This commercial "ass"-paper is everywhere, including your pension fund. And so, the only way out is simple: "The Homeowner and Bank Protection Act." Some foolishly forget the act's "other" firewall, the firewall to shield the banks from their own stupidity. Because, were the banks to suffer the fate of a disorderly, run-on-the-bank style collapse, everything, including your state's school district as we have just seen, is in jeopardy. Protect the banks, and demand a well-ordered reorganization of the entire system.
