Friday, November 09, 2007

SIFs, SIVs, and the market, Oh My!

Yesterday the Down Jones Industrial average fell over 200 points by midday due to comments by Fed Charman Bernanke that the credit crisis was much larger, and likely would take the better part of next year to unwind. The problem is that companies packaged mortgages into a kind of investment bond, called SIVs, or Structured Investment Vehicles. Unfortunately, the SEC hasn't required companies to account for the value or liabilities to these SIVs on their balance sheets. Until mortgages actually go into fault, and real estate is sold to recoup some of the loan, the actual value of these investments is difficult to determine. These SIVs are a problem.

The market recovered very quickly at the end of the day yesterday--good news, right! Maybe not. CNBC commentators noted that the market may have recovered because SIFS, or Sovereign Investment Funds, were targeting assets of American companies because they were currently cheap. What is a Sovereign Investment Fund? It's an investment fund created by a nation to invest in the assets of other nations. China has one, so does Saudi Arabia. In other words, as we but Chinese goods and Saudi oil, these funds build up dollars, which can be later used to purchase real assets. While we have had a negative balance of trade with these companies for years, it's only been recently that the government had been concerned that these funds have become so big they could cause "mischief" with our economy. I don't know about you, but mischief at the level of nation states worries me! We won the Cold War because the Soviet economy collapsed--I would hate to see America become a third world nation because of an economic collapse orchestrated by nation states who own our economy.

At any rate, the Bush administration has become worried enough to ask the International Monetary Fund (IMF) to consider setting standards of conduct for the operations of such funds.


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