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Leaking like a SIV or too big to fail?

Every crisis creates its lexicon, no matter how ridiculous.

A traders works on the floor of the New York Stock Exchange, Nov. 18, 2008. (Shannon Stapleton/Reuters)

NEW YORK — In times of crisis, words often fail. They can also fail to communicate.

We're now in one of those times.

Consider the alphabet soup of nonsense casually tossed around in the financial press and in Wall Street and Washington: TARP. Zombie banks. Mark to market. SIV. Collateralized debt obligations. Too big to fail.

That last one was used by Federal Reserve Chairman Ben Bernanke March 10. When speaking to the Washington offices of the Council on Foreign Relations, the Fed boss bluntly said some banks — without naming names — were "too big to fail." Bernanke also said the government would do everything possible to prevent their collapse, a promise that helped send Wall Street skyward.

The TARP, or Troubled Asset Relief Program, is by now old hat. TARP, of course, was meant to deal with "toxic debt." The plan fell short; the term stuck. All those bad bets placed by overcompensated exhuberance brokers (formerly known as investment bankers) on "mortgage-backed securities" (MBS) and other exotic investment vehicles are now, of course, assumed by many to be DOA. One joke making the rounds of fund managers these days: "Liquidity is the speed at which you wet your pants when you open your 401K statement."

So to further lighten the mood in these dark times, here's a quick guide to understanding at least some of the gibberish:

SIV: The "Structured Investment Vehicle," a device introduced by Citicorp in the late 1980s, essentially seeks to make money the way a bad gambler does: by borrowing cash at one interest rate, and hoping the investment covers the spread and kicks off a profit.

The giganticized version of this age-old bookie scam — the SIV — saw Citicorp and other banks borrow money by issuing short-term securities at low interest rates. They then lent that money in the form of long-term securities which paid a higher interest rate, theoretically making profits on the difference in the rates. But those "longer-term securities" often turned out to be mortgage-backed, or what turned out to be the equivalent of betting your nest egg on the Chicago Cubs to win the World Series.

So, like the loser who can't get another cash advance from his Visa card to pay off the local Gambino crew, the investment banks found that the SIV held water about as well as its homophone, the sieve.

The whole scheme came crashing down, and despite the fact these practices all took place off the bank's balance sheet (and out of the government’s jurisdiction), when SIVs failed, they had to be reconciled somehow by accountants, so this poison was added to the ledgers of loss most of the major banks now face. Such “off the books” mistakes help explain why good money pumped in via the TARP never seems to be enough.

Mark to Market: The need to reconcile gravity with practices like the SIV has led to a debate over whether banks should be forced to "mark to market" all assets they claim on their balance sheets. This is no small issue, and it isn't straightforward.

Many banks remain convinced that even their worst bets on securitized mortgage assets will be worth something someday, when confidence returns to the markets. They’re loath to allow the market — i.e., Joe Q. Investor — to set a value on them based on today's conditions. If they did, some analysts think that several large American banks, including Bank of America and Citigroup, would be insolvent.

The trouble is, of course, “mark to market” is just another name for the law of supply and demand. Will investors ever return to the stock market if they think a company's assets are being set for appearances sake, rather than by market forces?

Too Big to Fail (TBTF): This euphemism cited by Bernanke is shorthand for “give me money or I will blow up the building.” The government faces increasingly dire decisions regarding which firms will or will not survive the crisis, and those whose demise would take down much of the economy, too, fit into the TBTF category.