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KAI RYSSDAL: Moving on in the land of credit availability, we’ve talked about SIVs before. Today we’re going to have to talk about them again: Structured Investment Vehicles. Moody’s, the credit rating agency, is warning it might soon downgrade $105 billion in debt related to some of those SIVs. It would be the biggest rating cut since the subprime crisis hit this summer, and not at all what the credit industry’s looking for.
Our New York Bureau Chief Jill Barshay has more.
JILL BARSHAY: Structured investment vehicles raise money from investors and put it into high yielding bonds. A lot of those bonds are backed by subprime mortgages. Charles Jones is a finance professor at Columbia Business School. He says in return for their money, investors get short-term notes from the SIVs. Now Moody’s says it may downgrade those notes. Jones says the bonds in many of the SIVs are worth half of what they were six months ago.
CHARLES JONES: The bond market is still very sick. You wouldn’t know it from the stock market, which seems to be coming back nicely, but the bond market is still totally gummed up.
The downgrades of those notes could cause problems for money market and pension funds. Janet Tavakoli is the president of her own structured finance strategy firm. She says the money market funds own a lot of those notes. The funds could end up taking losses.
JANET TAVAKOLI: That’s a very big issue for investors who expected this to be very safe and to give them their full money back if they redeemed their money, and that’s what money market funds are grappling with.
The downgrade could also complicate a plan directed by the Treasury to bailout the SIVs. Columbia’s Jones says these downgrades could spook investors. He’s worried about a fire sale of mortgage-backed bonds.
JONES: This is I think an indicator that we’ve taken another step toward the edge of the cliff.
Jones says the SIV bailout is still in the cards, but Wall Street firms will now have to pony up a lot more money to make it work.
In New York, I’m Jill Barshay for Marketplace.