Hello!
I have one question conc. the current and past writedowns of the financial industry in connection with SIV and off-balance sheet transactions.
I am puzzled, how these off-balance sheet transactions work (in general) from a legal/accounting aspect and how these losses in the SIV fire back to the sponsor of the SIV.
What I have learnt through various articles is the following (I hope I did not missunderstand anything):
- The sponsor (e.g. a major US bank) sets up a new SIV as a legal entity in a “favorable” jurisdiction - e.g. Jersey/British Channel Islands So, I conclude, the sponsor must be the official “owner” of the SIV.
- This SIV usually borrows short-term money in the markets to finance its operations (and provides its leverage) As far as I have understood, the sponsor is not making any direct capital injections into this SIV.
- Equipped with short-term money, the SIV starts its operations (speculations)
What I am particulary interested in is the following:
-
Is the sponsor of the SIV required to make the ownership of this SIV public or available to certified public accountants?
Does the sponsor have to record this equity stake in its balance sheet?
I assume not - otherwise it would not be “off-balance” - or do I mix here something up?
What does “off-balance” really mean in this sense? Is the whole ownership of the SIV not recorded in the balance sheet? -
How does it work, that profits from the SIV get transferred to the sponsor?
How does this appear in the balance sheet of the sponsor? -
If for any reason, the SIV suffers huge losses, how does it work, that these losses fire back on the sponsor - i.e. show up in the sponsor’s balance sheet? I assume, that all SIV are companies with limited liabilities - so why not let these SIV go bankrupt? Wouldn’t that be the preffered way for the sponsor? How is this connection established between the sponsor and the SIV, that forces the sponsor to make these huge writedowns?
I read something of lines of credit which are guranteed by the sponsor to the SIV. But I am not sure, how what role these lines of credit play exactly in this game.
I would appreciate if someone of you could help me here to understand this topic in a “that’s the basic way it works” way.
Concerning my background: I am European (so I don’t have knowledge of specific US accounting laws) and I consider myself having a “good basic” knowledge of accounting.
Thank you in advance for all your help!