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What is a Structured Investment Vehicle?

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  • Written By: A. Leverkuhn
  • Edited By: Andrew Jones
  • Last Modified Date: 16 November 2016
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A structured investment vehicle is a specific kind of fund that has recently been used to generate profits in what some call “shadow banking.” In these types of funds, managers issue short-term securities at low interest, They then lend long-term securities at higher interest rates to make money from the borrowed capital.

Reports indicate that structured investment vehicles were developed as recently as 1988 by major banks and used by various financial firms until 2008. Industry experts have revealed that structured investment vehicles are no longer part of the general financial community.

The general method of getting capital for a structured investment vehicle, according to experts, was in selling accounts based on commercial paper. The volatility involved in this borrowing method was one criticism of the structured investment vehicle. The structured investment vehicle fund manager would use the LIBOR or London InterBank Offer Rate to set interest rates.

Another criticism of the structured investment vehicle is that the managers of the funds were not able to accurately assess the risks involved because they didn’t sufficiently observe the solvency of the securitized debts. The structured investment vehicles were rated, and industry experts point at examples of these funds being incorrectly assessed. All of this led to the general extinction of these kinds of financial instruments as the market volatility of 2008 erased capital and threatened investors.

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Critics of the structured investment vehicle also point out that it is absolutely necessary to consider the true risk of default, and not to use statistical models as a sole source of risk assessment. Financial professionals who are involved in talking about the risks of structured investment vehicles point to specific aspects of similar arrangements by traditional banks, where deposits (the borrowed capital) are insured by the federal government, and where the banks routinely screen borrowers thoroughly. In general, the subprime mortgage crisis, and other recent financial events, have made capital lenders newly skittish about being careless in lending money. Securitized debts that got passed to third parties are largely blamed for some of the carelessness that characterized structured investment vehicles and similar types of lending.

In short, the structured investment vehicle was a type of financial arrangement with a fairly short life span. Finance experts can use it as an example of how market volatility may affect the actions of the finance community as a whole. It can also be used to help government, consumer, or investor advocate groups look at how to regulate emerging markets and financial practices.

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