The plan to offload all those sinking SIVs into a a special fund where they could be hidden (AKA The Save Citi plan) is dead. No investors could be found for the estimated $350 billion of now toxic SIVs. So the banks were forced to take them back on their books, much as it pains them to act responsibly and ethically.
SIVs borrow short term money and “invest” it at higher rates, making money on the spread. This only works if what you buy retains its value and if lenders can be found to roll over your short-term debt. Neither is true any more for SIVs, and starting in January, many medium term notes come due and if a SIV can’t find new lenders suckers, it will become insolvent.
A bunch of clueless and incompetent regulators blinded by a free markets fundamentalist ideology – that ignores that financial markets without appropriate rules and regulations behave according to the law of the jungle – allowed these monsters to be created in the first place; these are the same folks that allowed the Enronâ€™s SPVs â€“ a close cousins of the SIVs â€“ to be created and create a cancer that destroyed Enron. It is a scandal that after the Enron affair these SIV were allowed to mushroom without any supervision and regulation.
Now their schemes of greed are exploding in their faces. The financial carnage has just started and I expect more than a few of them will be going to prison.