So, for instance, Golden Key needed to demonstrate compliance with, among other things, the P-l Capital Test, the Capital Wind Down Test, the CP Coverage Test, the Market Value Coverage Test, the Weighted Average Spread Test, the MCO Limit Tests, the Interest Rate Sensitivity Tests, the Home Equity Loan Interest Rate Sensitivity Test, the Currency Sensitivity Test, the Weighted Average Life Tests, the S&P SIV-Lite Monitor Test and the Mandatory Acceleration Test.
These daily tests were supposed to provide everyone with a high level of assurance that no SIV would ever be compelled to sell any of its bonds at a loss, because they provides early warnings about decreases in the market values.
SIVs are very complicated deals set up to access the commercial paper market. This is why we know that blind faith in triple-A ratings was essential to their marketability.
In the real world, when a manager of a money market fund is asked to evaluate the protections afforded by the Capital Wind Down Test, the CP Coverage Test and the Market Value Coverage Test, he will shut down the conversation right away. Someone who buys commercial paper is looking for a risk-free place to park money for a few days or months. He has neither the time, nor the resources, nor the incentive to devote hours of study to get up to speed about a particular SIV with an ever-changing investment portfolio.
Even if he got to the point when he understood the inner mechanics of an SIV, he would still have a hard time getting comfortable with the idea that the structure was as good as a 100% liquidity backstop. At the end of the day, a manager of a money market fund does not want to hear some long elaborate story about why a particular bond portfolio may be safer than Exxon. It's just not worth his trouble when he's getting paid, at best, a few basis points above the fed funds rate.
Plenty of evidence says that SIV investors had no idea what they were buying. SIV paper commanded no pricing premium, recalls Tabe. "Many people within major institutions, some of them sponsors, some of them investors in large volumes of the product, rating agencies, many of them just did not know what SIVs were," he says, referring to people directly affected by the SIVs' liquidity crises. "When it was time to take decisive action, [in late summer 2007], the people who could do that just didn't have the information. People who could do that at all the various institutions were trying to figure out what these vehicles were as they collapsed."
They were probably trying to recover from the shock of learning that did not have a 100% liquidity backup.
Out of $395 billion worth of SIVs, $25 billion, less than 8%, were called SIV-Lites. Regular SIVs held a mix of different types of bonds--issued by financial institutions and some structured deals--whereas Golden Key, Mainsail and the other SIV-Lites were comprised almost entirely of highly-rated mortgage bonds and CDOs.
Ratings Based On "Market Prices"
According to the rating agencies, each SIV portfolio took a daily measure of the safety of its bonds, based on individual credit ratings and individual "market values." In a deposition, David Rosa, who rated SIVs for Moody's in London, explained the rating agency's thinking. " Our analysis takes into consideration the market value of the [mortgage] securities and it takes into consideration partly as well the ratings of those securities," he said. "So to the extent that all this detail is considered by the market to be relevant, that will immediately be reflected in the market value, which we are monitoring." [Emphasis added.]
Really? This can be accurately measured on a daily basis? Exactly how could that be done? There may be a common belief that most mortgage bonds were actively traded in a secondary market, as if they were equity shares on the New York Stock Exchange. In fact, only a few people, including the rating agencies, had access to information refuting that notion. The "real" trading appears to have been nominal. And opaque over-the-counter markets are subject to zero protections against market manipulation.
The truth was that more than 70% of subprime bonds rated double-A and below were stuffed into CDOs, as the Philadelphia Fed learned years after the crisis. These bonds were never actively traded. In addition, plenty of triple-A and double-A subprime bonds were stuffed into SIVs.
So bonds were bought to be warehoused prior to launch of a newly rated CDO, but secondary cash trades appear to have been nominal. Since the most senior triple-A tranches had average lives below one year, they tended to disappear quickly, which is why Fannie and Freddie bought so many triple-A tranches without increasing their year-end balances. Finally, each securitization tranche is both unique, (about 14 tranches to a single deal), and small, usually well under $100 million.
Access to trading numbers is limited, but Goldman's trading activity, begrudgingly and selectively disclosed to the FCIC, offers some indication of what was going on
During
the months leading up to the panic, Goldman's about 10% of trading volume, was
for cash bonds, and only a small fraction of those bonds were rated double-A.
For instance, out of 1100 trades executed by Goldman in May 2007, only 8
trades, totaling $90 million, were for cash bonds rated double-A.
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