Structured Investment Vehicles

i. In the beginning was the natural object. Classical exchange involves the conversion of a natural object into a commodity. Generic finance creates an asset from the commodity. And synthetic finance is the virtual replication of the generic asset –we have seen that in synthetic exchange we repeat the asset, but in the course of its repetition a new difference is produced. Structured synthetic finance, then, is the process by which a synthetic asset is transmuted into a security: the securitized asset has been divided, but in the course of its division it now changes in kind.

Securitization, whether cash or synthetic, involves the pooling (de-differentiating) and tranching (re-differentiation) of the risks and cash flow of the assets involved, and their subsequent redistribution in the form of the new securities that result. The vehicle used to accomplish this process is either a special purpose vehicle (SPV) or a structured investment vehicle (SIV).

Our ultimate concern here is with SIVs. However, because SPVs are the vehicular predecessors to SIVs, it is worth first observing their form and function in structured finance.

When financial assets are structured, any number of assets are pooled, packaged, and sold by their owner to a SPV: this vehicle is a shell of a company, or corporation, specially created by its originator for the purposes of structuring the assets, thereby recreating them anew as asset-backed securities, and issuing notes on these new securities to fund the operation. This means that the SPV purchases, pools, and tranches the assets, which in their new form (i.e. as securities) are ‘backed’ by their cash flow. Such asset-backed cash flows are sold as securities to investors, and are therefore called ‘asset-backed securities’ (ABS).[1]

Because the SPV, like all such vehicles, is a technology for creating securities from assets, it earns a fee for its labor; but to be clear, it is otherwise not a party to the structured financial exchange: the underlying assets from which the cash flows of the securities derive are technically owned by the investors –although this is already somewhat difficult to say, given that the materiality of the assets are no longer individuated assets, but have metamorphosed into securities, and all cash flows from the assets have now been divided into securitized cash flows, whose guarantee has taken the form of notes; and all cash flows ‘pass through’ the SPV on to the investors, according to the Tranche, its agreed to terms of yield, level of subordination, etc. to which their note is linked.

The SPV, then, acts as a master conduit, a vacuous assemblage, or rhizome through which cash flows –it is a hollowed substance, a kind of body without organs, whose role is to buy or replicate financial assets, turn such assets into securities, sell these securities to investors, and then pass this cash flow through itself and on to the originator. And then again, throughout the tenure of the structured financial transaction, it passes the cash flows from the asset-backed securities on through itself, but this time to the investors.

For this reason, we see and say that the SPV is a ‘pass-through’ vehicle. Moreover, it is bankruptcy remote, it has no legal right to any principal cash flow, and the whole of its life is limited to the transaction for which it has been exclusively brought into being: when its purpose has been accomplished, the SPV is not so much ‘killed’ or ‘put down’, as it now simply ceases to exist.

The historical development of structured finance involves the concomitant differentiation of SIVs from out of SPVs.

SIVs are just like SPVs in all aforementioned form and function, as outlined above. However, there is one dispositive ontological difference: rather than selling notes to investors that are directly tied to the cash flows from ABS, the SIV sells notes tied to the cash flow derived from the SIV itself.

In the case of an SPV, the structuring vehicle sells notes as a way of funding the purchase of assets and their subsequent transmutation into securities. This means that by buying the notes backed by the cash flows of the securities, investors are simulating property-ownership of the assets, insofar as the SPV ‘passes’ the cash flow from the securitized assets ‘through’ itself and on to investors. However, the SIV sells notes to investors to fund its purchase and holding of the assets that it transmutes into securities. This means that investors are buying notes backed by the cash flow derived from the SIV, and the SIV is simulating property-ownership of the assets, insofar as the SIV funds its notes payments to investors from the cash flowing to itself from the securitized assets –and so now the notional value of the notes are linked to itself, not to cash flow derived from the value of the securities. This makes the SIV itself an asset-backed security,

For this reason, we see and say that the SIV is a ‘pay-through’ vehicle. Moreover, this vehicle is not only bankruptcy remote, and not only has no legal right to any principal cash flow, but by virtue of its rhizomatic and non-substantive substance, it is a vehicle for the abolition of private property. Like the SPV, the whole of the life of the SIV is limited to the transaction for which it has been exclusively brought into being: when its purpose has been accomplished, the SIV is not so much ‘killed’ or ‘put down’, as it now simply ceases to exist.

ii. Let us reflect on the ontology of the SIV. There are three points to make, briefly.

First, we again observe a particular instance of relaxation on an invariance requirement, as part of the trend we have generally witnessed throughout our examination of the ontology of synthetic finance. In this case, we see that the requirement on the collinearity of ratios of value has been loosened.

In any instance of either a classical exchange or a generic financial exchange there is an absolute invariance on the collinearity of ratios of value. Whether it’s a matter of buying and receiving $100 worth of a classical object, or buying and receiving the yield on $100 worth of a generic financial asset; in every instance the achievement of symmetry, and therefore the terms of the transaction, are predicated on a requirement that the notional value of the referent and the notional value of its cash flow should be absolute, invariant, i.e. that their ratios will not curve, bend, splinter, twist, or warp over the tenure of the exchange. There is an invariance requirement on the property of the ratio of value –and is one that initially carries over into a structured financial exchange, but now over time, and especially with the transition from an SPV to the SIV, has been progressively loosened. How so?

We will notice that in an SPV-administered structured financial exchange, there is a total notional value to the reference portfolio, whose risks and cash flows have been securitized; and when the SPV sells the notes to investors, they also have a total notional value, whose risks and cash flows have been divided into Tranches –but at any rate, the terms of the exchange intend to align these two notional values, as if they were a pair of parallel lines, whose equidistant alignment will not curve or bend or twist or warp over the tenure of the exchange.

However, with an SIV-administered structured financial exchange, and in particular, with the transition from the structuring vehicle acting as a pass-through to now a pay-through vehicle, this invariance requirement on the ratios of value is loosened. Again, we see that there is a total notional value to the to the reference portfolio, whose risks and cash flows have been securitized; and again, when the SIV sells the notes to investors, they also have a total notional value, whose risks and cash flows have been divided into Tranches –but in this case, the terms of the exchange do not align these two notional values, their ratios need not be arranged as parallel lines, their notional values may curve, bend, splinter, twist, or warp over the tenure of the exchange. For this reason we will observe that the structured synthetic financial exchange which utilizes a SIV involves a loosened invariance requirement on the collinearity of ratios on notional values, and therefore has yet a higher degree of symmetry than the aforementioned-like generic and synthetic versions of structured finance.

Secondly, as we saw already in our consideration of CLNs (Note 5), we should not underestimate the profound material capacity of synthetic exchange to create new assets, with new and novel sets of economic properties –synthetically created, yes, but created anew nonetheless. The SIV shows us this once again. How so?

We know from our example, that the reference portfolio in the structured financial transaction is composed of credit derivatives, and is therefore ostensibly a synthetic replication of a generic financial exchange. Likewise, we have seen that the parties to the transaction are synthetic lenders and creditors, or sometimes both (see Note 7), depending on the arrangement of varieties of synthetic obligations, their spatiotemporal order of risks, and spatiotemporal order of payments. But now, with a SIV, we see that the CLN investor has also entered into a generic financial exchange with the SIV –which is itself virtual and non-substantive, but for all that no less a real entity. This means that the credit linked note itself is both a synthetic and generic financial asset –but that also, quite unexpectedly, it is an asset whose status as a generic financial asset was only brought into being only by virtue of first being a synthetic asset. In other words, in a structured financial transaction that uses SIVs to distribute CLNs, we are able to derive the generic asset from the synthetic exchange, rather than vice versa, and that therefore not only does a synthetic exchange exhibit a higher degree of symmetry, but it also now proves both a more original and more fungible way of creating financial assets –and ex nihilo at that.

Thirdly, then, must be our Deleuzian question as we move forward –insofar as it is a question about the rhizomatic-character, the n-dimensional multiplicity of a SIV.

SIVs, like all such vehicles, (a) have no past and no future, insofar as they are convoked into being for the purposes of the transaction at hand, and when once completed are wound down; (b) are discrete and limited, in that they are prohibited from carrying on any other business not germane to the transaction; (c) are nominal and independent orphans, for their shares are public charity, they are bankruptcy remote, cannot be consolidated by any company or individual, and are not a subsidiary of their originator; and (d) are therefore non-substantive shells, i.e. a ‘filling’ of cash flow constantly passes through them, yet there is no essence of filling inside.

For this reason, in the future we will turn to Deleuze –for why he calls this kind of vehicle a body without organs, and shows that this is much more than simply a fun metaphor describing its ontological makeup. Indeed, we wish to know what, if any, is the historical-materialist meaning of this movement from a tree-like structure to the distribution of flows of finance-capital, which has dominated the structure to intermediation for so long, but is now an increasingly rhizomatic, non-substantive, dynamical structure? This is a future question to be more thoroughly asked and addressed by speculative materialism.


[1] ABS is the general term used to denote any variety of securitized generic financial assets, whether based on mortgages (MBSs), collateralized commercial loans (CLOs), collateralized corporate bonds (CBOs), collateralized insurance obligations (CIOs), and so on.

 

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