How many degrees of separation between this and a ponzy scheme?

"In the last few weeks, turmoil in the market for asset-backed commercial paper -- a type of short-term loan secured by mortgage and credit-card debt -- has forced bailouts at two German banks, sparked fears of losses at Barclays and driven a further Europe-wide slump in banking stocks.

"The problems for these banks are linked to so-called conduits and structured investment vehicles (SIVs), which in essence borrow money at low interest rates to invest in pools of debt that offer a higher return.

"What's more, banks that set up the vehicles don't have to include them on the balance sheet, meaning more money can be loaned elsewhere.

"The use of SIVs and conduits has rocketed in recent years -- with the European asset-backed commercial paper market now worth around 550 billion euros ($748 billion), up from under 50 billion euros in 1998.

"While the credit markets prospered, conduits and similarly structured SIVs, known as SIV-lites, were a money-spinning operation. Money was borrowed by issuing commercial paper.

Commercial paper, however, generally matures after only a month or two. That meant the conduits had to continually issue more paper in order to pay off earlier debts.

"And that's where the wheels have come off.

"'Very quickly the conduits can run into liquidity issues as cash is withdrawn faster than assets in the conduit can be sold,' said UBS analyst Stephen Andrews in a note to clients.

European banks battle short-term loan crunch by Simon Kennedy




Follow-through:

Greed & Fear marvels at the wilful blindness of stock market investors and looks to the great unwind of structured finance.

More and more banks are being forced to admit to having set up special investment vehicles, or “conduits”, off-balance sheet, he notes. “A lot of dodgy securitised debt is now being put back to them,” he says, advising investors to “fundamentally underweight all the financial plays globally that have been making their money in this fashion”. The main risk in this stance is an escalating moral hazard generated by central-bank actions, he adds.

(See, Legacy of the Greenspan Put)