The SIV Crisis in a Nutshell
Structured Investment Vehicles are funds that use short term debt to make long term investments, then use the interest rate difference (or "spread") to make a profit for the fund. The short term debt is largely in the form of commrcial paper (CP), a short term funding source for large organizations. The fund issues the commercial paper, then buys long term bonds and mortgage backed securites (which pay a higher rate).
As the 2007 sub-prime crisis grew, investors in commercial paper were reluctant to fund the SIV's, which held substantial mortgage backed securities- even though the SIV's claimed they had very little sub-pime exposure. An illiquidity crisis occured (i.e., the SIV's could not replenish their need for short term securities). This is the genesis of the current SIV crisis.
In December 2007, the US government proposed a $100 billion "Super-SIV" fund to help rescue the "good" SIV paper. They looked to private banks to fund the Super SIV fund.
The SIVs are tumbling right now. BofA 95% net loss last quarter. Sun Trust 99%. And the bubble is estimated to be at its peak this quarter! We are talking $100s of billions of dollars- much of it linked to mortgage backed securities.