GLOSSARY OF TERMS
The current economic crisis has brought these esoteric terms into mainstream conversation.
| TERMS | | Special Purpose Vehicle | | |
Special Purpose Vehicles (SPV), now pervasive in the financial world, are essentially shell companies that have no employees, no physical location, make no relevant business decisions and are not liable for bankruptcy. Their sole function is to keep risky business deals, such asMortgage-Backed Securities (MBS), from showing up on corporate balance sheets.
SPVs played a large role in the current financial crisis. Banks set up SPVs in offshore tax havens such as the Cayman Islands. As separate entities, the SPVs bought the loans from the banks and began to receive the income from the loan. Many of the loans were toxic MBS. As the bank no longer owned the loans, its reserves were freed up for more investment. When those investments included more MBS that were subsequently moved to the SPVs, it set up a precarious situation.
SPVs were able to buy the MBS by issuing bonds. These bonds gave investors the right to the income from the loan or other asset owned by the SPV. But when the housing crisis hit and the value of MBS fell, it set off a chain reaction that brought down investment banks and other major financial institutions.
SeeMortgage-Backed Security.
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