From www.ftalphaville.com Policymakers and investors have been obsessed in recent years about the potential for a hedge fund collapse to spread financial panic. But it seems one of the biggest threats to stability stems from the age-old risk of short-term borrowing to fund investments in illiquid long-term products, notes Gillian Tett and the FTâs capital markets team in a Monday article. In a comparatively obscure corner of the market, regulators are scrambling to understand what is happening in structured investment vehicles (SIVs), a breed of often huge, mainly bank-run, programmes de_signed to profit from the difference between short-term borrowing rates and longer-term returns from structured product investments. SIVs have proliferated in recent years and control assets worth hundreds of billions of dollars.  Depending on whether they are fully rated by credit rating agencies and on how strictly they have to conform to certain rules, they are known as SIVs, SIV-lites, or conduits. They are typically quite opaque, invest in complex securities and often do not need to be displayed on a bankâs balance sheet. Pointing to a âmini-crisisâ in the commercial paper market, Robert McAdie, global head of credit strategy at Barclays told the FT that âat least halfâ of the crisis is related to the SIV conduits. These programmes typically invest in credit market instruments, such as US subprime mortgage-backed bonds and CDOs. The profit for those who run such programmes comes from the fact that the assets pay fairly high yields, while the conduits and SIVs fund their purchases with short-term borrowings in which interest and principal payments are backed by financial assets that are deemed to have stable cash flow. Collectively this so-called âasset-backed commercial paperâ â or ABCP â lasts for anything between a few days and a few months before needing to be refunded, the article says. With billions of dollars of ABCP set to mature on Monday and on Wednesday, there is great un_certainty as to whether this can be refinanced. In the case of a blip in the market, SIVs and conduits are supported by liquidity facilities from highly rated, mainstream banks - meaning the banks must step in if the SIV cannot raise commercial paper in the normal way, unless the SIVsâ assets suffer significant ratings downgrades. Typically, the credit line provided by the sponsoring bank and a group of others in a syndicate must cover 100 per cent of outstanding commercial paper, the FT article says.These funding lines have rarely been drawn in recent years, due to abundant liquidity in the ABCP market. As recently as mid-June, the European commercial paper market was seeing records levels of issuance. However, amid last weekâs turmoil â and the dramatic intervention by central banks â some investors in the ABCP market started worrying about whether SIVs were also sitting on losses. The rush to sell structured products by hedge funds facing redemptions and other investors meant those market values that could be ascertained were being marked down heavily. As a result, by mid-July some investors decided to stop buying ABCP paper from SIVs suspected of subprime exposure. The German bank IKB was an early victim. By early August, the problems in the ABCP market had become so serious that some European banks were preparing for additional calls on credit lines to SIVs. But the banks are also grappling with a backlog of unsold leveraged loans, which is placing additional pressure on their balance sheets, notes the article.When some European banks â and a few US institutions as well â quietly started trying to raise new credit lines themselves early this month, it triggered additional alarm, as rumours spread about the potential losses at SIVs â on top of other problems roiling the financial world. Consequently, by mid-last week, some banks started shutting credit lines to a sweeping list of institutions. âCommercial paper is now being funded on an overnight basis. The banks will not roll paper for three months,â Dominic Konstam, head of interest rate strategy for Credit Suisse, told the FT. And while it seems that European financial institutions were particular victims of this credit squeeze, the problems were extreme in US markets, as SIVs typically raise a large proportion of their finance in dollars. Policymakers hope that some of this panic will dissipate this week following the massive emergency injections of liquidity by the ECB and the Fed. And indeed, by the end of last week there were signs vulture funds were circling, ready to pick up ABCP paper at bargain prices. âWhat some people are hoping is that the bottom fishers will appear and help the market self-correct,â says one big ABCP issuer. However, nobody close to this sector expects to see a quick solution soon. Commercial paper interest rates have not yet fallen, irrespective  of  central  banksâ actions. In New York on Friday, they closed at their highest level for six years. There is deep uncertain_ty about what the central banks will do next â making ABCP players even more reluc_tant to start issuing and trading again. âNobody is going to handle commercial paper if they think the Fed could be about to cut rates or do some_thing else completely unexpected overnight,â explains one. However, concludes the article, most pernicious problem is that âit is becoming clear central banks cannot resolve the biggest problem â a lack of clarity about valuations in structured credit markets and the almost complete loss of confidence that is infecting even the biggest and most diversified of conduit-type programmesâ.