O.C. debt securities under scrutiny are 'structured investment vehicles'

The debt securities under scrutiny in Orange County's investment pool were issued by so-called structured investment vehicles, or SIVs -- typically bank-managed funds that borrow using short-term IOUs to buy longer-term assets, such as bonds backed by mortgages or credit card debt.

As mortgage defaults have surged this year, Wall Street has become fearful that SIV funds could face losses that would leave them unable to repay their IOUs. That has soured investors on all types of SIV debt, even if the securities are backed by relatively high-quality assets.

Although most of these IOUs continue to pay interest to their investors, the market value of the securities has fallen. That raises the risk of loss if the investors decide to sell the IOUs before they mature.

Investors were drawn to SIV debt by the attractive interest rates they offered, generally annualized returns of 5% to 6%.

Besides Orange County, state-run cash pools in Connecticut, Florida and Montana, as well as some money market mutual funds, have been rocked by fears over SIV debt in their portfolios.

tom.petruno@latimes.com