How a subprime loan becomes a SIV

A borrower with a risky credit profile takes out a subprime mortgage, which along with others are sold and repackaged into an investment pool that issues mortgage-backed securities.

A collection of those securities are grouped together, creating what’s known as collateralized debt obligations (CDOs).

A bank forms an offshore entity that sells shares to investors. That “structured investment vehicle” allows the bank to keep the risk off its books and collect fees in return.

That vehicle issues short-term debt, which it uses to buy higher-yielding CDOs and other mortgage securities—making a profit on the difference between the yields on the two.