In August I posted on the danger that subprime mortgages pose to people who invest in money market funds. Today, the New York Times reports that several such funds have invested in commercial paper (CP) issued by Structured Investment Vehicles (SIVs) backed by subprime mortgage-backed securities (MBSs). I think all money market funds should start a public information campaign to let people know if they have the SIV virus and if so, what they're doing to protect their customers from it.

Earlier, I posted on all the new vocabulary words I've learned in the last year thanks to the subprime mortgage meltdown. This $1.3 trillion market consists of mortgages to people who can't afford to repay in many cases. Forty seven percent of the loans were made without documentation of the borrower's income -- these are known as liar loans. The subprime mortgages were packaged as MBSs and among the buyers were SIVs -- off-balance sheet entities that use a bank's good credit rating to issue CP to invest in MBSs.

Thanks to the subprime mortgage meltdown, the CP is not worth as much as before so the money market funds that bought it are now forced to break the $1 per share constant value or put money into the fund to make up for the lost value. So far, analysts say that most SIV securities are trading at 97 to 98 cents on the dollar. But if more SIVs are forced to unwind, the resulting fire sale would put pressure on prices.

The New York Times reports that the recently announced Super SIV plan to buy out Structured Investment Vehicles (SIV) is a thinly disguised effort to bail Citigroup (NYSE: C) out of these poorly constructed off-balance sheet obligations (remember Enron?). It looks to me like the law of large borrowers is drawing the government in to delay Wall Street's inevitable reckoning for the subprime meltdown.

What is the law of large borrowers? If you borrow $100,000 from a bank and you can't pay it back, that's your problem. But if you borrow $5 billion and can't find the scratch, it's the bank's problem. How does this apply to Citigroup?

Citigroup is the biggest sponsor of SIVs, and now that nobody wants to buy the subprime mortgage-backed securities (MBSs) backing the SIV's Commercial Paper (CP), Citigroup can't afford to write down its capital to account accurately for the loss it faces when it is forced to buy back its deeply underwater SIVs.