Yes, it is still liquidity

Today's FT discusses the current problems for SIVs and conduits and identifies two main ones:

They have been hurt as funding in short-term debt markets has seized up.

Simultaneously, the values in the kinds of assets they hold have fallen as investors deserted all asset-backed bonds in repsonse to fears of contagion from the US subprime mortgage markets.

Now the killer punch:

Analysts at Moody’s said during an investor call on Tuesday that the funding problem was by far the most serious for most vehicles.

“The ongoing liquidity crisis has deepened and broadened since . . . July,” said Paul Kerlogue, senior credit officer for SIVs at the agency.

“Vehicles that fund [by means of] the issuance of commercial paper have found financing either impossible or achievable only at exorbitant levels.”

There are three ways out of this. Default; pay up for CP at current levels and hope you don't run out of cash to pay spread before the ABCP crisis ends; or deleverage. Your asset quality effects which of these alternatives are available to you but it doesn't change your exposure: even if your assets and capital structure mean that your debt should still be AAA, you nevertheless still have a problem. And it is going to get worse, at least for a while. There are tens of billions of dollars of ABCP due to expire in the next ten days, and even more falls off next month. Some of that will be financed in the short term via backup CP lines with banks, but that will just force the 3m swap spread out further and the ABCP market is likely to become even more arid. The key to understanding the current crisis is the liquidity market.