If things looked bad for Citigroup last night, they could be about to get worse.

The Securities and Exchange Commission, the US financial regulator, is understood to be conducting an investigation into Citigroup’s accounting of its use of structured investment vehicles, or SIVs.

One source described the investigation as a “routine look” at the business by the SEC’s corporation finance division. But depending on what it finds, the investigation could be passed on to the regulator’s powerful enforcement division.

Under Chuck Prince, Citigroup built up assets worth about $80 billion (£38 billion) in SIVs with names such as Beta, Centauri and Dorada. SIVs allowed the US banking giant to use the short-term commercial paper (CP) market to raise money to back long-term investments, such as mortgages.

Little was known about SIVs before this summer’s credit crisis, mostly because they were not held on balance sheets and were never declared. They were like a black hole, with no regulatory reports or SEC filings.

In total they held about $400 billion of assets and were categorised in a league of their own, as “bankruptcy remote vehicles”, which the banks had no fiduciary duty to disclose and no contractual obligation to support.

But as investors panicked over US sub-prime mortgages, it became clear that SIVs – and an even riskier variant known as SIV-lites – were about to create a severe headache for Wall Street.

When investors began fearing SIVs were packed with dodgy paper tied to the sub-prime market, the financing to fund them dried up.

For Citigroup, $6.5 billion of sub-prime writedowns and related losses pushed America’s largest bank by assets to post its biggest profit decline in three years and the stock is down more than 31 per cent since the beginning of the year.

It is believed that Citigroup may report further losses on Monday, reflecting continued declines in the value of some mortgage-linked securities since the end of the third quarter.

The aftermath of the SIV debacle has left a handful of banks, led by Citigroup and with the support of Henry Paulson’s Treasury, scrambling to patch together a bailout fund to buy assets from the off-balance sheet vehicles. But progress has been slow.

A spokeswoman for the bank said: “Citigroup is confident in its SIV accounting. It is proper and in thorough accordance with all applicable rules and regulations.”

But just a few weeks ago, its top ranking executives were insisting Mr Prince’s job wasn’t in jeopardy.

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