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Post by jeffolie on Aug 13, 2007 18:58:09 GMT -6
ABCP (asset-backed commercial paper) With some of these ABCP conduits, a certain opaque nature exists surrounding the nonstandard methods of reporting or the standard definitions of certain asset types. So, one's not always sure exactly what type of collateral exists inside the conduit. "ABCP has grown very dramatically in the past 15 years or so, and no investor has ever lost money. Hopefully, cool heads will prevail, as most money-market funds hold 50% to 75% ABCP, and banks or financial institutions are obligated to support nondefaulted -- and in some cases even defaulted -- assets in the conduits. So, implications for the financial system are large." Money-market dark matter? The moral of the story? As we get further down the road, I think we'll discover that some money-market funds owned commercial paper issued by a conduit whose assets may not be up to snuff. So folks with a lot of assets in money-market funds might want to double-check that they know what's in them. Bottom line: The upcoming weeks should be pregnant with indications of more trouble throughout the whole financial-engineering world. More than a few outfits may discover that the triple-A pieces of paper they thought were worth 100 cents on the dollar are worth only, say, something in the 70s. That will make for a lot of heartache. articles.moneycentral.msn.com/Investing/ContrarianChronicles/CreditProblemsAreTooBigForTheFedsToFix.aspx?page=2If money market funds break the $1 mark then the liquidity will drain superfast. This could spiral out of control a lot faster than I guessed as next summer.
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Post by jeffolie on Aug 14, 2007 11:54:18 GMT -6
Sentinel Management Group asks to Halt Money Market Redemptions UPDATE: This is a weird twist. In the letter below, Sentinel wrote: We contacted the CFTC today and asked for their permission to halt redemptions until we can honor them in an orderly fashion. From Reuters: US CFTC says it can't halt Sentinel's redemptions The U.S. Commodity Futures Trading Commission has no authority to grant Sentinel Management Group's request to halt client redemptions, an agency official said on Tuesday. "The CFTC has no authority in this area," the CFTC official, who asked not to be identified, told Reuters. "This isn't something we do. "We have no role in whether or not the company does this and whether the client accepts it," the official said. Back to the original post: via Briefing.com: (hat tip Lance McDude) CNBC reported that Sentinel Management Group has asked permission from the CFTC to halt money market redemptions. Sentinel's inability to meet significant redemption requests has exacerbated the liquidity concerns that have led many to believe a real credit crunch is forthcoming. Sentinel Letter from the Street.com: As you undoubtedly know, the credit markets, along with most other markets, have experienced a liquidity crisis in the past several weeks. Investor fear has overtaken reason and has induced a period in which most securities have simply ceased to trade. Wefve all read the stories about one hedge fund or another suffering losses related to subprime exposure and closing down or being rescued. This fear, while warranted in some cases, has spilled over into the rest of the credit market and liquidity has dried up all over the street. In addition, investment banks and securities firms are stuck with LBO deals theyfve already entered into but cannot find buyers for the bonds so must inventory them themselves. This liquidity crisis has caused bids to disappear from the market and makes it virtually impossible to properly price securities or to trade them. High grade securities are trading like junk bonds as panicked investors dump names like General Electric at Tyco]like prices. We have carefully monitored this situation for the past several weeks and have met regularly to discuss the potential impact it may have on our clients. We had previously thought that the market would return to some semblance of order and that our clients would not join in the panic. Unfortunately, this has not been the case. We are concerned that we cannot meet any significant redemption requests without selling securities at deep discounts to their fair value and therefore causing unnecessary losses to our clients. We contacted the CFTC today and asked for their permission to halt redemptions until we can honor them in an orderly fashion. Sentinel has always sought to protect your interests and since our inception in 1980, we have never experienced a situation quite like this one. We will continue to monitor the markets and we will raise cash as opportunities present themselves. We understand that this will obviously cause inconveniences on your part however, at present, we do not see an alternative and we donft believe it is in anyonefs best interest if a run on Sentinel took place and we were in a forced liquidation mode. We value your trust in us these past 28 years and this has been a very difficult decision for us and we understand the implications of this decision both on you and on Sentinel. We feel, however, that this is the best way to assure you the best possible value on your investment. We will remain in contact with you and update you as things progress calculatedrisk.blogspot.com/2007/08/sentinel-management-group-asks-to-halt.html
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Post by jeffolie on Aug 14, 2007 11:54:59 GMT -6
Money Markets Halting Redemptions Tuesday, August 14, 2007 | 10:13 AM in Credit | Markets | Psychology/Sentiment via the always astute Doug Kass, we must point you to this simply unbelievable document . . . from Sentinel Management Group. That's right, some Money Markets -- safe as cash, totally liquid -- are halting redemptions. Note: there is a big difference between Money Market Funds, and "enhanced" Money Market Mutual Funds -- namely, whether or not they are FDIC guaranteed to $100k. bigpicture.typepad.com/
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Post by beachbumbob on Aug 14, 2007 12:55:57 GMT -6
closing the lid on redemptions will accelerate the run
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Post by unlawflcombatnt on Aug 14, 2007 14:43:11 GMT -6
Money Markets Halting Redemptions....we must point you to this simply unbelievable document . . . from Sentinel Management Group. That's right, some Money Markets -- safe as cash, totally liquid -- are halting redemptions. Note: there is a big difference between Money Market Funds, and "enhanced" Money Market Mutual Funds -- namely, whether or not they are FDIC guaranteed to $100k. bigpicture.typepad.com/I know people who thought they were in a money market, since they specifically asked their broker to put them in one, only to find out that they are in a money market "substitute." This is outright, blatant fraud. If a pension holder or IRA holder specifically requests that their money be put in a money market, the placement of their money in a money market "substitute" is criminal fraud. The following article from Morningstar.com sheds some light on the problem: 'Money Market Substitutes' Get Hit by Subprime WoesBy Russel Kinnel 8/13/07 " So much for money market substitutes. There have been a number of articles over the years about using short- or ultrashort-term bonds as money market substitutes. Yields on money market funds are typically low so it's understandable that you might want to boost income by moving to ultrashort- or short-term bond funds, which sometimes have a higher yield.
However, the subprime mess may forever dispel investors of that notion. Ultrashort is supposed to be the most conservative, low-risk bond fund around, yet a number of funds are in the red for the trailing four months and even the year. Consider that ultrashort has been about the worst place to be for the past four weeks. Through Friday, the average ultrashort fund is down 0.36%, versus gains of 0.37% for short-term bond funds, 0.37% for intermediate, and 0.16% for long bond funds. Only high-yield, emerging markets, and bank-loan funds have fared worse.
The category truly has the lowest risk when it comes to interest-rate risk as its funds have the lowest duration of any taxable funds around. We define ultrashort bond funds as those with durations of less than a year. Because they are naturally owned by investors with pretty short-time horizons most of the funds don't take on much credit risk. However, ultrashort bond funds are allowed to take on more credit risk than money market funds, and some do so. Moreover much of the subprime bonds these funds own are actually rated AA or AAA, so the risks didn't seem like all that much until now...." So a IRA/401K holder who has specifically requested putting their money in a money market fund, may find that they've been put in a much riskier money market fund substitute, with a description from the broker (buried in pages of "investment-ese" jargon), that they are in a fund that is "designed to mimic the performance of a money market." This, despite their being told that "Yes, your money is in a money market fund." This is absolute CRIMINAL fraud, which should be prosecuted to the fullest extent of the law. And, should the duped 401K holder lose their money, the money should be taken from the personal assets of the dishonest broker AND/OR the firm. And this re-reimbursement of the duped 401K holder should not be block-able by bankruptcy protection of either the firm or the broker. We need a new, accelerated prison-building project, for the flood of white collar criminals who'll be needing them.
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Post by unlawflcombatnt on Aug 14, 2007 15:04:40 GMT -6
I just thought I'd quote the end of the above referenced article, for some additional information: " In 2002, we saw something somewhat similar when markets got panicky about corporate bonds and funds that seemed pretty conservative got tagged. To be sure ultrashort fared much better then, but there were funds such as MetWest Low Duration (MWLDX) that got stung.... Some subprime debt has quite rightly been punished but it's hard to say if the higher end will rebound--not to mention a wide variety of bonds that have been hurt by the drop in liquidity and follow-on effects from subprime even though they aren't subprime or even mortgage-related in some cases....." So the decline of "liquidity" will also affect bonds that have nothing whatsoever to do with subprime or mortgages, except for the fact that they are managed/owned by a firm that also deals in subprimes. Lovely. I'm sure glad the subprime carnage isn't "spreading."
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