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August 16, 2007

Redemption

-- by Dave Johnson

Redemption has a different meaning to stock traders. Redemption is when people ask for their money out of a mutual or money-market fund. The fund managers have to pay with cash.

So the question is, do they have the cash to pay the people who are asking for their money?

If they do not have enough cash on hand, and the "credit crunch" makes it difficult to borrow to pay off redemption requests, they need to get the cash by selling something. Today they are selling stocks, gold, any asset they can. This causes prices to drop.

Suddenly everyone wants their money. People are taking their money out of mutual funds. Stockbrokers are issuing margin calls. Lenders of all types are worried and are starting to take a close look at the ability of their borrowers to make their payments. And few are willing to make new loans, because the value of the assets that are used as collateral is suddenly not what everyone thought it was.

Posted by Dave Johnson at August 16, 2007 10:42 AM

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Comments

Dave,

Sentinel Management Group, which halted redemptions a few days ago, just today filed for Chapter 11 bankrupcy. There's a story at:

http://today.reuters.com/news/articleinvesting.aspx?type=fundsFundsNews&storyID=2007-08-18T041621Z_01_N18227362_RTRIDST_0_SENTINEL-BANKRUPTCY-UPDATE-1.XML

Keep up the good work - Mike

Posted by: Michael David Crawford [TypeKey Profile Page] at August 17, 2007 9:50 PM

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