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February 18, 2008

Get Out Of Money-Market Funds

-- by Dave Johnson

"Suspended Redemptions."

Yes, I have been harping on this, but once again: if you have money in a money-market fund, transfer it to an insured bank account.

This is not about a money-market fund, but it shows what is happening in the financial markets. This could happen to your money, too. (I actually know someone who has lost a bundle in a hedge fund.)

Citigroup Stops Withdrawals from Hedge Fund: WSJ,

Citigroup has barred investors in one of its hedge funds from withdrawing their money, and a new leveraged fund lost 52 percent in its first three months, the Wall Street Journal reported Friday.

The largest U.S. bank suspended redemptions in CSO Partners, a fund specializing in corporate debt, after investors tried to pull more than 30 percent of its roughly $500 million of assets, the newspaper said. Citigroup injected $100 million to stabilize the fund, which lost 10.9 percent last year, the newspaper said.

What does this mean? It means that people who parked money in this fund can not take money out, and are likely to lose much of it -- even after Citigroup pumped $100 million of their own money in to try and save it. This has been happening to other hedge funds as well.

If you are getting a "good rate" on your money right now, you should be worried. There is a reason they say "risk equals return." That means that you have to take greater ricks to get a higher return. Banks are paying squat right now, but what rate of return is worth losing all of your money? This is not a low or moderate risk environment. This is a time of very high risk. People and companies are defaulting on their loans left and right. Put your money somewhere safe and insured right now. Pay off your debts. Tie down your finances because the storm approaches.

Did I say "insured"? I mean Federally insured. And that means a bank. Period.

If I'm wrong and you do this, what do you lose? A little bit of higher interest. If I'm right and you do this, what do you NOT lose? Everything.

(Through Atrios)

Posted by Dave Johnson at February 18, 2008 11:47 AM

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Comments

We shall see. You should remember that if a money market fund gets into trouble, that does not mean you will lose your entire investment. Money market funds have a share price. That price is engineered to be $1.00 in normal times (they pay out whatever dividends are necessary to keep the price at $1). If there's really trouble, then the fund will "break the buck" and the price of a share will dip below $1.

I have not heard of this happening yet, and we're at least a year into the credit crisis. If this happens to even one fund, it will make the news. There are thousands of funds out there. It seems to me that the money markets are holding up pretty well because there hasn't been one reported case (that I've heard of) yet.

Even if it does happen, the price of the fund that gets into trouble is likely to dip to $.95 or something like that. It's not like you lose everything.

Posted by: Jay Muntz [TypeKey Profile Page] at February 18, 2008 6:52 PM

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