Wednesday, August 15, 2007

Money markets latest to catch the subprime bug

Even though money market accounts are supposed to be “safe” investments, it looks like at least one got tempted to dip its hand into the subprime cookie jar:

Sentinel Management Group asked the Commodity Futures Trading Commission to help it stop Sentinel's investors from withdrawing their money, according to CNBC. Sentinel doesn't manage money funds for retail investors. Rather, it helps commodity trading firms and hedge funds invest the cash they accumulate in short-term, interest-bearing vehicles, according to The Wall Street Journal.

Money funds, similarly, invest in short-term, high-quality obligations called commercial paper. But in an effort to gain a competitive edge, some companies that run the funds stretch a little further out on the risk spectrum. Though it's not clear yet what securities Sentinel holds, there has been speculation in the market in recent days that some money funds owned short-term paper — including mortgage-backed securities — issued by banks with exposure to problems in the subprime-mortgage market.

The problem is twofold. One, Sentinel doesn’t have the type of liquid capital to pay off many investors. Two, the commodities commission said it has no power to do what Sentinel wants.

And, the problem has its own shockwaves
Sentinel is not a mutual fund company, and should not be confused with Sentinel Funds of Vermont, which today posted at its website that it is “in no way affiliated with the Sentinel Management Group (of Illinois).” …

Spokesmen for Fidelity Investments, Vanguard Group and T. Rowe Price said their firms have no significant exposure to commercial paper backed by subprime mortgages.

If other money-market funds are exposed, watch out. Calls on money could become stampedes, which will only further tighten business liquidity and cut the availability of business credit.

Cross-posted at Socratic Gadfly.