January 23, 2008

129,000 screwed savers in Scotland just learned the painful definition of "illiquid" today: Panic selling shuts £2bn property fund


I wish I could warn everyone. It upsets me to no end to read stories like these. Let me be as crystal clear as possible for anyone reading this blog:

IF YOU HAVE MONEY IN BANK ACCOUNTS OR INVESTMENTS THAT ARE NOT GUARANTEED, INSURED, OR CANNOT BE WITHDRAWN ON A MOMENT'S NOTICE - GET IT OUT NOW AND GET IT OUT FAST. YOU STAND TO LOSE EVERYTHING IF YOU DO NOT. YOU HAVE BEEN WARNED.

One of Britain's biggest property funds was forced to shut its doors to withdrawals yesterday after the slump in commercial prices triggered panic selling by small investors.


The move prompted fears of a Northern Rock-style run on billions of pounds invested in once high-flying funds which many savers have seen as a safe haven for their pensions.

Scottish Equitable said yesterday that 129,000 small investors in its £2bn property fund will not be able to access their money for up to a year

10 comments:

gk said...

Oh boy. I have a money market account I wanted to pull my money out of, and had taken a less than urgent approach to doing so. I just completed verification of a link to a savings account to transfer it to. So I go online to do the transfer. Guess what? Capital One is not allowing transfers to non-CapOne accounts. WTF? I hope this is just a system maintenance thing.

traineeinvestor said...

Anybody who puts money into an open ended fund that invests in illiquid assets like real estate is asking for trouble.

It does beg the question of exactly where you do put your money if safet is your first concern?

Anonymous said...

Like Robert Deniro said in the movie Heat:

"Don't let yourself get attached to anything you are not willing to walk out on in thirty seconds flat, if you feel the heat around the corner.

Anonymous said...

I have 98K in a State Farm Bank Money Market fund. According to the disclosure it's FDIC insured up to 100K.

Is it safe? If not where do you recommend stashing it.

I'm currently earning 3.25%. It used to be 4.7% until Ben Bernanke began removing th USD from it's life-support system.

Brian said...

This is, in my opinion, not much different than a bank run and a year-long "bank holiday".

The more illiquid an asset is inside a fund, the more likely this will happen. For years people have assumed that using funds to invest presented advantages only, and no disadvantages. Oops.

This is deflationary - the cash that is now trapped in that fund has a velocity of zero. Possible forever.

The battle between inflation and deflation will be amazing to watch.

Brian

Brian said...

Anon 1:21

Stay away from Municipal Bonds until the bond insurance collapse blows over.

Once it works its way through (who knows how long) munis may be a good deal again. We'll see.

Brian

Anonymous said...

Ok.. what about my 50k 401k?? It's very diversify but I can't touch it.

Should I just keep putting my 15k per year in it and not look back and hope and pray it's there for me when I retire.

Is that what we're saying here is that even a 401k isnt safe?

If not that, where should I stash my money, under a mattress??

Seriously.. I am suddenly nervous. I can borrow 50% of my money via online at a moment's notice.

Can I even pull my money out of my 401k money to put into a bank earning interest?

If I do that, I lose the matching dollars. My company also just instituted the ability for me to open a Roth IRA and traditional IRA's automatically from our paychecks.

Are IRA's liquid enough to weather this storm?

bleak said...

This fund is likely (or able to remain) liquid, but probably is outright insolvent.

Liquidity is analogous to someone saying, "Can I borrow a hundred bucks until next month? I'm good for it. (They probably are.)"

Insolvency is like a debtor saying, "I owe $500K for this McMansion, but it's only worth $250K. (And the 'value' keeps going down and the payments are going up!)"

Two very different issues. For banks, the first can be solved with the help of your local central banker. The second can be solved with receivership/bankruptcy (perhaps, with the help of the Capital Fairy).

crashdummy said...

Money market funds and CD (certificates of depostits) are not protected by FDIC. Only checking and savings accounts are protected up to $100,000. Unfortunately, "cash" in your online brokerage accounts are often converted to money market funds also.

crashdummy said...

Everybody should look at Quebecor World (stock symbol:IQW). Quebecor is a multinational company that prints newspaper insert ads and magazines. Two months ago, they were a $1 billion company. Now, they are worth $17 million and in bankruptcy. Just to show you what happens when your revenue declines and no one wants to lend you money.

Furthermore, any company that doesn't have large cash reserves to weather the prolong recession will probably capitulate. Real Estate assets, and plant & Euipment assets should be considered illiquid (possibly worthless) during recessions.

Dump stocks that have growing liabilities or no cash reserves. Buy their direct competitors that are healthy.

Buy discount retailers, fast food chains, grocers, autoparts stores, utilities, pharmaceuticals, energy, and agriculture.

Recessions are a good time to start a business. Often times, buinesses that go bankrupt will get locked out of the space they are leasing. They often forgoe the equipment in leiu of unpaid rent. Landlords will often lease the space out with all the equipment to anyone who can prove they have a lot of cash (rent money).