Liquidity concerns: How safe is your money?
March 13th, 2008Yesterday the New Zealand arm of the Dutch giant, ING, suspended withdrawals from 2 of its funds affecting some 8000 investors. The 2 funds were invested mainly in credit securities and were down over 20%-25% over the last year.
So nothing new there except the suspension of withdrawals from the fund. Now we’ve seen this already in the banking sector when Northern Rock closed its doors to depositors. Last month Scottish Equitable told 129,000 investors that they could not access funds for at least a year. Its familiar and sad story.
What’s the world coming to when you savings or cash is not safe. Well maybe we’ve got too comfortable with our present financial arrangements. Have you ever met a poor investment banker? Well probably not. The last 15 years has seen a phenomenal rise in the idea of money as an asset class itself. The ability of banks to create money via debt and ply the financial system with leverage has led to a new type of investing. The ability to create money out of nothing is how markets have grown to the size they are now. It’s not a zero sum game as long as the supply of money and leverage keeps increasing. No one embodies this more than Stephen Schwarzman of Blackstone. Just as George Soros and Michael Milken of previous years, he will be known as the man who made the most of the situation at the time.
What we are witnessing now is the de-leverage when all that new money goes poof! and people look around to see where the security or asset is and find it’s more of the same. Round and round it goes until it simply disappears (money is destroyed) or an asset is finally found to be sold, usually at an extremely low price.
So its pays to be sensible here. Check your savings and investments. Make sure you understand what type of access you have to them and under what terms.
Tags: confidence, credit, financial crisis, hedge funds, investing, markets
March 13th, 2008 at 10:00 pm
Nice writing. You are on my RSS reader now so I can read more from you down the road.
Allen Taylor
March 13th, 2008 at 11:32 pm
You might want to check your facts on the bit about Scottish Equitable there. They deferred some transactions from ONE fund class – the commercial property fund – for UP TO one year – not at least one year. The majority of deferrals are actually for no more than 3 months. The option to defer payments from commercial property is clearly stated within customer literature. The reason companies like Scottish Equitable did this (there are others that have done exactly the same) was to protect existing policyholders. If they continued to pay out without deferring, the fund managers would have been forced to sell properties in the fund’s portfolio very quickly to meet redemption demands. In the current climate that would have meant selling the properties at significant discount. That would have devalued the fund and everyone remaining in the fund would have suffered financially as a result. Is that fair?
If people want to have immediate access to their funds, perhaps more liquid investments would be appropriate. Bricks and mortar can take some time to sell.
Also, for your information, the Guardian story you link to has factual inaccuracies.
Just thought a bit of context would help here.
March 14th, 2008 at 12:53 am
Mark
Thanks for you comment. Context is always helpful in these matters. When i said “access funds” i meant their funds as opposed to “the funds” run by SE. Perhaps I should have said their investment instead.
The point of the post is that people need to understand the nature of their investments and the terms and conditions of getting in and out. Too often people focus on the proposed yield or potential return and when things go bad, as they are doing now, they are disappointed or aggrieved.
The lesson here is to learn more about the nature of the risks we take with our money whether by depositing it in a bank or investing it with fund managers.
As for journalistic inaccuracies what’s new!
March 14th, 2008 at 9:33 am
Thanks for the reply. I couldn’t agree more with your point overall about people understanding the nature of their investments and the terms and conditions of getting in and out.
Thanks.