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Is This a Run on the Bank? What Sentinel Management's Redemption Halt Really Means


Now we have a standoff... between those demading fairness, and those willing to take a chance on extending a little charity in honor of it.


This morning it was reported that Sentinel Management Group, a cash manager for institutions, corporations and accredited investors founded in 1980, sent a letter to investors saying, "We are concerned that we cannot meet any significant redemption requests without selling securities at deep discounts to their fair value and therefore causing unnecessary losses to our clients." (For more on why liquidity has dried up, see this morning's Five Things.)

What is Sentinel Management Group? According to Frequently Asked Questions posted on the firm's Web site, "Sentinel acts as an agent for its clients. Clients sign an Investment Management Agreement appointing Sentinel as a discretionary investment advisor to supervise and direct the investment of assets in the account on behalf of the client in accordance with the risk parameters agreed upon."

The firm is open only to corporations, institutions and accredited investors. Accredited investors must have a financial net worth of at least $1 million or income in excess of $200,000 annually for the past two years. If you think about it, income in excess of $200,000 as a couple is not a particularly high bar.

Now, Sentinel's FAQs say the company normally invests client cash mostly in the overnight market, also called the Federal Funds Market, or Fed Funds Market. In this market, depository institutions borrow and lend the balances, or reserves, that they hold in accounts at the Federal Reserve. Remember last week when the Federal Reserve conducted those open market operations to provide liquidity. They did so in this market.

But back to Sentinel. While the firm says clients can withdraw 100% of its daily cash (using a cutoff time of 4 p.m.), not all clients want daily liquidity. And here is where we begin to see how there could be problems. In the firms' Frequently Asked Questions, Sentinel notes, "Clients who do not need daily liquidity for the entire amount of their investment can authorize Sentinel to invest for longer periods. This gives Sentinel the flexibility to seek slightly higher yields when the short-term yield curve is more steeply sloped."

Importantly, Sentinel says the firm buys "only the highest quality and most liquid securities (unless specifically directed by a client to seek higher yield in somewhat lower quality issues.)" Ah, there we go. If Sentinel was managing cash positions for clients who were not in need of daily liquidity, then those clients perhaps directed the firm to invest in somewhat "lower' quality" issues in order to boost their yields. And as we now know, demand for those higher-yielding securities has dried up. Consequently, the firm is unable to trade, or even price, many of those securities.

Sentinel, like Goldman Sachs (GS) when referring to their Global Equities Opportunities firm, now says they own securities selling at "deep discounts to their fair value" and that would cause their investors "unnecessary losses." So, the bottom line is they don't want to sell those assets and give investors back their money. Yes, no one likes to sell things for a loss. Of course, markets care nothing about "fair value." Fair value is what someone is willing to pay, not what an investor deserves to receive.

And so now we have a standoff - between those demanding fairness, and those who may or may not be willing to extend a little charity in honor of it.

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