10/2/08

Give Me Back My Money, Reserve!

I've had a money market fund with the Reserve through TradeKing for a couple of years. Less than two months after the Reserve's Chairman and CEO wrote

We are pleased to report that you, and the markets in general, have embraced the very concept and foundation on which The Reserve was founded, an unwavering discipline focused on protecting your principal, providing daily liquidity and transparency, and all the while boring you into a sound sleep. Experience has prevailed and as a result, The Reserve’s assets grew by nearly 100%, or $61 billion, over the past year,

the Reserve's Primary Fund broke the buck because it owned Lehman Brothers paper. As that fund is being liquidated, investors are scrambling to get their money out of the Reserve's other funds. I guess I'm one of those.

When I signed up for TradeKing a couple of years ago, they offered three choices for a cash sweep. One was an FDIC insured account, another was a Reserve Treasury fund, and another was a municipal fund. At that time, the Treasury Fund (RUTXX) had a better yield (which is compounded daily) than the FDIC account. I figured it was just as safe as the FDIC--if the US defaults on its debts, it probably won't have enough money to insure deposits either. So I signed up for the Treasury Fund.

The yield got lower and lower. This September the yield got pretty close to zero. I decided to switch to the FDIC account. I sent TradeKing an email and they started the process of redeeming my money. Unfortunately for me (and all the others who decided the same thing), almost immediately thereafter the Reserve broke the buck on its Primary Fund. This triggered a sort of run on the bank, and the Reserve has yet to pay out its investors. It will begin returning money to Primary Fund holders in mid October, says a press release (PDF).

As for me, I don't know when I'll get my money back. I've been waiting since mid September. My fund hasn't broken the buck, but the Reserve isn't making redemptions on it. TradeKing hasn't been given a timeline.

I'm not yet worried that I'll lose money (aside from interest I could be earning on the FDIC account), but I can't trade with those funds. They've been separated in my holdings, now being listed as a mutual fund pending settlement. Good thing I've made some gains on options these past few weeks, or I'd have no cash in my account at all.

One lesson I'm taking away from this is to consider liquidity when yield hunting. Cash really is king (unless there's a currency collapse, in which case physical precious metals reign). It doesn't earn interest sitting under the mattress (preferably a safer place than that), but you can still use it to buy food when all the ATMs are out of money and the banks are closed. Always keep emergency cash, and silver and gold coins, lying around. The yield they pay is liquidity when electronic money is not available.

Update 10/7/08: After almost a month my cash was finally redeemed.