Redemption suspension

The words "suspend redemptions" evoked panic and fear in hedge fund investors in 2008 after Lehman Brothers collapsed. Insolvent hedge funds had to delay investor demands for redemptions because they lacked access to liquidity during the financial crisis. A credit freeze ensued, and no one trusted their counterparties who were equally insolvent.

Fine, hedge fund investors are allegedly savvy and required to understand the outsized risks and rewards of investment in hedge funds. An accredited investor needs to have a minimum income of $200,000 and a minimum net worth of $1 million, but most have income and net worth levels much higher than the minimum thresholds. They understand "high risk/high reward"--at least they're supposed to.

But the latest financial reform being pushed by the Obama financial team "to protect consumers" includes the following language: "suspend redemptions to allow for the orderly liquidation of fund assets." This clause is in direct conflict with Securities Exchange Commission (SEC) Rule 2a-7, which provides minimal risk, no volatility, and redeemability for money market funds. In other words, when the average Joe parks his money in a money market account, he expects miniscule interest earned, in return for the safety and liquidity of funds being instantaneously accessible via a computer keystroke or a visit to the bank teller.

What this "financial reform" clause does is allow financial institutions to NOT guarantee your request for cash withdrawal if financial markets are collapsing. In other words, how "safe" is your cash if you can't even access it in times of financial distress--or when there's a run on banks?

This is the same SEC which is chartered to protect investors from unscrupulous swindlers and regulate free, orderly markets. Given their dismal track record of protecting investors from the likes of Ponzi schemers Bernie Madoff and Allen Stanford, it should come as no surprise that savers and investors will become incredibly vulnerable should the next financial iceberg hit again.