The 'Other Cash' Crisis

Like millions of other investors, I parked my cash in something that was sold to me as a money-market fund. It appears on my account statement under the heading "other cash." I've owned shares for years, withdrawing cash as needed. There are several varieties of these cash alternatives; in my case they were called auction rate preferred shares (ARPS), which are shares in a closed-end mutual fund that owns various kinds of triple-A-rated bonds. There was little or no risk to the principal, because rates were set at regular auctions. There's never been a default on an interest payment. For 20 years the auctions continued without incident. Then in February the auctions failed. Goldman Sachs and Citigroup stopped bidding, and every other major Wall Street firm followed their lead. Liquidity evaporated.

The main point of a money-market fund or cash alternative is ready access to cash. In my case and that of many investors, that access vanished. The assets were frozen, unredeemable. When I called a Merrill Lynch broker to ask whether the failed auctions had any effect on my account, I was told I was stuck. The only relief Merrill offered was a margin loan against my assets. In other words I would have to pay interest to get my own money — which is infuriating, simply on principle.

For many the situation is much worse. Since first writing of my plight on SmartMoney.com, I've heard from dozens of worried investors. Some don't know how they'll pay their taxes. Others have canceled home purchases. Business owners say they can't meet their payrolls. ARPS and similar securities constitute an $80 billion market; many people owned them without even realizing it. And it could get worse: As credit woes spread, concerns are mounting that the more ubiquitous money-market funds could face a similar freeze.

Wall Street's silence has been deafening. ARPS investors tell me they've heard no explanation from their brokers. Their statements still carry the shares at face value, as though nothing happened.

So I called Goldman Sachs, the firm whose withdrawal from the market helped trigger the squeeze. I explained that I was a Goldman shareholder as well as a journalist, that I had recommended Goldman stock and had long admired the firm for its professionalism and integrity. I wanted to understand the firm's point of view. Had Goldman notified its clients? Was it helping clients in need? Was it working to solve this crisis? A spokesperson for Goldman called the next day: "I'm sorry we won't be able to help you." I was incredulous. The firm had no comment at all? I also called Morgan Stanley, in part because I had heard from a disproportionate number disgruntled Morgan Stanley clients. Its spokesperson was slightly more forthcoming, but he, too, said the company couldn't do much to offer relief to clients.