TEXT OF INTERVIEW
Scott Jagow: In times of trouble, investors often sell stock and go liquid for a while. They put cash in money-market accounts or short-term bond funds. But even those, it seems, are not immune from bad mortgage investments.
We found out last week that a General Electric bond fund was knee-deep in the subprime goo. GE offered people a chance to get out at 96 cents on the dollar. Allan Sloan, what’d you think of that?
Allan Sloan: Well, it’s horrifying is what it is. You see that now, all sorts of mutual-fund companies and some of the big bank companies are saying “Gee, we had this toxic waste in our money-market fund, but we’ll make sure to make you whole.” Which is in itself sort of scary that the sponsor has to make you whole. When you have a GE bond fund that says they’re not gonna make you whole, that really makes me sit up and say, “What on Earth is going on here?” And one of the things it makes me say is, “Why isn’t GE standing behind this?” But we don’t know that.
I can tell you the rules for not running into trouble like this.
Jagow: OK, what are they?
Sloan: It’s very simple. When you’re dealing with a money-market fund or a short-term bond fund, I mean they’re all essentially the same, except usually for their fees. And in the case of the money-market fund, the reason I, thank God, have not had to lose a minute’s sleep over subprime whatever is my money-market fund is a low-cost fund, and it doesn’t buy that stuff. The place you typically run into these problems are funds with higher-than-average costs that in order to be competitive, then have to get higher-than-average returns on assets. So they do what’s known in the trade as reaching for yield.
Jagow: So what do you think investors should do right now?
Sloan: You just want to be careful. And if you’re gonna be in money-market funds, you could be in a money-market fund that owns nothing but various U.S. Treasury things. You can be in money-market funds that have low costs, and are there for less likely to run into trouble. Whenever you see a higher-than-normal yield, you want to look out.
Jagow: All right Allan, since we’re approaching Thanksgiving, what would you say are the “turkeys” on Wall Street right now?
Sloan: Well, the turkeys are money-market funds with trash in them, and a lot of commercial banks and brokerages which suddenly found there were all sorts of turkeys in their portfolio that are gobbling up profits by forcing them to require losses.
Jagow: Allan Sloan from Fortune Magazine. Happy Thanksgiving.
Sloan: And to you, too, Scott.
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