Sentinel warns of losses if clients panic

NEW YORK (Reuters) - Sentinel Management Group Inc, which oversees about $1.6 billion in assets, sought to prevent clients from withdrawing their cash to avoid having to liquidate investments at a discount, helping to take the Dow on Tuesday to its lowest close in almost four months.

"Sentinel caught the biggest headlines today, and there were rumors about more liquidity issues and more distress concerning the investment banks," said David Katz, chief investment officer at Matrix Asset Advisors in New York.

"The market is shooting first and asking questions later, and as in the past weeks, weakness has begotten more weakness."

Sentinel, a futures commission merchant (FCM) with the U.S. Commodity Futures Trading Commission (CFTC), told clients in an August 13 letter: "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."

"We do not see an alternative and we don't believe it is in anyone's best interest if a run on Sentinel took place and we were in a forced liquidation mode," the letter said.

Early on Tuesday, CNBC Television reported the existence of the letter and said Sentinel had asked the CFTC to allow it to halt client redemptions until it could conduct them in an orderly fashion.

The CFTC later said it had received no such request from Sentinel and that even if it had, it had no authority to act on such a request.

Sentinel declined comment.

News about Sentinel came on the heels of problems at hedge funds managed by Goldman Sachs and other companies in the United States and abroad.

On Tuesday, several Canadian investment trusts had trouble repaying short-term loans, further evidence that a crisis that began in mortgages had led to a wider credit tightening.

"Problems persist in the commercial paper and asset-backed markets," said Frank Hsu, director of global fixed income at Fimat. "Today it's Canada, but other countries, including the U.S., could have similar issues."

In yet another sign of rising risk aversion among global investors, spreads on two-year interest rate swaps widened to 63.50, their biggest gap since the days following the September 11, 2001 attacks.

The Dow Jones industrial average .DJI tumbled 207.61 points, or 1.57 percent, to 13,028.92, its lowest close since April 24.

EXCHANGES LOOK TO REASSURE INVESTORS

The CME Group CME.N, the largest U.S. futures exchange, said in a statement that Sentinel was not a clearing member of the CME Group while assuring investors that its clearing member firms have continued to meet all of their obligations.

MF Global (MF.N), one of the world's largest brokers of exchange-listed futures and options, issued a statement saying it had no exposure to Sentinel.