"Sentinel took investors original cash deposits and bought very high quality short term securities (mostly floating rate notes issued by major financial institutions). They then took those securities and pledged them to a single counterparty (Fimat) in exchange for more cash. (Note: Sentinel's underlying investors still retain legal ownership of the original securities as long as terms of the repo agreement are not violated). Sentinel was charged some short term financing rate on that money, which they then used to go out and purchase another batch of securities, which appear for the most part to be higher yielding, lower quality and longer dated than the original batch that was pledged as the collateral. We don't know how much leverage they actually employed by doing this, because there is a chance that the counterparty might have lent them more money than would have been predicted by the actual face value of the collateral. We will have to assume it was 1 for 1, but it could have been 1.2 by 1 for example. We think the way this whole situation started to unravel was probably twofold: Investors initially asking for cash redemptions to meet margin calls which Sentinel met through cash on hand, but at some point they were probably forced to attempt to sell some securities. Since they only "owned" the longer dated, less liquid stuff (remember the high quality stuff was pledged as collateral), they were unable to do so as the credit markets froze up. Additionally, the counterparty probably started getting nervous about the underlying value of the repo collateral they owned, OR wanted more collateral as security. In either case, the repo counterparty likely demanded something from Sentinel which they were unable to produce in the short term without taking enormous losses (from selling securities) that they could obviously not absorb themselves. Eventually, they would have been forced to charge these losses back to their clients. It was at that point they were forced to suspend redemptions, essentially as a stalling tactic to try and work out their inability to satisfy both clients and the repo counterparty."

Also, FCStone Group, Inc. issued a statement explaining that due to the Sentinel sale of some of its portfolio to Citadel Investment Group LLC, FCStone anticipated a one-time after-tax charge of approximately $3.5 million in the third quarter. FCStone president and CEO Pete Anderson noted in a release that "Sentinel's liquidity issues will not affect FCStone's ability to serve our customers, nor will it impact customer funds in any way."