Sunday, September 21, 2008

SIPC

Their website has the below image, as second page of a pdf file.


For more, see here and here. Or Google or Live Search for more.

This SIPC "umbrella" is about as reliably capitalized against a run as some of the pooled-self-insurance covered brokerage houses, according to the Bloomberg reporting:

The SIPC relies on the backing of healthy securities firms. Unlike the Federal Deposit Insurance Corp., which insures bank deposits up to $100,000, the securities corporation doesn't have a direct line to the U.S. Treasury. The SIPC maintains about $1 billion in reserves, compared with $707 billion in client assets at Morgan Stanley's retail brokerage unit, according to the most recent earnings report released earlier this week.

``If you read the letter of the law, it all seems to be well-organized, and that's OK in a perfect world,'' said former Deutsche Bank managing director Mike Offit, who moved ``eight figures'' of his personal assets out of a brokerage account into a bank trust years ago. ``The assets of the SIPC are a speck on a fly on the back of an elephant in a herd of elephants.''

The 1970 law passed to create the SIPC gives the corporation the authority to ask the U.S. Securities and Exchange Commission for government loans to help cover its obligations.


And that Marketwatch article is cold comfort:

SIPC either acts as trustee or works with an independent court-appointed trustee in a brokerage insolvency case to recover funds. The statute that created SIPC provides that customers of a failed brokerage firm receive all non-negotiable securities -- such as stocks or bonds -- that are already registered in their names or in the process of being registered. At the same time, funds from the SIPC reserve are available to satisfy the remaining claims of each customer up to a maximum of $500,000. This figure includes a maximum of $100,000 on claims for cash. From the time Congress created it in 1970 through December 2006, SIPC has advanced $505 million in order to make possible the recovery of $15.7 billion in assets for an estimated 626,000 investors.


You are only covered against a brokerage going broke. You are not covered against portfolio loss, that is your risk as investor, and if you had money invested in a fund heavy on failed securities, then if you unloaded it on the downward spiral and have over $100,000 in cash at a brokerage, say from a couple providential liquidations of holdings before they tanked too badly, and the brokerage goes under, then your cash from closing out the dogs is only partly protected, by that "spot on the fly, on the elephant, in the herd of elephants."

Sleep well, on all that assurance.

And, we can always wonder how many of these kinds of hummers are out there, and how the interlocking arrangements will in the present market affect US investors.

With that thin margin of coverage in the event of a market wide loss of confidence and a run on multiple brokerages, the phrases "covered by a fig leaf" or "don't take more to the casino than you can afford to lose," come to mind.

Any others?