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Strategies & Market Trends : Booms, Busts, and Recoveries
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To: Rajkea who wrote (740)11/17/2000 2:36:01 PM
From: Tommaso  Read Replies (1) of 74559
 
A few weeks ago, an investigative story in the New York Times revealed that every aspect of the SIPC (if that's the acronym) was seriously underfunded, and also that theose who administer or arbitrate claims against failed brokers themselves charge fees that are comparable to amounts recovered. All of us have a false sense of security, believing that our assets are as safe as if they were in an FDIC-insured bank account.

For this reason, I recently removed most of the cash from my brokerage's money market account and put it into a bank "money-market" account that pays a little less interest, but is FDIC-insured. It's not convenient to take delivery on my securities, so I leave them in my trading account, recognizing that they are not really protected. I think that stocks in IRA accounts might get frozen for a long time in event of a brokerage failure, and I am thinking of changing these to a bank-sponsored brokerage account.

What we really have to count on is that our brokerages are well-capitlized and carefully run. To judge from the promptness with which they extract money from me (my money-market account with them) to maintain margin levels, I think they are being cautious.

But in a major contraction, millions of people could lose hudnreds of billions in brokerage and bank failures, much as people lost their cash capital in nineteenth-century bank failures.

After the Depression, even before FDIC, most people eventually got most of their money back from those bank failures. In the mean time they might have lost their houses to foreclosure.

But we all have to realize that the "insurance" covering brokerage accounts is very flimsy.
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