Suddenly the notion of big investment firms failing no longer seems like an alarmist fantasy
Bear Stearns (BSC) was preparing a bankruptcy filing before plans emerged at the 11th hour for it to be scooped up by JPMorgan Chase (JPM). Now many investors are pondering what was once unthinkable and wondering if their savings and investments are safe. Here are answers to some current concerns:
If my brokerage firm fails, are the assets in my account safe?
They should be. Unless a broker has run off with your assets, the securities you own will be available, even if the firm files for bankruptcy. Your biggest worry becomes how long it will take to get your money, but that's only a cause for concern if the back-office operations of the firm are in disarray. In the event of a financial crisis, an organization known as the Securities Investor Protection Corp. (SIPC) will step in to make sure that customer accounts are transferred to a financially sound institution. That's what happened when Cincinnati-based Donahue Securities collapsed in 2001.
How long will it take to get access to my investments if my broker goes belly up?
If history serves as a guide, it won't take long. For example, bad loans caused MJK Clearing, a Minneapolis brokerage firm, to fail in 2001. Clients were able to tap most of their money in about a week after their assets were transferred to another firm. Less than 5% of the $10 billion in total assets took six months to transfer.
Doesn't SIPC cover any losses?
There has been some confusion about SIPC's role. It steps in to cover losses only when assets disappear due to wrongful conduct, such as misappropriation, by the broker. In that case, SIPC covers losses up to $500,000 per account. (Only $100,000 may be in cash.) Most brokerage firms carry excess coverage for losses above this amount. You won't be covered for losses due to a drop in security prices.
What if I have a margin account?
If you purchased securities on margin and your broker has folded, things get much more complicated. That's because most of your purchase has been funded by money you've borrowed from your broker. If your broker suddenly needs cash, it can ask you to pay back the loan immediately—a margin call. That could force you to sell securities at a loss.
If I want to move my money somewhere else, will there be any problem?
The fastest way to move your account is with an "in-kind" transfer: Your portfolio is simply moved from Brokerage Firm A to Brokerage Firm B. Transferring accounts from one major brokerage firm to another can often be done in less than a week, since most firms work on the same electronic platform.
Are there any special issues if I own proprietary investments?
Many brokerage firms offer their own branded mutual funds, hedge funds, and other types of investments. Typically, these kinds of assets cannot be transferred. They must be liquidated, which takes time. Selling also raises capital gains issues when the sale results in a profit or a loss.
Back to The Financial Crisis Table of Contents