The publicity generated by the liquidation of California-based IndyMac Bank – one of the nation’s largest savings & loans with $32 billion in assets – along with recent headlines focused on the Bear Stearns bailout and problems with mortgage giants Fannie Mae/Freddie Mac serve to underscore the fragile state of the nation’s financial infrastructure.
Understandably, such news increases the concern of people about the safety of the money they have parked at the bank or invested with a brokerage. There are, however, some well established safety nets to provide savers with a measure of reassurance.
For bank customers, that reassurance comes in the form of the Federal Deposit Insurance Corporation (FDIC), created in 1933 to restore confidence in the banking system following the Crash of 1929 and the onset of the Great Depression.
Although the banking sector is feeling the effects of the mortgage meltdown, problems besetting the nation’s banks are not as severe as they were 20 years ago during the savings-and-loan crisis. IndyMac, for example, stands to cost the FDIC between $4 billion and $8 billion, but the agency presently has approximately $53 billion in reserves to meet emergencies. Of the nation’s approximately 8,500 banks and savings associations, only 90 are currently on the FDIC’s problem list.
The FDIC guarantees checking and savings accounts as well as certificates of deposits up to $100,000 or $250,000 for retirement accounts invested in bank products (i.e., not stocks or mutual funds). Joint accounts are insured up to $200,000.
Monies held in different categories of ownership – typically trusts – may also qualify for separate coverage, generally to a limit of $100,000. But be aware that FDIC rules are evolving constantly and you’d be well served to have your advisor, broker or lawyer keep you abreast of the changes. For instance, the rules are less stringent for revocable trusts than they are for irrevocable trusts. Be sure to keep careful, accessible records of all your assets, including your trust agreements.
In addition, the FDIC reports that about 37% of domestic bank deposits aren’t insured because they’re sitting in bank products the agency excludes from coverage, such as mutual funds, annuities and life insurance. So be aware that those little details can potentially add up to big numbers if your bank should hit the skids.
Clients of the nation’s brokerage industry can rely on a safety net of a somewhat different sort, courtesy of the Securities Investor Protection Corporation (SIPC), which, while also an insurer of last resort, has a somewhat different and narrower focus than the FDIC.
Chartered by Congress in 1970 as a member-funded, quasi-governmental entity overseen by the Securities and Exchange Commission (SEC), its mission is to help reimburse customers of failed or otherwise financially troubled brokerage houses. All brokerages registered with the SEC are required to be members.
What SIPC does not do is protect against losses from market and security price movement related to investor judgment or macroeconomic factors. It will, however, protect the number of shares you hold in the account. SIPC will not help in the case of fraud (e.g., if you’re sold worthless securities). It will help if a broker absconds with your funds or goes out of business, however.
Unlike the FDIC, the SIPC is not a regulator and relies on the enforcement mechanisms provided by of Financial Industry Regulatory Authority (FINRA), the states and the SEC. The goal of both, however, is to increase investor confidence and, ultimately, market stability.
The SIPC provides coverage for all SEC-registered securities up to a maximum of $500,000, including $100,000 in cash, per account. Excluded from coverage are unregistered investments such as commodities, options or currencies.
In general, investors can expect to receive their money in one to three months, assuming the brokerage has kept full and accurate records.
According to SIPC, it has paid out $508 million to make possible the recovery $15.7 billion in assets for about 625,000 investors from its inception through 2007. Over that time, fewer than 350 investors have incurred losses exceeding SIPC’s coverage limit, and the majority of those claims occurred before 1980 when SIPC’s maximum was $50,000.
It will hearten investors to know that in 2007 there were no brokerage firm failures that required SIPC intervention and only one (very small) failure so far this year. Owing to the rigor of the supervisory and regulatory regimes in force in the U.S., the overwhelming majority of firms that do go out of business do so without taking any client funds with them.
Additionally, all SIPC-member broker/dealers carry supplementary insurance called excess coverage. In the case of the 14 major brokerages that created the Customer Asset Protection Co. (CAPCO) in 2003, the coverage above and beyond SIPC’s limits is nominally unlimited.
Some other big players, including Charles Schwab, UBS and Merrill Lynch, opted instead for excess coverage provided by outside insurers, such as Lloyd’s of London, which allows for $150 million per brokerage customer and $600 million per broker/dealer.
A brokerage is only the custodian of your securities, meaning that customer funds are segregated and protected from creditor claims.
But your first line of defense is always the firm’s financial soundness and its customer protection rules. So it’s always wise to do a little homework on the broker/ custodian before signing up.
