Not quite. The SIPC files a complaint in federal court and a SIPA trustee is appointed. The trustee is a non-government person who acts effectively like a bankruptcy trustee and is supervised by the federal court. To the extent there is shortfall and customer claims are not paid in full, the SIPC is supposed to contribute up to $500,000 (just like FDIC insurance). I am no expert, but I presume that The SIPC, like the FDIC, and student loan guarantees, and other government sponsored entities that are treated in the federal budget as non-government so their liabilities are not treated as government liabilities in the budget process, are simply intermediaries backed up by the United States taxpayer, and it would not surprise me the least if the SIPC fund is significantly underfunded from the member brokerages.
David Shemano From: [email protected]<mailto:[email protected]> [mailto:[email protected]]<mailto:[mailto:[email protected]]> On Behalf Of Peter Hollings Sent: Monday, June 04, 2012 1:19 PM To: 'Progressive Economics' Subject: Re: [Pen-l] IRA question David, It is my understanding that SIPA provides that the mechanics you describe are carried out by an entity called the Securities Investor Protection Corporation. SIPC is a non-profit corporation funded by the member firms themselves. It provides insurance coverage capped at $500,000 for each insured account in the event of malfeasance by the firm holding customer securities. It is my understanding that SIPC is not substantially capitalized as a real insurance company would be. An insider who was involved in setting it up once told me that it had letters of credit from the major banks that it could draw on in the event that its funds were exhausted by claims and its members were unable to make sufficient contributions. With the repeal of Glass Steagall, the letters of credit would seem in some cases to be meaningless – like a promise to loan yourself money. Another reason I am concerned is the potential for contagion because of derivatives, the lack of effective regulation, and a climate of corruption that would seem to tolerate misappropriation of customer assets. Thus, I think the SIPC could blow up along with its members, rather than provide a safety net. Peter From: [email protected]<mailto:[email protected]> [mailto:[email protected]]<mailto:[mailto:[email protected]]> On Behalf Of David Shemano Sent: Monday, June 04, 2012 3:43 PM To: Progressive Economics Subject: Re: [Pen-l] IRA question I can answer. Your IRA is almost certainly held at a Citi brokerage entity (as opposed to a banking entity) and brokerage bankruptcies are governed by the SIPA (Securities Investors Protection Act ) rules as opposed to the Bankruptcy Code. Brokerage bankruptcies were quite common pre-New Deal, and occasionally still happen (Lehman, MF Global). To summarize a very complicated situation, the assets will be presumptively liquidated very quickly and distributed as soon as possible (brokerages do not reorganized for all practical purposes). First, secured creditors get paid, but this will not affect you because by rule the brokerages cannot give customer property (assets held by the brokerage on behalf of the customers) as collateral (except under certain circumstances that will not have applied to you). Next in priority will be customers like you. To avoid fights over whose bond belongs to who, SIPA treats all customers as creditors and not owners, and puts all customer claims (claims of customers for whom the brokerage acted as broker) into one big class, and the class then share all customer property pro rata. If there is anything left over, then general unsecured creditors (e.g., lenders who lent money to the brokerage) will share pro rata. As a practical matter, provided the brokerage followed the regulatory rules, it is almost impossible for the brokerage to be actually insolvent as to the customer claims. Therefore, instead of going into the market and selling all of the securities as soon as possible (which could really negatively affect prices), it is much more common for the individual customer accounts to be transferred to a solvent brokerage within a matter of days (the Lehman brokerage accounts were moved to Barclays within one week of the Lehman bankruptcy), so you would not experience anything other than a letter informing you that your account was moved. This is very similar to what happens when the FDIC takes over a bank and the deposit accounts get transferred. MF Global is a scandal, because money was improperly transferred from the brokerage unit to proprietary trading affiliate when they were desperate for cash. David Shemano From: [email protected]<mailto:[email protected]> [mailto:[email protected]] On Behalf Of [email protected]<mailto:[email protected]> Sent: Monday, June 04, 2012 11:06 AM To: Progressive Economics Subject: [Pen-l] IRA question I have an IRA with Citi. Most of the money is in bonds: Ginny Mae, Treasury Bonds, Russian bank bonds, etc. Some is in money market which my broker says is insured. If something happens to Citi, can I lose money? That is, is Citi just an intermediary? Are the bonds that I own still good in the event of a Citi failure? Thanks, Joanna ________________________________
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