Investor Brain

Friday, March 21, 2008

S&P Says CAPCO is OK

In the wake of the Bear Stearns collapse, industry analysts grew concerned over the financial stability of the Customer Assets Protection Company (CAPCO), which carries their excess SIPC coverage.  (Please See “Are You Covered If Your Broker Fails?” and “If Your Broker Goes Belly Up, Part II” for an in-depth explanation.)

Yesterday, Standard and Poor’s issued a rare bulletin in which they said that CAPCO is maintaining its A+/Stable rating in spite of the claims that may ensue in a post-Bear Stearns universe.  Of interest in their bulletin is the assertion that “In the event of an excess SIPC claim related to Bear Stearns, CAPCO should benefit from a guarantee provided by JP Morgan Chase for Bear Stearns’s obligations.  In addition, clients withdrawing funds from their personal accounts actually reduces CAPCO’s potential maximum loss.” (Italics are mine.)

As the S&P bulletin spells out, for an excess SIPC claim to occur, all of the following must happen: client assets must be found to be missing, lost or stolen, and customer property, SIPC advances, fidelity bond proceeds, if any, and distributions from the general estate of the member, if any, to customers are insufficient to satisfy customer account obligations. Neither SIPC nor excess SIPC cover a decline in the market value of a client’s investments.  Clearly the Bear Stearns collapse is not due to missing, lost or stolen customer assets. 

We’re looking at a problem related to market value, which is due to some management choices that turned out to be inappropriate, rather than outright theft. 

Too bad there’s no insurance that protects against inappropriate choices.

Monday, March 17, 2008

13th Annual Review of Online Brokers Up at Barron's Online

Barron’s Online has revamped some of their policies, and some stories are available to non-subscribers after 3PM Eastern time on the date of publication.  What that means is that the review of online brokers can be read on their site now, even if you’re not a subscriber.

Here it is.  Page 6 spells out the rating system, and is not in the print edition.  Page 5 includes the sidebar critical of bank-based brokers.  There is a lot of content on pages 3 and 4 that did not appear in print, mainly descriptions of the brokers not in the top 10.  In short, the online version is about 30% longer than what ran in print. 

Making It Click: Annual Ranking
Of the Best Online Brokers

By THERESA W. CAREY

TURNING THE COMPLICATED INTO THE SIMPLE is a basic aim of online brokerage. It means bringing together the prices of everything from Nokia shares to options on South African gold to U.S. Treasury bonds on a single platform. It means simultaneously offering insights into Malaysian politics and Florida housing costs while organizing millions of electronic messages from global bourses for data, orders and transactions into information that investors can act on instantaneously.

Read the entire story here: Best Online Brokers

Friday, February 08, 2008

A Note from SIPC's General Counsel

I received the following email this morning from Josephine Wang, the General Counsel for SIPC (Securities Investor Protection Corp.), a nonprofit group funded by the financial-services industry, in response to my column “If Your Broker Goes Belly Up: Part II,” that ran at the end of December.  Barron’s readers have been asking some questions as a result of my work. 

Here is her email, which I publish here in an attempt to get the word out, as Ms. Wang requests. 

Dear Ms. Carey:  SIPC has received some inquiries relating to the article “If Your Broker Goes Belly Up: Part II.” From the questions received, there seems to be some confusion over how assets are distributed in a liquidation proceeding under the Securities Investor Protection Act ("SIPA").  Certain investors apparently believe that if their brokerage fails, their only recourse is against the funds advanced by SIPC.  Because this is incorrect, we would appreciate if you would share the following with your readers:

“In a SIPA proceeding, there are two kinds of property as to which customers have preferred treatment: “customer name securities” and the fund of “customer property.” Customer name securities are identifiable to particular customers because they are registered in the customer’s name and can be negotiated only by the customer.  If in the possession or under the control of the failed broker when the broker is placed in liquidation, customer name securities are returned outright to their owners irrespective of value.  All other property (cash and street name securities) held by the broker for its customers becomes part of a “fund of customer property.” Customer property is distributed pro rata among customers.  To the extent of any shortfall in customer property, SIPC makes up the difference, within certain limits.

To illustrate:

Q.:  Assume that a customer is owed $1 million in customer name securities, and $1 million in securities held by the broker in street name.  Assume also that 10% of customer property is missing.  What does the customer get?

A:  The customer receives:
(i) $1 million in customer name securities.
(ii) $1 million in securities of which $900,000 will come from customer property and $100,000 from SIPC.”

If you have any questions, I will be happy to try to answer them.  If there is another method for passing this information on to your readers (e.g., a letter to the Editor), please let me know.

Thank you for your help.

Josephine.