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.

Posted by twcarey on 03/21 at 08:52 AM
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