Financial topics

[John]

Dear Higgie,

> I would have to believe that if such a bankruptcy were to be
> repeated today, contagion is a lot more likely.

A lot of pundits on cnbc and bbtv claim that banks and hedge funds
have learned their lessons and are much better protected today.

John

[Higgenbotham]

A lot of pundits on cnbc and bbtv claim that banks and hedge funds
have learned their lessons and are much better protected today.

John

Therein lies a big part of the problem. They have learned nothing except the false assurance that they have learned something, which is worse than having learned nothing.

[OLD1953]

The metals situation is very much like the collapse in 1980. Everyone was yelling about a new high tomorrow, and then the bubble burst, and metals dropped like a stone, along with everything else.

[Higgenbotham]

This is the official line on the safety of futures accounts. It's fine as far as it goes.

http://www.mfglobal.com/File%20Library/ ... _Funds.pdf

Also, the FCM is required to use these funds only in certain pre-defined instruments. The end result is that, in the event of a crash or FCM bankruptcy, customer funds can be more easily recovered.

True enough.

I would go so far as to agree that a regulated futures account is safer than a regular brokerage account and that's why I use one. Regulated being the key word. Most people don't know what that means.

Refco Inc. and 23 of its unregulated subsidiaries filed for Chapter 11 bankruptcy protection. However, Refco's regulated subsidiaries (where customers' futures trading and managed futures accounts resided) were unaffected and customers were able to continue trading and managing their accounts.

Absolutely true.

This was a really well written and informative article (if you already understand everything in it). I would venture to guess that not one person in 10,000 understands everything in the artlcle and all its nuances and ramifications.

[richard5za]

Futures account.

Could be a wise move. I looked at one futures broker a couple of years ago and reckoned that he could be up to all the tricks if he wanted to do so, and investors could find that they had nothing. Serious lack of sound governance in the structuring. This is just a sample of one and perhaps it does other futures brokers an injustice. On the other hand there are some well structured and sound stock brokers.

[Higgenbotham]

Refco did an IPO a few months before they went bankrupt and the stock was gobbled up by investors who thought it was sound. Despite the fraud, all regulated accounts were safe. The nonregulated accounts were tied up in the bankruptcy. I realize that probably not one person in 10,000 understands the difference, as a lot of big money from around the world was parked in nonregulated Refco accounts. But that's all yesterday's problem. Today's problem is systemic and potential contagion is the issue in my opinion. The question is how many outhouses will be left dry when the tsunami hits, not whether it was built out of wood or brick.

[vincecate]

Higgie, you are far more worried than I am about brokers failing and people not getting the wealth that their statement says they have. In a country where the idea of "too big to fail" is now encoded as law, I think the government would print as much money as need to protect customers at brokers with the government's SIPC insurance.

http://www.sipc.org/how/brochure.cfm

I don't think the government will replace brokerage account funds.

They bailed out the rich bankers. If they don't insure the little guy's brokerage account, after telling him it was insured by the government, there would be hell to pay. I think it will be easier for the government to just print money and cover the little guys who vote than to let them lose if the broker goes under.

[OLD1953]

The fuss over jobs would be NOTHING compared to the howls if it was proposed to bail out small investors in uninsured accounts.

[Higgenbotham]

They bailed out the rich bankers. If they don't insure the little guy's brokerage account, after telling him it was insured by the government, there would be hell to pay. I think it will be easier for the government to just print money and cover the little guys who vote than to let them lose if the broker goes under.

Bank accounts are for the little guy and brokerage accounts are for the guys who have extra money to gamble with. Nobody will sympathize too much with anyone who has money to gamble with and has lost it. Brokerage accounts aren't insured in the same way bank accounts are and nobody is saying they are. The article I posted by the Chicago Mercantile Exchange above is correct on all points when they say:

In recent years, many investors found out the hard way they have very little recourse to recover funds in the event of a financial firm's bankruptcy. Although the Bernie Madoff "hedge fund" was by far the highest profile case, there were numerous less publicized bankruptcies and defaults at other firms and investments (including legitimate ones), in which investors found recouping remaining funds difficult or impossible. Sometimes it's a case of being the last in line of a long list of creditors, a problem that's compounded when customer funds aren't separated from a firm's funds. Such "commingled" funds might have been used to fund the firm's operating expenses or in its own trading. If a firm enters bankruptcy, it can be very difficult or impossible to recover customer funds that were commingled in such a fashion.

When investors dial into Bank of America's brokerage arm, they tell you in a recorded message each time that accounts are not insured by the FDIC and may lose value. That includes the cash in the account because those are money market funds and they can break the buck. In 2008, the Fed backed those because SIPC does not insure them.

[Higgenbotham]

What Is The SIPC?
The Securities Investor Protection Corporation was originally created in 1970 by Congress to protect investor interests. The SIPC is not a government agency or a regulator; it's a nonprofit membership corporation that is funded by its member securities brokers.

There are, of course, some exceptions and caveats. Obviously, SIPC doesn't compensate investors for declines in the value of their investments, and that rule also applies to money-market funds that "break the buck."

http://www.forbes.com/2008/09/15/bearst ... x_inl.html

This is going to be a great surprise to people if they panic out of their stocks and then get their money cleared into a default money market fund thinking it is insured and safe, only to lose that.

One thing people have to realize is that when Glass Steagall was gutted, there were very smart Boomers and Gen X'ers who had all day to think up ways to rip people off.

The CMA account is a securities account with Merrill Lynch, Pierce, Fenner & Smith Incorporated. The account provides access to services and products offered by licensed banks, including check writing and FDIC-insured deposits that are held at the banks. Securities, mutual funds and other nondeposit investment products available through the account are not FDIC-insured, not guaranteed by a bank and may lose value.

Investment products, insurance and annuity products:

Are Not FDIC Insured
Are Not Bank Guaranteed
May Lose Value
Are Not Deposits
Are Not Insured by Any Federal Government Agency
Are Not a Condition to Any Banking Service or Activity

http://www.totalmerrill.com/TotalMerril ... entaccount

Hard rain coming.