I just got off the phone with a source at the Securities Investor Protection Corporation (SIPC). What I learned was very surprising, and it’s time for every stock investor in the U.S. to be on high alert.
To start out with, the SIPC was initially formed by congress, however, it functions as a private corporation which funds itself through member firm annual dues. It creates a fund which promises to replace missing stocks and other securities that may be missing where it is possible to do so (source). Additionally, they promise to cover up to $500k in missing securities, and up to $250k in missing cash. In terms of the size of the SIPC fund, I was told by this person at their firm that, the fund reserve usually remains in the $1 billion area, and it is further, covered by up to a $2.5 billion backstop by the U.S. Treasury.
What’s interesting here, is that all it takes to tap out the $1B SIPC fund completely, is a total of 2,000 investors who lose accounts in excess of $500k in securities. Additionally, all it takes is 5,000 investors who lose in excess of $500k in securities to complete tap out the backstop offered by the U.S. treasury.
Now this BEGS the question–what happens during the next broker dealer/investment bank collapse, when lets say, $6 billion in customer stock accounts and funds end up missing? This will quickly deplete the entire SIPC fund, as well as dry out the entire U.S. Treasury backstop.
Now we can assume if the treasury bond market is still alive and well, the U.S. government will quickly come to the rescue and bail out the SIPC. But what happens when the U.S. government reaches it’s day of reckoning in the bond markets, such as what we’re seeing in the Euro-zone? Do you really expect it will be able to fund the SIPC with priority over all other collapsing programs and guarantees?
Additionally–in my conversation with the SIPC, the source disclosed that “800 accounts with MF Global that held stocks, are now being reimbursed” by their fund. The more important and unanswered question was–how much were those losses and how much is left in the fund? Unfortunately, the source could not answer this question.
It’s high time for U.S. stock investors to consider and prepare for broker dealer collapse risk. I have written a ten page paper called, “BulletProof Shares – How To Protect Your Stock Investments From A Collapsing Broker,” which will illustrate two easy methods for stock investors to sever all broker counter-party risk from the shares they own. It will be offered for free and will be released shortly.
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Thanks for your continued support,
Tekoa Da Silva
Bull Market Thinking