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When the broker tanks, are client accounts at risk?

A reader asks:

"I read your recent blog about Merrill Lynch's sale of mortgage securities for a fraction of their face value. I have a sizable (for me) investment portfolio at Merrill. Fortunately, I do not own any Merrill stock. Should I be concerned about a Bear Stearns-type collapse?"

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My reply:

I know of no reason why investments held/managed by Merrill Lynch would be in jeopardy. The only Bear Stearns clients who lost money in connection with the firm's collapse were the ones who invested in its ill-fated hedge funds, Bear Stearns stock or directly in subprime mortgage bonds.

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Bear Stearns investment clients who owned, for example, Google or Procter & Gamble stock are fine, except to the extent that those stocks are affected by the general market. Bear agreed to be absorbed by JPMorgan Chase, and customer accounts were unmolested.

The Securities and Exchange Commission requires brokers to strictly separate their capital from that of customers. In the event that doesn't happen, there's another safety net – the Securities Investor Protection Corp. The SIPC makes investors whole if client assets are missing. Most investment firms must be SIPC members.

That said, remember that the SIPC is not the equivalent of the Federal Deposit Insurance Corp. for banks, ensuring that what you put in is what you get out. Brokerage accounts, as investors can attest this year, are subject to violent market swings even if the broker is flourishing.


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