SIPC "Insurance"

Securities Investor Protection Corporation

SIPC serves two primary roles in the event that a broker-dealer fails. First, SIPC acts to organize the distribution of customer cash and securities to investors. Second, to the extent a customer's cash and/or securities are unavailable, SIPC provides insurance coverage up to $500,000 of the customer's net equity balance, including up to $100,000 in cash.

Sounds pretty good, right? Well, being the natural skeptic that I am most of my nest egg bypasses broker-dealers entirely. I mostly participate directly in government TIPS auctions and I also have I-Bonds that are either in my possession or are included in my Treasury Direct account. And why might that be?

September 24, 2009
Madoff Victims Oppose Hiring Picard for Criminal Case (Update3)

“Congress repeatedly warned SIPC that it was underfunded,” Chaitman said. “Yet SIPC chose to charge its members a mere $150 per year for the privilege of printing on hundreds of billions of dollars of trade confirmations that the customers’ accounts were insured.”

SIPC

It is important to understand that SIPC is not the securities world equivalent of FDIC–the Federal Deposit Insurance Corporation. Congress specifically considered creating a Federal Broker-Dealer Insurance Corporation, but lawmakers wisely concluded that such a designation would be both misleading and out of step in the risk-based investment marketplace that is so different from the world of banking.

Let's put this another way. The lawmakers "wisely" concluded that the risk-based investment marketplace is/was actually riskier than the world of banking. I know. It's kind of hard to believe these days. It actually is true though.

Now you know why I was one of those people who pre-panicked when ETrade started experiencing difficulties. I moved my money to Ameritrade. It's still there.

November 12, 2007
E-Trade Shares Nosedive on Subprime, Downgrade

"That peers have virtually entirely avoided the credit crisis, again highlights the flawed strategy and lack of credible risk management by E-Trade's senior executives and the board of directors," Bhatia wrote in a client note.