Is trust an issue for you when investing?


By uomo_senza_nome   Follow   Tue, 14 Feb 2012, 1:48pm   2,101 views   16 comments
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As noted in this thread, financial institutions engaged in lawless behavior have hardly been prosecuted.

Also consider this: http://jessescrossroadscafe.blogspot.com/2012/02/chris-whalen-jpm-has-mf-global-money.html

But in quiet whispers, the Street knows the truth, that the money was stolen, not once but twice. And even these hard cases are shocked. The first time by MF Global and from the very top, and then afterwards in the courts and the regulatory bodies that used the bankruptcy to take the funds from the customers and give them to the creditors.

And it does stink to high heaven. But the clean up men are giving the evidence a thorough scrubbing while justice waits, Chicago-style.

It has placed a chill on those trading in the US markets. Even they are frightened of such lawlessness. They can't help but wonder, who's next? And how far will they go?

Do you worry at all that the trust/confidence you have in the financial institution/brokerage firm will be upheld during times of distress?

How are you hedging it, if you believe such a worry about 'vanishing customer funds' is genuine?

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  1. Vicente


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    1   1:59pm Tue 14 Feb 2012   Share   Quote   Permalink   Like (1)   Dislike  

    Well I'm down here in the "cheap seats" where SIPC and FDIC protection are sufficient coverage. So I don't hedge for it at all. I did have all my eggs in the E*Trade basket, but have spread into Fidelity and Ameritrade, partially to take advantage of promotions (Delta SkyPesos) and partly to see if I like them enough to move out of E*Trade entirely. As best as I understand it SIPC should take care of my equities but not the cash. However I don't generally leave a lot of cash laying around in a brokerage account indefinitely, if there's much there I move it back to bank account where I have FDIC protection.

  2. uomo_senza_nome


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    2   2:11pm Tue 14 Feb 2012   Share   Quote   Permalink   Like (1)   Dislike (1)  

    Vicente says

    where I have FDIC protection.

    Vicente says

    where SIPC and FDIC protection are sufficient coverage.

    SIPC protection is only for equities you're right. We shouldn't have much cash in brokerage accounts simply sitting. that much should be clear through the MF Global scandal.

    Are you sure about the FDIC?

    http://www.bloomberg.com/news/2011-10-18/bofa-said-to-split-regulators-over-moving-merrill-derivatives-to-bank-unit.html

    This should help to clarify why Glass-Steagall needs to be reinstated. And why the Fed may be a poor choice as bank regulator, itself being a private institution owned by the banks.

    Vicente says

    Well I'm down here in the "cheap seats"

    Include me too ;) 1.2 billion in customer funds is not a lot of money from a giant's perspective. But it still means substantial amount to the customers who lost it.

  3. clambo


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    3   4:34pm Tue 14 Feb 2012   Share   Quote   Permalink   Like (2)   Dislike  

    When I am investing, I buy mutual funds. These I have at Vanguard and T.Rowe Price.
    I've only bought several individual stocks, which I consider more speculation than investing. I sold them and kept Apple and bought a few shares. That is the only individual stock I own.
    I have heard of Merrill paying fines in the millions of dollars so many times over the years I wouldn't touch them with a 10 foot pole.
    Since my Vanguard stock trades are so inexpensive ($2) there's never a reason to even consider another place do make them. I think T.Rowe Price brokerage fees are also very low.
    I have no fear of anything unusual happening at either Price or Vanguard to any cash in a sweep account.
    I have no need for the other places whatsoever.

  4. APOCALYPSEFUCKisShostikovitch


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    4   8:47pm Tue 14 Feb 2012   Share   Quote   Permalink   Like (2)   Dislike (1)  

    The best investment today is a working knowledge of how to behead an attacker with an ax.

    In mere months, it will mean the difference between eating or being eaten.

    Get used to it.

  5. DrPepper


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    5   7:16am Wed 15 Feb 2012   Share   Quote   Permalink   Like (1)   Dislike (1)  

    I don't have much faith in the legal protections set up for investing. MF Global is a ringing indication that there is no rule of law and the system is broken.

    I checked my Etrade accounts and technically only margin accounts are subject to rehypothecation but the customer agreement specifically states that cash in my regular brokerage account is NOT segregated.

    So if I understand all of this correctly, if Etrade went POOF tomorrow my shares in stocks SHOULD be okay but my cash could conceivably be gone.

    As a result I lowered the amount of cash I had sitting one the sidelines by about 20% and returned some of it to a regular bank, some to silver/gold, and some to the Mark 1.0 Mattress.

  6. uomo_senza_nome


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    6   8:36am Wed 15 Feb 2012   Share   Quote   Permalink   Like (1)   Dislike (1)  

    clambo says

    I have no fear of anything unusual happening at either Price or Vanguard to any cash in a sweep account.
    I have no need for the other places whatsoever.

    Are you sure? Doesn't vanguard give the same protection like other firms such as Etrade/Fidelity? They all are insured by SIPC, but SIPC only works for securities - not cash.

    I guess normalcy bias is hard to overcome ;)

  7. uomo_senza_nome


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    7   8:36am Wed 15 Feb 2012   Share   Quote   Permalink   Like (1)   Dislike (1)  

    APOCALYPSEFUCK is Tony Manero says

    In mere months, it will mean the difference between eating or being eaten.

    Aargh...I should get to work on that potatoes :)

  8. clambo


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    8   9:35am Wed 15 Feb 2012   Share   Quote   Permalink   Like (2)   Dislike (2)  

    I don't keep much cash so it doesn't matter I guess.

  9. uomo_senza_nome


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    9   10:47am Wed 15 Feb 2012   Share   Quote   Permalink   Like (2)   Dislike (2)  

    Ritholtz has a piece relevant to this topic:

    http://www.ritholtz.com/blog/2012/02/volcker-rule-mfglobal-bankcounterparty/

    You are, in fact, a counter-party to your bank.


    Thanks to the sheer ideological idiocy of Phil Gramm, enabled by the corruption of former Treasury Secretary Robert Rubin and the hubris of former Treasury Secretary Larry Summers, Glass Steagall was repealed. Thus, banks could be as stupid as they want to be — and you get to foot the bill.

  10. Dan8267


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    10   11:18am Wed 15 Feb 2012   Share   Quote   Permalink   Like (1)   Dislike (1)  

    I don't have trust issues with Vanguard, the mutual fund company I invest with. However, I would have trust issues with other large financial companies.

    At least with passively managed index funds, you don't need much trust in the financial institution. However, I have long-term trust issues with the U.S. economy. Seems like it's century is over and America is going to be a second-rate economy during the 21st century.

  11. Vicente


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    11   11:29am Wed 15 Feb 2012   Share   Quote   Permalink   Like (1)   Dislike  

    Thanks for pointing this out. But for me, it's really only practical at the retail investor level to spread one's risk over more than one brokerage and to shelter cash under FDIC. Anything else would make sense for serious money managers but takes too much time to be worthwhile.

    Alternatives? Buy gold and bury it in your yard I guess.

    Quote for the day is relevant:
    "Of course the game is rigged. Don't let that stop you--if you don't play, you can't win." - Robert Heinlein

  12. freak80


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    12   9:28am Wed 22 Feb 2012   Share   Quote   Permalink   Like   Dislike (1)  

    Vicente says

    Alternatives? Buy gold and bury it in your yard I guess.

    I've thought about doing that...but gold "crashed" in 2008 along with everything else.

    Seems like cash is the worst asset class right now, except for all of the others.

  13. theoakman


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    13   10:37am Wed 22 Feb 2012   Share   Quote   Permalink   Like   Dislike (2)  

    wthrfrk80 says

    t the customer agreement specifically states that cash in my regular brokerage

    Gold didn't crash, it pulled back.

  14. thunderlips11


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    14   8:39am Wed 7 Mar 2012   Share   Quote   Permalink   Like   Dislike   Protected  

    It does for MFGlobal Customers:

    "Time for me to pick up my toys and go home."
    It's perhaps no surprise that customers burned by the MF Global collapse have sworn off commodities, and in some cases, investing in general. Desai says, "I've stopped contributing to any 401(k) plans. I don't put any money, anywhere that's not FDIC insured. I'm buying real assets and I've quit all the trading."

    http://www.fool.com/investing/general/2012/03/06/after-mf-global-collapse-customers-struggle-with-c.aspx

  15. freak80


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    15   9:12am Wed 7 Mar 2012   Share   Quote   Permalink   Like   Dislike  

    Trading = gambling.

    The house always wins in the long run.

  16. freak80


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    16   9:13am Wed 7 Mar 2012   Share   Quote   Permalink   Like   Dislike  

    And at least a casino doesn't charge a $7 fee for each gamble.

    Plus there are lights, sounds, and an all-you-can-eat buffet.

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