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Rule n.1 for small investor: I don’t trust anybody. Not even the institution which is holding my stocks. May 12, 2010

Posted by deminvest in investment.
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Can a broken bank grag your stocks into its black hole?

Can a broken bank grag your stocks into its black hole?

I always had a little doubt. Little but scary:

What happens to my stocks if the financial institution which holds them goes belly up?????

This doubt was stronger last year, when banks WERE going belly up.

I read everywhere that stocks and securities held by banks do belong to the customers and are not involved in bank bankruptcies.

I did believe it.

Still last year I decided to switch off a program by which my bank was giving me small “risk free” returns lending my stocks to customers who would use them to sell short. My thought was that a bank in big trouble may want to gamble to save its life. What better gamble in times of trouble than shorting a stock market in free fall? If I lend my stocks to them and they go broke, I simply become one of their (unhappy) creditors.

Well today I read an article reminding me I shall not trust anybody. The unthinkable has happened last year:

the day before filling for bankruptcy, Lehman Brothers branch in London transfered 11 Billion of securities owned by their customers to its NY branch.

http://lehmanlotto.blogspot.com/2009/11/lehmans-uk-administrator-proposes-to.html

How long will it take them to get those securities back to England?

I will try to:

1) divide my securities into 3 trading accounts on 3 different financial institutions

2) avoid banks accounts by branches of foreign banks. If I want to use a foreign bank I’ll open my bank account in the country where it is headquartered. Also Icesave gave a bad time to its foreign customer when it went broken.

Comments»

1. rtal - May 15, 2010

ur right..one has to leverage on levels of risk probabilities.. banks which are branches of foreign banks may have higher risks of exposure in dragging investments in some kind of black hole but are there laws or home country policies that may guard investors on this?

2. Deminvest - May 17, 2010

What happens is that every bank account is insured by the government of the country where it resides for a certain amount. I believe it is $ 100.000 in the US.

Usually banks that start operating in a foreign country open a new corporation in the new country.

When the main bank goes bankrupt, also the foreign corporation goes broken, because it has too many cross obligations with the main corporation to survive.

So great problems arise:

1) Bank CEO is subject to his homeland judges. To have less problems at home, he may bring home as much cash and securities as he can hours before bankrupt. Homeland creditors will be more satisfied and more homeland jobs can be saved. This is what happened with Lehman.

2) Governments will get into discussions to figure out which is liable to pay back bank customers. There is international agreements, but international agreements can be interpreted, more so when countries are in times of financial weakness . Good example of such situation is Icesave dispute:
http://en.wikipedia.org/wiki/Icesave_dispute

This sums up to the fact that there is a very small risk to have troubles. You don’t risk to lose all your money, but your do risk to end up involved in legal actions that may
* be costly,
* take a long time and
* not be 100% successful.

3. rtal - May 21, 2010

thanks for the info deminvest u say it very well as a stark reality


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