Good times generally make for self-congratulatory annual reports, which make for cheap entertainment when bad times hit.
A choice document is the 2007 report of the Securities Investor Protection Corp. The SIPC is a nonprofit organization established by Congress in 1970, to help recover investors’ assets when a brokerage firm closes because of bankruptcy or other financial problems.
Until recently SIPC was an obscure operation with little activity. Last year, it wasn’t called on to oversee a single case.
That was because of “the vigilance of the Securities and Exchange Commission, the Financial Industry Regulatory Authority, and the state regulators,” Chairman Armando J. Bucelo Jr. wrote in his report to SEC Chairman Christopher Cox.
Bucelo went on:
SIPC’s Board of Directors is constantly concerned that SIPC has sufficient resources to deal with any foreseeable circumstance. At year end, the SIPC Fund stood at an all time high.
The low level of brokerage failures over the last few years has allowed our assets to grow, since those funds were not needed to satisfy new customer claims. …The probability that the Fund will be exhausted in a
one year period is very small.
In the ongoing financial hurricane, the chairman’s assurances now have a “Brownie, you’re doing a heck of a job” tone.
The SIPC is representing clients of Bernard Madoff, where losses have been predicted as high as $50 billion. As of Dec. 31, 2007, SIPC assets were just $1.5 billion.
The Madoff case is the biggest ever handled by the organization. And as the Wall Street Journal has noted, the organization has “a miserly track record of paying out claims.”
The law establishing SIPC provides that customers of a failed brokerage receive all stocks and bonds registered in their names. The SIPC reserve fund can then pay up to $500,000 to each customer suffering losses.
The fund is supported through assessments on SIPC members - the brokerages themselves. Until 1995, this fee was based on a percentage of each member’s revenues. After that, it was set at a paltry $150 per year, with most of the fund’s remaining revenues coming from investments. Last year, the organization collected just $850,000 from member brokerages.
The SIPC operation appears to be another instance of support for oversight and enforcement dwindling during the halcyon years.
But oversight agencies aren’t established for the good times. Warren Buffett’s oft-repeated observation applies: “You only find out who is swimming naked when the tide goes out.”
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