Another large bankruptcy involving the brokerage industry hit Wall Street recently and resulted is more pain for its’ clients. As has been widely reported in the MF Global bankruptcy (See NY Post, Friday, November 18, 2011” Burned by Greed”) many of its clients now face the prospect of either losing part or all of their investment. This is true with customers who held investments with MF’s securities brokage accounts. Cash only customers may be paid in full.
People will learn that the bankruptcy process can be slow, but fair. Many had their cash accounts frozen and only recently had the monies released by the bankruptcy judge.
There are other stories of people with their life savings in jeopardy. One of the major lesson to be learned is that of risk in the marketplace. Companies can and do go bankrupt and when that happens the average investor can be hurt in the process. Bankruptcy aims to even the playing field but is not a perfect solution. The problem is that there is only a limited amount of assets that can be recovered and all the clients claims are treated equally in this process. The claims generally are greater than the assets recoverable. So as in the MF case some people will only get 60% of their money back.
One way to protect oneself is to be aware of the risk and not to place all of one’s assets with any one broker or asset class. Diversification would have helped some of these people. The old saying of “not to put all your eggs in one basket” applies here as well. Those who placed their life savings with MF surely, given a second chance, would have placed only a part of their capital with MF and the rest in bank Cd’s , money market, or even another broker.
The bankruptcy process is fair and can serve to protect clients to recover funds which may not be available without the existence of such laws. However, it is not a guaranty that clients will recover all or any of their funds. Buyer beware.
