My 1st Million At 33 – yes, you can do it too

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  • Archive for January, 2012

    Re-hypothecation is a standard practice for margin accounts

    Posted by Frugal on 1st January 2012

    Several friends of mine have concerns about their stock account safety, due to the concern of recent MF Global blow-up. So I read through the customer’s agreement and emailed the following five commonly used online brokerage firms: TD-Ameritrade, Scottrade, FirsTrade, Interactive Brokers, WellsTrade. ALL of them spelled out exactly and replied back to me with affirmative answers that they CAN re-hypothecate (or re-pledge) any of your assets in your margin brokerage accounts. For some of them, like Interactive Brokers (and a few others), it is not possible to move your stocks into your cash side of your margin account (unless your account is a cash-only account), even when you don’t use the margin buying power in your account. But of course, any gains or losses due to the re-hypothecation of your assets are not yours. ALL stock accounts are protected by SIPC coverage ($500K, including up to $250K cash, in the event of theft). But as you know, there are probably trillions of assets protected by the very small amount at SIPC. If there is a big theft like Madoff’s Ponzi scheme, SIPC is very hard-pressed to cover everything.

    The best thing to do is still to exercise your proper judgment, and go with a firm that doesn’t do any proprietary trading (usually against their own customers like many big Wallstreet firms). On paper, everything is “safe” until the money in the pot is just not enough for everyone.

    I also suggest to move your assets to cash accounts if possible. When you get a dividend-in-lieu instead of a regular dividend from your stocks, or you don’t get any mails or emails about voting events for your owned stocks, you can be very sure that your “own” stocks have been sold short by someone against your own interests.

    Also close any accounts at JP Morgan (or Chase bank), which has basically but “legally” confiscated MF Global customers’ funds for the failed trades by MF Global. Don’t ask me how it can be legal. Thanks to Federal Reserve for allowing this to happen.

    Regardless, I think if MF Global customers cannot recover their funds and at the same time Corzine doesn’t go to jail, there is something deeply wrong in this country.

    Posted in Investing | Comments Off