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What happens to the stocks that a brokerage firm holds if it bankrupts?
04-05-2018, 04:44 AM (This post was last modified: 04-05-2018 04:46 AM by Rako.)
Post: #1
What happens to the stocks that a brokerage firm holds if it bankrupts?
Lehman Brothers was a major brokerage firm that crashed in 2008. It held their customers' stocks and bonds from other companies' assets. So if a Lehman customer wanted to buy a bond in another company, Lehman would hold it for the customer.

What happened to the stocks and bonds when Lehman Brothers went belly up? If a stock or bond held by Lehman Brothers on behalf of the customer was $50 during the bankruptcy, might the customer receive only $5 when Lehman's holdings were distributed in order to pay off creditors? It's an important question in a time of risky markets.

Brokerage firms are supposed to segregate the customers' stocks and bonds from the company's own bonds, leaving the customers' stocks and bonds intact in case the brokerage firm goes under. But supposedly since the Man Financial case in 2011, the courts might not honor this distinction if the company goes under:
What would happen if you had your money in Lehman Brothers when it filed for bankruptcy?

Quote:By "your money" I am going to assume that you mean you had a trading account at Lehman, (rather than you owned shares in Lehman stock.) Up until Man Financial went belly up, the answer would always have been, "client funds are 100% segregated from the business operations." ManFi proved that was a myth. No one went to jail for stealing client funds. (Technically, Man did nothing officially illegal, but in my book, stealing is stealing.) ~Jack Edward Heald

Quote:the strict answer is that you become a creditor.

Theoretically your position as a creditor determines in what order, available funds go to repayment. But it is not always true.

A while back, some people had a gold account with one of these financial houses that went bad. The people had “segregated accounts’ (meaning the funds were not considered bank capital) and also, in many cases, could point to a bar of gold with their own serial number on it.

Some judge came along and said .. nope. It was all to be sold and the funds distributed pro rata because of “fairness”.

The question you are really asking is not what happens to you .. the answer to that is simple … you get screwed (if not by the financial house, then by the courts). The real question is … can you believe any of it .. the claims to stability of the fin house or the idea that there can be justice in the courts. ~Carl Wimmer


Quote:MF Global, formerly known as Man Financial, was a major global financial derivatives broker, or commodities brokerage firm that went bankrupt in 2011. MF Global provided exchange-traded derivatives, such as futures and options as well as over-the-counter products such as contracts for difference (CFDs), foreign exchange and spread betting.

The trustee liquidating the company said that the losses incurred by customers of MF Global stood at $1.6 billion at April 2012.[4][5] In January 2013, a judge approved a settlement that would return 93 percent of customers' investments, with the prospect of additional payouts from the company's general estate.

I know of another case where a brokerage firm invested in profitable bonds of a successful company and sold the bonds to its investors, but then made other, fraudulent investments. As a result, the brokerage firm went bankrupt and the investors, including those who bought the profitable notes, recovered only a tiny percent of their invested principal.

So imagine if a giant brokerage firm like TD Ameritrade goes belly up today. What will happen to the stocks and bonds that TD Ameritrade held on behalf of its customers today? The customers would not be left holding any stock certificates, as everything would be in book entry form with TD Ameritrade.
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04-05-2018, 08:03 PM
Post: #2
RE: What happens to the stocks that a brokerage firm holds if it bankrupts?
In my country if that were to happen you would lose your investment. Why would anyone allow a broker to hold their stock portfolio?
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04-06-2018, 03:20 AM
Post: #3
RE: What happens to the stocks that a brokerage firm holds if it bankrupts?
The old, usual way to buy and sell stocks was to call up the stock's company (like Exxon or a power plant company) yourself and buy a stock in that company directly. Then the company sent you a stock certificate in the mail. When you wanted to sell the stock, I think that you might have to look for a purchaser or else you could call the company and they could get around to it in a few days.

Nowadays, a major portion of Americans, if not most, use brokers or brokerage firms like Lehman Brothers or TD Ameritrade to buy and sell stocks. Supposedly it's easier for record keeping and for use, and quicker. So if you see that the stock is going up or down, you can use the broker system to buy it immediately.
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