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November, 2013


Are we really protected if, instead of keeping money under the mattress, we have cash, cash-like funds, or other assets held by financial firms? Well, yes and no.

The bad news: Bank and brokerage account errors at customers' expense may not have to be corrected by either the company or the feds, even when an institution admits responsibility for the mistake. According to a ruling a few years ago, in a suit by one of its clients against Bank of America, even if they clearly made a boo-boo (not quite the official language used in the decision), the financial entity does not have to make things right when a patron did not discover and report the problem to the delinquent bank in a timely manner. In that instance, more than a year had gone by from the time of a customer's multiple thousand dollar deposit till he noted it had not been credited to his account. The court decided he ought to have called it to the corporation's attention earlier and that B of A was not required to make restitution. (It may be best not just shelve or toss out those bank statements!)

Further, in case of severe hacking or of either local or national disasters that shut down the internet and/or one's bank operations for an extended period, do not expect to pull dollars out of an account till after the problems have been corrected. Under certain circumstances, that money under the mattress idea may not look so bad.

More bad news: Even though on average customers would be better off not trading assets but keeping them in their accounts for the long haul, in some states (and TX is one of them), a buy-and-hold investor can lose some or all of his/her investment simply by not doing anything in their account(s) for awhile.

I recently was required to notify one of our mutual fund account companies more or less that I was still alive and kicking or else, they said, the value of my investments with them, over $5000, would be turned over to the State of Texas in accordance with an "account inactivity" law. Presumably if I had been on extended vacation and/or had required sustained care and did not receive the company's mailing till returning or getting better a few months later, or if I had assumed the envelope contained junk (which is what it looked like) and had ignored or thrown it away, I would before long be several thousand dollars poorer and the state that much more affluent.

Good news, sort of: As we understand it, our member-FDIC bank accounts, both savings and checking, are guaranteed against losses due to bank failure, up to $250,000 per account, per account holder, and per financial institution, by the Federal Deposit Insurance Corporation, an independent agency of the U.S. government. It is possible for a household to have $500,000 of such coverage, for example if a husband and wife have a joint bank account, or even a $1,000,000, in case a couple and two older children are jointly named in a revocable trust account worth that much or more.

Losses due to fraud or withdrawal using stolen identity are apparently not protected in this way but may be covered by provisions involved in credit or debit card abuse. If in doubt, check with your bank or card companies. It may be a mistake to assume that, just because one has money in the bank, it is safe. What is more, online checking is usually not as secure as regular, old fashioned bank or credit union checking, and even if the banks make good on thefts accomplished through the internet, there may be nuisance complications which could tie up one's funds for awhile.

More good news: Losses of account funds due to the bankruptcy or other closure of a brokerage that is a member of the Securities Investor Protection Corporation (SIPC) and that holds our bonds, bond mutual funds, or shares of our exchange traded funds, stocks, or stock funds, are protected up to $500,000 per account by the SIPC. Certain key deadlines apply. For example, one should expect no joy if filing a claim with the SIPC more than six months after a loss has occurred.

Moreover, if a terrorist act shuts down the exchanges on which our shares are traded, it may be quite awhile before buying and selling, and hence accesses to those assets' redemption values, are restored. However, if we own pieces (shares) of strong businesses, chances are good that eventually they will regain the pre-terrorism values and prove to have been worthwhile investments, despite such contingencies as limited wars, hurricanes, earthquakes, or the destruction of Wall Street. (If the Big Apple, Washington, D.C., Los Angeles, and San Francisco are nuked at essentially the same time, all bets are off.)

Considering that neither the FDIC nor SIPC are likely to cover losses due to most account circumstances other than failure of the institution holding one's assets, it seems wise to check with the particular bank, credit union, mutual fund company, brokerage, or other financial entity to learn in advance of an adverse incident exactly how one is or is not protected and what steps he or she can take to minimize theft, losses from incompetent handling of our records or resources, and so forth.

In brief, we have contingent protection of our cash equivalent, equity, or bond accounts, yet should probably not take for granted the absolute recovery against losses of even covered values, in the event of an unfortunate financial event.

For more information about what is and is not covered, the reader may find of interest the Q & A pages on FDIC - Your Insured Deposits and SIPC - Investor Protection.


Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)

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