Just about a year ago to the day, Bernie Madoff confided in his sons that his multi-billion dollar investment management business was actually a fraudulent Ponzi scheme. Returns had been fabricate to attract more money, clients looking to redeem assets were paid from new deposits, and in all more than $65 billion was essentially stolen from investors. The good news is that Bernie Madoff is paying for his crimes, sentenced to spend what will certainly be the rest of his life behind bars.
Lives were ruined with the Madoff scandal, but slowly some investors are seeing at least a partial recovery of the assets they lost. During the first ten months of this year, The Securities Investor Protection Corporation (SIPC) had paid out more than $534 billion to Madoff investors. While it pales in comparison to the billions he stole that will never be returned, it makes sense to take a look at 3 different forms of protection for investors and customers of financial institutions.
SIPC: The Securities Investor Protection Corporation, or SIPC, was formed by Congress in 1970 to protect investors in the event of the collapse of a money manager or brokerage firm. In the case of bankruptcy, fraud, and other unforeseen events that put investment assets at risk, SIPC is able to step in and restore at least some cash to investors. It’s important to note that SIPC coverage does not protect investors from poor investment decisions, so no owners of Enron stock got any relief from SIPC. However, in cases that qualify, SIPC covers up to $500,000 in securities including up to $100,000 in cash. Many brokerage firms purchase supplemental insurance that protects all customer positions in the event of that firm’s collapse.
FDIC: the Federal Deposit Insurance Corporation, or FDIC, was started in 1933 to shore up confidence in the banking system after the bank failures of the Great Depression. This is not a government-funded program. Instead, it is funded by banks who participate in the coverage. In recent months the mounting bank failures have put a great deal of pressure on the FDIC fund, but every FDIC-backed dollar held in an institution that has failed has been recovered by bank customers. The normal FDIC limit is $100,000 per customer at each financial institution. Congress, in light of the recent financial crisis, has pushed the limit the $250,000 per customer at each institution through the end of 2013.
NCUA: The National Credit Union Administration, or NCUA, is a government agency that charters and supervises credit unions. This group backs a fund called the National Credit Union Share Insurance Fund (NCUSIF) that provides deposits at credit unions with backing based on the full faith and credit of the US government. This body was formed in 1934 as part of the Federal Credit Union Act and it currently insures more than 80 million account holders across the country. The limits on NCUA are the same as those for FDIC insurance.
