How Safe Are Your Assets?

George Hosfield, CFA, is Ferguson Wellman’s chief investment officer and chairs the firm's Investment Policy Committee. In addition, he is a member of the equity team with responsibility for management of the consumer discretionary sector on a global basis. He is a principal of the firm.

On the heels of the Fannie Mae and Freddie Mac bailouts last week—yesterday's announced bankruptcy of Lehman Brothers, the sale of Merrill Lynch and concerns about the solvency of American International Group (AIG) have rocked the financial sector. Though the human and financial toll of such actions is significant, we were heartened by the regulators’ willingness to stand aside and let the free market exercise the forces of “creative destruction.” The subprime-induced contagion has stretched the fabric of the financial system to its limits. Those companies that became leveraged beyond reason and competence are now faced with failure—as either their liabilities exceed their assets, or they lack the liquidity necessary to continue business as usual. These troubled companies have been spread across the financial sector and include brokerage firms (Bear Stearns, Lehman Brothers, Merrill Lynch), insurance companies (AIG) and banks (IndyMac, Washington Mutual). This is understandably unsettling because such institutions are normally considered safe havens and good stewards of their clients’ assets. Their failure, or potential failure, has led the general public to question the safety of other financial institutions.



How long will this subprime-induced financial turmoil persist?

Certainly nobody knows. As has been the case with other financial crises and dislocations (more on this in our upcoming third quarter Market Letter), the U.S. financial system will get through this problem. At this juncture, we believe the more important question is price, not time. In other words, when will the capital markets fully discount the bad news and be poised to mount a recovery? It is hard to know with precision. Though the economic slowdown (rising unemployment, anemic GDP growth, tepid consumer confidence) and “headline risk” associated with de-leveraging personal and corporate balance sheets could extend well into next year, we suspect that we are in the “latter innings” of discounting the pain of this crisis.

Are my assets safe?

In the unusual event that problems were to occur, there is insurance for brokerage accounts provided by the Securities Investor Protection Corporation (SIPC) for up to $500,000 per brokerage account and $100,000 of un-invested cash to each client. Generally speaking, brokerage firms carry additional SIPC coverage beyond this limit. Accounts held at major brokerage firms (Merrill Lynch, Charles Schwab, UBS, etc.) or bank custody departments offer additional safeguards that make it extremely difficult (short of fraud) for client assets to be commingled with the brokerage firm’s assets. However, your personal banking accounts are a different matter. As we have stated in previous communications—if you have any concerns about the health of your personal bank, you should make sure that your holdings (per depositor) in any single institution are less than $100,000 as a precautionary measure.

As always, please do not hesitate to contact me or your portfolio manager with any questions or comments.

Best regards,
George Hosfield, CFA