What will happen if my bank goes bankrupt?
November 12, 2007 3:04 PM   Subscribe

What will happen to my money if E*Trade declares bankruptcy?

I have a few bank account elsewhere, but the majority of my money is help in various E*trade accounts. This includes checking, savings, brokerage, and CDs. I'm aware that the money in the banking arm is FDIC insured, but what does that really mean? Is all of my money insured? Will it all go away if E*Trade goes under?

Any sort of real world explanations and advice would be appreciated.
posted by monkeystronghold to Work & Money (22 answers total) 2 users marked this as a favorite
I googled this for you.
posted by found missing at 3:09 PM on November 12, 2007

This e*trade page suggests that FDIC insurance (with dollar cpas) applies to checking, savings, and CDs. Brokerage accounts are "investment products," described as not FDIC insured.
posted by ClaudiaCenter at 3:11 PM on November 12, 2007

poof - gone
posted by caddis at 3:13 PM on November 12, 2007

Currently #20 on Google Trends! In addition to the link found missing posted, there's also this thread from Yahoo Answers, FWIW.
posted by Armitage Shanks at 3:14 PM on November 12, 2007

Brokerage accounts should be SIPC insured rather than FDIC. What that means I do not know.
posted by Justinian at 3:19 PM on November 12, 2007

Caddis is, as far as I can tell, completely wrong.
posted by Justinian at 3:20 PM on November 12, 2007

First off, don't assume that if E*Trade goes under that your money will automatically be lost. There's no corporate blackhole that is created when a company closes up.

In this specific case, your checking, savings, and CD are federally insured by FDIC to $100,000 each. Your brokerage account is insured by SIPC to $100,000. And, your stocks, bonds and other traded securities are yours; the company is simply acting as a custodian and holding them on your behalf.

You might face some headaches, but shouldn't face loss.
posted by NotMyselfRightNow at 3:25 PM on November 12, 2007

I will chime in to say that caddis is wrong for the sole purpose of lowering the asker's hypothetical panic level. Please do some cursory research first - I don't pop in to medical threads and say "You're going to die, sorry. Laters!".

SIPC protects you up to $500,000 and claims to restore funds in 99% of all cases. You should make sure you have a statement or something that details your current account holdings, or at least make your own list, since it looks like you might need to fill out some forms if it comes to that. Here's their information pamphlet [pdf].
posted by 0xFCAF at 3:31 PM on November 12, 2007

The FDIC recently closed NetBank. ING stepped in to buy their FDIC-insured deposits. Info here.
posted by Andy's Gross Wart at 3:33 PM on November 12, 2007

When a bank fails, federal authorities usually try to find a white knight to come in and take it over. If that happens, then depositers don't lose a dime. The white knight assumes the full liabilities and covers them 100%, even if they exceed FDIC guidelines.

If E*Trade goes belly-up, I wouldn't be surprised if something like that happens.
posted by Steven C. Den Beste at 3:50 PM on November 12, 2007

This happened to me with a brokerage in a foreign country. Obviously, the legal ramifications were difficult, though I'd wager the basic dynamics were the same.

My third-party mutual fund (my only holding at the time) was transferred to a smaller brokerage house automatically, which, a year or two later, transferred it to one of its subsidiaries.

After awhile, there was a run on the banking industry in the aforementioned foreign country, and the mutual fund's book value dropped to about a mil US due to liquidated accounts. At this point, we were notified that it had decided to close up shop, and we received a check for our liquidated shares (taking a long-term capital loss in the process, alas).

So that's what may happen in a worse-case, sucks-to-the-max scenario, painted in broad strokes (and taking into account differences in security laws). Transfer of mutuals and stocks to a third-party brokerage, then, if the US economy truly tanks, a possible liquidation by the fund managers of mutuals. Or stocks close to the zero point due to bankruptcy filings.

But unlike our sanguine, bundle-of-joy friend caddis above, I don't think it'll get that far. Yes, E*trade has broken the critical $10 marker, but its fundamentals are okay, and I think it'll aggressively downsize before filing for bankruptcy. (The country in which my security company went kaput was downsizing-averse in the 1980s, FYI).

So I'm gonna sleep easy tonight. And for the rest of the week, barring a major catastrophe.
posted by Gordion Knott at 3:51 PM on November 12, 2007

For your brokerage accounts, isn't E-Trade just a conduit to facilitate the transaction? Your money is still with the company you chose to invest in, correct? Your money should still then be there, but you will have to find another way to track it or another broker. I agree with some of the other posters, the feds aren't going to let the whole thing sink without offering some assistance. It still sucks, though. Sorry.
posted by 45moore45 at 3:57 PM on November 12, 2007

That's my understanding too (not that I'm an expert). If you've bought stock in IBM, then you own that stock in IBM and what nothing that happens to your broker changes that.
posted by winston at 5:33 PM on November 12, 2007

Yeah. I wouldn't keep wads of cash sitting in your brokerage account, though. I have $22.83 in cash in my brokerage account so I'm not too worried.
posted by Justinian at 5:36 PM on November 12, 2007

I was wrong.
posted by caddis at 6:31 PM on November 12, 2007

From the brokerage standpoint, you have SIPC coverage to a minimum of $100,000. Many firms carry excess SIPC coverage which is private insurance that covers the risks to the account above $100,000. I do not know if E*Trade does or does not. IF E*Trade goes into a SIPC liquidation, you will get your money up to $100k, but it will take a few years for them to sort it all out and verify the books and records of the brokerage.

My experienced guess is that right now, likely tomorrow, the SEC and/or NASD (FINRA) will be at the brokerage ensuring that customer funds and fully paid for securities or in the proper 15c33 segregated accounts "locked up" from the brokerage and its business risks. IF E*TRade is in compliance, then your only risk is time to get your money. If you purchased stock on margin, then likely, ETRDC loaned out your securities and they would have to get them back and you would have to either pay for the part your borrowed or sell them to get the stock or your cash from those shares back.

I agree with an earlier poster that the most likely scenerio would be another brokerage (Ameritrade? Schwab?) would buy the accounts from the bankrupt entity and all accounts would be guaranteed by the purchasing firm.
posted by JohnnyGunn at 7:36 PM on November 12, 2007

Does E*Trade really show any signs of going under?
posted by ooklala at 7:37 PM on November 12, 2007


While your money is FDIC (to $100k) insured and your securities are SIPC insured (to $500k) you do not want this bureaucratic nightmare. If will take a long time for you to get your money, and there is no reason to suffer that.

The problem is not that you will lose you're assets (you won't), the problem is what you do when the website goes dark one morning and you can't log into your account.

You can transfer your account to another brokerage in about 7-10 days, and they do all the grunt work, and believe me, they are getting the calls. A lot of the aggressive investor folks are moving to optionsXpress (which also has stocks, mutual funds, etc.) and the more conservative folks are flocking to Schwab and TD ameritrade. These brokerages aren't involved in the mortgage nonsense and are pretty stable.

My advice to you is to call Schwab or some other brokerage, explain that you want to get the hell out of Etrade pronto, and they'll take care of you.
posted by Pastabagel at 7:42 PM on November 12, 2007 [2 favorites]

Your brokerage account is insured by SIPC to $100,000. And, your stocks, bonds and other traded securities are yours; the company is simply acting as a custodian and holding them on your behalf.

Note that SIPC covers fraud committed against you by your broker; it's not really the same thing as FDIC insurance on your bank account!

That being said, let's say your brokerage account at E-Trade contains ten shares of XYZ stock, each valued today at $10. If the brokerage goes under tomorrow, you still own the stock -- it's in your name -- but you have no guarantee as to its value! If it takes the government two months to sort out the accounts and transfer your information and holdings over to NewCompany, you'll still own the ten shares, but if in those two months during which you had no access to your holdings their value has declined to $5 a share, well, that sucks for you.

The white knight [bank] assumes the full liabilities and covers them 100%, even if they exceed FDIC guidelines.

While this has happened in the past -- i.e. depositors have been "made whole" by the FDIC even if their accounts exceeded the $100,000 maximum -- there is no guarantee that the FDIC will do this with all situations going forward. They are not obligated to do so.

Does E*Trade really show any signs of going under?

Yes -- and you can thank the housing bubble shitstorm for that. Basically, they bought a bunch of CDO's (collateralized debt obligations -- basically, highly leveraged "bond sausages" made up of a mix of mortgage-related mystery meats, some of which have turns out to be near-worthless) and according to Citibank's analysts today, their debts currently exceed their ability to repay. If Citibank's people are right, E-Trade is now functionally bankrupt, though not declared as such yet. However, everybody loves their trading software, so there's a chance they'll get bought out by some bank who thinks that's a pretty great asset.

By the way, E-Trade will not be the last brokerage/bank/money market to go tits up in the coming months...more "OMG, our debts exceed our deposits" fun is coming to some funds, banks, and companies near you in the very near future...

Finally, a note for people who are not E-Trade customers but who may have options in play on the stock...

I have three April $10 put options on E-Trade, bought about a month ago, and so of course the value of those puts went crazy high today (hooray!). But after doing a quick happy-dance, I wondered, do I sell the puts today/tomorrow for quick profit, or do I wait until I can exercise the actual options in April, knowing that E-Trade may not actually be in business anymore come April? Basically, what happens to my put options if the company is in bankruptcy and/or the stock stops trading before the options date comes along? So I called my brokerage, Fidelity, today and talked to two different people who both had to check with the back office to get a solid answer on this, and it turns out that yes, it is possible that if trading is halted on the stock -- or even if it technically stays listed but its value drops very very low (like what happened to NetBank), it is possible to lose your options position altogether. So, of course, I sold the puts. Just FYI for other people who are short stocks like this one...
posted by Asparagirl at 9:32 PM on November 12, 2007 [4 favorites]

Thanks, Pastabagel. Asking another brokerage to hassle etrade for me is a terrific. idea.
posted by Coventry at 3:40 AM on November 13, 2007

No problem, but I can promise you that E-Trade will not go bust. The govt. and Fed will not allow it. If a brokerage went dark, it would create a run on the markets not seen since 1929.

Instead, they will broker a buyout or takeover of the company. In fact, just this evening E-Trade's CEO unexpectedly left the banking conference where he was supposed to speak, which means either he's walking the plank or the company is getting sold.

In case anyone cares, this BusinessWeek article describes the financial details. Etrade's brokerage business is fantastic, so it would be attractive to anyone with a few billion $ to inject into the company.
posted by Pastabagel at 5:05 PM on November 13, 2007

If a brokerage went dark, it would create a run on the markets not seen since 1929.

Didn't a few brokerages go belly up in the 2000/2001 tech boom/bust? Not huge ones like E-Trade, and I don't think anyone lost major money, but still.
posted by Asparagirl at 5:51 PM on November 13, 2007

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