The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: Dago on September 22, 2019, 12:59:22 PM
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Just wondering what is the process and the protection for customers if Black Rock goes to bankrupt. Any idea ? are the physical etfs somehow protected because there are proper stocks held by the company ? or would that just be part of the general assets to distribute ?
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Yes, the owners of the ETF/fund would still own the underlying securities. Also the SIPC (https://www.sipc.org/) is for investors like the FDIC is for bank account owners (obviously it doesn't guarantee no loss of value since investments can go up and down, unlike a bank account)
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Dago
I like your thinking...I like to consider all aspects no matter how unlikely. It’s good to know they are protected
Bad
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See also Stocks -- Part X: What if Vanguard gets Nuked? | jlcollinsnh (https://jlcollinsnh.com/2012/09/07/stocks-part-x-what-if-vanguard-gets-nuked/)
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Yes, the owners of the ETF/fund would still own the underlying securities.j
Unless there was fraud going on inside.
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Are we all getting sceptical because of the recession talk and fears of ‘index fund bubbles’.....?
If so great, it’s good to dig deep and fully investigate potential issues....it costs nothing.
Watched the big short recently (hadn’t had a chance till recently)...didn’t realise US government played such a hand in facilitating the crash. Also didn’t realise that when Michael burry challenged the government afterward, he got repeated audits and fbi investigation...which cost him 1mill...I thought that type of dirty tactic only happened here in Ireland lol
So why couldn’t these big billion dollars funds be involved with issues...
Baz
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Note that the structure of Vanguard is US only. For example, here is Australia it's not set up like in the US. The US corporate entity owns Vanguard Australia. I haven't checked Ireland, but I suspect that it's the same.
That said, the funds/securities are held in trust, not by the holding company, so they're still protected.
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Very good explanation direct from the FINRA website:
https://www.finra.org/investors/alerts/if-brokerage-firm-closes-its-doors
It is not a zero-probability event and is definitely possible. Example: MF Global.
Even if it was to happen, there is a high probability that the investors will be made whole, just like MF Global: https://fortune.com/2013/11/15/how-mf-globals-missing-1-5-billion-was-lost-and-found/
It is a matter of faith in the financial systems. So the regulators, the court system and all other arms of the government would likely be all over themselves to recover the investor money that is supposed to be sacrosanct.
Of course, it goes without saying that you *may* lose money if the stars aligned perfectly against you. During the MF Global episode - for a long time it looked like the customers were hosed, before the money was finally recovered!!
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How exactly would a company with literally trillions of dollars of investments go under? This is getting into silly territory like those movies on Discovery imagining what would happen if there was an asteroid impact.
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How exactly would a company with literally trillions of dollars of investments go under?
1. Fraud.
2. Operational Risk.
#1 needs no explanation. Example: WorldCom, Enron.
#2 is possible even for Vanguard and brokers like that. Index funds, as simple as they sound, do a lot of funky stuff that we don't get to see. Derivatives, option pairs etc are common occurance. Whenever you do that, there is a major operational risk. example: JPMorgan lost $2Bln with a hedge gone wrong.
Vanguard, as sterling a reputation as they have, is still assigned a non-zero probability of default by every counterparty it trades with. :-). It's not a likely event, but definitely possible (with a very low probability) that Vanguard goes under.
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How exactly would a company with literally trillions of dollars of investments go under? This is getting into silly territory like those movies on Discovery imagining what would happen if there was an asteroid impact.
This should be obvious; but because they don't literally have trillions of dollars to spend. It's not their money, they manage it for others. I could have assets of nothing more than a laptop and a pair of sweatpants and manage a billion dollar fund from my bedroom by buying stocks with other people's money. If I then didn't have money for rent my fund would go under, and somehow be disolved