Can the Securities Investor Protection Corporation (SIPC) itself go bankrupt?
"SIPC is a corporation - a legal entity separate from its owners. In the case of SIPC, it is funded through the fees paid by its members. All the US brokers are required to be members and to contribute to SIPC funds. Can it go bankrupt? Of course. Any legal entity can go bankrupt. A person can go bankrupt. A country can go bankrupt. And so can anything in between. However, looking at the history of things, there are certain assumptions that can be made. These are mere guesses, as there's no law about any of these things (to the best of my knowledge), but seeing how things were - we can try and guess that they will also be like this in the future. I would guess, that in case of a problem for the SIPC to meet its obligation, any of the following would happen (or combinations): Too big to fail - large insurance companies had been bailed out before by the governments since it was considered that their failure would be more destructive to the economy than the bailout. AIG as an example in the US. SIPC is in essence is an insurance company. So is Lloyd's of London. Breach of trust of the individual investors that can lead to a significant market crash. That's what happened in the US to Fannie Mae and Freddie Mac. They're now ""officially"" backed by the US government. If SIPC is incapable of meeting its obligation, I would definitely expect the US government to step in, even though there's no such obligation. Raising funds through charging other members. If the actuary calculations were incorrect, the insurance companies adjust them and raise premiums. That is what should happen in this case as well. While may not necessarily solve a cashflow issue, in the long term it will allow SIPC to balance, so that bridge loans (from the US government/Feds/public bonds) could be used in between. Not meeting obligations, i.e.: bankruptcy. That is an option, and insurance companies have gone bankrupt before. Not unheard of, but from the past experience - again, I'd expect the US government to step in. In general, I don't see any significant difference between SIPC in the US and a ""generic"" insurance coverage elsewhere. Except that in the US SIPC is mandatory, well regulated, and the coverage is uniform across brokerages, which is a benefit to the consumer." Not sure if I follow your question completely. Re: What if some fraud takes place that's too big even for it to fund?   SIPC does not fund anything. What it does is takes over the troubled brokerage firm, books / assets and returns the money faster. Refer to SIPC - What SIPC Covers... What it Does Not and more specifically SIPC - Why We Are Not the FDIC. SIPC is free for ordinary investors. To get the same from elsewhere one has to pay the premium. Edit: The event we are saying is a large brokrage firm, takes all of the Margin Money from Customer Accounts and loses it and also sell off all the stocks actually shown as being held in customer account ... that would be to big. While its not clear as to what exactly will happens, my guess is that the limits per customers will go down as initial payments. Subsequent payments will only be done after recover of funds from the bankrupt firm. What normally happens when a brokrage firm goes down is some of the money from customers account is diverted ... stocks are typically safe and not diverted. Hence the way SIPC works is that it will give the money back to customer faster to individuals. In absence of SIPC individual investors would have had to fight for themselves.
Safe deposit boxes are rented out to customers, and their content is not bank's property. Money deposits are not being taken by the creditors if a bank goes bankrupt, for the same reason - its not bank's money, it belongs to the depositors. However, frequently banks go bankrupt because they do not have enough cash at hand to pay back the depositors. In this case, unless insured (up to $250K in the US, EUR100K in EU), some or all of the deposits may not be immediately (or even at all) available. Depositors become creditors of the bank in the bankruptcy proceedings. Safe deposit box, however, is rented to the customer, and the content is not removed by the bank to be used elsewhere, as happens with monetary deposits. So even if the bank is bankrupt and doesn't have enough money to cover the monetary deposits, the content of the safe deposit boxes doesn't magically disappear, and the owner can get it back. The access to the deposit box itself may be limited due to the bankruptcy, but the content will remain there waiting for its owners. In the United States, when a bank goes bankrupt, FDIC takes over it and its assets. Safe deposit box rental contract is an asset. It is taken over by the FDIC and will be sold to a buyer (usually as a part of the whole branch where the box is located), who will continue operating/servicing it. Value investing is an investment approach that relies on buying securities below their intrinsic values. There are two main concepts; one is the Intrinsic Value and the other is Margin of Safety.  Intrinsic value is the value of the underlying business - if we are talking about stocks - that can be calculated through carefully analyzing the business looking at all aspects of it. If there is an intrinsic value exists for a company then there is a price tag we can put on its shares as well. Value investing is looking to buy shares well below its intrinsic value.  It is important to know that there is no correct intrinsic value exists for a company and two people can come up with different figures, if they were presented the same data. Calculating the intrinsic value for a business is the hardest part of value investing.  Margin of Safety is the difference between the buying price of a stock and its intrinsic value. Value investors are insisting on buying stocks well below their intrinsic value, where the margin of safety is 20%-30% or even more. This concepts is protecting them from poor decisions and market downturns. It is also providing a room for error, when calculating the intrinsic value.  The approach was introduced by Benjamin Graham and David Dodd in a book called Security Analysis in 1934. Other famous investor using this approach is Warren Buffet Books to read:  I would start to read the first two book first. I'll give it a shot, even though you don't seem to be responding to my comment. SIPC insures against fraud or abuse of its members. If you purchased a stock through a SIPC member broker and it was held in trust by a SIPC member, you're covered by its protection. Where you purchased the stock - doesn't matter. There are however things SIPC doesn't cover. That said, SIPC members are SEC-registred brokers, i.e.: brokers operating in the USA. If you're buying on the UK stock exchange - you need to check that you're still operating through a US SIPC member. As I mentioned in the comment - the specific company that you mentioned has different entities for the US operations and the UK operations. Buying through them on LSE is likely to bind you with their UK entity that is not SIPC member. You'll have to check that directly with them. Haven't there been examples of governments defaulting, delaying payment and imposing haircuts on investors? Greece and Argentina come to mind. Quite a few Govt have defaulted in the past or were very of default or crisis. Most 3rd world countries or developing countries have under gone stress at some point. Greece was amongst the first example of Developed country going bankrupt. am I not better off if the fund invests solely in AAA corporate bonds, avoiding government bonds? Well that depends. Corporate bonds are not safer than Government Bonds. There have been instances of Corporate bonds not giving the required returns. "That is a great distinction you bring up: Has the Don filed for personal BK or Corp bk?  In April of 2011, The Wall Street journal [asked him](http://blogs.wsj.cccom/washwire/2011/04/11/trump-will-probably-run-as-independent-if-he-doesnt-win-gop-nomination/): Should someone who filed for bankruptcy multiple times be running national finances at a time when we have a big debt problem?  His Answer?  ""I've never filed for bankruptcy.""  ...um... to say the LEAST this is semantics, I would classify it as an outright lie.  I say that because he slaps the name on EVERYTHING, he is the President, CEO, Chairman of the Board - he is responsible (until things go south) then the investors and debtors are left with an empty shell.  Here are some examples:  * Trump Plaza Hotel bankruptcy – On Nov 2, 1992, Trump's Plaza Hotel was forced to file Chapter 11 bankruptcy protection after being unable to make its debt payments. Under the plan, Trump agreed to give up a 49% stake in this luxury hotel to Citibank and five other lenders.   * Trump Shuttle closure – The Trump Shuttle became no more when it merged with Shuttle Inc, operating as USAir Shuttle in 1992.  * Donald Trump personal bankruptcy – By 1994, Trump slashed a large portion of his $900 million personal debt and washed away $3.5 billion in his portfolio's business debt.  * Trump Hotels &amp; Casino Resorts' bankruptcy – On November 21, 2004 Trump's company filed for bankruptcy. Trump said the filing was ""really just a technical thing"" as the best way to implement a restructuring plan.  * Donald Trump personal bankruptcy (again) – Once again, Trump filed for personal bankruptcy protection and restructured his debt in 2004.  * Taj Mahal bankruptcy – On November 22, 2006 Donald J. Trump’s casino empire filed for bankruptcy protection after months of negotiations with bondholders over restructuring a crushing debt.  * GoTrump.com – Donald Trump's online travel search engine was launched in 2006. Just a year later it folded.  * Trump 29 Casino – Now known as Spotlight 29 Casino because Donald Trump's ownership/management involvement ended in 2006).  * Donald Trump Ocean Resort Baja – This Mexican resort was never built and investor's deposits (up to $500,000.00) have not been returned. Trump claims these buyers are “lucky” because they would have lost more money in a tanking market had the projects been actually built.  * Trump Towers Tampa – Trump is being sued right now in Tampa, Florida for taking deposits on a 52-story condo tower that he never built. None of the buyers got their $45,000 deposits back. And in an ironic twist, initial sales of this condo were so successful that all deposits were returned to charge a higher price.  * Trump International Hotel and Tower Chicago – Trump built the second tallest building in Chicago… he also defaulted on a $40 million loan. Rather than having to pay the bank loan, Trump demanded the same bank should pay him $3 billion for ""undermining the project and damaging his reputation.""  * Trump Magazine – Trump's private-labeled publication (which was aimed at affluent readers in major US markets) suffered from sagging ad sales. It folded on May 19, 2009. This was Trump's third failed attempt at offering a magazine bearing his name.  * Trump International Hotel &amp; Tower New Orleans – If constructed, this Trump Tower would become the tallest building in the city of New Orleans and the state of Louisiana at 70 stories high. But the project was put on hold in February of 2009.  * Trump Entertainment Resort Holdings bankruptcy – On February 17, 2009 casino operator Trump Entertainment Resorts Inc filed for Chapter 11 bankruptcy protection (with a debt ratio of $50 million in assets to his $500 million in debt).  * Donald Trump SoHo Hotel Condominium – Donald Trump was sued for fraud over his New York SoHo condo offering in 2010. The lawsuit by 15 plaintiffs alleged that during the first 18 months of marketing, Trump advertised that the building was ""30, 40, 50, 60 percent or more sold"" when in fact just 16% of the units were sold.  * Trump Ocean Resort Baja Mexico – Instead of a 525-unit luxury vacation home complex with pools and tennis courts, this project is shaping up to be a legal battle with a big hole in the ground. Dozens of angry buyers sued Trump for failing to complete the project. Trump claims he only lent his name to the project (and it was the developers who allowed the project to fail).  * Trump International Hotel &amp; Tower Fort Lauderdale – Construction was to be completed by the end of 2009 featuring 298 hotel condominium units. Having defaulted on a $139 million loan, Donald Trump announced in November of 2010 he was no longer affiliated with the project.  * Trump International Hotel &amp; Tower Las Vegas – Through the end of February 2010, the 1,282-unit condominium hotel had only closed on 302 units. That equates to a 23.6% vacancy rate. It was forced into renting out the building as apartments.  * Trump International Hotel &amp; Tower in Dubai – This 62-story mixed-used building on the Palm Jumeirah’s Golden Mile was first announced in 2005. Construction was never started and the $2.9 billion project had been canceled and replaced with a shopping mall.  So, back to your distinction - has he filed for personal BK?  No.  Has he filed for personal BK protection while he reorganized debt - YES.  Does he manipulate the Corporate BK laws by playing a Corp shell game and filing for BK protection - Yes.  Is it smart business?  Or a scam?   TL:DR - Magnets Bitch!  *Edit for formatting" He has had at least [four or more bankruptcies depending which ones you count](http://www.politifact.com/truth-o-meter/statements/2016/jun/21/hillary-clinton/yep-donald-trumps-companies-have-declared-bankrupt/), and at least 3 of them were from active casinos.  Where most of the games are mathematically rigged in the houses favor.    It is kind of mind boggling that he can go bankrupt even running a casino. See my post listing Trumps failures.  Clearly lenders/investors/people get sucked into things all the time.  P.S. Established Corps and LLC are granted credit all the time.  In my example I never mentioned how old or established, or well funded any of these Corps were. Ponzi schemes (or pyramid schemes) are based on paying earlier investors from the money invested by the later ones. For Ponzi scheme, the idea is generally to distribute some relateviely high consistent dividend/payout based on the inflow of money from new investors. As long as new investors are coming, the scheme can be sustained for quite some time (see the Madoff's example that spanned over decades). In the mean time the scheme operator can take (some of) the investment money to himself (legally as fees and salary, illegally as embezzling). The scheme operator doesn't actually have to put in any money other than some organizational expenses. However, at some point the new investors' money won't be enough to pay all the existing investors (inevitably, sooner or later, since the dividend payout grows with each new investor and there are no infinite exponential amount of new investors to cover for it). That's when the $#!+ hits the fan and sons of the schemers start ending up hanging from the ceiling. Pyramid scheme is built on similar idea, but the dividend payout varies based on the level of the investor (i.e.: the investor gets paid based on how many new ones he brought in, and how many new ones rooted from them). Thus the incentive to bring new investors is directly shifted to the investors themselves. The schemers here are at the top and get the most payouts from all the rest of the participants. They themselves usually put no or very little investment. However, the end result is the same: couldn't possibly be enough investors to sustain this model forever, and it will inevitably fail at some point. When such a scheme fails - the paying fund ends up being bankrupt, either due to cashflow problems (not enough money in to pay money out) or because all the money dries out (usually - both). How to detect - if the reports are not falsified (which in most cases they are) you'll see clearly that there's no actual investment income in the cash-flow. But, the reports are usually falsified to conceal this exact fact. So, that's where the independent auditors and regulatory oversight come in handy. Generally, if an investment fund doesn't have a reputable independent auditor - stay away.