A good many customer accounts were lost, stolen or strayed in the stock market debacle of 1969-70, which bankrupted so many brokerage houses.
Today, the investment industry worries that history may repeat itself -- but this time in bonds.
In recent months, the bond market has suffered its worst crash ever, as bond prices tumbled while interest rates rose. Big, diversified brokerage firms can generally stand a los in one department as long as the others are doing well. But small firms that specialize in municipal bonds are finding it much tougher to survive.
The Pittsburgh municipal bond house of Simpson Emery and Co. recently went under -- a victim of bad markets and a bad management. Preliminary estimates show the firm owes some $780,000 to about 500 customers.
Because the records aren't in the best shape, it may be three months or more before anyone knows whether Simpson Emery has enough assets on hand to cover its debts. If not, customers will have to look to the Securities Investor Protection Corp. (SIPC) for relief.
SIPC rose from the ashes of the 1970 stock market, pledged to protect investors when their brokers go broke. There's no insurance against day-to-day mismanagement, or against any losses you suffer from ill-advised investment. But if your broker goes out of business and takes your securities with him, SIPX steps in to help.
Each account is insured against losses, in cash and securities, of up to $100,000 (although the cash portion of the loss is covered up to only $40,000). SIPC takes responsibility for bonds, stocks, notes, certificates of deposit and cash, but not commodities or commodities options.
"We have been concerned about being hit with a rash of liquidations, especially of smaller municipal bond firms," Hugh Owens chairman of SIPC, told my associate, Linda Rubey. "But so far, they seem to be hanging in there."
This judgment is confirmed by several private and public agencies inspected all the other bond dealers in Pittsburgh and Philadelphia, and found them managing their affairs with extreme caution. One firm had $1 million in cash or short-temr securities and only $200,000 in bonds (a percentage division of assets that individual investors might do well to copy).
A study by the Philadelphia Stock Exchange found that only one other bond house had sustained a loss as great as Simpson Emery, but still had enough capital to get by. The exchange is now monitoring about 10 bond firms on a weekly basis, but says that, at the moment, it's not worried. The New York Stock Exchange is also requesting reports from member firms that do a large bond business.
The National Association of Securities Dealers surveyed 375 municipal bond firms after last October's collapse, and found most of them still in acceptable shape. Several firms had to raise more capital A few paid off their customers and went out of business.
That study was repeated after the bond markets were socked again last month. Preliminary results suggest that the industry's super-cautious investment policy is still keeping losses under control. Nevertheless, industry sources would not be surprised to see a few more firms fail.
If you're a bond investor, you would do well to protect yourself.
First, have all your bonds registered in your own name rather than in the name if the brokerage house. Personalized securities can often be delivered out of a failed firm almost immediately. But cash and securities registered to the brokerage house are held until records are straightened out, which may take several months.
Second, put your bonds in a safe deposit box rather than keeping them with your broker.
Third, be sure you have good records. The back office of a failed brokerage house is often in a shambles. Your records may confirm a trade that your broker's books overlooked.
A pension fund, incidentally, is considered only one account, so there's only $100,000 of SIPC insurance. It might make sense to keep a pension fund with a larger brokerage house, perhaps one whose privately offered insurance exceeds SIPC's.