I am a risk manager and credit analyst by training (actually, I think I was born that way), so when I created my hedge fund over three years ago, one of the first questions I asked the partner of (large, well-respected hedge fund) law firm who drafted my fund’s foundational documents was: “What happens if (very large, well-respected, money center bank) goes under? What assurances do I have that my investors will be able to get their money back?”
I cannot say that it was the first time that this law partner heard that question, but I know his answer was not a canned speech; he thought about it for some time, but his conclusion was that in most cases the law is on account holders’ side. Honestly, I expected him to point me to a specific and unambiguous statute that protected the account holders’ assets, so I was a little surprised by his answer. However, he did walk me through the recent instance when investors were not protected: Lehman Brothers’ British account holders.
Jason Zweig asks the same question in this week’s Intelligent Investor column and learns that it has not been a problem in over 400 bank failures.