Scott Rothbort thestreet.com What Happens to Investors if E*Trade Goes Belly-Up 11/12/2007 3:22 PM EST The question brought up by Steve Birenberg and one on many people's minds is what happens to investor accounts if E*Trade (ETFC) goes belly-up. To the best of my knowledge, I will guide you through what I believe could happen, and should also allay some but not all investor fears. We need to focus on two concerns: cash balances and security holdings. Cash balances are a bit complex and vary from firm to firm. Cash balances are typically held in one of three forms: credit broker balances, money markets and bank deposits. Each much be viewed separately, as each has its own credit exposure and potential protection. SIPC (Securities Investor Protection Corporation) protects investor cash and security holdings in the event of bankruptcy of a broker. However, there are limitations to what protection SIPC provides, and the process of recovering one's assets is not timely. SIPC is akin to but is quite different from the FDIC (Federal Deposit Insurance Corporation), the later of which insures deposits at banks. In the event that investors' cash balances at a broker were swept into bank deposits, then FDIC would step in to insure those deposits. FDIC also has limits on the amount of money per account that it will protect. Furthermore, many security firms and banks purchase excess protection. Typically, excess protection is one of those items that are disclosed to investors and depositors in new account forms and on statements. However, this information is buried in the fine print that nobody every bothers to read it until its too late. Finally, sweeps into money market accounts have no protection whatsoever. Because of that fact, during the credit crisis this summer there was a run on money market accounts, and investors were redirecting money market deposits into Treasury bills. If I can think of anything else, I will post, but for now, hopefully this should help.