I rarely publish a blog article that merely points readers to another blog or online article, but this one by Herb Greenberg in his MarketBlog for MarketWatch.com is worthy, with Bear Stearns at the crisis point of failure, and others perhaps not far behind.

When you deposit stock in a brokerage account, or buy shares in your account, the shares do not go into your name but into the broker’s “street” name. Many times they are depositied directly into Depository Trust Company, in which case they are held in DTC’s street name, which is Cede and Co. Although the stock is beneficially owned by you, title to the stock really is in the broker for your account.

In other words, ownership of your stock becomes legally split, as in the trust situation. In simple cases, the true owner of a thing is shown (e.g., vehicle) as the owner on the instrument of title (e.g., vehicle title). But in the trust situation, the trustee holds legal title for the benefit of the beneficiaries, who actually own the thing in trust. Stock held in street name by the broker is analogous to the trust situation. Your stock is held in a pool of stock by the broker in the broker’s name, not yours.

If the broker goes toes up, you merely become a creditor of the brokerage, with its assets distributed first to creditors, then ratably to customers. There is no good fix for this, since brokers simply cannot hold securities in your account in your name. The only other alternative is to have the securities held in a trust bank, as explained by Herb and his colleague in this article:

It is worth reading. Make sure your broker is solvent with not much subprime exposure.