If somebody were to tell you that you do not technically own your shares in a public company, you probably wouldn’t believe them, would you? That seems rather ridiculous, doesn’t it? Many people have their life-savings invested in the stock market, and how could somebody else own something that you paid for with your own money?
Unfortunately it’s true, and you are not the legal owner of your investments. The banks and brokers are the real owners, and you are just issued an entitlement, an unusual relationship that they characterize as “street name” ownership, and all shares are held in book-entry form (electronically) at the DTCC, with the banks and brokers acting as the registered holders on the company’s books.
“Under Article 8, the beneficial owner of the shares held in a custodial account with an intermediary (such as a broker) is considered to be the holder of a “securities entitlement” in a “financial asset” which is ultimately held by a depository”,
—Marcel Kahan, The Georgetown Law Journal
Now for the trip down the rabbit hole. What would you say if someone were to tell you that, through this ownership structure, these mega-banks and brokers can technically invent fictitious share entitlements that don’t actually exist ?
You’d probably tell them they were full of sh*t, wouldn’t you?
That’s a conspiracy you’d say!
Fake news! Somebody call the fact-checkers!
Only publicly traded companies have the right to create and redeem shares, and brokers are just the middlemen that facilitate capital formation, so they can’t create shares, right?
… it’s already happened…
As you can see in the image below, the traders were issued buy-in notifications by their clearing firm via email, giving them time to find someone who is willing to loan out new shares long enough so the 13 day forced buy-in date is reset back to day #1.
Just for anybody who doesn’t know, a clearinghouse is the middleman that sits between a trade, guaranteeing both the buyer and the seller receives their cash or securities. If a buyer or seller fails to deliver the cash or securities, they guarantee delivery to the counterparties by making up for the loss with their own money.
“Central clearing virtually eliminates counterparty risk by interposing a “clearinghouse”between the two counterparties to the loan. The clearinghouse becomes the borrower to every lender and the lender to every borrower. In the event one party fails to meet its obligations, the clearinghouse steps in and assumes the obligation. The clearinghouse maintains sufficient capital to stand behind every trade it clears. By doing so, the clearinghouse creates a more efficient market and mitigates systemic risk, allowing borrowers and lenders to trade without concern of counterparty default” (https://www.docketbird.com/court-documents/Iowa-Public-Employees-039-Retirement-System-et-al-v-Bank-of-America-Corporation-et-al/COMPLAINT-against-Bank-of-America-Corporation-Credit-Suisse-AG-Credit-Suisse-First-Boston-Next-Fund-Inc-Credit-Suisse-Group-AG-Credit-Suisse-Securities-USA-LLC-EquiLend-Europe-Limited-EquiLend-Holdings-LLC-EquiLend-LLC-Goldman-Sachs-Co-LLC-Goldman-Sa/nysd-1:2017-cv-06221-00001)
For the sake of brevity, we’re going to refrain from getting into reverse conversions as it will most likely just leave you confused. But to put it into layman’s terms, in this particular context, it is basically just being morphed into an agreement to call the stock back from one another other at a specific time:
“I get to put it to you tomorrow, you get to call it from me tomorrow”.
Again, it’s just a day loan (in this particular context), and it’s easy to understand once you get past all that complicated phraseology.
This is where it gets interesting.
Remember that “partner ” we talked about?
They were also using fake shares!
Yes, they were just inventing fake shares and cycling them back and forth between each other — like a hot potato!
One person was loaning the other person fake shares until the forced buy-in date was reset back to day #1, then the other person who received the day loan was simply repeating the favor down the road!
It’s important to understand that stock trades are just broker to broker transactions, and all these IOU’s are simply credits from one broker to another, with the DTCC acting as their ledger. Just these six corporations pictured below account for 70% of the prime brokerage industry, and as we noted before, they are the true record holders listed on the company’s books.
Technology has also made rapid advances since the days of those SEC complaints, so we can only assume that it is a lot easier to complete these transactions today.
Back then, this problem was also more concentrated into individual stocks – usually mid/microcaps — but today these IOU’s have now gravitated into the ETF market, where dealers — known officially as “Authorized Participants” — will buy stocks in the open market, then exchange these stocks for ETF shares.
For example, let’s say there is an ETF that is supposed to represent the technology sector; the dealers will buy — for instance, Apple, Facebook, and Microsoft — then exchange these stocks for the ETF shares.
ETF’s now represent 78% of all equity related failure to delivers, and anybody who has followed the market long enough probably knows very well that many of histories worst financial scandals have involved structured financial products that represented a basket of goods; mortgage backed securities being the first that should come to mind.
Pictured below is one of the most glaring examples of this problem. This went on for 4 years prior to the publication of this report.
It’s pretty safe to say that this table speaks for itself…
Understand that there is nothing normal about that picture you are seeing. A fictitious loan is probably one of the worst forms of fraud one can imagine. It would be like loaning someone fake gold, charging them interest, then threatening to seize their assets if they didn’t pay you back!
Remember, ETF shares are simply claims to ownership of an underlying asset, so just imagine what would happen if the market were to suddenly collapse while there is potentially as much as 400% more share entitlements circulating at any particular moment in time.. A run on these ETF’s could result in the ETF operator — in this case State Street — becoming liable for all these extra ETF shares, or worse, it could cause the institution going bankrupt.
Sounds kinda like a ponzi scheme, doesn’t it?
Now take a look at the largest institutional holders.
Oh look! It’s them: the owners of the Depository Trust and Clearing Corporation..
Another example of this strange dichotomy can be seen in the price of $GLD between March and December of 2013. During this time period, the value of its assets decreased by 52%, while the price of the ETF (Ticker $GLD) only fell by 24%, meaning if you were an investor in the $GLD and you tried redeeming your shares, you technically could’ve lost an extra 27%!
51% of the shares outstanding were short during this time period.
Just for anybody who doesn’t know, the GLD’s only asset is gold.
You can see that the price of $GLD falls almost at the exact same rate as the price of Gold, yet oddly, the amount of gold held in the fund decreases by 40%, from 39.6 million troy ounces, to 21.8 million troy ounces.
Yet as the price goes up, you barely see any new shares being created..
So they’ll redeem the ETF certificates when the price is dropping, but they won’t create them on the way up?
If there was ever a more blatant example of counterfeiting in our capital markets, it would be this. Even the author of this report acknowledges that it’s probably due to all the fake shares in circulation.
The ETF market has a combined market cap of $6.18 trillion, so again, you can only imagine the chaos that would erupt in the event of a financial crisis when everybody tries redeeming their shares all at once..
Remember, an ETF is essentially just a mutual fund.
“ETFs offer investors an undivided interest in a pool of securities and other assets.”
“Apart from the fact that ETFs trade intraday, most ETFs are similar to mutual funds in that they both translate investor purchases and sales in the fund into purchases and sales of underlying holdings.”
–Eileen Rominger, director of the SEC’s Division of Investment Management
(Financial Times) “However, in the past two years (at the end of 2017 and 2018), the amount of pledged collateral received by the major banks that could be repledged onwards was $8.1tn, up 33 per cent from 2016’s end…. there has been an increase in pledged collateral to almost all global banks (adjusting for conversion to US $). The source of primary collateral was $3.7tn of underlying securities, implying a velocity of about 2.2*”.
—Manmohan Singh, Senior Economist with the International Monetary Fund
5 banks ….2 owners…
As you can see, this is just par for the course on Wall Street.
“Bank of England in 1694, to use the moneys he had won in privateering, said, “The Bank hath benefit of interest on all moneys which it creates out of nothing.” This was repeated by Sir Edward Holden, founder of the Midland Bank, on December 18, 1907″
–Dr. Carroll Quigley, 1966
It almost seems like the combination of these banks and brokers that came with the elimination of the Glass Steagall Act has resulted in some kind of cultural run-off between the two divisions, where the idea of fractional reserve banking has somehow made its way into the board rooms of these brokerages houses, and they’ve managed to find a way to convince themselves that extending the existing supply of a corporations outstanding capital stock somehow benefits society.
There is obviously no pressing need to issue more share entitlements than actually exist in the secondary markets because technically you are not facilitating any kind of tangible business activity.
Short to medium term price fluctuations have very little impact on the actual business operations because by that point the company has already raised the capital, and thus everything that happens after the IPO or secondary offering is simply people passing around their certificates.
Sometimes it might help to issue extra shares when the price has diverged excessively from its intrinsic value, or to facilitate bidding and selling, but it’s nowhere near as important as it is in banking, where you can exponentially increase the amount of productively you can get out of every dollar that is in circulation at any particular moment in time.
Through broker to broker transactions, and combined with their complete control over the only centralized clearing mechanism in the country, the current settlement system as it exists today also creates terrifying conflicts of interest. There is nothing normal about Exchange Traded Funds reporting 8 institutional owners per outstanding share in circulation over a period of 4 years, or assets under management that fall in value by almost twice the rate of gold — that is the very definition of a Ponzi scheme.
There is also a risk that all these fake share entitlements could be loaned out — which again, is probably one of the most egregious forms of financial frauds you could possibly imagine.