The Clearing House

“The development of our financial oligarchy followed, in this respect, lines with which the history of political despotism has familiarized us: usurpation, proceeding by gradual encroachment rather than by violent acts; subtle and often long-concealed concentration of distinct functions….

……which are beneficial when separately administered, and dangerous only when combined in the same persons. It was by processes such as these that Caesar Augustus became master of Rome.

The makers of our own Constitution had in mind similar dangers to our political liberty when they provided so carefully for the separation of governmental powers”.

(1914) Other People’s Money and How the Bankers Use It– Chapter I: Our Financial Oligarchy

When you compare the structure of our financial markets to what was revealed in the Pujo Committee and the articles cited in the book, “Other People’s Money and How the Bankers Use It”, you will quickly realize how little of a difference there is between the anti competitive robber barons that existed during the early 20th century, and our capital markets today.

They own the regulators; they own the brokerage houses; they own the clearing houses; they own all of your investments; and it’s even been shown that they can exert complete control over the government.

Through this full spectrum dominance over the nation’s financial infrastructure, not only can these mega-banks exert significant control over the price of publicly traded companies by manipulating supply and demand via the stock loan markets, but they can also change the outcome of corporate elections, which in effect, enables these multinational banks to exert a hidden influence over who sits on the board of American corporations.

Many have whispered about this hidden financial element, but few have actually quantified how it works. This report will show you everything.

The Depository Trust and Clearing Corporation

Without this essential service, a stock exchange will struggle to survive because nobody will be sure if the counterparty will deliver, and all it takes is the slightest bit of doubt for the entire system to collapse. The exchange may be able to operate on a small scale, but not at the capacity that you would expect to see on the NASDAQ or NYSE, and if you have competitors, bankruptcy is not only a possibility, but a certainty.

In the United States of America, there is only one central clearinghouse: The Depository Trust and Clearing Corporation, and for almost 50 years they have maintained a virtual monopoly over this essential service.

It is a private corporation that is owned by these mega-banks and brokers.

DTCC 2018 Annual Report

To give you an idea of the influence these banks have over this institution, we are going to analyze a recent lawsuit filed by a consortium of pension funds against the largest banks and brokers in the United States. It perfectly illustrates their stranglehold over our capital markets, proving beyond any shadow of a doubt that not only will these massive corporations work together behind closed doors to stifle competition, but that they also have the ability to instruct the directors of the DTCC to block new entrants that pose a threat to their hegemony. (links open to the exact line of text — if stops working, just highlight the linked text and you can find an excerpt at the bottom of the page).

Stock Loans

Most of the time, retirement funds tend to hold their investments for very long periods of time, and in order to take advantage of these dormant positions, fund managers will often attempt to increase their clients returns by loaning out these shares to short sellers and market makers so they can be used for arbitrage.

But there is one big problem: still to this day, no centralized exchange exists for the stock loan industry, forcing massive money managers like Blackrock and CalPERS , along with every hedge fund in America, to employ brokers to match borrowers and lenders, siphoning $100’s of billions from our retirement savings.

Today, most of these transactions are still facilitated over-the-counter, meaning lenders and borrowers have no way of accessing live price data. Only the brokers and “TBTF” banks have access to this information, allowing them to charge practically whatever they want without anybody knowing if they received a fair market price.

I think the securities lending market is just like the mob. I think it’s completely rigged...It’s a completely manipulated black hole...

–Marc Cohodes, Copper River Partners

In the stock loan industry, large orders are at times still facilitated via private broker to broker telephone conversations, meaning transactions that would normally only take a few seconds if they were executed on an electronic exchange can end up taking as much as several hours and numerous phones calls before they can be completed.

This is actually surprisingly similar to how the OTC markets used to work before they adopted electronic exchanges, where brokers first had to call each other, then ‘meet on the curb‘ outside of their offices in order to negotiate pricing. Back then, customers only had access to delayed price quotes, but this was obviously a very long time, and the OTC markets have since been providing their users with live pricing data for almost two decades now. Yes, even the pink sheets have been more transparent than the stock loan industry.

Experts have been critical of this system of exchange for almost 20 years, with some using phrases like ‘bastion of old tech’ or “the mother of all dark pools” to describe how archaic the industry looks when backdropped against a financial community dominated by artificial intelligence and high frequency trading algorithms.

“The current stock loan market involves high search costs and inefficient pricing.

It can take numerous phone calls over several hours to locate a hot stock and negotiate pricing. The lender has no indicative level of pricing other than the demand information provided by the brokers, which the lender has no way to verify. In other words, the securities lending market requires considerable manual effort to complete transactions that in other markets take seconds or minutes at most. Because of the fragmented nature of the market, identical loans can trade simultaneously through different channels at very different prices. These high search costs preclude arbitrage across liquidity pools”

Following decades of collaboration, and 100’s of millions in start-up capital, four companies — Quadriserv/AQS, SL-x, and Data Explorers — all came very close to modernizing this massive $1.75 trillion market.

They built electronic exchanges similar to what you would see on the Nasdaq and NYSE, with public quotes that would’ve been accessible to everybody. Of course, this would have finally cut out the middle-man (the mega-banks and brokers), putting an end to a backward and opaque system of exchange that for decades had been plaguing pensioners, mutual funds, and endowments with 100’s of billions of dollars in exorbitant fees that by any reasonable stretch of the imagination should never have been charged in the first place.

But it’s just never that easy.

It threatened their cartel

In 2016, it was estimated that these brokers were extracting as much 65% of the revenues from the stock loan market, most of which was going to a very small group of investment banks.

The cumulative effect this can have on our pension funds is astronomical. Just to put that into perspective, Frontline estimated that as little as a 2% annual fee charged by your average mutual fund over a period of 50 years would result in a 66% reduction to your retirement savings.

The New York Clearing Association

As we all know, history has a tendency to repeat itself, and the brazen anti competitive behavior showcased in that stock loan lawsuit is certainly not the first time something like this has happened. It almost perfectly emulates the Cartel from the days of the New York Association, when a consortium of the country’s largest financial institutions could shutdown any bank in the nation simply by refusing their services. In fact, it was this very behavior that eventually went on to become the primary focal point of the Pujo Committee in 1913, immediately before the passing of the Federal Reserve Act.

Included below are key excerpts from this Committee that will show you the true power of a clearinghouse. Quotes from the book, “Other People’s Money and How the Bankers Use It” (1914), a collection of essays written by Louis Brandeis during that time period, will also be included, and everything has been broken down so it will only take about 5 minutes to read.

From the Depository Trust and Clearing Corporation’s 2018 Annual Report

(February 28, 1913) “Report of the Committee appointed pursuant to House resolutions 429 and 504 to investigate the concentration of control of money and credit”.

Knickerboker Trust was banned from using the clearing services of National Bank of Commerce of New York, leading to its immediate collapse.

Without the services of the the New York Association, the most dominant Clearing House at the time, it was well known by customers and bank owners alike that they would almost certainly fail within as little as a few days.

Even so much as a rumor would cause a bank run

The New York Clearing House forces Oriental Bank to stop working with two Brooklyn Banks, even though they pose no risk to anybody and represent an important percentage of Oriental Bank’s profits

The men who through their control over the funds of our railroads and industrial companies are able to direct where such funds shall be kept and thus to create these great reservoirs of the people’s money, are the ones who are in position to tap those reservoirs for the ventures in which they are interested and to prevent their being tapped for purposes of which they do not approve. The latter is quite as important a factor as the former. It is the controlling consideration in its effect on competition in the railroad and industrial world.”

–(1914) Other People’s Money and How the Bankers Use It

A sort of gentleman’s agreement decided the fate of the entire country..

“These bankers are, of course, able men possessed of large fortunes; but the most potent factor in their control of business is not the possession of extraordinary ability or huge wealth. The key to their power is Combination….

There is the obvious consolidation of banks and trust companies; the less obvious affiliations–through stockholdings, voting trusts and interlocking directorates–of banking institutions which are not legally connected; and the joint transactions, gentlemen’s agreements, and “banking ethics which eliminate competition among the investment bankers”.

–“Other People’s Money and How the Bankers Use It”, (1914)

All it took was 1/4 of its members to block somebody from joining, regardless of their qualifications, and even if these people were competing with the appellant.

Even if the bank was a member of the club, in the event of a change of control, the bank would be expelled if the members did not approve of the new management.

It’s a clique; a private club; a Cartel.

Do you see how powerful these organizations are? They shutdown two healthy banks for no reason whatsoever. People’s life savings were in those banks, and this was before social security, so you could literally starve back then; you and your family.

If the stock loan market were to emerge from the shadows of the “OTC” and on to a public exchange where everything is closely scrutinized, it would be much easier to track who was borrowing stock, and at what price, which could potentially reveal what these mega-banks are up to behind the scenes. People might even start recommending that they include all of these loans into a Consolidated Tape, making it much harder for them to hide their activities.

“Under Graber, I learned that Wall Street was an illusion,”.. “There were different magicians using different tricks in different ways. But everyone cheated. It shocked me so much in the beginning. I admired these people. And they cheated”.

Samuel Israel III

Keeping this market in the dark doesn’t just give you control over the spread, like what is seen here.

Cover illustration of Harper’s Weekly December 13, 1913 by James Montgomery Flagg.

“And then as time went on and/or a position got bigger, the rate would get jacked up on us…… So our cost of doing business in a particular name would go from not costing us anything to costing us tens of millions of dollars”…

Marc Cohodes, Copper River Partners

“William Paterson, however, on obtaining the charter of the 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


control the government

the middleman that sits between a trade
“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”

mandatory arbitration process

stranglehold over our capital markets
“In September 2009, Quadriserv/AQS executives learned that, during a conversation with the Head of the Stock Loan Desk at Defendant Bank of America/MerrillLynch) that took place weeks earlier, Goldman Sachs’ Conley “got so angry at the mention of[Quadriserv/AQS’s] name that spit was coming out of his mouth.” Conley told the Bank of America executive that he was “opposed to transparency in any form,” and that his opposition was driven by the above-market spread Goldman Sachs secretly made on stock loan transactions.Conley pressured Bank of America to reverse course and to join the opposition to Quadriserv/AQS or risk being ostracized by the other Prime Broker Defendants”

Stifle competition
“In one such meeting on October 12, 2012, Andrew Clayton, Global Head of Securities Lending at Northern Trust, explained that Northern Trust would like to support SL-x,but could not do so without the approval of Goldman Sachs. In another instance, BNY Mellon(then Bank of New York) agreed to extend a $50 million line of credit and to participate actively

instruct the directors of the DTCC
“DTCC’s clearing business—admitted to SL-x that the DTCC could not offer SL-x central stock loan clearing without the approval of Goldman Sachs and other Prime Broker Defendants”

their hegemony
“During a meeting with the DTCC on April 8, 2008, for example, AQS executives were originally told by DTCC’s Managing Director and General Manager Fixed Income Clearanc eand Settlement Group, Thomas Costa, that “this sounds great, but who’s going to start your car in the morning?”

Pension funds are being forced
“Defendants’ market power and willingness to abuse it to silence, punish, and exclude those who dared to cross them is one important reason why their conspiracy was able to operate under the radar until recently. As noted above, Defendants wielded their considerable clout to bully and threaten even large, established entities in the stock loan market. This clout meant that even their more aggressive tactics could remained unspeakable by those who feared retaliation. Defendants’ threats—and the power behind them—kept those to whom they were directed quiet about the conspiracy they furthered. Those who were targeted feared incurring the wrath of those Defendants on whose services and relationship they depended if they did anything that would inform the market (including Plaintiffs and the class) about the strategies to quash emerging market innovation

every hedge fund in America

$100’s of billions
“Specifically, Quadriserv’s analysis predicted a 32% reduction in the total fees paid by stock borrowers as a result of credit and pricing efficiencies on AQS, effectively saving borrowers approximately $4.5 billion per year in fees paid on stock loan transactions. This analysis also predicted that fees paid to stock lenders would also increase from an approximate 26% of gross annual stock loan revenue paid to beneficial owners in the current inefficient OTC market to an approximate 52% of gross annual revenue under the efficient, AQS model, netting beneficial owners approximately $1.44 billion more in gross revenues each year”

Still facilitated over the counter
“The stock loan market is an “over-the-counter” (“OTC”) market, meaning that there is no central marketplace or exchange through which market participants can send their bids and offers to the entire market or obtain real-time trading data such as price and volume information. Instead, stock loan transactions go through a broker-dealer intermediary that provides the prospective borrower with a single price for the transaction in an opaque market with very limited information”.

the mother of all darkpools
As managing director and global head of sales for Credit Suisse’s Advanced Execution Services, Santayana saw the evolution of FIX connectivity, as well as advances in smart order routing, algorithmic trading and high-frequency trading. “This environment– securities finance–is the ‘mother of all dark pools’,” he said.

backward and opaque
To paraphrase Tolstoy, all efficient markets resemble one another, but each inefficient market is inefficient in its own way. This case concerns the “stock loan” or “stock lending” market, which is an inefficient, antiquated, and opaque over-the-counter (“OTC”) trading market artificially dominated by a handful of large prime broker banks. As set forth herein, these banks (the “Prime Broker Defendants”) conspired to keep the stock loan market frozen in this inefficient state to preserve their collective market control and dominance

$100’s of millions
“Tellingly, shortly after the deal between OCC and AQS collapsed, EquiLend itself offered to buy AQS. After years of being boycotted and having spent nearly $100 million in investor money with very little volume or profit to show for it, AQS’s owners accepted EquiLend’s offer of less than $5 million to purchase the assets of AQS”

Banded together
Led by Goldman Sachs and Morgan Stanley, the Prime Broker Defendants were motivated to conspire to prevent new entrants in the stock loan market from successfully offering electronic trading and clearing platforms and additional pricing transparency that would threaten the Prime Broker Defendants’ collective dominance of this lucrative market. The threats they faced were so credible that the Prime Broker Defendants did not dare act unilaterally, and so they agreed to act as a cartel

refused to provide key services
In mid- to late-2013, the Prime Broker Defendants renewed their commitment to standing against SL-x. They agreed to boycott SL-x, collectively refused to use its platform, and took steps to ensure that other market participants turned their back on SL-x as well

threatened their top hedge fund clients
Similarly, Morgan Stanley’s European Prime Brokerage Desk threatened its hedge fund clients with the loss of critical prime brokerage services if they were to “trade away”their stock lending business to venues such as SL-x. Hedge funds including Renaissance Technologies, D.E. Shaw, Millennium Management, and SAC Capital were all threatened by Prime Broker Defendants with retaliation if they moved their stock lending business to AQS“.

two decades now

electronic exchange
“Quadriserv/AQS and SL-x both developed electronic trading platforms on which stock loan trades could be executed and centrally cleared at transparent prices.3 These companies strongly believed that such platforms were a natural step in the evolution of the stock loan market, and many in the industry (including some within the Prime Broker Defendants’ own banks) agreed. It is well-established in the academic and empirical literature that trading and clearing on electronic platforms improves the efficiency of financial markets and improves price terms for investors. In both cases, however, the Prime Broker Defendants met this threat by organizing a group boycott of the platforms to starve them of liquidity. They also took parallel steps to pressure others in the market not to use the platforms and to penalize those who did”

net worth of only $8000

66% reduction to your retirement savings.

blood drained out of that bankers face
“It was this trade data transparency that, in the words of SL-x executives, the Prime Broker Defendants found “most controversial” and caused the “color to drain out of their face”when explained at in-person sales meetings. As explained by Deutsche Bank’s Head of Supply Trading, Kevin Soobadoo, in one such meeting that took place with SL-x executives in October 2012, among the prime brokers’ concerns about SL-x was that it provided “too much transparency,” or at least “too much immediate transparency,” for comfort. JP Morgan requested the ability to turn off the real-time ticker, or block certain trades from being included, a request that SL-x declined”.

20 years



Beneficial interest

Street name

they still refused
“The dealer community is not really supporting this,’ said Joe Levin, the CBOE’s vice president of research and product development in Chicago.
Credit-default swaps, conceived more than a decade ago by bankers in New York and London as a way to protect lenders against default, now are used by hedge funds and investors as a less expensive way of betting on the creditworthiness of companies than purchasing bonds”.

4 thoughts on “The Clearing House

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  • June 1, 2020 at 1:51 am

    The sector is valued at $1.72 trillion and produces $9 billion per year in revenue — sounds like an industry to me. But more to the point, this story shows that there exist terrifying systemic problems in our financial system. That American entrepreneurs were verbally threatened with physical violence by agents of these multinational banking organizations (allegedly, although this came from very reliable sources) for attempting to innovate an industry that has been described by experts as both a ‘bastion of old tech” and the ‘mother of all darkpools’ speaks volumes about the general degradation of corporate culture on Wall Street. Kill or be killed is not supposed to be taken literally..Not in America at least.

    Today, even the pink sheets are more transparent than the stock loan sector, yet strangely, in the age of smart phones, AI, and complex high frequency trading algorithms, these multinational banking organizations have fought tooth and nail to maintain the status quo.

    What are they hiding, and is there more to this story than they’d like us to believe? Why do they constantly insist on conducting their activities in private, and devoid of any reasonable public scrutiny?

    While millions lose their jobs and analysts forecast great depression level economic figures, the stock market has somehow managed to post its strongest 1 month rally in 3 decades. (correction: it was the best 50 days in history)

    It’s sick…That’s the only word you can use to describe this situation– sick.

    What worse is that these companies provide little in terms of real tangible value to society; they just suck value out of the economy through an alphabet soup of complex financial products and hidden fees, while the average working American falls deeper into debt, and millions go without proper healthcare. The OECD just updated their world inequality report, and the results were shocking. The wealth gap in America was almost double that of every other westernized nation in the world. This isn’t some Bernie Sanders spiel, those are facts. These banks are out of control, and they’ve turned our capital markets into a casino.

    Many people wonder why we lost to Huawei in the race to 5-G, but maybe the answer has always been staring us dead in the eye. 40% of corporate profits do not belong in the financial sector, and it’s just that simple.

    This has gone on long enough, and it’s time for a change.

    According To Northwestern Mutual, One-Third of Americans’ Monthly Income Is Going Toward Paying Off Debt

    The United States is One of the Most Unequal Countries in the World According to the OECD

  • May 31, 2020 at 11:43 pm

    The Stock Loan “industry” helps the buyside act like a long-short hedge fund for its own account: the buyside can decide which companies to disfavor by making those shares easy to LEND out, and with the money from lending those shares BUY more of the shares it favors. To think! From the outside, you’d think the buyside, like Blackrock, merely act as humble servants of their clients wishes to invest! NOT at all ! They act like masters of the universe: they can call the winners and losers by control over lending!

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