Ownership of most securitized assets in the US capital market depends upon the reliability of inter-related electronic records maintained by broker-dealers and custodians.

	Without Cooperation, Markets Are a Babel

The technology supporting securities record keeping is complex and sophisticated. Billions of securities efficiently change ownership each month, effecting property rights of tens of millions of investors.

Under ordinary circumstances, these transfers are done with a high level of safety at low cost. What is involved is the electronic posting of accounts maintained on computer hard drives.

Properly organized with off-site backups, emergency energy sources, and dual operational centers, a modern capital market should be able to operate, virtually uninterrupted, even in the event of an atomic attack.

However, the resilience of the system in a severe crisis, depends upon cooperation between broker-dealers and custodians, the seriousness of their prior commitment to disaster recovery, and on each playing a part to achieve recovery without loss.

No institution can survive alone should the records of all others be irretrievably lost.

How safe these securities are in the event of an actual atomic attack on New York City is anyone’s guess.

Unfortunately, Congress and the SEC have been lax is looking out for investors’ interests in this regard.

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Now that terrorists are racing to set off an atomic bomb in New York City and the New York Times has a green light on giving national secrets to the enemy — raising the odds on a successful nuclear attack — its time to consider the safety of your financial assets.

	Will This Protect You?

It will be too late when a mushroom cloud begins to rise above Manhattan.

Tens of millions of Americans have brokerage accounts with SIPC protection which they think means that they have government insurance of up to $500,000 on stocks and bonds in custody with a broker-dealer, plus $100,000 on cash balances — similar to the FDIC guarantee on bank accounts.

Investors that have less than $500,000 with their broker may think that if an atomic bomb goes off in New York City that their assets will be safe.

Their assets may indeed be safe, depending on the broker, but not because of SIPC protection.

The Truth About SIPC Guarantees

The Securities Investor Protection Corporation is a federally chartered private company (not part of the government) that offers limited protection to some customers of certain broker-dealers in the event of bankruptcy.

However,

• The SIPC program, unlike FDIC, does not have the guarantee of the federal government;

• The SIPC, as of December 2005, only had $1.4 billion in assets — a minuscule fraction of the value of securities in custody with broker-dealers — entirely inadequate for losses in the event of an atomic attack on New York City;

• Even when a broker offers SIPC protection when an account is opened, there is no assurance that this protection will be in place when needed. If a broker is deregistered by the SEC, or fails to pay into the program, the coverage lapses;

• Conditions for coverage under the SIPC program are complex, highly technical, and loaded with exceptions, difficult for most investors to understand or verify (See the Act);

• The SIPC program does not cover investment fraud;

• There is no protection for loss of market value during the many months it may take for the SIPC trustees to return securities to account holders. In the case of a margin account, inability to take defensive action during a long delay in settling a claim may not only wipe out an investor’s assets entirely, but create a substantial liability to be settled;

Without effective and unconditional guarantees from the government for recovery of securities in custody with broker-dealers in the event of destruction of the main records of a broker-dealer, the burden is upon each investor to determine whether a particular broker-dealer is safe or not.

Unfortunately, most investors not only lack the technical competency and understanding of internal broker-dealer systems to judge the disaster resilience of a particular firm, but most broker-dealers do not even provide the information that clients would need to make such a determination.

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According to the Wall Street Journal of July 11, 2020, Dan Curry, a managing director of Moody’s who oversees corporate finance for the Americas, said,

“We think issuing debt to repurchase stock or pay dividends is not a good idea — that doesn’t strike us as conservative financial policy.”

This is highly relevant to interpreting recent flows in the bond and equities market, as indicated in the article, “Record Stock Buybacks Financed by Borrowing: Q1 2006“.

My first reaction to Mr. Curry’s statement was:

“Well, duh!”

It seems obvious to me that using bonds to finance buybacks is worse than just “not a good idea”.

Think about it.

Investors are asked to loan money to a company so that it can transfer these funds to shareholders who will have no liability or interest in ever paying them back! The money is not used to fortify the company and its bond repayment capacity, but rather the opposite.

An investment banker who goes along with such a ridiculous scheme demonstrates not only ignorance of conservative finance, but extremely shaky moral grounds for decisions.

The flow of funds accounts for Q1 2006 indicate that this improper use of bond financing is now running in the billions — not millions of dollars. This shows that there is something seriously wrong with investment banking in the US.

It appears that Jeff Skilling, ex Enron CEO, was right when he said, after being convicted, “That’s the way the system works.”

The ethical problems of US investment banks were certainly not resolved with the Enron trials.