I'm from the Government, and I'm here to help.
President Reagan said those are the nine most terrifying words in the English language. When it comes to The Great Taking, we’re told to ignore the black and white words on the page; to trust the government. The truth is that the federal government is not and will not protect your investments from The Great Taking. It is not here to help you. To quote Admiral Akbar "It's a trap!"
Don’t fall for it.
It is a fun little game that is played at our expense. Proponents of the 1994 UCC Article 8 revision say it is highly unlikely that you will lose your investments if your broker or custodian fails. And even if your investments are at risk under state law, federal laws and regulations will protect you.
Federal regulators also play this game by saying that state laws, like the UCC, protect investors in certain situations. The appearance of two levels of protection is convenient but it obfuscates the fact that – in truth – we are not protected by either one.
But that is against the law
Working in South Dakota and Tennessee during the 2024 legislative sessions we were told repeatedly that brokers are required by state and federal law to protect client investments. That a financial institution would be breaking the law if it put investor assets at risk. It was such a relief to hear that because we all know that Wall Street never breaks the law. I realize sarcasm may not come across in the printed word, but that was sarcasm.
We’re told that laws and regulations are in place to protect innocent investors. There is even a federal law called - ‘The Investor Protection Act’ - so rest easy. If you like that blue pill, stop reading.
The rest of the story
In the bankruptcy of Lehman Brothers (Lehman) following the 2008 financial crisis all of Lehman’s customer accounts were frozen, both individual accounts and institutional accounts. State law did not protect the investors nor did federal law. In fact, both federal and state law worked together to protect JP Morgan Chase as the secured creditor of Lehman. Retail customers of Lehman were only ‘protected’ because the bankruptcy estate sold off Lehman’s retail business to Barclays, Neuberger Berman, and other solvent broker-dealers.1 Institutional investors eventually got their assets back when the stock market rebounded, but it took 6+ years.
The 2008 financial crisis was caused in large part by fraudulent practices with Mortgaged Backed Securities and Collateral Debt Obligations. Wall Street’s criminal activity was ignored by federal regulators, aided by shady bond rating companies, and by federal agencies. Millions of Americans lost their jobs, their homes, and their lost their savings and no one on Wall Street went to jail. No consequences. Rather no negative consequences.
Yes, Lehman failed but the other Wall Street firms, large insurance companies, and the big banks were bailed out by Congress (taxpayers) and the Federal Reserve.
But we are reliably told that Congress immediately went to work to make sure this kind of thing never happens again! In fact, when we were in Tennessee last year meeting with legislators, we were told by the banking lobbyists that Dodd-Frank fixed the problems exposed in the 2008 financial crisis. Do you know that in the 10+ years since Dodd-Frank was passed some of the provisions haven’t even been put into place yet.
But the real question is – who wrote the Dodd-Frank bill? Hint, it wasn’t Sen. Dodd or Rep. Frank. It was written by attorneys working for Wall Street and the big banks.
2008 is ancient history with the pace of news and information today. Are there recent examples of fraud and crime in the financial markets? Yes.
Just last week FINRA fined JP Morgan $3 million for reporting inaccuracies and supervisory oversights dating back more than 16 years. It gets worse, these ‘reporting inaccuracies’ were that JP Morgan ‘misreported’ short positions for 77 billion shares (yes billion) from 2008 to August of 2024.
A $3 million fine for misreporting 77 billion shares over 16 years? That’ll teach ‘em. And you might want to ask yourself, who is FINRA. FINRA is the Financial Institution Regulatory Authority, it is a private non-profit corporation, a Self-Regulatory Organization (SRO) that supervises member firms including brokerage firms and exchange markets. SROs are a topic for another post.
Short Selling
Before sharing more information about recent Wall Street behavior, I want to define a ‘short sale’. If you think a particular stock currently trading for $150/share is overvalued and you expect it to drop to $100/share what can you do? Even if you do not own any of that stock you can sell the stock ‘short’ for $150/share and then when it drops to $100/share you buy it. Legally before you can sell the stock (that you do not own) you have to ‘borrow’ the stock from someone who owns it. But that doesn’t always happen.
What is naked short selling? From Investopedia:
• Naked shorting is the illegal practice of selling short shares that have not yet been determined to exist or that the trader hasn't secured in some way.
• Because of loopholes in the rules and discrepancies between paper and electronic trading systems, naked shorting continues to happen, a process the Securities and Exchange Commission (SEC) has been working to clamp down on through newer transparency rules. (emphasis added)
According to Investopedia, naked short selling is illegal, but how would we know if it is happening on Wall Street? Are there signs?
Failure to Deliver
Failure to Deliver (FTD) is when the party selling the stock is unable to deliver the shares that were ‘sold’. A naked short sale is a good example of a practice that can result in an FTD and the number of FTDs on Wall Street is eye popping.
There are several accounts on X (formerly Twitter) that do an excellent job following FTDs and other financial issues, three to follow are @kshaughnessy2, @stephmase22, and @McSqueezyTheCow (yes, that is the handle). Just before Christmas @McSqueezyThe Cow posted on X “December 23rd saw the highest daily amount of U.S. Treasury settlement failures at DTCC in 2024 so far, at $73.87 billion.” @kshaughnessy2 added “DTCC saw 6.6 trillion in FTDs in 2024 including the 73.87 (billion) on December 23rd”. She asks the question “Any regulator or politician concerned about this???”
Anyone? Bueller? Bueller?
How is this related to The Great Taking? Well, it’s all related for sure, but the reason I am pointing this out is to illustrate that 1) Wall Street’s gonna Wall Street and 2) the federal regulators are not coming to the rescue (at least not to your rescue).
Some say we failed to learn any lessons from past financial crises, but that is not true. Wall Street has learned that laws can be flaunted, and profits made without risk or repercussion because the eventual and inevitable losses are socialized by the rest of us. So financial firms will continue to skirt or beak the law and be at peace knowing that they will be protected from ‘financial Armageddon’ by your state law, specifically UCC Article 8.
Bottom line
We’re told that investors are not at risk from The Great Taking, that federal and state law protects us. The reality is that federal and state laws and regulations actually protect the ‘too big to fail’ financial institutions. We are told everything is fine, that there is nothing to worry about. But the pieces are in place; the laws, regulations, and players are in position. The cavalry is not coming - it is up to us.