Reverse Robin Hood

Welcome to a bizarro world where your state lawmakers have codified a law that robs from the poor to protect the rich.

It is probably too much to ask for Kevin Costner remake Robin Hood to show this new reality. But we can dream.

The purpose of this Reverse Robin Hood law is to protect the too big to fail (TBTF) banks. The TBTF policy is not written in any statute – but it is reality none the less. In a nutshell TBTF is based on the premise that it will be the end of the world as we know it if any Global Systemically Important Banks (G-SIBs) are allowed to fail. That we as citizens must keep that from happening through our tax dollars and even to the point of sacrificing our IRAs and 401(k)s.

TBTF is also destructive because these protected entities know they cannot fail. This leads to risky behavior and moral hazard. There are no negative consequences for greed and wrongdoing – at most there is a slight pause in risky and illegal activity, just until the dust settles. Then the grift and greed storms back, usually to a far greater degree. After all today’s barons of Wall Street are standing on the shoulders of the great fraudsters of the past. Quite a legacy.

Unbeknownst to you (and frankly unbeknownst to a majority of state lawmakers who voted on the bill) Article 8 of the Uniform Commercial Code (UCC) in your state codified an important foundation to protect the biggest banks in the event of financial ‘Armageddon”. The law provides two striking exceptions that give certain large banks priority to your investments if (when) a financial intermediary files for bankruptcy. You? You have an unsecured contract claim against your broker. You and other investors will be a back of the line.

UCC Article 8 provides protections for the largest banks throughout the entire Article, but the nuts and bolts are found in UCC Article 8-511.

§8-511. Priority among security interests and entitlement holders.

(a) Except as otherwise provided in subsections (b) and (c) of this section, if a securities intermediary does not have sufficient interests in a particular financial asset to satisfy both its obligations to entitlement holders who have security entitlements to that financial asset and its obligation to a creditor of the securities intermediary who has a security interest in that financial asset, the claims of entitlement holders, other than the creditor, have priority over the claim of the creditor.

(b) A claim of a creditor of a securities intermediary who has a security interest in a financial asset held by a securities intermediary has priority over claims of the securities intermediary’s entitlement holders who have security entitlements with respect to that financial asset if the creditor has control over the financial asset.

(c) If a clearing corporation does not have sufficient financial assets to satisfy both its obligations to entitlement holders who have security entitlements with respect to a financial asset and its obligation to a creditor of the clearing corporation who has a security interest in that financial asset, the claim of the creditor has priority over the claims of entitlement holders.

You might wonder why these two exceptions were put into UCC Article 8 and why our efforts to remove the exceptions from state to state is met by full throated opposition from the Uniform Commercial Cult and the bank lobby – the evil twin towers of Mordor.

Hint: It is not about margin accounts as the ULC, the bank lobby, and their grifters argue. No. (At some point – hopefully soon – lawmakers will see and know that they are being lied to.)

No, these exceptions are in your state law because the Drafting Committee for the 1994 UCC Article 8 Amendment understood that some folks on Wall Street are going to do bad things, they are going to break the law. The drafters understood that the too big to fail policy will actually encourage Wall Street to break the law. It’s just too darn profitable after all.

And when – not if – firms on Wall Street fail the law in your state will protect the biggest banks at your expense. The Official Comments of the Drafting Committee and the annotations in your state’s Code make that clear. Crystal. Clear.

Reverse Robin Hood - How Will This End?

The end of the story is as yet unwritten, but the hour is late.

Maid Marian is now betrothed to Klaus Schwab, Robin Hood is canceled by bank lobbyists and the Uniform Commercial Cult, the Merry Men have scattered, and Sherwood Forest has been tokenized by Larry Fink.

Enjoy the propertyless gulag.

I think I’ll join Friar Tuck for a wee dram.