There’s quite a few folks that are still on the edge about direct registering their shares. I hope to shed some light on the risks associated in keeping your assets in a (un)trusted custodian, like a bank or brokerage institution. In this post, I plan to cover the following topics:
The origin of FDIC coverage
Parallels with the Crypto meltdown
SIPC coverage of brokerage accounts (or lack thereof)
Extra: FDIC deposit sweeps (specific to Fidelity)
Your options to take control of your own assets
Note: None of the topics mentioned within this post or my account history are intended as financial advice. Do your own research and come to your own conclusions. These thoughts are mine alone and are not representative of any person, group, or institution other than myself, /u/pewpewstonks420x69.
We’ve all seen it – any bank out there has “member FDIC” written on all their signs and spoken in their commercials. The FDIC is an official government body (this is important) funded by the US government to insure all bank accounts up to $250,000 in case of a bank default. There is a similar institution in place for credit unions called the NCUA created in 1970 by congress.
The origin of the FDIC comes from way back during the Great Depression. In 1929 during the stock market crash, about 650 banks collapsed – another 650+ would fail the next year. Over the course of the Great Depression, 9,000 banks failed, losing depositors $7 billion dollars. That’s about $195 billion dollars in today’s money.
Congress rushed to implement a regulatory fix, and it was proposed in the Banking Act of 1933 – known as the Glass-Steagall Act. In this act, the FDIC was created to insure accounts up to $2,500, then $5,000, then kept being raised throughout the years until today’s current limit of $250,000.
Another important aspect of the Glass-Steagall Act is that it limited the securities banks could purchase with deposits effectively to government Treasury Bonds, and nothing else:
This separation of commercial and investment banking was removed by the Financial Services Modernization Act of 1999, also called the Gramm-Leach-Bliley Act, effectively allowing banks to gamble consumer deposits on the stock market with equities, debt instruments, and risky derivatives again for the first time since 1933, as long as they kept some form of partial reserve. This act is widely blamed for causing the 2008 GFC – which prompted creation of the Dodd-Frank Act in 2010, which was supposed to reinstate some of the restrictions created in 1933. My opinion: the Dodd-Frank act was all just a big pony show to say “Hey look at us we’re doing something!” There’s hardly anything of concrete value in it.
Just like FTX, BlockFi, and just about every other crypto exchange pre-FTX, stock brokerages have NEVER published their proof of reserves. There’s not a shred of evidence out there that any brokerage owns the securities due their customers in full reserve. They could buy every stock 1:1, they could buy a 50% hedge and play with the rest, or they could just be taking all your money and playing hedge fund with it. There’s of course, “regulation,” where’s the mayo Kenny?!? But NEVER!!! concrete evidence that a brokerage firm owns your assets. Even the regulators don’t want to see evidence of positions (in this case by swap dealers).
For this, we can only equip our tinfoil and hypothesize about the potential risk and outcome. What convinced me of the worst was when Robinhood was issued a $3 billion margin call during the Jan ’21 GME run-up. So either 1 of 2 things happened:
Robinhood internalized long stocks and call options via selling the option, trying to play Theta Gang and predicting they’d beat their clients
Robinhood straight up took their clients’ money and wanted to go play hedge fund
Either way, those orders never hit the market. If they did, there’d have been no margin call. Draw your own conclusions here, but I think it’s very telling that crypto exchanges are publishing their reserves and liabilities before any brokerage institution.
At least the top banks are willing to admit they’re leveraged upwards of 30 to 1 with a grand total of $200 trillion worth of derivatives liabilities on their balance sheets (Page 18, Table 13)
A quick history on AIG – they were, in the 2008 GFC, one of the providers of Credit Default Swaps. They essentially sold insurance for Collateralized Debt Obligations (CDOs, the infamous dog shit wrapped in cat shit mortgage bonds), providing a payout in case the CDOs went under. Shocker, they did, and guess who couldn’t pay up? You guessed it, the insurance provider who didn’t have the reserves they promised.
You may have noticed that financial institutions like brokerages have “SIPC Insured” plastered all over them like the banks have FDIC. “Your funds are insured!” they say. But to what extent? The US retirement market alone accounts for $37.2 Trillion, $7.3 Trillion of which comes directly from 401ks alone. Almost all of these funds would be held through brokerages. The SIPC should be absolutely loaded to insure these institutions. Right?
They have $5 billion in cash equivalents and another $2.5 billion on tap through an LOC. Yes, this is with a B, and the above retirement accounts are with a T. And to boot, they’re not backed by the US Government, meaning they don’t get access to that lovely money printer via the Fed’s Infinite QE purchasing treasury bonds.
They’re short of their obligations by somewhere between 3 TO 5 ORDERS OF MAGNITUDE. This is the Wall Street way of saying “Sorry pal, here’s 5 bucks for your troubles.” The moment “dumb money” gets wise to the scam, the bank run that will ensue will DWARF the losses (recall: $195 billion in today’s money) suffered from the bank defaults in the Great Depression. Also recall, we have not a shred of evidence they’re holding any security for any of their clients.
This is what got me going down this rabbit hole today. I love the convenience of doing my banking in the same place as most of my investments (sans my DRS’d beloved stonk), so I decided to see if my funds, held in Fidelity’s FDIC insured deposit sweep, were actually held in my name. After all, during MOASS, it’s likely that every brokerage in the US will go bankrupt, so I wanted to ensure that my FDIC cash accounts were not subject to their bankruptcy proceedings. So I decided to read the fine print for the FDIC insured deposit sweep program and, surprised Pikachu face:
Long story short, Fidelity owns your bank accounts too (held via the FDIC sweep program). All subject to confiscation and redistribution by the bankruptcy court.
Most of the general public will be quick to yell “but muh regulashunnn!” When this giant pile of burning feces comes rocketing toward the markets, as they watch their pensions, 401ks, and other vehicles of life savings evaporate before their eyes.
The problem here is that there’s human freakin’ beings shoved into every nook and cranny of the markets’ processes – which allows for corruption on a grand scale. This includes the numerous
bribes fines paid for criminal activity on a daily one time basis.
So how do you protect yourself, since nobody elseSEC, CFTC, DTCC, FINRA, NCSS, OCC will do it for you? (shocker, right?)
Get your assets where someone else can’t touch ’em.
Maybe your crazy grandfather who stashed cash in every wall of his house wasn’t so crazy after all. Anything left in any bank will be subject to the bank imploding (like exactly what happened to his parents in 1930) – and who the hell knows if the FDIC will have the funds to pay you back, or if the Fed will let the Federal government burn(This is why the CBDC pilot program happening right now is so terrifying). In all honesty though, the US dollar will likely collapse. Read /u/peruvian_bull‘s Dollar Endgame DD series. It’s amazing.
PHYSICAL precious metals:
Gold and Silver. Not some silver ETF, even the physical-backed ones will leave you with nothing when your broker defaults. Besides, the big ETFs are all backed by futures contracts, which are leveraged 100:1 or 400:1, for gold and silver respectively. Note, gold and silver can and have previously been confiscated by the US government under penalty of law. Something to keep in mind in case you plan on stacking.
This is exactly why they exist, after all. Cryptos, specifically BTC (and others with similar deflationary traits), were explicitly designed to A. be completely non-custodial, meaning YOU hold YOUR OWN MONEY and nobody else can touch, gamble, steal, or seize it, no matter what – and B. Deflationary, so the secret tax of inflation can never be leveraged against you by any governing body. Once again, read the Dollar Endgame series.
And last, but of course, not by any means the least……
This applies to ALL companies you hold in a brokerage account! Anything left registered in your broker’s name (which is everything you think you own) will be subject to forfeiture upon a brokerage default, let alone if they’re even holding it at all…..
But most importantly, DRS our most beloved stonk, $GME.
DRS holds shares of a company under YOU DIRECTLY, rather than in “street name” registration for your broker under Cede & Co. Nobody has a damn clue (nor do they care) that you think you own those shares, unless you hold them your very self via DRS.
BUY, HODL, DRS.