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This bizarre rule in the US is a huge risk to your investments

Goldhedge

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This bizarre rule in the US is a huge risk to your investments
Simon Black

March 9, 2016

Sydney, Australia
Human beings have come up with some crazy ideas for money and finance over the years.

Conch shells. Beads. Animal skins. Salt. Rice. All of these were used as a form of money at one time or another.

But the strangest by far has got to be the Rai Stones of Yap Island.

Yap is a tiny speck in the western Pacific, a few hours by plane from the Philippines and Guam.

Long ago, islanders began using gigantic limestone discs called Rai Stones as a form of money

Rai Stones were large– the size of a mid-sized car– so they were seldom moved.

And they could be anywhere… at the bottom of the ocean, in the middle of the jungle.

So rather than roll your Rai Stones down to a local bank, or pile them up in the back yard, everyone on the island just sort of knew who owned which Rai Stones.

And whenever there was a transaction, word got around that ownership of a particular Rai Stone had changed hands.

It was crude, but it worked.

This is the hallmark of any well-functioning financial system: the ability to properly account for private property ownership.

Think about it– when you buy a house, there’s a deed that’s recorded in the local clerk’s office. When you buy a car, a certificate of title is issued.

This makes the chain of ownership very clear and unmistakable. You know with 100% certainty that whatever you buy is exclusively yours.

But strangely enough, this isn’t the way it works when you buy stocks in the Land of the Free.

There’s a concept in the US financial system called “Street Name Registration”.

This means that when you open a brokerage account and buy shares of Apple, your broker registers those shares in THEIR name, not yours.

In other words, your broker officially owns the shares.

On their internal books, the broker maintains a liability that they owe you the shares. But the Apple stock isn’t your asset. It’s the broker’s.

The reason they do this is convenience. It’s easier for them to buy and sell stock on your behalf if the shares are held in their name.

This strikes me as totally ludicrous.

Imagine if when you buy a new car the dealer registered the title in HIS name instead of yours; or if your home was held in the name of your real estate broker.

This makes no sense. Financial securities should work like any other asset: when you buy it, it’s yours. Simple.

That’s how it works here in Australia, where they have a system of direct ownership; it’s called the Clearing House Electronic Sub-register System, or CHESS.

That’s a fancy way of saying that, in Australia, when you buy or sell stocks, ownership of the shares passes to you directly.

The database is maintained electronically, and brokers have no control over these records.

This ensures there is no feckless intermediary standing between you and your assets.

It’s such an easy concept– to actually own the stocks that you buy. But that’s not the way the financial system is set up in the US.

The even bigger issue is that Street Name Registration in the US leads to serious problems whenever there’s financial turmoil.

Banks and brokers have a bad habit of ‘borrowing’ from their customers. They call it ‘hypothecation’ and ‘re-hypothecation’.

Essentially, brokers routinely take the shares that they’ve purchased on your behalf (and registered in their own name) and pledge them as collateral in other deals over and over again to boost their profits.

Assuming everything else goes OK, problems seldom arise.

But as soon as the financial system hits a speed bump (like it did in 2008), it can get very bloody for the original investor who put up the money.

Bottom line, you might not own what you think you own.

And given all the serious challenges facing the financial system, it makes sense to pay attention to how your investments are registered.

It may be worth checking with your broker to see if you can do ‘direct name registration’, whereby they re-title the investments in your own name.

This would help ensure that if your broker ever ran into trouble down the road, you would still have control of your assets.

You might also want to consider investing in better jurisdictions like Australia where you can have a lot more certainty over the assets that you own.

Besides, there are plenty of great investment opportunities down here.

The Australian dollar is at a multi-year low against the absurdly overvalued US dollar. So assets are already quite cheap.

Besides, the commodity recession has pushed valuations so low that many Australian companies are trading for less than the amount of cash they have in the bank.

This has been a winning investment strategy for us (and premium members), with returns in excess of 30%. More on this another time.

https://www.sovereignman.com/trends...d0d8df6ca99953a5105c1c36362079eb88420404f16ce
 

GOLD DUCK

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QWAK,For that reason alone no one in the USA should buy stocks!:thumbs down:

the DUCK :winks2:
 

solarion

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All the usual suspect banksters.

 

Professur

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This is exactly how shorts work ... because the shares stay in the marketplace, and not in your hands.
 

Ensoniq

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When you open a brokerage account in the US you get to choose whether to hold the certificates in name or not.

At anytime you can have them placed in your name and delivered to you

Most people don't opt for certificates for convenience
 

GOLD DUCK

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When you open a brokerage account in the US you get to choose whether to hold the certificates in name or not.

At anytime you can have them placed in your name and delivered to you

Most people don't opt for certificates for convenience

QWAK,Ensoniq,Good luck trying to get a hard copy of your stock cert. :dduck:

They changed the rules several years back and now the brokers do NOT have to give them to you or help you get them!:thumbs down:

the DUCK :winks2:
 

Ensoniq

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Got any citations for that mr Duck?

It's news to me
 

GOLD DUCK

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Got any citations for that mr Duck?

It's news to me

QWAK,Ensoniq,Just call your broker and ask for hard copies!:2 thumbs up:

the DUCK :winks2:
 

tigerwillow1

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Looks like you're out of luck getting a certificate from TDAmeritrade:

"Stock certificates are not available for any security participating in the Direct Registration System (DRS). In some cases, you may be able to obtain these certificates directly from the security's transfer agent. For non-DRS security certificate requests, fees will apply. Please contact a Safekeeping and Restricted Stock representative for assistance obtaining these certificates."
 

Goldhedge

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Sinclair warned about this @ 4 years ago.

GOTS! Get Out Of The System!

You want your shares in your name at the transfer agent, not street name.

That or you'll want the actual stock certificates in your gubby lil hands!


Some agents will tell you there's an expense involved in getting the shares, but it's worth it.
 

AurumAg

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Lest we forget, there is this which already thickened the plot:

November 15, 2012 — 1:17 PM PST

link

Stock and bond certificates held in an underground Manhattan vault owned by the Depository Trust & Clearing Corp. were damaged by flooding in Hurricane Sandy, according to the DTCC.

The New York-based company that processes transactions in U.S. equities and government, municipal and corporate bonds said it’s too early to determine how many of the 1.3 million physical certificates can be restored, according to a statement. The 40-year-old vault was submerged when the Atlantic Ocean’s largest tropical storm on record slammed New York City. DTCC has hired “disaster recovery and expert restoration firms” to work on the project, the firm said yesterday.

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