The Hidden Risks in Your Brokerage Account

Credits: The Great Taking Part 3: Heads They Win, Tails You Lose 3/4

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The Hidden Risks in Your Brokerage Account That Could Wipe Out Your Life's Savings

When investors entrust their hard-earned savings to a stock brokerage, there is an assumption that it will be safely custodied until needed. However, largely unknown regulations enacted after the 2008 financial crisis expose brokerage account holders to loss in the unlikely event of large-scale bankruptcy.

Understanding this complex part of the financial system allows investors of all means - whether your retirement nest egg, children's college fund or other savings - to make more informed choices.

A Set of Regulations Called “Safe Harbor” Prioritizes Wall Street Creditors Over Main Street Investors?

Most investors don't realize that legal provisions called “safe harbor” directives accomplish the opposite of what they proclaim by imperiling brokerage clients for the sake of system stability. These regulations direct bankruptcies involving brokers and other financial companies to make secured creditors whole first before returning a dime to investors and other unsecured creditors.?

Secured creditors means those who have extended loans or credit to the firm against hard collateral – namely major banks, hedge funds and shadow lenders who have claims on the very stocks, bonds and cash brokerage clients believe they own. Certain elite derivatives and swaps contract holders also qualify as secured creditors, as strange as that may seem.

So regular investors actually own mere “security entitlements” – a special, subordinate legal classification unique to investment assets – rather than direct property rights. Security entitlement owners stand last in line for leftovers should their brokerage or custodians fail and trigger resolution procedures. And with unregulated swaps, futures, and opaque offshore lending strangling the financial industry, many experts warn that too-big-to-fail institutions are increasingly backing off their risky activities using mom-and-pop investment accounts.

A Brief History: From the 2008 Crisis to the “Orderly Liquidation Authority” Regime?

When Wall Street collapsed in 2008 from excessive leverage and derivatives speculation, regulators faced an impossible choice: either impose losses on irresponsible banks or rescue them to avoid economic catastrophe. They chose the latter by socializing losses using taxpayer bailouts.

New reforms like 2010’s Dodd-Frank Act aimed to end this “too big to fail” doctrine by creating a judicial-style liquidation protocol called the “orderly liquidation authority” to wind down safely failed financial mega firms. But lobbyists cleverly expanded safe harbour privileges, thinking regulators would coordinately seize control of all brokerages before bankruptcy reaches them, protecting clients.

Yet legal experts warn that no such coordination authority exists between regulators governing investment firms versus commercial banks. Brokers sit squarely where contagion risks first emerge so will likely fail before regulators perceive crisis conditions. When stock brokerages and investment banks failed in 2008, holding companies dumped them into normal bankruptcies. There is no reason to expect different during the next crisis.

Worse still, the preferential treatment creditors receive under safe harbour during financial firm liquidations incentivizes excessive speculation - the very root of instability. By assuring creditors, they will get the first cut of assets lowers lending standards and allows risks like over-leveraged derivatives books. Hence why Wall Street’s derivatives casino mushroomed over 60% since 2008 when it should have shrunk if regulators made good on promises to eliminate too-big-to-fail policies that necessitated bailouts last time.

Protect Yourself: How to Not Lose Everything When Wall Street Crashes?

So regular investors are left holding the bag yet again by regulations favouring speculators over savers. However, steps exist to mitigate brokerage bankruptcy risks based on location, structure and form of asset holdings:

1. Choose only the most reputable and conservatively run brokerages. Financial disclosures reveal much about their stewardship and risk management priorities.
2. Maintain multiple brokerage relationships, not just a single one bearing full account risks. Divide account values across two to four firms.
3. Request actual stock and bond certificates when available. Though less convenient and costly if sold, they legally constitute hard property versus electronic security entitlements.
4. For cash holdings, sweep into direct US Treasury bills instead of money funds. These qualify for direct FDIC pass-through insurance up to $250,000 per depositor, per bank.

Closing Perspective

Understanding obscure financial stability regulations allows better decision-making to avoid being a victim when – not if – markets crash. Voters and investors must demand reform reestablishing fundamental property rights and accountability.

If you are concerned about the ownership structure of your investment portfolio and want to learn more about Webbs's research and potential solutions, don't hesitate to contact me at [email protected] or use my Calendly Link.

Watch The Video:

The Great Taking - Safe Harbor Means Your Financial Assets Are At Risk of Being Taken

You can find my review of Part 1 on LinkedIn Here: Untangling the Complex Web of Legal Structures in Financial Ownership.

You can find my review of Part 2 on LinkedIn Here: Who Really Owns Your Stocks and Bonds?

• Join the conversation here: The Great Taking Part 3: Heads (Public Content)
• Continuation of Part 3: The Great Taking Part 3: Two (More) Ways of Protecting Your Wealth (Private)
• Missed Part 1? (Free): Great Taking Part 1 (Public Content)
• Continuation to Part 1 found here: The Great Taking: Solutions For Part I (Private)
• Missed Part 2? Click here (FREE): The Great Taking: (Public Content)
• Continuation to part 2 found here: The Great Taking: How To Protect Your Shares and Bonds (Private)

The original David Webb interview that kicked this research off is found here:

• Part 1 (Free): https://peak-prosperity.com/DWEBB
• Part 2 (Free): https://peak-prosperity.com/DWEBBprt2

Additional Resources:

1. The Great Taking PDF
2. The Great Taking - Documentary
3. The Great Taking Download
4. The Great Taking (Audio Book) by David Webb

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