by Chris Talgo, American Thinker:
Although it sounds too far-fetched to be true, Americans don’t actually own the stocks, bonds, mutual funds, and other assets held in common retirement vehicles such as Roth IRA and 401(k) accounts. In reality, Americans own what are called “security entitlements.”
Back in the old days, before digitalization fundamentally transformed the mechanics of financial transactions, this was not the case. But that was then. This is now.
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Most Americans have probably never heard of the Uniform Commercial Code (UCC), which is “a comprehensive set of laws governing all commercial transactions in the United States.” Even fewer Americans are familiar with Article 8 of the UCC, which “provides a modern legal structure for the system of holding securities through intermediaries.”
In the mid-1990s, Article 8 was revised so that “investment securities can be safely used as collateral” by large financial institutions. Essentially, this modification of an obscure set of laws allowed big banks to use their customers’ securities in investment accounts as collateral in the derivatives market.
Eventually, the big banks began using their customers’ securities as collateral to make money in the developing worldwide derivatives markets. Basically, banks like JP Morgan Chase, Citi, Wells Fargo, Bank of America, and others pool these assets in places like the Depository Trust Company (DTC), which “is a member of the U.S. Federal Reserve System, a limited-purpose trust company under New York State banking law and a registered clearing agency with the U.S. Securities and Exchange Commission.”
Incredibly, the DTC retains “custody of more than 1.4 million active securities” valued at more than $87 trillion. Despite the fact that most Americans have no idea about the DTC and what it does, it carries immense power and influence throughout the financial world.
Now, back to derivatives. In 2002, Warren Buffet stated that “derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal… We view them as time bombs, both for the parties that deal in them and the economic system.”
He is not alone in that view. Many other investment gurus, from Carl Icahn to Michael Burry, agree with Buffet.
Today, the worldwide derivatives market has reached the astronomical figure of more than $1 quadrillion. For those not familiar with that number, one quadrillion = 1,000 trillion.
In the early 2000s, the total derivatives market was a fraction of what it has ballooned into today. However, even then, financial derivative instruments connected to home mortgages like credit default swaps, posed an imminent threat to the worldwide financial system when the housing market collapsed in 2008.
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