The Unknown ($)20 Trillion Dollar Company

via Ming.tv

There is a busy little private company you probably never have heard about, but which you should. Its name is the Depository Trust & Clearing Corporation. See their website. Looks pretty boring. Some kind of financial service thing, with a positive slogan and out there to make a little business. You can even get a job there. Now, go and take a look at their annual report. Starts with a nice litte Flash presentation and has a nice message from the CEO. And take a look at the numbers. It turns out that this company holds 23 trillion dollars in assets, and had 917 trillion dollars worth of transactions in 2002. That’s trillions, as in thousands of thousands of millions. 23,000,000,000,000 dollars in assets.

As it so turns out, it is not because DTCC has a nice website and says good things about saving their customers money that they are trusted with that kind of resources. Rather it is because they seem to have a monopoly on what they do. In brief, they process the vast majority of all stock transactions in the United States as well as for many other countries. And – and that’s the real interesting part – 99% of all stocks in the U.S. appear to be legally owned by them.

In the old days, when you owned stocks you would have the stock certificates lying in your safe. And if you needed to trade them, you needed to get them shipped off to a broker. Nowadays that would be considered very cumbersome, and it would be impractical to invest via computer or over the phone. So the shortcut was invented that the broker would hold your stocks instead of you. And in order for him to legally be able to trade them for you, the stocks were placed under their “street name”. I.e. they’re in the name of the brokerage, but they’re just holding them in trust and trading them for you. And you’re in reality the beneficiary rather than the owner. Which is all fine and dandy if everything goes right. Now, it appears the rules were then changed so the brokers are not allowed any longer to put the stocks in their own name. Instead, what they typically do is to put the stocks into the name of “Cede and Company” or “Cede & Co” or some such variation. And the broker might tell you that it is just a fictitious name, and will explain why it is really more practical to do that than to put it in your name.

The problem with that is that it appears that Cede isn’t just some dummy name, but an actual corporation that DTCC controls. And, well, if you ask anybody about this, who actually knows about it, they will naturally tell you that it is all a formality. To serve you better, of course. And, well, maybe it is. DTCC seems like a nice and friendly company. It is a private company, owned by the same people (major U.S. banks) who own the Federal Reserve Bank. And if they all stick to their job, and just keep the money and your stocks flowing smoothly, I’m sure that is all well and good. But if somebody at some point should decide otherwise, and there’s a national U.S. emergency and/or the U.S. government becomes unable to pay its debts, well, they might just not give you your stocks back. Because legally they own them. Something to think about.

An fascinating article about this whole thing is here. I will include it at the bottom too, in case it should disappear. Not that I can vouch for or agree with everything the guy is saying, and some of it is a little whacko, but obviously he’s been researching this quite a bit. You’ll find very little about it on the net otherwise.

5 thoughts on “The Unknown ($)20 Trillion Dollar Company

  1. I have to correct my comment: thinking more about it, the DTCC is an investor, through its stockholders’ aims and its board members’ existent industry-sector involvement in the securities industry.

  2. Hello. I stumbled across this and thought it an interesting read. You are correct in that the corporation is a custodian of certificates of securities for investors (approx. 1,1000 of them in the forms of investment banks and trading houses and securities funds) but they customarily do not co-own temporary funds. They serve as a valuator, underwriter, storage house and sometime insurance agent for those funds’ securities.

    I also think you misread their asset picture. Their share data includes issues that they themselves do not invest in; in other words, their cash they can claim as assets at settlement isn’t all trading values of securities themselves but the transaction costs of processing those issues’ trading and valuations.

    The Securities Act of 1933 is structured so that clearing agencies, processors, banks, underwriters, and investors themselves all have clearly defined parameters of ownership and custodianship of securities. The DTCC itself falls in all of these roles except investor and also has subsidiaries that are self-regulating organizations. Sometimes their dealings are murky, as we can see here:
    http://www.forbes.com/opinions/2008/09/23/naked-shorting-trades-oped-cx_pb_0923byrne.html

    However, in the end the DTCC cannot commandeer ownership of yours and my securities. This would be improper conduct as a violation of several commerce and property laws, as well as the SEC’s directives, and would most likely be an imprisonable offense. Under eminent domain the Federal Treasury itself, through the Securities and Exchange Commission, could be able to seize our securities but to do so would deprive all of the DTCC’s subsidiaries revenue. There’d be no benefit and plenty of loss for the DTCC. It’s much easier for their lobbyists, and they are undoubtedly legion, to, say, propose large Federal cash disbursements to stimulate the needed trading volume to keep the DTCC profitable… say, oh, around 700 BILLION DOLLARS?! šŸ™‚

    You are also correct that, though there are shares outstanding of common and preferred stock for exchange, that the DTCC is practically privately held. However, since some of the banks that hold the stock are undergoing, er, difficulties, maybe some shares will shake loose for you and I!

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