III. Security Entitlement
Never attempt to win by force what can be won by deception.
Niccolo Machiavelli
The greatest subjugation in world history will have been made possible by the invention of a construct; a subterfuge; a lie: the “Security Entitlement.”
Since their beginnings more than four centuries ago, tradable financial instruments were recognized under law everywhere as personal prop- erty (perhaps that is why they were called “securities”). It may come as a shock to you that this is no longer the case.
In order to convey to you what has been done, let me start with an analogy:
Let’s say that you have purchased an automobile for cash. Having no debt against the vehicle, you believe that you now own it outright. Despite that, the auto dealer has been allowed by a newly invented legal concept to treat your car as his asset, and to use it as collateral to borrow money for his own purposes. Now the auto dealer has become bankrupt, and your vehicle along with all of the others sold by the dealer are seized by certain secured creditors of the dealership, with no judicial review being necessary, as legal certainty was previously established that they have absolute power to take your car in the event of the bankruptcy of the dealer.
Now, to be clear, I am not talking about your car! I am illustrating the horror and simplicity of the lie: You are led to believe that you own
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something, but someone else secretly controls it as collateral. And they have now established legal certainty that they have absolute power to take it immediately in the event of insolvency, and not your insolvency, but insolvency of the people who secretly gave them your property as collateral. It does not seem possible. But this is exactly what has been done with all tradable financial instruments, globally! The proof of this is absolutely irrefutable. This is wired to go now.
Essentially all securities “owned” by the public in custodial accounts, pension plans and investment funds are now encumbered as collateral underpinning the derivatives complex, which is so large—an order of magnitude greater than the entire global economy—that there is not enough of anything in the world to back it. The illusion of col- lateral backing is facilitated by a daisy chain of hypothecation and re-hypothecation in which the same underlying client collateral is re- used many times over by a series of secured creditors. And so it is these creditors, who understand this system, who have demanded even more access to client assets as collateral.
It is now assured that in the implosion of “The Everything Bubble”, collateral will be swept up on a vast scale. The plumbing to do this is in place. Legal certainty has been established that the collateral can be taken immediately and without judicial review, by entities described in court documents as “the protected class.” Even sophisticated profes- sional investors, who were assured that their securities are “segregated”, will not be protected.
An enormous amount of sophisticated planning and implementation was sustained over decades with the purpose of subverting property rights in just this way. It began in the United States by amending the Uniform Commercial Code (UCC) in all 50 states. While this re- quired many years of effort, it could be done quietly, without an act of Congress.
These are the key facts:
• Ownership of securities as property has been replaced with a new legal concept of a "security entitlement", which is a contractual claim assuring a very weak position if the account provider becomes insolvent.
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All securities are held in un-segregated pooled form. Securities used as collateral, and those restricted from such use, are held in the same pool.
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All account holders, including those who have prohibited use of their securities as collateral, must, by law, receive only a pro-rata share of residual assets.
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“Re-vindication,” i.e. the taking back of one’s own securities in the event of insolvency, is absolutely prohibited.
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Account providers may legally borrow pooled securities to collater- alize proprietary trading and financing.
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"Safe Harbor" assures secured creditors priority claim to pooled securities ahead of account holders.
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The absolute priority claim of secured creditors to pooled client securities has been upheld by the courts.
Account providers are legally empowered to “borrow” pooled securities, without restriction. This is called “self help.” As we will see, the objective is to utilize all securities as collateral.
I assure you that this is not conjecture. You would be greatly mistaken in dismissing this as “conspiracy theory”, which is a common reaction to so much unpleasantness. It is possible to really know about this. The documentation is absolutely irrefutable.
In April of 2004, The European Commission Internal Markets and Services Director General proposed the “setting up of [sic] group of legal experts, as a specific exercise intended to address problems of legal uncertainty identified in the context of considering the way forward for clearing and settlement in the European Union” [4]. This became the Legal Certainty Group.
Legal uncertainty sounds like a bad thing, and legal certainty sounds like a good thing. However, the objective was merely to make it legally certain that secured creditors would be empowered to immediately take client assets in a failure of a custodian.
In March of 2006, the Deputy General Counsel for the Federal Reserve Bank of New York provided a detailed response to a questionnaire prepared by The Legal Certainty Group, which was looking to the Fed
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to tell them exactly how to do it [5]. The following are excerpts from that response, which is also included in full in this book’s appendix:
Q (E.U.): In respect of what legal system are the following answers given?
A (N.Y. Fed): This response confines itself to U.S. commercial law, primarily Article 8 . . . and parts of Article 9, of the Uniform Commercial Code (“UCC”) . . . The subject matter of Article 8 is ‘Investment Securities’ and the subject of Article 9 is
‘Secured Transactions.’ Article 8 and Article 9 have been adopted throughout the United States.
Q (E.U.): Where securities are held in pooled form (e.g. a collective securities position, rather than segregated individual posi- tions per person), does the investor have rights attaching to particular securities in the pool?
A (N.Y. Fed): No. The security entitlement holder . . . has a pro rata share of the interests in the financial asset held by its securities intermediary . . . This is true even if investor positions are ‘segregated.’
Q (E.U.): Is the investor protected against the insolvency of an intermediary and, if so, how?
A (N.Y. Fed): . . . an investor is always vulnerable to a securities intermediary that does not itself have interests in a financial asset sufficient to cover all of the securities entitlements that it has created in that financial asset . . .
If the secured creditor has “control” over the financial asset it will have priority over entitlement holders . . .
If the securities intermediary is a clearing corporation, the claims of its creditors have priority over the claims of entitle- ment holders.
Q (E.U.): What rules protect a transferee acting in good faith?
A (N.Y. Fed): Article 8 protects a purchaser of a financial asset against claims of an entitlement holder to a property interest in that financial asset, by limiting the entitlement holder’s ability to enforce that claim . . . Essentially, unless the pur- chaser was involved in the wrongdoing of the securities in-
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termediary, an entitlement holder will be precluded from raising a claim against it.
Q (E.U.): How are shortfalls [i.e. the intermediary’s position with an upper-tier intermediary is less than the aggregate recorded position of the intermediary’s account-holders] handled in practice?
A (N.Y. Fed): . . . The only rule in such instances is that the security entitlement holders simply share pro rata in the interests held by the securities intermediary . . .
In actual fact, shortfalls occur frequently due to fails and for other reasons, but are of no general consequence except in the case of the securities intermediary’s insolvency.
Q (E.U.): Does the treatment of shortfalls differ according to whether there is (i) no fault on the part of the intermedi- ary, (ii) if fault, fraud or (iv) if fault, negligence or similar breach of duty?
A (N.Y. Fed): In terms of the interest that the entitlement holders have in the financial assets credited to its securities account: regardless of fault, fraud, or negligence of the securities intermediary, under Article 8, the entitlement holder has only a pro rata share in the securities intermediary’s interest in the financial asset in question.
That’s how it works directly from “the horse’s mouth”, i.e., the most authoritative source possible—lawyers working for the Fed.
Further exposure of the purpose of the invention of the security en- titlement can be found in a discussion paper concerning “legislation on legal certainty of securities holding and dispositions”, prepared by the European Commission’s Directorate General Internal Market and Services in 2012 [6]:
Where securities are concerned, the standard has always been that a custodian has to hold sufficient securities in order to meet all its clients’ claims. In most EU jurisdictions, such a standard is guaranteed by giving investors ownership rights towards securi- ties.
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Some markets, however, treat securities like money. The US and Canada based their law on the concept that investors do not own ’securities’, but they own ’securities entitlements’ against their
account providers instead.
The advantage of this concept is the potential increase in the amount of assets available as collateral, but critics view it as a threat to stability of the system, because the assets concerned are based on the same underlying resource.
Concern has been voiced by market participants, regulators, cen- tral banks, and international institutions about potential collateral shortages . . . There is pressure to broaden the range of securities eligible as collateral.
As a result of the demand for collateral, securities are increasingly regarded by market participants as a funding tool. These trends reinforce the market trends to treat securities like money . . . with significant implications for ownership.
The risk of unauthorised use of clients’ assets is increased by the employment of omnibus account structures. Omnibus accounts pool assets so that individual securities cannot be identified against specific investors.
This works well until a bankruptcy occurs. If the account provider defaults, a client with a mere contractual claim becomes an unse- cured creditor, meaning the client’s assets are, as a rule, tied in the insolvency estate and it is obliged to line up with all the other unsecured creditors to receive its assets back. . . .
[R]e-use of security interest collateral carries greater risk to the financial system because multiple counterparties may compete for the same collateral in default (so called ’priority contests’).
Clearly, the European Union Directorate General Internal Market and Services, fully knew the above in 2012.
In the next global financial panic, what are the chances that there will be much of anything remaining in these pools of securities after the secured creditors have helped themselves?
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There will be a game of musical chairs. When the music stops, you will not have a seat. It is designed to work that way.
It is time to ask: cui bono? Who benefits? It is certainly not the citizens, who have lost their property rights, who have been betrayed in this deception by their own governments.
The reason given for this legislation on legal certainty is “demand for collateral” by “market participants.” They are not referring to you and me, the public. “Market participants” is a euphemism for the powerful creditors who control governments. They have worked for many years to establish their legal certainty worldwide.
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