When the Derivative Bubble Pops: “The Great Taking”. David R. Webb
Book by David Rogers Webb, "The Great Taking"
The Great Taking, a book by David Rogers Webb
The book is about the taking of collateral (all of it), the end game of the current globally synchronous debt accumulation super cycle. This scheme is being executed by long planned, intelligent design, the audacity and scope of which is difficult for the mind to encompass.
Included are all financial assets and bank deposits, all stocks and bonds; and hence all underlying property of all public corporations, including all inventories, plant equipment; land, mineral deposits, inventions and intellectual property.
Privately owned personal and real property financed with any amount of debt will likewise be taken, as will the assets of privately owned businesses which have been financed with debt. If even partially successful, this will be the greatest conquest and subjugation in world history.
Excerpts from the Book
In chapter 3, the author notes that ‘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 beginning more than four centuries ago, tradable financial instruments were recognized under law everywhere as personal property… It may come as a shock to you that this is no longer the case.’
‘You are led to believe that you own 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 collateral backing is facilitated by a daisy chain of hypothecation and rehypothecation in which the same underlying client collateral is reused many times over by a series of secured creditors. And so it is these creditors, who understand the 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 professional investors, who are sure 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 required 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.
- All securities are held in unsegregated pooled form. Securities used as collateral, and those restricted from such use, are held in the same pool.
- 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.
- “Re-vindication”, i.e. the taking back of one’s own securities in the event of insolvency, is absolutely prohibited.
- Account providers may legally borrow pooled securities to collateralize proprietary trading and financing.
- “Safe harbor assures secured creditors priority claim to pooled securities ahead of account holders.”
- The absolute priority claim of secured creditors to pooled client securities has been upheld by the courts.
‘… the objective is to utilize all securities as collateral.’
‘The documentation is absolutely irrefutable.’
‘In March of 2006, the Deputy General Counsel for the Federal Reserve Bank of New York provided a detailed response to questionnaire prepared by the Legal Certainty Group, which was looking to the Fed to tell them exactly how to do it.’
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 (NY 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.
The Q&A goes on to establish that the investor does not have rights attaching to particular securities in the pool, that an investor is always vulnerable to a securities intermediary’s solvency: “if the securities intermediary is a clearing corporation, the claims of its creditors have priority over the claims of entitlement holders.”
‘Further exposure of the purpose of the invention of the security entitlement 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: “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 securities. 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, central 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 unauthorized 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 bankruptcy occurs. If the account provider defaults, a client with a mere contractual claim becomes an unsecured 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…’
‘Re-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.”)’
In chapter 4, “Harmonization”, Webb goes on to describe how the EU lost its proprietary rights to securities and became like the United States and Canada in that regard. (Through vehicles such as “The Hague Convention on the Law Applicable to Certain Rights in Respect of Securities Held with an Intermediary,” drafted in 2002 and signed in 2006. It is an international multilateral treaty intended to remove, globally, legal uncertainties for cross-border securities transactions. Euroclear, one of two European International Central Security Depositories (ICSD)- the other is Clearstream- made the following statement in a 2004 memorandum “with preparatory information regarding European Legal Harmonization”: “Recommended… Eliminate impediments to free use of collateral cross-border”…via keeping registered securities on a fungible basis at a local level, protection of the rights of the nominee, “elimination or modification of requirements that directly or effectively require the maintenance of individual records or accounts per beneficial owner…”
In 2014, the Central Securities Depository Regulation (CSDR) was implemented by the EU directive No. 909/2014. ‘A Central Security Depository (CSD) operates a book entry system for electronic settlement of trades and maintains record of “ownership.” An International Central Security Depository (ICSD) is linked to national CSDs, and it handles securities lending and collateral management. As noted by the European Securities and Markets Authority “CSDR plays a pivotal role for post-trade harmonization efforts in Europe, as it enhances the legal and operational conditions for cross-border settlement in the EU.”
Webb describes how in Sweden and Finland, where legal systems and national registries of securities holder ownership assured owners that their securities could not be used as collateral without express agreement, laws were changed to ‘give the local CSD legal authority and broad latitude to pass legal control of customer assets as collateral to the ICSD without the knowledge or approval of the account holder… The implementation of this is now so thorough that a Swedish citizen cannot hold Swedish government bonds in Sweden as property without exposure to insolvency of the account provider, the local CSD or of the ICSD. The securities of Swedish citizens are certainly pooled with securities being used as collateral elsewhere.’
In chapter 5, ‘Collateral Management’, Webb describes how ‘inevitably following “the everything bubble” will be “the everything crash”. Once prices have essentially crashed and all financial firms rapidly become insolvent, these collateral management systems will automatically sweep all collateral to the Central Clearing Counterparties (CCPs) and Central Banks. The trap, into which all nations have been herded, is ready and waiting to be sprung. There will be an epic endpoint to the decades of seemingly out of control financialization, which served no beneficial purpose for humanity, but the devastating effects of which are apparent even now it has been a deliberate strategy executed over decades. This was the purpose of inflating the global bubble entirely out of proportion with any real world thing or activity, which must end in disaster for so many, with no pockets of resilience allowed to remain in any country.’
In chapter 7, Central Clearing Parties, Webb describes how insolvent these clearing houses are.
‘Central Clearing Parties take on counterparty risk between parties to a transaction and provide clearing and settlement for trades and foreign exchange, securities, options and most importantly derivative contracts. If a participant fails, the CCP assumes the obligations of the failed clearing participant. The CCP combines the exposures to all clearing members on its balance sheet. Is there a risk that CCPs might fail? Euroclear is an International Central Securities Depository (ICSD) which was designed to channel customer collateral to CCPs. In 2020, Euroclear published an article discussing the possibility of failures of CCPs, Regulating the Risks of CCPs, in which we find the following remarkable statements of panelists at Euroclear’s Collateral Conference:
“Regulators around the world have demanded more capital, more collateral and more clearing. And to a large degree they now have what they wanted… And yet despite the huge efforts undertaken by market participants there are still two major concerns. The first is that financial regulations from different jurisdictions are not fully aligned with one another. And secondly that the risks in the financial system have been concentrated into Central Clearing Counterparties (CCPs). These two issues come together in the upcoming regulatory push to devise resolution and recovery regimes for CCPs around the world… the EUs push to create a recovery resolution regime for CCPs.. has also created tensions between the clearing houses themselves and their clearing bank and asset manager members, as to who should pay what in the event of a collapse of these critical market infrastructures. But, for the EU institutions, the red line is that if a CCP fails, then the taxpayer will not be expected to pay.” ‘The last paragraph is a subterfuge assuring that in the “resolution” the secured creditors will immediately take the underlying assets; that is the plan, i.e., nationalization must not be allowed. (A “bail in”, not a “bail out.”)The report goes on:’ “blah blah blah… does not detract from the fact that risk is now heavily focused within these institutions…. Indeed, just because CCPs have not failed in the past, there is nothing to say that there will not be a CCP crisis in the future. Panelists were concerned that with the small capital base CCPs currently have, any recovery and resolution of a failing CCP will involve direct clearing members standing up to support them through a number of difficult actions for the firms involved…”
“If a large CCP is in trouble because of its members default, then we will be having a banking crisis” says Benoit Gourisse, Senior Director, European Public Policy at ISDA.”
Webb it goes on to describe recommendations by the Financial Stability Board and the Committee on Payments and Market Infrastructure at the BIS ‘to conduct further work on CCP financial resources and recovery and resolution… To further strengthen the resilience and resolvability of CCPs in default and non-default loss scenarios.’ In it’s Central Counterparty Financial Resources for Recovering Resolution report, 2022, the BIS expressed concern about system-wide and contagion effects and interconnectedness of the system, but ‘absolutely avoided contemplation of exactly what happens in a global financial crisis!’
The Depository Trust and Clearing Corporation operates two CCPs, both of which have been designated in the US as “Systemically Important Financial Market Utilities” (SIFMUs); however, the clearing corporations’ and the depository’s recovery and wind-down plans are a bit hazy as they are absurdly underfunded. They have, however, made provisions to create brand new entities after the bubble pops. Webb goes on to describe how the CCPs are designed to fail because they are deliberately under capitalized. ‘The startup of a new CCP is planned and pre-funded. This construct assures that the secured creditors will take all collateral upon which they will have perfect legal control.’ As of March 31, 2023, the entire capitalization underpinning the Central Security Depository in the CCPs for the entire U.S. Securities market and derivative complex was a tad over $3.5 billion.
Click here to download a PDF version of the book, an HTML version is also available here.
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