Consider the following:
What if for the last 30 or 40 years of your employment you went to your bank to deposit your Friday paycheck. Let's say you got $600 or $700 or $800 per week after taxes in your check. You go to the bank and make a deposit and get your deposit receipt (any bank...CitiBank, Bank of America, Chase, etc..). You then write checks against those deposits to pay your bills.
One day you turn on the TV to find that "Your Bank" has been systematically taking the check you endorsed and instead of depositing it into your account has been depositing it into some offshore account for their own benefit. Unbeknownst to the teller, he or she has been giving you a phony receipt that doesn't mean a thing and simply putting your endorsed check into the drawer she was told to put it in. "Your Bank" has a few guys who programmed a computer to generate fake statements, provide fake interest, generate fake yearend tax documents, etc...
"Your Bank" has been promising higher rates of return if you lock into a longer term certificate of deposit (cd) so they know you won't be withdrawing that money any time soon. As a matter of fact, you'll probably just end up rolling that over when it comes due anyway so they can just print you up some more phony documents saying you own a new long term cd.
"Your Bank" has determined exactly how much cash it will need (daily, weekly, monthly) to meet the amount of checks (redemptions) it will need to pay on your behalf so as to make you think it's your money paying the bills. That amount is wired from their offshore account where yours and everyone's checks are really being deposited. In reality, they took your deposit but never put it into your account. They simply stole it by putting it directly into their offshore account. Again, they immediately stole it. It never made it to your account.
Your paychecks were never deposited into your account. Your deposit receipts were phony. Your monthly statements were phony. The SEC, oops I mean the Department of Banking never caught on even though it should have been completely apparent that this major fraud was taking place. SIPC, oops, I mean the FDIC steps in and says that there was never any money deposited into your account so the money that you thought you have been conservatively saving for the last 30 or 40 years was never really there and thus you are not entitled to FDIC protection on something that never actually existed because you never really owned an account.
The cd's you THOUGHT you opened were never really funded. You never really had any cd's. This would also mean that the 10 year cd's that you thought you've been rolling over decade after decade have never really earned any interest.
You carefully made sure that you always kept each account under the FDIC protection limits so you would always be safe. You had complete trust in your bank, the FDIC, the Department of Banking. But now it's all gone. You are devastated and in financial ruin. The last 30 or 40 years of your working life have been a complete lie. Pretty horrendous, isn't it?
BUT WAIT...it will get even more interesting...now you are going to be sued. Even though the deposits you thought you were making into "Your Bank" were never really deposited into "Your Bank", the withdrawals and checks you've been writing against your fictitious accounts have been being paid OUT of "Your Bank." So you have no deposits into "Your Bank," but 30 or 40 years of withdrawals and checks that you've been writing. Everything from your mortgage payments that you made to pay off your house, to your utilities, to your credit card bills, to $50 for Christmas that you would give each year to your grandchildren, to your car payments, to your health insurance, etc, etc, etc...none of that was your money. You have to give it all back. After all, we can't let "Your Bank" get away with letting them pick and choose who is entitled to what based upon their phony and fictitious monthly statements.
And lastly, who should be going to jail? The teller who took your money? The man or woman at the desk behind the glass who opened your accounts and rolled your cd's every 10 years? These people thought they were working for a highly regulated financial institution yet they were the ones (unknowingly) taking your checks and issuing you phony receipts. What about the sales team who were paid to advertise and bring in new accounts? If they had no reason to believe that this massive fraud could possibly be taking place in such a regulated environment could they/should they be held accountable for creating the ads that enticed you to come into "Your Bank" and open up an account? Shouldn't their intent be considered? They were working under the pretense that this was a legitimate business operating lawfully.
I would agree, however, that this is almost as far fetched a story as if you had heard one day that a major stockbroker who was a former chairman of NASDAQ, admired by all, heavily regulated and periodically investigated by various agencies, advised the SEC in times of crisis, championed and admired by the SEC, had an impeccable reputation, invested very conservatively and diversified...this is almost as far fetched as if this broker pulled off a decade's long Ponzi scheme right under the nose of the SEC. The bank scam I could understand, but the broker? No way. Especially if the broker has a much better reputation than the banks.
WE NEED TO RELY UPON OUR ACCOUNT STATEMENTS. THIS IS ALL WE HAVE. WE NEED TO RELY UPON THE AGENCIES ENDORSING AND INSURING THESE ACCOUNT STATEMENTS. IF YOU CAN'T TRUST THAT YOU ARE PROTECTED THEN THE ENTIRE FABRIC OF OUR ECONOMY WILL CORRODE AND CRUMBLE.
In our system of fractional reserve banking, if we cannot rely on our bank (and brokerage) statements and know that they will be protected as promised under the charters of the FDIC, SIPC, etc...then a run on the bank should take place, but because of fractional reserves, we know that there is not enough money out there to satisfy a large fluxof withdrawals. For this reason it is not only important for victims of financial crimes, but it is essential that the Congress understand the bigger picture of what they will be debating in the Garrett Bill. Mr. Bernanke should also be in agreement with this. He, above all, should understand what would happen with a lapse in confidence in our brokers, our banks and our other financial institutions. If everyone started cashing in their stocks as well as their bank accounts...I don't even want to think about it.
Finally, this should not be viewed as a bail out by the government or the taxpayer. This should be viewed as the financial responsibility of SIPC. If necessary, SIPC members should be assessed accordingly to cover any shortfall that may arise to cover the obligations of SIPC. I believe you will find enormous public support if people knew that Wall Street had to take the hit for one of its own. I also believe that it is only right for Wall Street and SIPC members to cover any shortfall in SIPC funds because it is SIPC protection that enables them to thrive in this world of paper statements. (This is the same theory that we use in this country to tax the rich...If it weren't for the freedoms of this country, they wouldn't be rich. If it weren't for SIPC protection, the brokers would not be rich.)
Think of your insurance premiums. If you get in a lot of car accidents your car insurance premiums go up. If you live in an area where there tend to be a lot of accidents, your car insurance premiums are higher. If you live in an area where people flaunt the law and drive without insurance, those who do have insurance pay more in their premiums. (They are also outraged because they pay a higher price because of the people who don't carry insurance. They will be more apt to whistle blow on those who they know are driving without insurance - see self policing below)
By having SIPC ultimately responsible for their obligations, this will keep confidence in our institutions. SIPC will also learn a quick lesson with regards to being adequately funded. If they need to assess brokers then the brokers will do a better job at self policing their colleagues. They will actually look down upon wrongdoers in their industry rather than simply look the other way. It is win-win-win with not the taxpayer, but SIPC funding their liability.
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