This article was originally published by Anonymous Financial Guy at The Organic Prepper
In this economic climate, lots of folks are wondering how to protect their money. Some people are forced to invest in retirement funds by their employers, others play the market, some invest on their own, and nearly everyone has checking and savings accounts. But when the amount of money you have goes beyond something you could live off for a month or two, how do you deal with it wisely while minimizing your risk?
There is a history of government seizure or confiscation of assets. This can be found in nearly every country, including both the Federal and State level in the United States. Rather than go into the nature of politics or maintaining a wartime economy or support of an asset-based currency or filling tax revenue shortages through seizures, let’s just acknowledge that a government entity of any sort may choose to make a rule that effects a transfer of a citizen’s wealth to that government for whatever purpose. That is a political risk that will not go away.
Instead, let us focus on contracts and agreements that we can control. Namely, our relationship with banks and custodians. Those agreements can impact our ability to maintain our wealth, ourselves, and hopefully be redeemable for cash upon demand.
There are three rules for protecting your investments and we can learn those through situations that we all read about in the news. Let’s first examine some relatively recent history, here in the United States, when US citizens could watch their wealth evaporate quite legally, because of contracts they did not pay attention to.
Rule #1: Make sure you have more than a Chinese firewall in place between your financial instrument and the reporting entity.
Everyone remembers Bernie Madoff – many clients of Bernie Madoff lost a lot of money. Was this legal? No – it was a Ponzi scheme, but it’s worth examining as your protection for something Illegal as a counterpoint to what is legal. A Ponzi scheme is when a client’s withdrawals come from other client’s money.
How can this happen? Well, in order for this to be successful, you need to have a security, a sales force, and a custodian (reporting agency) all working together, in one house. Checks and balances in the US financial system virtually assure (that as long as the regulators are doing their jobs) an issuer of a security may not report on their own value while they sell their issue directly to clients. This, however, is exactly what Bernie Madoff did. He offered his own “strategy” to his own clients and made his own statements as to client value.
Knowing this, Rule #1 for protecting your bank accounts and investment accounts is to make sure you have more than a Chinese firewall in place between your financial instrument and the reporting entity that tells you what your balance is. A lot of folks with checking accounts as well as IRA or investment accounts at the same national banks should pay close attention to this. We will discuss why in detail presently.
If you own the data, and you control the asset, guess what? That is why banks and custodians call the shots. Everybody else plays by their rules. That is where the control is.
Rule #2: Read your custodial and banking agreements.
Not too long ago, there was a company named Lehman Brothers, which was a Wall Street finance firm that became heavily invested in CDOs (mortgages mostly) in 2008 and whose over-leveraged collapse heralded the 2009 market crash. Now there is quite a bit worth knowing about Lehman Brothers, but for the purpose of this article, I would like to highlight one significant aspect involving the clients of Lehman Brothers Prime Brokerage Services, whose accounts on deposit were considered assets of Lehman Brothers for firm-level financing in what is known as rehypothecation.
Since these client monies were considered firm-level collateral for lending purposes, those assets were frozen while Lehman Brothers went through bankruptcy proceedings. What is different with this scenario than with the Bernie Madoff scenario is that the rehypothecation aspect of assets on deposit through Lehman Brothers Prime Brokerage Services was in the fine print of the actual custodial agreement.
It was legal. The assets were separately accounted for on the client level and they remained in the client’s name, but the effect of client money being a “co-signer” for Leman Brothers’ open market fundraising made that money subject to the claims of creditors.
Market circuit breakers, black box algorithms and the technology underlying the stock market have changed dramatically since the year 2000, and a lot of folks do not quite realize exactly how much. Now, this topic is pretty detailed and could easily cover several pages itself, but for the purposes of our article, we’ll just cover absolute basics.
Fractional ownership of shares and omnibus trading: It used to be that a single stock was set at a price and that is what you paid for it. Now, not only can you own an account for partial shares, but block trading (also called omnibus trading) of large lots of shares with multiple owners is commonplace. It actually gave rise to major discount brokers like Etrade and Scott Trade in the late 90s. But technology on the trade routing side progressed immeasurably after the NASDAQ in the early 2000s went “public” and began to attempt to resell trade and order routing software to other world exchanges.
Circuit breakers: Sept 11, 2001, is probably going down as the last time the overall market would be shut down due to a calamitous event because now exchanges have circuit breakers in place. In the old days, market makers were required to buy or sell particular issues on demand, thus the term ‘market maker’. If there was power to the exchange and floor, traders placing orders, then stocks were changing hands.
Today, the entire market process is automated to a very large extent. Computers control large orders almost as they are confirmed by the exchanges. That is how fast the market reacts – within milliseconds. Obviously, there is potential for issues, and that is where market circuit breakers come into play. For example, a circuit breaker may look at each issue (stock) individually, and if too much momentum is experienced either up or down in too short a time, the circuit breaker engages. Then, all trades are held and may potentially be backed out. Keep in mind this is after a confirmation has been issued but before settlement. We will talk more about settlement, but for now, just be aware that major stock exchanges have the ability to halt individual issues, in addition to the actual halting of trading (giving trade confirmations) and if that happens, those frozen trades go into to limbo for a period of time (potentially days) and may be kicked back or canceled.
Now, most average investors will never experience this, because your common, the retail public has very limited, very controlled access to actual trade windows.
Rule #3: Just because you have a confirmation, it doesn’t actually mean you have a trade or anything resembling settlement.
Know your trade windows and anticipated settlement times so you can get in front of a problem before it gets exponentially worse.
Now let’s talk a little more about the settlement of securities. Another aspect to be aware of in your custodial agreements is exactly how your security gets settled and turned into cash. You place a trade and the trade happens according to schedule. Then there is a period of time for settlement where those funds may not necessarily be available to commit elsewhere. This is your estimated settlement time. It is somewhere between Trade Date +1 day and Trade Date + 3 days depending on what you are buying or selling.
After that period of time, then you have monies available in your brokerage money market fund (as long as your custodian can’t rehypothecate it right?. Well, at least not with government money market funds. Proprietary money market funds maybe not…they have their own rules.) Then you can request for those funds to go into your bank account so that you can withdraw the cash physically.
But not always. If for whatever reason, things really go sideways and your brokerage firm cannot “sell” your position, your brokerage agreement may allow your custodian to settle your trade-in kind. This means a physical delivery of the stock certificate you were trying to sell. Once again…see Rule #2 and beware of your agreements.
So you can see that with a brokerage account of any kind, the potential to have your trades held, or not settled directly before even getting to your bank might throw your planning a bit off.
So… what about big banks?
Let’s re-visit using national, well-known banks for both banking and brokerage or securities. While this is a big mess if you follow financial industry and banking industry history, rather than go into any details, now that you have a little bit of understanding of the mechanics of the industry, what do you think of this?
- A national bank that controls your checking and savings accounts (and potentially what you can access on a daily basis)
- And that national bank also has the convenience of brokerage services
- And that national bank even has their own proprietary mutual funds and money market funds.
The five largest banks in the US could be directly described as above. Not to ring any alarms, but if there was going to be a call for capital controls to prevent a bank run, where do you think the government would be wisest to focus their efforts?
There are ways to get in front of these modern issues and red flags to be aware of.
- Remember the 3 Rules.
- Keep 6-12 months worth of living expenses of cash on hand.
- Use multiple banks, brand names are fine, just keep in mind separation of all brokerages and banks. Having multiples of banks and brokerages can be a pain but will be worth it for diversification of sources.
- For each account, you need to separately write down in a single location the best contact number, your account number, and passcodes and the 3 best ways for them to receive written instructions. (Email? Fax? Weblink? Trading software?)
- Always maintain a physical copy of a blank withdrawal form and ACH request form. Know if these need to be notarized or not and know where to send them.
I just wanted to paint a picture of one small piece of the current financial system. I hope this was helpful to the folks out there who aren’t privy to the nuances of modern finance.
About the Author
Anonymous Financial Guy is a blue jeans and flannel wearing critical-thinking financial advisor who enjoys systems and structure, understanding underlying limitations, and has a healthy dislike of authority.
Market back up over 500 points today.
Thank God I don’t have money in the market. Mine is in LAND.
This is called strategic asset protection. Protect yourself and your assets by being 100% liquid, which means your wealth is invested in 100% hard assets you control and have hidden. With no assets in any institution or account where it can be counted or taken or stolen or confiscated by any default or asset forfeiture. Like burried gold and silver in the bank of dirt. You want to look poor and not a target. Hard assets meaning homesteaded property, guns, art work, jewelry, gold and silver, several years of food supply, and cash. What they cant see they cant take. If you have debts and credit cards, pay off all your car loans mortgages and secured debts first. Pay unsecred credit cards last. Do not keep any checking or direct pay deposits in the same bank as any debts. Or they will steal your payroll deposits if you default on a debt payment. If you have a pension take a one time lump payoff settlement and get out now before it is bankrupt from underfunding and pay your mortgage off and vehicles. This big crash coming will be like a Theater Fire, there are only so many exit doors. A few get out and the rest will get crushed by the greedy bodies piled up trying to get out last. Going to get really FUBAR FUGLY coming up. Good luck.
Agree: have nothing to do with the financial services industry, period. They don’t work for you; they work for themselves.
The entire sector is nothing but a pump-and-dump operation: Bernie Madoff to the tenth power.
Keep a few accounts active so that you can do basic business and home transactions but store your wealth elsewhere.
I have not had a Bank account since 1973.
I do Credit unions only, I have a few.
I keep 6 months of living expenses in cash
underneath the waterbed or elsewhere.
I can fight a war, or start one.
You probably could not afford to
buy my property. I know for certain
I could not afford NailBangers place.
My pensions are bond and real estate based.
Our corn doesn’t grow worth a shit,
so what am I doing wrong?
My father said that when he was younger, a portion of their corn crop was shriveled. They found out that there was an old slave cemetery in that same area.
That part of my property has soil that is hard as rock when it compacts. No Cemetery. Hawaiians had lots of slaves,(they enslaved each other) but none buried on my land.
Corn seems to be the only stuff that doesn’t do well here. Although quite a few miles away a dairy does well growing it as feed.
There you go you answered your own question shiet pure gold COW shiet!!
I remember my grandparents had trouble with that hard packed crap the old man mixed a 50/50 sand and manure once a year it eventually stayed reasonable I also assume you till all your compost in as well? If your still having troubles with the corn look into what Taber Alberta does I know they have that hard packed crap there too.
Chemtrails. Affects some soil leaving other soil unaffected.
Sgt.Dale you are the wisest of us all….i invest in metals…..lead,brass and copper
I do have some lead, brass and copper. The wife and I do have silver she has hers and I have mine. We have a little computation to see who can get the most. She is winning. Don’t tell her, but I invested in a couple more of those things with barrel and triggers that go bang. Please don’t tell her. LOL
Best investment is in yourself and no debt. I agree with the ‘land’ idea. As well as useful possessions. Tools, hardware, supplies. The abilities you learn and can pass on. Last, just, said it before, be satisfied with the idea of work. It is a good thing.
Very true. Nobody has ever got rich investing in the financial services industry; lots of people have got rich stooging clients by working for the financial services industry. There is your clue.
Seems the first thing you need to do to protect your money and wealth is not give it to any financial institution if you can help it. 100 oz of gold and 100 lbs of silver should see most folks through retirement years ( providing we last another 20-30) if not like I said bury in the yard and bug out if you survive all good. You come home dug it up and rebuild If not then you didn’t need it anyway.
As far as contractual agreements.
Think of it this way Fiat currancy is currancy by law. If that law gets tossed what happens to your contract???????
If you want to keep it then don’t give it away. It’s that simple.
Exactly why I don’t have a credit card. If the item cannot be purchased with a check, debit card or cash, then patronize another establishment. Stores that accept credit cards have to pay for the privilege. Of course, that is also reflected in the prices to the consumer.
100 oz Au x $1,350 = $135,000
12 oz Ag x 100 x $18 = $21,600
TOTAL current value (approx.) = $156,600
Divided by 20 years = $7,830 per year.
That’s just about $150 per week.
I can’t imagine what living expenses will cost over the next 20 years, but you can bet that they will be a whole lot higher than they are right now. Not only will food, energy, medical costs, housing, transportation, etc. continue to skyrocket; as government debt keeps skyrocketing, taxes are certain to go way up also! Talk about pouring money down the drain!
How well could you live right now if your entire income was $150 per week? (I would not count on Social Security, Medicare, or other entitlement programs holding their value over the next 20 years. To be on the safe side, you should plan your finances as if they will not exist at all. Even if they are still around in some form, they might not be worth much.)
Don’t forget that you and/or spouse may very well have serious health issues that require treatments or medicines not covered by insurance. And if you eventually need to go into a nursing home, well… my dad is currently in a Veterans’ Home (non-profit) that costs $100,000 per year. If you had to pay that, your ENTIRE hoard of 100 troy oz Au and 100 troy pounds Ag would disappear in 18 months.
(If you’ve ever seen a TV documentary that investigates some of those nursing homes that are willing to accept people who have no income except Social Security, you know that a lot of them are hideous. I’d rather be dead than be helpless and trapped in some of those places.)
That “18 months” figure assumes that your metals will increase at the same rate as medical / nursing home costs. If those costs increase at a faster rate, the metals won’t even last a paltry 18 months.
Almost nobody has anything near what they will need for living expenses after age 65. Financial experts say that to have even a modest, middle-class life will require one million dollars allocated for retirement. That’s $40K per year for 25 years, which is not a fortune when you think how fast it can vanish due to medical or nursing home costs.
At the values used above, a million bucks works out to around 641 troy oz Au and 7,692 troy oz Ag. How many of us will have access to a million dollars in assets for our retirement years?
To paraphrase Tiny Tim, “God help us, every one”.
Really good points: none of the entitlement programs will be worth anything in the next 5 years, let alone the next 10 or 20. You have to prepare as if they do not exist.
I work part-time in the UK for my company, and there is next to nothing that is public there that a) works, b) is worth much. Try accessing any government benefit or service and you will find it over-loaded with Muslims and Africans and oldies. In the past 20 years, all government benefits and programs have shrunk to next nothing: they will throw you a few thousand pounds a year in state pension if you have paid 30 years into it, but you will get nothing else. The currency keeps going down so savings shrink year-on-year.
As for paying “tax”, that is a sucker’s game. None of the big capitalists keep their wealth in the country and even the Queen invests most of her wealth outside the country, she has such little faith in the place. People can see that you pay tax and then they walk down the road and hand it over to a Somali family of six a day later.
Frank ~ Thanks for the kind words; and also for the perspective of someone who has a firsthand view of the joys and wonders of socialism.
This is the type of future that the Bernie Sanders supporters (and a lot of Hillary supporters) desire for the USA. They refuse to believe the actuality that you have described, because they prefer the intoxicating vision of Something For Nothing, With Plenty For All.
I suspect that most people have not done the math regarding what they will need for their retirement years, and what will actually be available. They have vague notions that Social Security and Medicare will simply provide pretty much everything they need.
The $1 trillion per year deficit adding to the current $20 trillion National Debt (and the approx. $150 trillion in unfunded mandates) cannot continue indefinitely. There WILL be a day of reckoning…. and for the folks that are whooping it up with “bring on the reset!” — they better have at least a million bucks saved up, or they and their loved ones stand a good chance of also being casualties of “the Greater Depression” when it happens.
Rule #1:::: Don’t give your money to a guy that snorts blow off the azz of a $1500/hooker
Available for licensing ?
If you want to protect your money, don’t keep it in a useless bank.
And have small denominations …like 5s and 10s….plenty.
I cash my SS check as soon as it is deposited.
It is my savings. Just not in a bank.
One year’s expenses? What then??
Save all you can—but in a dire situation as mentioned–imagine putting thousands on the streets/homeless.
Not gonna happen.