Flight #55 US World Reserve Currency, Is Your Money Safe at Your Bank, Custodia and Pros/Cons of Private Equity

Questions from the Flight Deck:

What if the US Dollar is not the dominant world currency?

• https://www.visualcapitalist.com/cp/how-reserve-currencies-evolved-over-120-years/

Part 1:

How to know how much FDIC insurance you have?

• https://edie.fdic.gov/calculator.html? 

Should we be nervous about the banking system?

• There is no safer place...

How much can I actually hold in my bank account, FDIC insured? See FCIC calculator.

Why are banks and brokerage firms different?

• Banks accept deposits onto their balance sheet. When you deposit money, it becomes a liability for the bank.

• Brokers are middlemen. They hold your money (custodial relationship) and then allow you to buy investments. These do NOT go onto the broker's balance sheet. They take a little to “broker the sales” but do not own anything. You own the underlying investments.

What would happen if Schwab went bankrupt? FDIC, SIPC.

• Rule 15c3-1, "Net Capital Rule" of the U.S. Securities and Exchange Commission (SEC), makes it mandatory for brokerages to maintain a minimum amount of prescribed capital in liquid form. Rule 15c3-3, “Customer Protection Rule,” requires brokerage firms to keep client assets (both cash and securities) in a separate account from the firm’s assets to avoid any confusion

• What does a broker (Schwab) do with our money versus what a bank does with our money?

  • Bank invests and loans your money

  • Schwab puts it in stocks that YOU own. Schwab doesn’t hold them. Schwab can't do anything with your money. It’s not even on their balance sheet.

    • However, Schwab does have a banking component. A subsidiary of Charles Schwab.

    • Schwab has several components, subsidiaries:

      • ETFs, Mutuals Funds

• • • • Custodian, Broker-Dealer 

• • • • Banks

• • • Who controls money at ETFs, Mutual Funds...

• • • • Securities of underlying funds are not held at Schwab, Vanguard. They hire and pay a custodian to keep these securities separate...

• • • • • Who WAS the same – Bernie Madoff.

• • • https://international.schwab.com/account-protection

• • • Broker collapsing versus broker theft...

• • • • Protected up to US$600 million. The combined total of our SIPC coverage and our "excess SIPC" coverage means Schwab provides protection up to an aggregate of US$600 million, limited to a combined return of US$150 million per customer, up to US $1.15 million of which may be in cash. This protection becomes available in the event SIPC limits are exhausted.

• • • • SIPC covers shares, not $$$ amounts: For example, if an investor is holding 200 shares of ABC Inc. originally purchased through a failed stock broker, SIPC will work to replace or restore the same number of shares to the investor. However, if the stock price plummets during the time the stock broker goes bust to the time that the SIPC steps in, the SIPC will not reimburse the money the investor lost.

• Ron Berger: https://www.youtube.com/watch?v=wz64z1YuL0A&t=816s

Part 2:

https://www.businesstrialgroup.com/practice-areas/securities-litigation/oil-gas-partnerships/ 

Why do we go after these types of investments? Are they necessary to be successful? Do they add diversification?

• Private REITs

• Land Investments

• Mineral Rights

• Oil and Gas LPs

Why do they look so attractive? 10-12% annual Yield...

• Phoenix Capital Group...

• What does Yield mean?

Early bank run on Blackstone last December but it is NOT a bank. This guys says it is OK but if you wanted your money out of it- you cannot have it https://seekingalpha.com/article/4563565-the-truth-about-blackstone 

How do you value something?

Are short sellers able to sell private securities easily.

How do we know if the price is right, close to right or downright wrong.

In public markets, is volatility a bug or a feature?

“Fox watching the hen house”

Fundrise claims that privately held outperform public markets but there are multiple issues with this kind of data:

https://fundrise.com/education/why-private-markets-outperform-traditional-publicly-traded 

• Internal rate of return helps private equity firms but NOT always clients

• Are losers in private equity always captured in data? survivorship bias.

• What counts in private investment is the quality of people, trust, and the investments?

• How many private firms are zombies that still show value on balance sheets

• When the tide goes out... you see who swimming is nakedly.

• ..."But I get my 8%, 9% or 10% dividend : ) “ Where does the dividend come from?

• Wall Street moved from banks & public markets (active mutual funds) to private- why? Because that is where the story, the reputation, the glitz, can be manufactured- with out all this “nobody can beat the market stuff” That is where the money is in the roaring 20s.!