Best of the Week
Most Popular
1.Crude Oil Price Trend Forecast 2016 Implications for Stock Market - Nadeem_Walayat
2.Odds of Winning Walkers Crisps Spell & Go olidays K, C and D Letters - Sami_Walayat
3.Massive Silver Price Rally During The Coming US Dollar Collapse - Hubert_Moolman
4.Pope Francis Calls For Worldwide Communist Government - Jeff_Berwick
5.EU Referendum Opinion Polls Neck and Neck Despite Operation Fear, Support BrExit Campaign - Nadeem_Walayat
6.David Morgan: There Will Soon Be a Run to Gold Like You've Never Seen Before - Mike Gleason
7.British Pound Soars on BrExit Hopes Despite Remain Establishment Fear Mongering - Nadeem_Walayat
8.Gold Price Possible $200 Rally - Bob_Loukas
9.The Federal Reserve is Not Going To Raise Interest Rates and Destroy Gold - Michael_Swanson
10.Silver Miners’ Q1’ 2016 Fundamentals - Zeal_LLC
Free Silver
Last 7 days
The Numbers Add Up to Vindication for a Cautious Gold Bull. . . - 1st June 16
Will the Fed be Blind Sided by Stagflation? - 31st May 16
Gold Price Not Ready for a Final Intermediate Cycle Low - 31st May 16
EU Referendum - British People vs Establishment Elite, Vote LEAVE an Act of Defiance! - 31st May 16
Gold - Mr. Cool Cucumber is starting to Sweat - 31st May 16
AMAT Chirps, b2b Ramps, Yellen Hawks and Gold’s Fundamentals Erode - 31st May 16
Stock Market Re-Testing Overhead Resistance - 30th May 16
David Cameron Questioned on Out of Control Immigration at TEN TIMES Conservative Election Pledges - 30th May 16
Bitcoin Price Skyrockets And Is Now Up More Than 100% This Jubilee Year - 30th May 16
This Is Not The America My Parents Immigrated To In 1957 - 30th May 16
“Debt, Not The Economy, Reaches Escape Velocity” With Graham Mehl - 29th May 16
EU Referendum, Black Vote LEAVE or REMAIN? Which is Worse for Racism for Britain's Ethnic Minorities? - 29th May 16
Billionaire Gross: Jubilee Debt Relief as Prelude to New Global Economic Order - 29th May 16
Wargaming North Korea - Assessing the Threat - 29th May 16
EU REMAIN Population Forecasts - England 4.1 million Explosion, London Migration Crisis - 28th May 16
A Guide to the Trump-Sanders Debate - 28th May 16
Gold And Silver – At Significant Support. New “Story” Developing - 28th May 16
The Next Systemic Lehman Event - New Scheiss Dollar & Gold Trade Standard - 27th May 16
Energy and Debt Crisis Point to Much Higher Silver, Metals Prices - 27th May 16
Gold Junior Stocks Q1 2016 Fundamentals - 27th May 16
These Crisis Markets Are Primed to Deliver Big Gains, Platinum Never Cheaper! - 27th May 16
Operation Black Vote BrExit Warning for the Wrong EU Referendum - 27th May 16
UK Immigration Crisis Hits New Extreme, Catastrophic ONS Migration Stats Ahead of EU Referendum - 27th May 16
Many of the World’s Best Investors Made Their Fortunes This Way…And You Can Too - 27th May 16
The Ugly Truth About Stock Market Manipulation and Gold Prices - 27th May 16
Gold Price Looking Vulnerable While Gold Stocks Correct - 27th May 16
The 5 Fatal Flaws of Trading - 27th May 16
The Next Big Crash Of The U.S. Economy Is Coming, Here’s Why - 27th May 16
A New Golden Bull or Has the Market Gone Too Far Too Fast? - 27th May 16
It Feels Like Inflation - 26th May 16
Negative Interest Rates Set to Propel the Dow Jones to the Stratosphere? - 26th May 16
S&P Significant Low has Occurred – Not Likely! - 26th May 16
Statistics for Funeral Planning in UK Grave - 26th May 16
Think Beyond Oil And Gold: Interview With Mike 'Mish' Shedlock - 26th May 16
Hard Times and False Mainstream Media Narratives - 26th May 16
Will The Swiss Guarantee 75,000 CHF For Every Family? - 26th May 16
Is There A Stocks Bear Market in Progress? - 26th May 16
Billionaires Are Wrong on Gold - 26th May 16
How NOT to Invest in the Gold Market - 26th May 16
The Black Swan Spotter...Which Saw the Oil-Crash coming; now says the “Invisible Hand” will push Brent to $85 by Christmas - 26th May 16
U.S. Household Debt Still Below 2008 Peak - 25th May 16
Brexit: Wrong Discussion, Wrong People, Wrong Arguments - 25th May 16
SPX is at Strong Resistance - 25th May 16
US Dollar, Back From the Grave? - 25th May 16
Gold : Just the Facts Ma’am - 25th May 16
The Worst Urban Crisis in History Could be Upon Us - 24th May 16
Death Crosses Across The Board Are IRREFUTABLE Stock Market Sell Signals - 24th May 16
Bitcoin Trading Alert: Bitcoin Price Stays below $450 - 24th May 16
Stock Market Crash Death Cross Doom Prevails - 23rd May 16
Did AMAT Chirp? Implications for the Economy and Gold - 23rd May 16
Stocks Extended Their Rebound On Friday - Will They Continue Higher? - 23rd May 16
UK Treasury Propaganda Warns of 3.6% Brexit Recession, the £64 Billion Question? - 23rd May 16
Stock Market Support Breached, But Not Broken! - 23rd May 16
George Osborne Warns of 18% Cheaper House Prices - BrExit for First Time Buyers - 22nd May 16
Gold Bull-Phase I Continues to Confound (The Trek to “Known Values”) - 22nd May 16 r
Avoiding a War in Space - 22nd May 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Why 95% of Traders Fail

Did Hurricane Sandy Cause $36.5 Trillion In Damage? Flooded Bank Vaults

Stock-Markets / Financial Markets 2012 Nov 05, 2012 - 02:30 AM GMT

By: Raul_I_Meijer

Stock-Markets

Diamond Rated - Best Financial Markets Analysis ArticleFirst of all: the answer to the title question is, as far as I can see: no. But it's almost certainly a whole lot more than the $50 billion reported today, and that $36.5 trillion amount doesn’t come from thin air; it appears in a number of news articles about Sandy. All in all, the story raises a few more questions, allows you to play with a bunch of numbers, and leaves you puzzled, amazed and at times easily bewildered.


Here’s how: One of many things flooded by hurricane Sandy last week was a bank vault below 55 Water Street in Lower Manhattan. At first glance nowhere near the most interesting news coming out of the storm aftermath, since it doesn't involve human lives lost, or people losing their homes. Still, given the potential amount of damage in dollar terms, it does warrant a second look.

The vault in question belongs to the Depository Trust & Clearing Corporation or DTCC, a clearing house for Wall Street firms, owned by Wall Street firms. On its own website , the DTCC describes itself like this:

DTCC, through its subsidiaries, provides clearing, settlement and information services for equities, corporate and municipal bonds, government and mortgage-backed securities, money market instruments and over-the-counter derivatives. In addition, DTCC is a leading processor of mutual funds and insurance transactions, linking funds and carriers with their distribution networks.

DTCC's depository provides custody and asset servicing for more than 3.6 million securities issues from the United States and 121 other countries and territories, valued at US$36.5 trillion.

In 2010, DTCC settled nearly US$1.66 quadrillion in securities transactions.

A number of things here: it's easy not to realize that if 3.6 million securities are valued at $36.5 trillion, each of these pieces of paper is on average worth over $10 million. Not exactly your average pieces of paper. Also, in what way or fashion DTCC serves as a clearing house for OTC derivatives is an interesting little riddle, but not one we can expect to get an answer to. Still, something has to drive up that average value, and stocks or bonds are not prime candidates for that role.

It’s also easy to overlook the fact that storing 3.6 million pieces of paper, certainly in a way that makes them easily retrievable, requires a huge amount of space. You can't exactly just stack them one on top of the other.

Back to Sandy. It flooded Lower Manhattan, including the bottom floors and basement at the DTCC building. And improbable as it may seem, and while DTCC reported having "sealed" the vault, apparently it's not uncommon for bank vaults to focus on break-ins, but not on water damage.

Which leads to this, as reported by CNN:

Stock certificates feared damaged by Sandy

Trillions of dollars worth of stock certificates and other paper securities that were stored in a vault in lower Manhattan may have suffered water damage from Superstorm Sandy.

The Depository Trust & Clearing Corp., an industry-run clearing house for Wall Street, said the contents of its vault "are likely damaged," after its building at 55 Water Street "sustained significant water damage" from the storm that battered New York City's financial district earlier this week.

The vault contains certificates registered to Cede & Co., a subsidiary of DTCC, as well as "custody certificates" in sealed envelopes that belong to clients.

[DTCC Chief Executive Michael Bodson] said the DTCC's computer records are intact and that the corporation has "detailed inventory files of the contents of the vault."

The building remains inaccessible, but the lower floors are believed to be flooded. The full extent of the damage cannot be assessed until power is restored and the building is deemed safe to enter.

Well, we know a bit more, but it would be nice to shine a little more light on the situation, and especially the damage incurred. For instance, we don't know yet what percentage of the 3.6 million securities were stored in the vault in question. Or what the damage actually consists of when, if we are to believe the CEO, detailed computer records of the papers and inventory files of the vault exist. The Financial Times has this:

Stock Certificates Feared Ruined by Sandy

Trillions of dollars of stock certificates are feared ruined after Hurricane Sandy flooded a vault at the Depository Trust & Clearing Corp, the Wall Street-owned organization that manages important parts of the U.S. trading infrastructure.

The DTCC houses 1.3 million paper certificates for shares, bonds and other financial instruments, including foreign securities, at the organization's headquarters in Manhattan’s financial district.

[..] the DTCC admitted on Thursday that its vault remained underwater and officials had still not been able to assess the damage. “The building itself remains inaccessible and will be until power is restored and an on-site health and safety inspection can be completed,” it warned in an email alert to its clients. It has suspended processing of physical certificates for an indefinite period.

Adding to the confusion, the DTCC also said that it was still trying to track down certificates that were in the mail over the period of the storm. Couriers are experiencing disruptions of their own and could take several days to reroute deliveries to DTCC’s alternative sites.

A spokeswoman added that it had electronic records of all the certificates, which could be reissued. “Hindsight is 20/20. We have taken a lot of precautions, in terms of protection both for the security of our systems and of our records, and we have a full inventory of the certificates, as well as a robust recovery plan.”

Right. The DTCC was reopened for business almost immediately, or the world of finance probably would largely have come to a standstill. But it is "open" only electronically, because the pieces of paper the business, which involves thousands of transactions daily, is based on, are not available. They may well be gone for good. And someone at some point (as in a thousand times a day) will want to hold his piece of paper in his own hands. So the paper will need to be replaced. But what does that cost? More from FT:

DTCC is used by the financial industry for clearing and settling trades, and it houses stock certificates so that they do not usually have to be posted around the country from investor to investor. The vast majority of trades are now recorded electronically without certificates moving at all.

The organization said that it switched its systems to back-up servers and was dealing with electronic trades as normal out of offices in Dallas, Texas, Tampa, Florida and Brooklyn, New York. More than 1,000 of its New York employees are working from home.

In recent years, the DTCC has spearheaded an effort to encourage electronic-only share and bond issuance, so the proportion of securities that exist in paper form has declined. The organization has further encouraged the process by encouraging “dematerialization”, where certificates are converted to electronic format.

In a white paper earlier this year, it said that it cost the financial industry almost $300 million to replace $16 billion of certificates that disappeared in the collapse of the World Trade Center in 2001.

An interesting development: the idea is to have people and companies treat the securities trade the way they treat cash vs plastic. That may well work, and even then only to a degree, for shares and bonds worth $100 or so, but we were looking at pieces of paper, remember, that are worth that $10 million on average. It's a nice idea, but the DTCC will in the near future have to keep dealing with a lot of paper. So what has been damaged in that vault will need to be replaced.

How much paper are we talking about, and what does it cost to replace it?

If we put our confidence in the FT for the moment, here are the relevant indicators: the flooded vault held 1.3 million paper certificates. If they represent an equal part of the $36.5 trillion that the total 3.6 million certificates the DTCC says it holds are valued at, $13.2 trillion in certificates may have become effectively useless and in need of replacement.

In 2001, it cost $300 million to replace $16 billion of certificates. Now, it could be easier and cheaper to replace larger amounts of documents, but it could also be much harder, and more expensive. Hard to say from where I'm sitting. It must be hell to look through a far larger pile of soaked and perhaps rotting documents. Labor cost alone could be huge therefore.

Seeing that it cost $300 million to replace $16 billion of certificates, the price for replacing the entire $36.5 trillion the DTCC holds would be $684 billion. $53,33 per unit replaced. But, at least as per the FT, the damage in the vault in question involves not the entire $36.5 trillion, but "only" $13.2 trillion in certificates.

In other words, and of course with a caveat or two, the cost - for the financial industry - of replacing the flooded certificates would seem to amount to about $248 billion. Give or take a handful of change. And who knows what else was in that vault.

We should have no illusions at all that we can get to the heart of things in a field as opaque as this (and that is a problem in itself), but I do think it's good to ask questions about it. For one thing, I'd like to know who's going to pay that $248 billion. Because I don't think the banks who own the DTCC are planning to do it themselves. And foolproof insurance for a vault that's not waterproof sounds unlikely as well. I guess we can all figure where it goes from there.

By Raul Ilargi Meijer
Website: http://theautomaticearth.com (provides unique analysis of economics, finance, politics and social dynamics in the context of Complexity Theory)

© 2012 Copyright Raul I Meijer - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Rudy-Avizius
06 Nov 12, 18:18
Charge it to Goldman Sachs

Since Goldman Sachs had the financial ability to have full power in its building while the rest of the city suffered and hospitals had to evacuate, perhaps we should charge the "only $13.2 trillion" to them.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife