Dematerialization

There are now no property rights to securities held in book-entry form in any jurisdiction, globally. In the grand scheme to confiscate all collateral, dematerialization of securities was the essential first step. The planning and efforts began over half a century ago. That there was some great strategic purpose behind dematerialization is evidenced by the fact that the CIA was assigned the mission.

The project leader was William (Bill) Dentzer, Jr., a career CIA operative [2]. By his admission in his own written memoir [3], he started his career working to establish anti-communist student organizations in Europe with the backing of the CIA. The CIA had arranged his draft deferment. He was then specifically assigned to the CIA and worked there openly for five years. Subsequently, he was “transferred” from the CIA to the task force which created the Agency for International Development (AID). He became Special Assistant to the first head of AID, and thereafter Special Assistant to the U.S. Coordinator of the Alliance for Progress, which was active in Latin America. He was then appointed Executive Secretary of the Clay Committee, which lobbied for Congressional appropriations for AID. After three years as Director of AID in Peru, he was named Deputy U.S. Ambassador to the Organization of American States. He states in his memoir:

Then, strangely, even though he had no background in any aspect of banking or finance, he was appointed New York State Superintendent of Banks by Nelson Rockefeller. This came after his nomination to the newly-formed New York State Council of Economic Advisors by its Chairman, former head of the World Bank, Eugene Black. Interestingly, Black’s father had been Chairman of the Federal Reserve in 1933. Within two years of assuming his position as New York State Bank Superintendent, Dentzer was named Chairman and CEO of the newly formed Depository Trust Corp. (DTC), a post he held for the next twenty-two years, i.e., through the entire process of dematerialization.

In the late 1960’s, something called the Banking and Securities Industry Committee (BASIC) had been formed to find a solution to the “paperwork crisis.” It seemed the burdens of handling physical stock certificates had suddenly become too great, so much so, that the New York Stock exchange had suspended trading some days. “Lawmakers” then urged the government to step into the process. The BASIC report recommended changing from processing physical stock certificates to “book-entry” transfers of ownership via computerized entries in a trust company that would hold the underlying certificates “immobilized.” This trust company would develop the necessary computer and other systems. I happened to meet with network engineers of DTC forty years ago, in my first job out of school.

Was this “paperwork crisis” manufactured in order to provide an imperative for dematerialization? Consider that DTC did not begin operations until 1973, and that no significant degree of dematerialization was achieved for many years. However, somehow during this intervening period, stock exchanges continued to function, in spite of escalating trade volumes, without the elimination of certificates. Especially with the aid of computerization, it could be done, and was done.

DTC eventually became the model for the Central Securities Depository (CSD) and Central Clearing Counterparty (CCP), the purposes of which will be explained later.