As I was reading The SEC's Annual Reports, I found something interesting.


Look at the unconsolidated balance sheet of broker-dealers from the SEC's 1983 Annual Report. Notice the numbers for Receivable from Other Broker-Dealers and Payable to Other Broker-Dealers. These numbers are opposite sides of the same transactions between broker dealers. securities borrowed from one broker are owed to another. As expected, in 1981 and 1982, the numbers for Receivables and Payables between broker dealers are fairly close to each other





Now look at the unconsolidated balance sheet of broker-dealers from the SEC's 2003 Annual Report (the last one available). The numbers for Receivable from Other Broker-Dealers and Payable to Other Broker-Dealers are completely disconnected. For example, in 2002 Broker-Dealers claim other broker-dealers owe them either 939 billion or 387 worth billion of borrowed securities. These are the same securities!



What explains the huge difference between these numbers is how they were reported. For Receivable from Other Broker-Dealers the trade-date value of borrowed securities was used, and for Payable to Other Broker-Dealers the current current-market value was used. Since selling borrowed stocks put downward pressure on prices by artificially inflating the number of securities on the market, it makes sense that the current market value would be less than trade date value. In other words, the 939 billion was how much the securities were worth at the time they were borrowed, and 387 billion was what they were worth after broker dealers had finished short selling.

The graph below shows the numbers for Receivable from Other Broker-Dealers and Payable to Other Broker-Dealers from 1982 to 2002.



What all this means is that in 2002, Broker-Dealers were either overstating their assets by 552 billion or understating their liabilities by 552 billion. Either way, with only 100 billion in equity, they are completely insolvent and have been so for a long time.

The graph below shows reported equity of Broker-Dealers VS their true net worth when the numbers for Receivable from Other Broker-Dealers and Payable to Other Broker-Dealers are removed from balance sheets. Broker-Dealers have had a negative net worth since 1989.