Paper stock certificates hang on in digital market
Bob Kerstein loves his paper stock certificates.
At a time when stock trading is dominated by rapid-fire computers, he relishes paper stocks for their palpability. Wall Street seems cryptic and far away, but certificates are something he can see and hold.
They're a pleasant throwback, a tangible marker of company history, a wisp of inky artwork in a canyon of electronic solemnity. So when Facebook went public this year and decided not to print paper stock certificates, Kerstein was bummed.
"A travesty," he says.
He's used to it. For years, people have been writing the obituary for paper stocks. They're derided as hard to track, easy to lose, out of date and out of place.
And yet they keep sticking around, stubbornly analog in a world gone digital.
Die-hards hoard Enron certificates in hopes they'll be worth something someday. They hold on to Bear Stearns because they lost everything on it -- or, for a few, because they made a ton of money betting against it.
They scramble for Disney because their kids are into Mickey and the stock, graced with the image of the famous mouse and Walt Disney himself, looks nice in a frame.
Joe Wildberg, an auto industry retiree in Wolverine, Mich., has been accumulating stocks of old Michigan copper-mining companies since he ran across a few shares in a house he inherited.
"Where else would you find a document going back to the 1840s?" he says.
Tom Carroll, a sales director in Reston, Va., was a hit at a family reunion when he doled out stock of the old Pennsylvania Railroad, where his grandfather worked for 52 years.
"Everybody was getting them framed and hanging them up to remember our grandfather," he recalls.
Kerstein's favorite is a certificate for a business with the unfortunate name Shadyside Operators. The stock he owns is dated Oct. 29, 1929 -- during the most infamous crash in Wall Street history.
Kerstein makes a living hawking paper stocks on a website he founded, Scripophily.com. But of Shadyside, he vows, "I'll never sell."
Long before companies churned out TV commercials and Twitter feeds, they used stock certificates to establish their public image. They hired artists, picked out elaborate lettering, added fancy borders.
Sometimes the decorations made sense, like drawings of locomotives on stocks for railroad companies. Sometimes they didn't, like pictures of toga-clad warriors on stocks for refrigerator businesses.
But today, paper stocks are, to put it gently, out of place. Finance firms time trades in milliseconds, and banks accept smartphone photos of checks. The government hasn't issued paper versions of Treasury bonds since 1986.
And yet paper stocks command an odd resilience -- even odder when you consider how many times people have tried to kill them.
The Depository Trust & Clearing Corp., which handles most of the administrative underpinning of stock trading in the United States, set a goal this summer to eliminate paper stocks, perhaps as early as 2015.
The DTCC likes to point out that more than 700 issuers on U.S. stock exchanges no longer offer paper shares, including big names like Apple, General Motors and Microsoft. But more than 6,300 still do.
The DTCC can't figure out why. "Having possession of a physical certificate really adds no value to the investor or to anybody else," says Daniel Thieke, managing director of settlement and asset services. "You can't do anything with it except look at it and put it in a file cabinet."
In 2003, the Group of Thirty, an influential coterie of the world's business and government leaders, called for an end to paper stock trading worldwide -- and extras like the paper documents that investors get to confirm their holdings.
Three years later, the group concluded that "islands of paper and manual processes remain and are a persistent source of inefficiency." The G30 hasn't made further recommendations.
As far back as 1991, the Government Accountability Office warned that paper certificates in the U.S. would "hamper the strength of our markets" and noted that Denmark, France and Norway had already gone virtually paperless. The agency, which works for Congress, hasn't updated its report either.
To be sure, the paper-haters have had success. In 1990, there were more than 32 million physical certificates stuffed into the DTCC vault for safekeeping. Now there are only about 1.2 million.
States have gradually gotten rid of laws that required companies to issue paper shares when asked. The DTCC now charges $500 to brokers who want to withdraw paper certificates.
In 2004, the Securities Industry and Financial Markets Association, a trade group, distributed an imaginary tale of two sisters to help financial advisers persuade clients to go paperless. Louise insisted on paper stocks. Winnie didn't. Guess who was better off.
After all, paper stocks are expensive to print and mail. It's easy to stuff them away in the attic or the safe-deposit box, forgetting them until long after the company is gone and the shares worthless.
They get lost: Thomson Reuters, which operates the Securities and Exchange Commission's Lost and Stolen Securities Program, says $48 billion worth were reported missing or stolen last year.
Trading them is also a pain, usually requiring a trip to the post office and a certified signature rather than a few clicks on E-Trade. And keeping track of them can be harrowing. In 2006, Warren Buffett had to trundle a Berkshire Hathaway certificate worth a terrifying $11 billion from Omaha, Neb., to processing in Minneapolis, so he could give the converted shares to charity. Buffett briefly considered FedEx but opted to send someone from his office.
So if paper stocks are so square, why are they still around?
A lot of companies, it seems, really don't mind them -- maybe because they build shareholder goodwill and public-relations cred. Companies like McDonald's and Starbucks, whose certificates are popular among collectors, say they have no plans to nix paper shares.
Playboy had a blockbuster when it decorated its shares with a nude image of Miss February 1971. It was so flooded with requests that it had to switch to a less exciting design. "It just got to be a little too much," says spokeswoman Theresa Hennessey.
Maybe it's also just easier to send them to the few investors who ask rather than argue about paper's failings. "We don't have an abundance of requests," says a McDonald's spokeswoman, who declined to give details.
The cluster of investors who prefer paper not for novelty but for security could prove especially hard to bicker with. Recent computer glitches that sent the market swinging aren't going to convince any of them that their stock is safer when it's a number punched into a corporate record.
In 2007, corporate gadfly Evelyn Y. Davis filed a proposal asking Macy's to issue paper stocks to shareholders who asked. Macy's said it wasn't considering getting rid of them anyway.
She had less success at NYSE Euronext, parent company of the New York Stock Exchange, where for three years she lobbied the company to issue paper shares.
"Hackers can get into computers or even terrorists and destroy them," Davis wrote in the proposal she submitted in 2008, 2009 and 2010.
NYSE Euronext, which went public in 2007, has never issued paper shares. In a response to Davis, it said that eliminating paper stock certificates protected shareholders against extra costs and fraud.
"The securities markets in the U.S. and around the world are rapidly moving toward a paperless environment," the company wrote.
Paper stocks are in such obvious decline that basic statistics, like how many are still floating around, are afterthoughts.
The Group of Thirty, the Securities Transfer Association and SIFMA say they don't have that information. Nor does the Lost and Stolen Securities Program, the World Federation of Exchanges or the International Organization of Securities Commissions.
In 2005, the DTCC estimated that paper stocks were involved in about 0.1 percent of trading each day in U.S. markets, based on transactions the DTCC oversaw. It doesn't have updated information.
SIFMA's last report about how much it costs companies to print and distribute paper stocks was in 2004. (Answer: $250 million a year.) The STA's last report on how much it costs companies per share is even older. (Answer: $1.51 to $4.26.)
Even the DTCC acknowledges that the quandary will likely work itself out.
"With the changing demographics of investors," says spokesman Ed Kelleher, paper stocks "will probably die a natural death in a few years anyway."