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I believe that the standard broker contract for an individual investor allows the broker to loan shares owned by the investor without compensation.

Actually, the above is only true for margin-enabled accounts, I believe. These are indeed the standard accounts with some brokers, but not with all. BTW, the broker can lend out any or all shares in your margin account even if you haven't borrowed anything on margin. However, if you have a cash account (that is, a non-margin account; a brokerage account that is not margin enabled), I don't think that any of your shares may be lent.

Warren Buffett and Charlie Munger have warned repeatedly about underappreciated, widespread, correlated risks in the financial system due to derivatives. Buffett has referred to derivatives as "financial weapons of mass destruction". Once things start to go wrong, the over-reliance on derivatives would cause the problems to spread and grow very quickly and very widely; lots of financial institutions could end up in default.

This past Spring, at the Berkshire Hathaway 2005 shareholders meeting, Buffett said that an ordinary investor who keeps securities in a cash account with a major broker should be able to weather any looming financial meltdown. The disturbing implication was that marginable accounts may not be safe. Incidentally, this suggested that holding the securities in Street name (as opposed to holding paper certificates showing registration in your name) was OK, so long as the account was not marginable. Following the meeting, I immediately made sure that the vast majority of my family's securites were held in non-marginable accounts. Anyone else who shares these concerns may want to do the same.
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