The Saga Of The Bearer Bonds; Smuggled Bonds Are Probably Genuine

Update:
The Japanese Bond Smugglers Are Missing (The Business Insider)

US Treasury says bonds seized in Italy are fakes (Reuters)
The US Bearer Bonds ‘Coincidence’ (Must-read)

Related article: Italy Seizes $135 BILLION Of US Bonds: Smuggling Or Counterfeit-Printing?


The German newspaper ‘Die Welt’ (The World) reports:
(Original article: Welt Online , Translation courtesy of Google: Here)

Smuggled Bonds are probably genuine
Geschmuggelte Anleihen sind wohl echt

Bull’s eye for the customs officers:
Volltreffer für die Zöllner:

The smuggled bonds valued at 134 billion U.S. dollars are apparently authentic.

Die geschmuggelten Wertpapiere im Wert von 134 Milliarden Dollar sind offenbar echt.

The Italian financial police caught two Japanese, trying to carry multi-billion bonds in the false bottom of their suitcase to Switzerland.
Die italienische Finanzpolizei hatte zwei Japaner ertappt, die im doppelten Boden eines Koffers milliardenschwere Anleihen in die Schweiz schaffen wollten.

Note that this has received very little coverage in the so-called “mainstream US media” – but it is everywhere in Europe and Asia.

Japan, for its part, oddly said the following as soon as this story started to hit the press:

“We have complete trust in the fact that the U.S. views its strong-dollar policy as fundamental,” Yosano, 70, said in an interview in Tokyo on June 10 before attending a Group of Eight meeting of finance ministers starting today in Italy. “So our trust in U.S. Treasuries is absolutely unshakable.”

Uh huh. And the Japanese said in December of 1941 that all was well too. Anyone remember what happened on the morning of the 7th?

Let’s apply a little “Occam’s Razor” to this entire story.

You’re not going to walk into a bank with $130 billion in bearer bonds and cash them. Nor are you going to sell a bond with a $500 million face value to someone without them authenticating it. They will be authenticated before you get one dime out of them – no matter who you think you’re going to “give” them to.

So if they’re fakes and you’re “just screwing around”, there is no reason to hide them. Nor is there any particular reason to have authentic and recent original bank documents in your luggage with them, as has been reported.

Next, unless someone knew you were smuggling them, why would you be subject to that sort of search? What made the people involved “interesting” to the authorities? This doesn’t sound like a random stop to me; how many people are carrying $130 billion in bearer bonds at any given point in time? No, someone was tipped off that this was happening. Now why would you bother to stop them here, prior to their attempted delivery of such instruments, if they were fake?

Think about this: You know someone is smuggling a load of drugs. You can either bust them immediately or you can tail them and bust them when they show up at the “meet” to exchange the dope for the money. If you do the former the guys with the money get away, having committed no crime. But if you do the latter, you get to bust both the courier and the purchaser – two times the effectiveness for the price of one, and double the seizure value, since you get to seize the cash too!

So let’s assume that the certificates are real, as German media seems to believe and which, by the way, makes logical sense given what they were and the sheer impossibility of cashing a fake $500 million bond.

Ok, who has $130 billion in bearer bonds? Remember, bearer instruments haven’t been issued by the Treasury since 1982, when they became illegal to issue, at least to US institutions and residents (there was an exception carved out for Treasury instruments issued to non-US residents in 1985 – a time of high deficits) The answer to that question: it is rather unlikely that there remains $130 billion of legitimate US Bearer issuance outstanding anywhere – to anyone.

Mr. Holmes would be initially puzzled by such a caper. On the one hand we have the impossibility of the bonds being real, because there simply isn’t $130 billion of issues remaining outstanding. On the other hand we have the impossibility of negotiating a fake $500 million bearer instrument, making the exercise of counterfeiting one expensive and futile.

This leaves us with more questions than answers at this point.

Or does it?

As Mr. Holmes is famously rumored to have said, “once you eliminate the impossible, whatever remains, however implausible, must be the truth.”

So what remains? Let’s run a theory here – one of the few possible remaining options, given the exclusion of what we know not to be true…

Are we willing to assume that all the “issue” of Treasury bonds has been done “above board” as required by law. If Treasury has been surreptitiously issuing bonds to, say, Japan, as a means of financing deficits that someone didn’t want reported over the last, oh, say 10 or 20 years, then the following is about to occur:

Who could have possibly been complicit in such a scheme? I can come up with only two nations (and only nations could be involved due to size): The Japanese and Chinese. Since the two individuals who were arrested were reported to be Japanese nationals……

There are tremendous implications in an event like this, again, assuming the bonds are real.

The owner is going to want them back, of course. But Italy is going to keep a third as their statutory penalty for non-declaration on the border. Oops. That’s great for Italy, but it blows bananas for the actual owner.

Of course Italy (or the US!) could declare them “fake” and as a consequence simply burn them. If they are in fact real, that’s an even bigger problem. See, Bearer Bonds are issued without registration – they are as anonymous as a $100 bill in terms of who owns them. That’s one of their “features”, and why they were often used for various clandestine money operations. So if they are real and are destroyed, the owner is out of luck – their money is gone just as it is if you burn a $100 bill in an ashtray.

How much is $130 billion in this context? About 1/5th or so of what Japan legitimately owns of US Treasury debt. How would you like to take an instantaneous (and permanent!) 20% haircut on your securities? That’s what I thought.

To add some balance here, there have been stories about fake bearer bonds coming out of North Korea and other places for years. But the idiocy of attempting to pass a $500 million certificate belies this possibility – who in the name of God would take such a thing and give you anything for it without authenticating it first? While bearer instrument are “anonymous” in terms of who owns them, their authenticity is easily verified as they ARE serialized instruments.

I remain puzzled, and am not advancing the above theory as fact.

It is, however, one of the few explanations that actually fits the facts, and for that reason, I think we need some answers. If in fact previous administrations were issuing “off-book” Treasury debt in this fashion to sovereigns then implications are truly explosive as such issues are blatant and outrageous unlawful acts and would expose everyone involved to severe criminal penalties.

Let’s hope we get those answers, and this isn’t one of those “funny things” that just disappears into the night.

Saturday, June 13. 2009
Posted by Karl Denninger

Source: The Market Ticker

4 thoughts on “The Saga Of The Bearer Bonds; Smuggled Bonds Are Probably Genuine

  1. At first blush it would be easy to say these bonds are fakes, but I agree with you who other than maybe North Korea would fake such high denomination bonds?

    If these are complete fabrications, the US Treasury should be able to tell almost instantly. There still is a lot of weird old financial paper that sits forever in central bank vaults, but give the denominations, the Treasury or Fed would be able to make a determination literally on the phone. Why the SEC would be involved in the process is a another item I don’t get.

    Actually I don’t get allot of this. The two potentials are equally bad, super high denomination fake paper floating in the financial system or true governmental monkey business on a massive scale. .

  2. One. The bonds are quite obviously faked. Besides the ridiculously high values, they claim to be from 1934, and are labelled as “Kennedy” classification. The US government says they never made any “Kennedy” bonds.

    Two. The forgeries were NOT made to be presented. They were made as part of a con job. Can’t you just see some stupid thief saying “Yes sir I will buy your illegal drugs/guns/blood diamonds. Do you take stolen bearer bonds? Well, you will have to wait a few years to try and cash them, so I’ll overpay you a bit.”

  3. The bonds are real and do not belong to a Soverign government but to the vernerable Dragon Family. The two individuals stopped are powerful members of the DF, Akihiko Yamaguchi and Mitsu Watanabee. They left europe without a problem just using their passports so stop the intrigue.

    As for the Italian Government. What they confiscated was just paper. without verification from the FEDS or the MOF in Japan no one can use them. Therefore no fine if there is no value. Verification = Value….

    Nothing more needs to be said. Simple matter that should go away shortly and oh yeah the matter that should be looked at is the FEDS issuing bonds without the Senates/Publics knowledge. Has been going on for a long time.

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