The Saga Of The Bearer Bonds

It just gets more and more odd after my original report, with the latest coming from a German newspaper (translation courtesy of Google):

Hit for the Zöllner: The contraband securities valued at 134 billion U.S. dollars are apparently real. Die italienische Finanzpolizei hatte zwei Japaner ertappt, die im doppelten Boden eines Koffers milliardenschwere Anleihen in die Schweiz schaffen wollten. The Italian financial police had two Japanese caught in the false bottom suitcase billion-dollar bonds in Switzerland wanted to create. Von dem Fund profitiert das hochverschuldete Italien.

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.

http://market-ticker.denninger.net/archives/1119-The-Saga-Of-The-Bearer-Bonds.html


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Thursday, June 11, 2009

Italy Seizes $135 BILLION Treasury Bonds And US Fiscal Circumstance Become A Laughingstock

by Eric deCarbonnel
Below is a major story missed by the mainstream media. Business Insider reports that Italy Seizes $135 BILLION Of US Bonds.
(emphasis mine) [my comment]Italy Seizes $135 BILLION Of US Bonds
Joe Weisenthal
Jun. 11, 2009, 1:43 PM


Update: The picture on the right is of the seized "bonds", via Italian site Adnkronos.

They look an awful lot like the bonds pictured in this story, about an age-old scam designed to confused seniors into buying fake bonds.

That being said, there was a period when the Treasury did issue high-denomination bonds up to $500 million.

Original post: This is a totally crazy story.

Asia Times: Italy’s financial police (Guardia italiana di Finanza) has seized US bonds worth US 134.5 billion from two Japanese nationals at Chiasso (40 km from Milan) on the border between Italy and Switzerland. They include 249 US Federal Reserve bonds worth US$ 500 million each, plus ten Kennedy bonds and other US government securities worth a billion dollar each.

The question now is whether the bonds are real or counterfeit

Karl Denninger, who discovered the story, notes that either way, this is wild:

If they're real,
what government (the only entity that would have such a cache) is trying to unload them?

If they're fake,
this is arguably the biggest counterfeiting operation ever, by a factor of many times. I've seen news about various counterfeiting operations over the years that have made me chuckle, but this one, if that's what it is, is absolutely jaw-dropping.

The cute part of this is that if the certificates are real Italy just got a hell of a bonanza - their money laundering laws provide for a statutory 40% penalty for failure to declare instruments and cash in excess of $10,000 Euros, which means they'd garner a close-to-$40 billion dollar windfall.

We're leaning towards counterfeit on this one
[hopefully. Otherwise it looks like Japan is dumping its US reserves]. Either way, we wanna know more! [Agreed]Japan Today reports that 2 Japanese carrying $134 bil worth of U.S. bonds detained in Italy.2 Japanese carrying $134 bil worth of U.S. bonds detained in Italy
Thursday 11th June, 06:18 AM JST

ROME — Two Japanese nationals were detained by Italian financial police last week after trying to enter Switzerland with $134 billion worth of undeclared U.S. bonds, mostly Treasury bonds, an Italian daily said Wednesday. The Japanese consulate general in Milan confirmed that the detention had taken place and said it was trying to confirm with Italian authorities whether the two were indeed Japanese nationals and their identities.

According to the report in il Giornale, two unidentified Japanese in their 50s concealed the bonds, including 249 U.S. Treasury bonds each worth $500 million, in a suitcase with a false bottom that was searched by the Italian authorities June 3 when they were in Chiasso, at the border with Switzerland, about 50 kilometers north of Milan. The daily did not say on what charges they have been detained, but the two may have been detained on suspicion of attempting to take a large amount of securities out of Italy without declaring it because the paper said they had not declared the bonds.
Asia News reports that these bonds are undistinguishable from the real ones.Italian authorities have not yet determined whether they are real or fake, but if they are real the attempt to take them into Switzerland would be the largest financial smuggling operation in history; if they are fake, the matter would be even more mind-boggling because the quality of the counterfeit work is such that the fake bonds are undistinguishable from the real ones.

What caught the policemen’s attention were the billion dollar securities. Such a large denomination is not available in regular financial and banking markets. Only states handle such amounts of money.

The question now is who could or would counterfeit or smuggle these non-negotiable bonds.


While we are on the subject of stories not picked up by the mainstream media, here is another one that was missed. OCRegister reports that the international media had a big laugh over Treasury Secretary Geithner's visit to China. Wednesday, June 10, 2009
John Tamny: Withering dollar not funny

Does Geithner's indifference to the collapse of the dollar signal further weakness? [yes]

Though
the U.S. press mostly withheld mention of it last week [I wonder why], the international media had a big laugh over Treasury Secretary Geithner's visit to China. Apparently more aware of the dollar's withering condition than our chief dollar steward – a scary thought on its face – they clearly understood the audience laughter when Geithner told Chinese students that dollar–denominated "Chinese assets are very safe."

It doesn't take an in-over-his-head Treasury secretary to understand that when the dollar is falling, the assets that pay out those dollars are necessarily imperiled. The Chinese, and all holders of U.S. Treasuries are necessarily skeptical, and with good reason. Whereas a dollar bought 1/250th of an ounce of gold in 2001, as of this writing it only buys 1/960th. Despite this stupendous collapse in the unit of account, Geithner remarkably believes that our federal debt is a good bet.

For this alone, it's hard to be optimistic about the dollar's prospects.
When Treasury heads exhibit total ignorance about its value, and in Geithner's case a sanguine countenance, this is a signal that the greenback is being ignored and that further weakness will be accepted.The Gartman Letter explains the significance of this event even more clearly:The Telegraph in London was even more severe when it said, tersely, that “US Treasury Secretary Tim Geithner was laughed at by an audience of Chinese students after insisting that China’s US assets are safe…. The comment provoked loud laughter from the audience…” But the US media avoided any reporting of the laughter that greeted Mr. Geithner’s speech. None of the US television stories reported laughter; none of the US newspapers reported the laughter; none of the US magazines covering the trip reported the laughter… but the laughter was loud; it was palpable and it was very, very real. Simply put, the US fiscal circumstance has become a laughingstock, and we do not say that lightly. It is, however, true.My reaction: The US media is deliberately missing some major stories.

1) Italy's financial police has seized US bonds worth US 134.5 billion from two Japanese nationals at Chiasso (40 km from Milan) on the border between Italy and Switzerland. They include 249 US Federal Reserve bonds worth US$ 500 million each, plus ten Kennedy bonds and other US government securities worth a billion dollar each.

2) These seized bonds have big implications:

A) If they're real, some government is trying to unload large quantities of US securities.
B) If they're fake, this is arguably the biggest counterfeiting operation ever, by a factor of many times.

3) The international media had a big laugh over Treasury Secretary Geithner's visit to China.

4) Geithner's indifference to the dollar's collapse signals that the greenback is being ignored and that further weakness can be expected.


Conclusion: Although I could see why the US media decided to suppress both these stories, it is still amazing what is being ignored:

1) Evidence of possible surreptitious dumping of US Treasury bonds (bearer bonds) by the Japanese government done quietly in Switzerland to avoid alerting people (including presumably the US Government).

2) The US fiscal circumstance has become a laughingstock.
http://www.marketskeptics.com/2009/06/italy-seizes-135-billion-treasury-bonds.html

Baldur Fjölnisson, 15.6.2009 kl. 12:28

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