Tuesday, June 16, 2009

What would one be doing with $134 billion of US bearer bonds in a suitcase (be they real or counterfeit)?

That's a question being asked in several countries today...
Japan is investigating reports two of its citizens were detained in Italy after allegedly attempting to take $134 billion worth of U.S. bonds over the border into Switzerland...

The Asahi newspaper reported today Italian police found bond certificates concealed in the bottom of luggage the two individuals were carrying on a train that stopped in Chiasso, near the Swiss border, on June 3.

The undeclared bonds included 249 certificates worth $500 million each, the Asahi said, citing Italian authorities. The case was reported earlier in Italian newspapers Il Giornale and La Repubblica and by the Ansa news agency... [Bloomberg]
A story that raises interesting questions!

Multiple reports (do you read Italian?) describe these as "bearer bonds", as they pretty much would have to be. Regular US bonds have registered owners, so they can't be traded surreptitiously, and today don't even exist on paper but only as electronic bookkeeping entries, so they can't be packed in the false bottom of anything.

Bearer bonds date back to the 1800s, as a type of bond for which possession is 100% of the law. The person who possesses a bearer bond owns it, and title to it passes upon delivery to the next person. There is no registered bond owner of record. Bearer bonds are the bond world's equivalent of "cash", with the advantage that they can be issued in massive denominations -- US government bearer bonds have been issued in amounts up to $500 million. (Not exactly Montgomery Burns' trillion dollar bill, but the real world's closest thing to it.)

As such in the 20th Century bearer bonds found great use in tax evasion and money laundering. In the U.S. that largely ended in 1982 when Congress enacted the Tax Equity and Fiscal Responsibility Act, which in addition to repealing a good portion of Ronald Reagan's famous tax cuts of the previous year, also stopped federal issuance of bearer bonds and taxed new issues of corporate, state and municipal bearer bonds out of existence.

But previously issued bearer bonds are still out there, and "traditionalist" bond investors still head to their safe deposit boxes every six months to clip the coupons off them to collect their interest. The US issued bearer bonds with 30-year and 50-year maturities, so some are still around.

But $134 billion is a heck of a lot of bearer bonds to be found in one false bottom of a suitcase! The only nations that own more US debt than that are Japan, China and Russia, so if those bonds are real the guy who was carrying that suitcase is/was the United States' fourth largest creditor.

It's hard to believe such a load of bonds can be real -- but it's also hard to imagine any kind of scam involving so many fake bonds.

While the owners of US bearer bonds are unregistered, the bonds themselves are easy to check out by calling the US Treasury with their serial numbers and asking about them. Is anybody buying $134 billion of bonds not going to do that? Even if getting a big discount on the purchase price? I mean, this is not unloading a suitcase of freshly printed $20s. It seems unimaginable that anyone would take them without verifying them. (Yes, "there's a sucker born every minute", but that would be one special kind of $134 billion sucker!)

On the other hand, could the bonds possibly be real? In that case there's no problem verifing them, they have the value of real money. But where could that much money possibly have come from?

There was a loophole in that law of 1982, TEFRA's anti-bearer bond provisions were aimed at bonds issued domestically -- there were exceptions that enabled bearer bonds to still be issued to foreigners.

Has the Treasury quitely been issuing bearer bonds to the Japanese, in response to some "special request", to fund the US deficit? And if the Japanese Ministry of Finance one day found $134 billion of bonds missing, would it let anybody know? "Oooops! Hey, has anybody out there seen...?"

I have no idea. What would you be doing with $134 billion of bearer bonds (real or fake) in a suitcase?