No doubt you are already aware of the wild stories circulating in response to the news that two Japanese nationals were caught trying to smuggle some $134 billion in U.S. Government bearer bonds into Switzerland from Italy. Since the Secret Service seems a bit slow in addressing the issue (What's the problem? Haven't you hired an undersecretary of Secret Service motivation yet? Couldn't you get Agent Frank Horrigan out of retirement and send him on special assignment or something?) and the Italians change their story about the instruments almost as often as they change governments, we thought you might benefit from some of our analysis.
Obviously, with respect to authenticity, there are three options:
1. All the documents are fake.
2. Some of the documents are fake.
3. None of the documents are fake.
Taking these in order-
1. All the documents are fake. (Likely)
If all the documents are fake then the possibilities narrow to some degree:
Perhaps the work of a technically sophisticated but socially inept counterfeiting operation that is most likely attempting to dupe gullible private citizens or low-level managers. As of today an Italian Colonel in the Guardia di Finanza was complimenting the workmanship of the documents and speculating some of them might be authentic (at least to the European press). Leaving aside for a moment the rather dire career consequences such pronouncements might have, one assumes the Italians have some experience with forged documents. Admittedly, however, such expertise might not readily flow up to an officer politically focused enough to reach the rank of Colonel in any Italian organization. (I think I met one at a party in Miami once).
It would be a short-lived game once someone tried to pass one to an institution of any note. One assumes any bank large enough to accept such instruments into anything other than a safe-deposit box has best-practices methods to authenticate them, the key portion of which would be contacting the issuer (since the Fed doesn't issue/hasn't issued bonds like this, this would have to be the Treasury). Obviously, the Treasury would maintain specimen copies and make these available via facsimile transmission for a first-blush gut check. Still, Swiss institutions are highly unlikely to accept even authentic bearer instruments from a U.S. issuer without a very detailed provenience investigation. Further, even bearer bonds are serialized, meaning that it should be a trivial matter to establish if the securities these documents purport to be were actually issued. As technically sophisticated as such forgeries might be, absent access to authentic originals, details like issue dates and proper serial numbers would be hard to obtain.
Some support for this theory:
None of the coupons on the various documents appear to have been clipped. Since the Treasury has not issued bearer bonds since 1982 or 1985 (depending who at Treasury you ask) if these documents were authentic someone has taken a serious inflation beating on the deferred interest payments. (Turns out that high denomination instruments weren't printed after late 1969).
The Treasury claims that less than 1% of "marketable securities" are in bearer form. $134 billion in bearer bonds would imply some $13 trillion in marketable securities (assuming that class includes these bonds). This conflicts with the amount of "Total Marketable U.S. Treasury Securities Outstanding" for November 2008, as reported in Table B-87 of the 2009 "Economic Report of the President." That document lists total Marketable U.S. Treasury Securities Outstanding" as $5.82 trillion. All outstanding Treasury securities are listed in the same table as $10.66 trillion with "Unmarketable Securities" taking up $4.83 trillion. Note that in the category of "Marketable Securities" "Treasury Bonds" are listed at a "mere" $594.6 billion.
Even if we choose to discount the Treasury's offhand "1%" figure, it is difficult to imagine that a huge portion of the outstanding treasury securities would be in the form just a few, similar documents that somehow found their way into a single briefcase on the Swiss-Italian border.
High quality counterfeit "Federal Reserve Bonds" and the like are apparently common and seem to originate from Indonesia and other places where unrest has permitted high quality presses to fall into nefarious hands.
2. Some of the documents are fake. (Possible).
This would be quite possible if our two Ninja Smugglers were delivering a sample original document and a set of fake duplicates to show a buyer the quality of the forgeries. In this case you are still dealing with a technically competent counterfeiting operation, but now you have one with access to at least one of the originals. That begins to feel like a state sponsored operation, or, at the very least, a rather amazing theft story. One wonders why the theft of a $500 million bearer bond (the smallest possible denomination according to the Guardia di Finanza) would not be reported, but stranger things have happened behind the walls of an embarrassed bank.
The Treasury did in fact issue $500 million denominated instruments between 1955 and 1969, starting in early 1955 along with $100 million instruments. In fact, all of the Treasury bonds printed in the early 1950s were bearer instruments with coupons. Imagine processing half a million coupons and you start to understand why the larger denominations were attractive. The last were apparently printed in late 1969. It seems clear that $1 billion instruments were never issued. Those would appear to be forgeries.
Taking the "theft" example, having no hope of passing the document (provenience investigation) one could still maximize value by counterfeiting it and, as before, selling the result to foreign intelligence services, governments, or just gullible American/Japanese/French tourists in Italy/Switzerland.
It is also entirely possible that this is the work of a government. (Foreign or domestic). There is quite a great deal of precedent here The German Operation Bernhard, named for SS Major Bernhard Krüger, forged a huge number of small and medium denomination Bank of England pound notes during World War II, to provide their agents with currency, to pay for war material from foreign sources and to destabilize the British economy. At its peak the work was of such high quality that the Bank of England itself readily accepted the currency. Over GBP 100,000,000 was printed just in 1945. The Germans actually planned... wait for it... wait for it... to drop the currency from airplanes over England (apparently the very few helicopters that existed at the time had insufficient range) but the Luftwaffe, badly weakened by then, did not have the air power. Examples of the notes still occasionally turn up though the Bank of England invalidated several series of the relevant currency denominations in response to the counterfeits.
More recently, the origins of high quality forgeries of $100 notes, the "PN-14342" family, have been attributed to Iran (which printed its own currency on Intaglio presses prior to the revolution) North Korea, Russia and even the CIA (permitting it to evade congressional budget oversight).
Motives for foreign counterfeiting of such notes should be obvious. They are less so, perhaps, for high denomination bearer bonds. This is the hitch in this "fake" bit. That's a lot of bonds to have in the same place and one assumes even a Guardia di Finanza Cadet would notice if the serial numbers were all the same and not bother to pester the American Secret Service for authentication. Why print more than one serial number with such high denominations? Lot of work, that. Could it really be that no one noticed this? (Well, it is Italy, after all).
3. None of the documents are fake (unlikely).
For the purposes of amusement, and delving for a moment into (REALLY into) the realm of aluminum foil (Haven't you ever stopped to wonder who it was who pulled real tin-foil off the market and forced everyone to move to the aluminum variety? And why?) there is the (slim) possibility that you printed the damn things. That splits us into a number of alternatives:
Some foreign government (no corporate entity or individual has $134 billion laying around) has been holding the things to use as portable cash in emergencies. (This would explain the lack of coupon clipping- who cares about interest when you are just looking for portable wealth?) Or perhaps they haven't even been holding them for a long while, but exchanged them recently to facilitate their clandestine cross-border movement- perhaps even with the acquiescence/assistance of the Treasury. (After all, it would look pretty bad if that much U.S. debt was moved around openly). Here ya go [China (~$760 billion)/Japan (~$680 billion)/Russia (~$140 billion)] a bunch of bearer bonds we had laying around in the archives so you can smuggle the things into Switzerland.
Technically the difference between a valid and invalid Treasury bond is the willingness of the Treasury to accept it. Excellent deniability here. If anything at all happens you can just disavow the documents, reissue some other ones, or not, whatever. This would answer the question "how did anyone think that any bank would accept such large denominations?" The Treasury would validate the documents, of course. This would, however, not answer the question as to why two individuals traveling on Japanese passports would be attempting to slip into Switzerland in the best amateur hour smuggling operation since the guy who dropped two kilos of cocaine on the floor while standing at the immigration counter at JFK.
What might answer that question in this highly unlikely but entertaining scenario is the fact that this sort of rank incompetence is quite characteristic of the Japanese generally and Japanese Intelligence (Naikaku Jōhō Chōsashitsu) specifically. Hardly a month goes by without news of some executive with a case filled with brand new U.S. hundred dollar bills in Tokyo. At one point in 1998 a briefcase with $50 million in negotiable instruments was left in the Tokyo subway by an intoxicated bank executive.
Perhaps Japan wants to move capital offshore in preparation for general hostilities related to North Korea's increasingly evident mental deficiency.
We have heard a few reports that the individuals weren't arrested (though these aren't well sourced) and the Japanese consulate doesn't seem to know (or want to tell anyone) if they are actually Japanese nationals. (What's the hold up? You've got passports and passport numbers. Should be a matter of hours to get that figured out).
We would be remiss if we did not point out the (fanciful) possibility that this was the Treasury's doing entirely. Why?
Perhaps you intentionally orchestrated the discovery of the instruments which you will now rule counterfeit to cast doubt on similar instruments you would prefer not to redeem. (Play rough with us, China, see what happens).
Perhaps you were establishing credit with a foreign financial institution from which you could buy more Treasuries (hah) or otherwise buoy the market (S&P 500 futures are a popular theory for manipulation these days) without tipping the Treasury/Fed's hand in the process. (Credit Suisse and UBS both have enough AUM to conceal a "mere" $134 billion).
Perhaps you wanted an easy way to tip the debt crippled Italy 40% of $134 billion (the forfeiture fine for failing to declare) without congressional oversight. That buys a lot of Fiats. China or Japan will probably be blamed for the "incident" and no one will be surprised if it is hushed up. Instead everyone will assume that the remaining 60% went back to the original holder and Italy gets $53 billion without a lot of questions. Clever, Mr. Geithner,
Of course, any of these "they're real" options brings up a rather serious question:
Since these securities appear to have been off the books, and none of the Treasury disclosures about foreign or domestic holdings would seem to support this many bearer instruments (much less this many in the same place) how do we (does anyone) ever believe any statements about the size of outstanding U.S. debt again?
Whatever the case you have to admit that it is a sad state of affairs when, under your stewardship of the Department of the Treasury, an incident like this stirs up even the slightest suspicion rather than being immediately relegated to pages of "Treasury Debt of Honor," the latest Tom Clancy pulp to be found in the "thriller" section of one of LaGuardia's HMSHost owned bookstores.
We challenge you to do the right thing. That, of course, is to come out with a clear, concise statement ending the sort of speculation that, while currently confined to fringe financial blogs, has begun to creep into major outlets. (Handelsbaltt, for instance). Be careful, though. If someone suddenly notices that Italy has gone on a spending spree (Dodge Vipers for EVERYONE!) we hope you have a good lawyer. (Though, after the Turbo Tax Teflon, we suppose that's not really an issue). Sphere: Related Content Print this post