At last, after a deafening official silence since Italy’s arrest three weeks ago of two Japanese men smuggling what appeared to be about $134bn worth of US Treasury bond certificates across the border to Switzerland, a US Treasury spokesman has declared the paper to be “clearly fakes.”
“That’s beyond the fact that the face value is far beyond what’s out there,” Stephen Meyerhardt, a spokesman for the US Bureau of the Public Debt in Washington, told Bloomberg.
US Treasury records show an estimated $105bn in bearer bonds have yet to be surrendered, and most matured more than five years ago, he said, noting that the US Treasury stopped issuing bearer bonds in 1982. Treasury securities are now issued electronically, after the US started converting all of its marketable debt from paper to electronic form in the 1980s, adds Bloomberg, noting:According to the Italian authorities, the seized notes included 249 securities with a face value of $500m each and 10 additional bonds with a value of more than $1bn as well as securities purported to be “Kennedy” bonds. Meyerhardt said no such securities exist.
As other commentators have noted, had the notes been genuine, the pair would have been the US government’s fourth-biggest creditor, ahead of the UK with $128bn of US debt and just behind Russia. They would have been “carrying the gross domestic product of New Zealand or enough for three Beijing Olympics”, quipped Bloomberg’s William Pesek in a Wednesday column:
“If economies were for sale, the men could buy Slovakia and Croatia and have plenty left over for Mongolia or Cambodia. Yes, they could have built vacation homes amidst Genghis Khan’s Gobi Desert or the famed Temples of Angkor. Bernard Madoff who? “
More intriguing is a Japanese media report this week that the alleged Japanese bond-smugglers have been released as they “broke no laws”, according to the Mainichi Shimbun, which sent a reporter to the Italian town of Chiasso where the men were arrested by Italian police (hat tip, Clusterstock’s Joe Weisenthal)
Under Italian law, as the two men had not tried to cash or present the bonds at a bank, they had not broken any law, so after being questioned, they were released, the Mainichi reported, adding that the Japanese consulate in Milan has “not ascertained their whereabouts”. The wording throws a nicely Japanese bit of ambiguity on the whereabouts of the pair, but makes it clear there was nothing to hold them in detention - despite reports suggesting they could have been aiming to pull off one of the biggest frauds in history.
Fraud or not, the incident raises some compelling questions - not least, why it took so long for the US to issue a denial. Other questions relate to the scale and audacity of the alleged fraud - for example, if you were trying to pull off a scam of this magnitude, why go for securities which don’t exist (”Kennedy” bonds), or certificates for amounts that go way beyond “what is out there”?Another question is why the authorities have been so silent on what FT Alphaville described last week as either “an odd little story - or perhaps an absolutely massive one - that has been largely overlooked”. Probably, says Pesek, “because of the absurdity of our times”:The last year has been a decidedly disorienting one for capitalists who once knew up from down, red from black and risk from reward. It almost fits with the surreal nature of today that a couple of travellers have more US debt than Brazil in a suitcase and, well, that’s life.
For those who like a good conspiracy yarn, the more - err, livelier - theories over the saga have included some highly entertaining responses attached to a recent post here by Cynicus Economicus. Another blogger with a fertile imagination, Karl Denninger, writing on the Market Ticker, wondered if the US Treasury “has been surreptitiously issuing bonds to, say, Japan, as a way of “financing deficits that someone didn’t want reported over the last, oh, say 10 or 20 years”.
Given what Denninger described as the “sheer impossibility of cashing a fake $500m bond”, we concur with Cynicus Economicus’s questions on why anyone might want to forge the bonds; who, and how, they might have planned to pass them off; and what mechanism might they have used to sell the forgeries.
The answer, sadly, is known only by two Japanese men, presumably in Italy somewhere, whereabouts unknown…
Related links:
Frauds, phonies and [bond] scams - TreasuryDirect
William Pesek: Suitcase with $134bn puts dollar on edge - Bloomberg
Quantitative stealing - FT Alphaville
Japan secretly selling smuggled US$ bonds? - Cynicus Economicus
The saga of the bearer bonds - Market Ticker
Japan probes two seized with undeclared bonds - Bloomberg
