Friday, June 19, 2009

The strange case of the dog that isn't barking over the $134 billion of bearer bonds. 

Revised: I've added a couple more possibilities to cover all the bases, and a few more thoughts, after a fun discussion with some associates.

Three days ago we told the story of the detention in Italy of two Japanese nationals crossing the border into Switzerland who were found by border authorities to be carrying $134 billion in purported US bearer bonds in the false bottom of a suitcase.

Since then a very strange thing has happened: Nothing.

This story has gotten a lot of play in Europe, but US media coverage has been virtually zilch (as of when I checked Google News a couple hours ago). Even at Bloomberg, the only US news agency to file original reports in the subject, however brief, the longest piece has been an opinion column wondering how strange it is that nobody has been reporting the story.

And it is indeed strange because either...

A) The bonds are counterfeit, and this is one of the largest counterfeiting frauds in history; or

B) The bonds are real, and represent a potential earthquake-blow to the world financial system in the midst of the ongoing financial crisis, as some major government has tried to get out of US bonds and dollars in a big way, on the sly.

Isn't either of these a real story?

Moreover, on its surface this appears a case worthy of Sherlock himself, because each of the two major obvious possibilities seems, well, incredible to the point of being impossible.

[] Scamming someone into buying $134 billion of fake bearer bonds would be considerably more difficult than scamming them into buying a fake Mona Lisa. If Mona wasn't missing from the Louvre, any buyer would immediately know any copy being offered is a fake. If Mona was reported missing from the Louvre, well, it's possible a fanatic art lover might pay to buy a copy passed off as the real thing to hang in his den and admire until he dies, I guess.

But people buy US bonds for the dividends they pay and to cash them in. These bonds were issued in denominations of $500 million each. Nobody is paying for those without calling up the Fed to verify that they are real. Which is easy -- call, give the Fed the serial numbers and other descriptive information, and it replies, "No, fakes" or "Yes, real, and owned by the Chinese government to whom we are paying interest", and if you aren't buying from the central bank of China you know the bonds are either fake or hot, and you aren't going to get your money back from them. End of scam.

Moreover, who could buy $134 billion of US bonds? -- $134 billion is more than the GDP of New Zealand. Only the Chinese, Japanese and Russian governments own that much. Major governments like them are the only buyers, they all have hotlines to the Fed, and they aren't going to be scammed.

A counterfeiter would be better off producing mere millions of dollars of fake currency or of, say, $10,000 bonds that could be peddled to many buyers. How a $134 billion scam could even be conceived is ... hard to conceive.

So, Sherlock might say, eliminating that as impossible we have these possibilities ...

[] The bonds are real and were being moved by the Japanese (or Chinese) government to get out of the bubble in US bonds before it bursts, via an "under the table" trade in Switzerland for something else of value -- instead of by making market sales that would themselves bust the bond bubble in ways that could rebound against the seller (grievously!). That's an idea that in fact may make sense on its face.

But why would the Japanese government move $134 billion into Switzerland by taking the crazy risk of having a couple guys try smuggling it in a suitcase on a train reportedly full of itinerant workers, through a border crossing known for smuggling, and so subject to scrutiny by customs authorities? Wouldn't it instead use the near absolutely safe option of sending the bonds by diplomatic pouch?

Which makes us look at parties who can't use a diplomatic pouch. Maybe...

[] The bonds are fake and were sent by a "rogue" nation. It would take a government to work a deal on the order of $134 billion. And maybe, say, the North Koreans would try to pull something like this off with a third party. Yeah, they'd have to be nuts, and ignorant of how western finance works -- but they are. And the North Koreans are well known for mass counterfeiting of dollars, either to pay their own bills or as an act of economic warfare (or both) -- perhaps they decided to "go nuclear" with the option? Or maybe...

[] The bonds are real and were sent by a "non-official" person from a foreign nation. The few news stories published on all this typically say that the US stopped issuing bearer bonds in 1982. But, as I noted in my prior post, the law that ended the issuance of bearer bonds in the US contains exceptions that enables the Treasury to still issue them to foreigners.

Now imagine, hypothetically, that the Chinese government, for reasons of its own, asked that, in exchange for its continued support in financing the US deficit, the Treasury issue some of the bonds it was buying in "bearer" form, and that the Treasury did. The Chinese government still has roots in communism, is trying to make the jump from third-world to first-world in one generation, and is rife with factionalism. Suppose next that the bearer bonds wound up in the hands of an individual government functionary, and he decided to keep them under his personal control to secure his position and "influence" over the government, not to mention a well-funded retirement. Might those bonds then find themselves on their way to an anonymous safe deposit box in Switzerland?

This idea eliminates the awkward requirement of a buyer for the bonds, and offers entertaining James Bond-type story possibilities. But why would the government of nation like China ever open itself to such a risk by demanding bearer bonds, rather than registered bonds, in the first place?

Well then possibly the bonds are fake and not from a government ...

[] The bonds are fake and part of a small-money "Nigeria"-type scam. In this the scammer claims to hold some huge asset, but for some strange reason needs your help to cash it in, in the form of an advance payment of money from you, in exchange for which he promises you a share of the asset after he cashes it in. (Nigeria scams require seemingly unbelievable stupidity on the part of their victims -- but experience shows human stupidity is something one can always safely believe in.)

I guessed before that "Probably this was all some lunatic scam gone bad, a 'Nigerian' scam of insane proportions" -- primarily because it gets the dollar amount involved down to plausible levels. Making it even more likely, it turns out that this scam has been pulled with bearer bonds before. (ht: Newmark's Door)

But the idea of a Nigeria-scam still leaves plenty of questions: This scam has to be pulled on rubes, real dummies. You need a big market of people in which to find them -- the big old USA, as in the linked example, is fine! But if you were going to pull this scam using fake bearer bonds, why would you smuggle them into Switzerland, which has probably the smallest and most financially astute population outside of Liechtenstein?

It doesn't seem like anyone would take these bonds into little Switzerland unless there was someone there already committed to wanting them. Who? Moreover, with a Nigeria scam the victim wouldn't be buying the bonds, acquiring them, but would be paying money to help the scammer dispose of them. So why would the bonds be going into the country at all, instead of the victim's money going out?

And why all the secrecy after a routine Nigeria scam was busted? Shouldn't they be publicizing it as a public service, a lesson on consumer safety?

I think the five general scenarios above cover all the logical possibilities (real/fake bonds, govt/non-govt actors, etc.).

But there are two more peculiarities about this case that are odd in any scenario...

[] Nobody's been arrested(!) Multiple reports say this -- and even that the two men carrying the bonds have been released.

Yesterday the mystery deepened as an Italian blog quoted Colonel Rodolfo Mecarelli of the Como provincial finance police as saying the two men had been released. The colonel and police headquarters in Rome both declined to respond to questions from the Financial Times.
These two guys either were part of the one of the biggest counterfeiting scams in history or owe 40% of $134 billion -- that's $53.6 billion -- as the penalty under Italian law for smuggling undeclared real securities over the border ... and they've been released? (Does this suggest they have the protection of a legitimate government??)

Even if this was "merely" a Nigeria-type scam involving $134 billion of forged securities being smuggled over the border, would you expect the perps to be released and allowed to walk away?

[] The news blackout. After the initial reports from Italy, there's been virtually nothing of substance reported of any kind. Why? If the bonds are fake and this was a routine scam of some sort, why not say so and give the details? Why were the smugglers released? Who where the smugglers? The most simple fact of whether or not they were really even Japanese hasn't been confirmed.

The initial multiple reports from Italy said that the bonds if counterfeit are excellent counterfeits (although how many $500 million US bonds do local Italian police see? so how would they know?) and that US authorities have been asked to examine them and are expected to do so next week.

But today a brief statement from the Fed declared the bonds to be fake even without examining them. "Based on the photos we've seen on the Web, they're not even close to looking like a Treasury security." [WSJ] They are judging by photos on the Web? Like this?

All of this has me putting on my Holmesian deerstalker cap, and for the first time in my life seriously considering ... maybe ... conspiracy theory.

If the bonds were real and you were the US government, what would you do? I'd think...

1) Declare definitively that the bonds are "fake" (no need to even look at them) to protect the world financial order in general and the value of the US dollar and US debt in particular, then...

2) Suppress all media investigation into the genuineness of the bonds, for obvious reasons, and then, just maybe...

3) Burn the bonds! Subtract that $134 billion from the national debt. Why not? The bonds are fake, right? Is the government of Japan (or China) belatedly going to say: "No, no, the bonds are real! Hey, give them back to us! We were just trying to smuggle them onto the world's financial black markets ..."? I doubt it. Why not teach 'em a lesson and save the taxpayers some real money at the same time?

Well, I'm not quite a conspiracy theorist yet. If I was forced to wager, I'd still put my money on "Nigeria scam" as least implausible.

I don't know what the truth is -- but shouldn't any of these possibilities be a real story for the press?

Whatever went down, something happened on an historic scale: attempted fraud, smuggling, forgery, act of economic warfare, James Bond-like intrigue, Nigeria scam, something. The news blackout itself would seem to be a story.

Yet not one hound in the entire pack of the press is barking. Which seems very strange, considering all the endless inanities that the entire pack goes yap! yap! yap! yap! yapping about all the time.

It's a mystery to me.