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How the Bearer Bonds Saga Could Bring Down the US

Posted on: Jun 18th, 2009 | By Contrarian Profits | Filed under Top Story

Todays Notes reads more like a John le Carre novel than an investment newsletter. But bear with us.It tracks one of the most fascinating news stories youve never heard of. The news reports aremaddeningly sketchy. And the mainstream media is doing a damn good job of not reporting the story.

But its clear the arrests by Italian authorities of two Japanese-looking men allegedly attempting tosmuggle $134.5 billion worth of US bearer bonds across the Swiss border is the biggest financialcrime in history. And one with major implications for Americas economic security.

For those of you who dont know, a report surfaced on Monday, June 8, on an obscure Vatican-sponsored news website, AsiaNews.it, that Italys financial police (Guardia Italiana di Finanza) had

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.

According to the report, these securities included 249 US Federal Reserve bonds worth $500 millioneach, plus ten Kennedy bonds and other US government securities worth a billion dollar [sic] each.

If the report is true (it has been relayed by the Associated Press, Bloomberg, The Times and the DowJones news service), it means these two as-yet-to-be-identified men were carrying securitiesamounting to the GDP of New Zealand or enough money to fund three Beijing Olympics in non-negotiable bonds in their suitcase.

As Bloomberg put it, If economies were for sale, the men could buy Slovakia and Croatia and have plenty left over for Mongolia or Cambodia.

The story is filled with bizarre and incongruous details. Enough, in fact, to make the mind of even themost determined news hound spin.

1. First, theres the obvious question of whether these billion and half-billion dollarnotes are real or fake. According to the AsiaNews report, Italian authorities havenot yet determined whether they are real or fake but [] if they are fake, thematter would be even more mind-boggling because the quality of the counterfeitwork is such that the fake bonds are undistinguishable from the real ones.

2. The story has received a lot of coverage in Europe and Asia. But US media outletshave ignored it, despite the fact that it concerns either the biggest evercounterfeiting or the biggest ever smuggling of US bonds. (A third possibility isthat the story itself is a fake. Even so, this would merit serious attention as itimplies that someone or some state or state agency is interested in destabilizingthe value of US debt at a time when its most sensitive to destabilization, i.e.,when America is issuing most of it.)

3. The story broke smack in the middle of heightened concerns over the stability of US bonds markets. Treasury Secretary Tim Geithner has just completed a trip toChina, where he did his best to assuage Chinese fears that US fiscal andmonetary policy is undermining the value of US government and agency debt.And the BRIC nations Brazil, Russia, India and China have recently stirred thepot by calling for a less dollar-centric global currency system.And following the

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report of the bond arrests, Japan the second largest foreign holder of US debtafter China felt it necessary to come out with the following statement via itsfinance minister: We have complete trust in the fact that the U.S. views itsstrong-dollar policy as fundamental. So our trust in U.S. Treasuries is absolutely

unshakable. (As Karl Denninger points out on his blog, The Market Ticker, the Japanese said in December 1941 that all was well, too.)

1. According the Dow Jones Business News, An official at Japans Consulate Generalin Milan said Tuesday that Italy was still investigating the case, adding it wasntconfirmed that the two men are Japanese.So are the allegedsmugglers/counterfeiters Japanese or arent they? And if they arent, why did thepress reports say they were?According to Dow Jones, the Japanese have sent aletter asking for further information to the Italian tax police as well asprosecutors. But why the delay?

1. A breaking report from Joe Weisenthal at The Business Insider, snatched from Japanese TV, says the Japanese bond smugglers are now missing. If this was asimple case of counterfeiting (albeit the biggest in history), its highly unlikely theItalian and US authorities would have let the men carrying the bonds simply slipoff into the night

2. The amount seized should ring alarm bells. On March 30 2009, the TreasuryDepartment announced that $134.5 billion remained in the TARP. The statedamount of seized bearer bonds was $134.5 billion.

3. According to JS Kim of investment research company SmartKnowledgeU, Thetwo well-dressed Japanese men opted to travel to Chiasso on a local trainnormally full of Italian manual laborers commuting to Switzerland. If they werereally intent on successfully smuggling these bonds, counterfeit or real, whywould they not take more care to select a travel route in which it was literallyimpossible for them not to stick out like two sore thumbs?

4. The bearer bonds were discovered in a hidden briefcase compartment after acustoms inspection. As Kim also points out, If the bonds were indeed authenticand owned by a nation state, they could have been transported in a diplomaticpouch exempt from customs searches that would have guaranteed transportwithout detection.

Here at Notes we have two theories about the bond arrests, presuming the story is legit. (That is to say presuming the reporting on the story is legit. More on this later.) Both have serious implications for the US economy and all who depend on it for their livelihoods.

The first possibility, as we see it, is that the events in Italy are evidence of sophisticated economicespionage and an attempt by a (hostile) foreign power to undermine US economic power.

In other words, somebody wants to destabilize the US bond markets by spreading the word that US bonds can be forged, but that the quality of the counterfeit work is such that the fake bonds areundistinguishable from the real ones (as the original report put it). Raising legitimate concernsabout the ability to withstand counterfeiting efforts is a sure-fire way of sabotaging a currency.

It wouldnt be the first time that such a strategy has been used to destabilize an enemy power. DuringWorld War II, Hitler launched Operation Bernhard to crash the British war economy. By the end of

the war, it had produced 132 million expertly counterfeited British pounds a sum that represented

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about 15% of all British pounds in circulation at the time. The British ran a similar counterfeitingoperation against the Nazis.

It seems careless, to say the least, to get caught with $134.5 billion dollars worth of securities by a

regular inspection on a train. Weve already ruled out that this wasnt an official state operation(otherwise the bonds would have traveled in a diplomatic pouch). So its certainly odd that peoplesophisticated enough counterfeit or steal $134.5 billion worth of US government bonds couldnt think of a safer way to transport them.

The implication is the Japanese interlopers wanted to be caught. And they wanted the world toknow that US bonds could be so expertly forged.

Who would want to destabilize US economic power? Who would have the technology and the know-how to print such convincing forgeries? Who is a declared enemy of the US? Who might haveJapanese looking agents working for them? North Korea would have to top the list of suspects

Also, theres the question of why the Italian authorities didnt allow the Japanese couriers to deliver their illicit cargoto its destination (and therefore also apprehend the intended recipient/s of the bonds). Surely, that would have been of interest to the Italian authorities, who seem to have been acting on a tip-off. (Unless you believe that the Italians are inthe habit of searching false-bottomed suitcases of well-dressed Asians on their way to Switzerland.)

One explanation for this is that the Italians believe these bonds are real. Italian law prevents people importing or exporting more than 10,000 in cash. And the penalty for violating the law is 40% of the money seized. That wouldmean the jackpot of the Italian government the fine for this particular haul would be 38 billion. This would go a longway to eliminate the countrys public debt.

This brings us to our second theory. If the bonds turn out be real, it points to the possibility that theUS Treasury may have been secretly issuing bonds to foreign nations to finance Americas deficits.This has worse implications than the sabotage theory. Let us explain

The bonds the Italian authorities seized earlier this month were bearer bonds. That means they areunregistered whoever holds the physical piece of paper owns the instrument.

This is where the plot really thickens. Since the passing of the US Tax and Fiscal Responsibility Actin 1982, the US doesnt officially issue this kind of bond anymore. And according to theTreasurys own figures, the approximate amount of debt outstanding in bearer bonds as of May 2009is just over $100 billion roughly $34 billion less than the amount wound up in a false-bottomedsuitcase on a train from Milan to Switzerland.

It seems the only way the bonds could be real is if the Treasury has been issuing bonds it doesnt want anyone to knowabout.

According to underground investor Karl Denninger at The Market Ticker, this is one of the few explanations thatactually fits the facts. And Denninger goes a step further. He writes:

If in fact previous administrations were issuing off-book Treasury debt in thisfashion to sovereigns then implications are truly explosive as such issues areblatant and outrageous unlawful acts and would expose everyone involved tosevere criminal penalties.

http://www.treasurydirect.gov/govt/reports/pd/pd_bearregsec.pdfhttp://www.treasurydirect.gov/govt/reports/pd/pd_bearregsec.pdf

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This wouldnt surprise us in the least. Right now the US government is on a $12.8 trillion spendingspree. As weve said before, its now the biggest player in the US economy. And its destined to bethis way for a long time to come.

Put simply, the government money, and a handful of chosen stock shoot up. (To find out which stocksare benefiting from this unprecedented spending splurge, read on here. )

This story has more holes than a Swiss cheese. We know from experience here at Notes (your co-editor spent two years working as an investigative reporter in his native Ireland) that there is rarelysmoke without fire when it comes to news stories. But one aspect of this story still puzzles us andits a part of the story nobody to date has questioned: What was an obscure Vatican-sponsored newsoutfit doing breaking the largest financial crime story all time?

As far as we can tell, AsiaNews.it broke the story on June 8. Major news services followed on withtheir own reports much later. Bloomberg, for instance, only got to it yesterday. So how didAsiaNews.it, a website linked to the Ponticial Institute for Foreign Missions and funded by theVatican scoop the major news agencies on the bond story?

AsiaNews.its About Us page freely admits that it is an anti-Communist organ of the Roman CatholicChurch, nobly dedicated to China and her people. The organizations missionary zeal is not difficultto detect:

Since [Chinese] university students have internet access, we think that AsiaNewswill help them to be familiar with the impact Christianity has on Asian andChinese society. Already many Chinese intellectuals think China can be saved by

Christianity, so as not to explode into a soulless market or a dictatorship thathumiliates the individual.

Whatever the truth behind the bearer bond arrests , we know it doesnt bode well for Americaseconomic future. At best, it demonstrates that the US faces economic sabotage from an (as yet)unknown source. At worst, its evidence of underhand behaviour by US authorities to finance thecountrys spiraling debt problem.

Even if the case can be put down to (a highly incompetent) nation trying to offload its dollar holdings,it underscores our argument here at Notes that investors need to closely watch US debt markets todetermine the future of their investments.

This year, its estimated that the US Treasury Department must raise $15 billion a day in debt just tokeep the country afloat and Team Obama in pocket. Its our view that this is Americas Achillesheel.

The US economy has already been brought to its knees by too much private debt. We believe its public debt problem could one day deal the country a deathblow.

More on this topic (What's this?)

The Strange Inconsistencies Behind the $134.5 Billion Bearer Bond Mystery (theUnderground Investor, 6/16/09)

http://www.streetauthority.com/gdi-sample-summit-report-tes.asp?TC=GD0071http://www.wikinvest.com/blogger/wikinvest_wirehttp://www.theundergroundinvestor.com/2009/06/the-strange-inconsistencies-behind-the-134-5-billion-bearer-bond-mysteryhttp://www.streetauthority.com/gdi-sample-summit-report-tes.asp?TC=GD0071http://www.wikinvest.com/blogger/wikinvest_wirehttp://www.theundergroundinvestor.com/2009/06/the-strange-inconsistencies-behind-the-134-5-billion-bearer-bond-mystery

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Investing in Bonds: Three Steps to Smarter Bond Investing (Investment U, 3/5/12)

The Ultimate Guide to Bond Investing (Investment U, 2/20/12)

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