Update On the $134.5B in Bearer Bonds Case

I first linked to this story on Friday, June 12. Here's an interesting update from the U.K. Telegraph:

Is this the death of the dollar?

After two smugglers were stopped last week with what at first appeared to be $134bn in US state bonds, the tension and paranoia surrounding the fate of the dollar hit a new high.

By Edmund Conway
Published: 7:32PM BST 20 Jun 2009

Border guards in Chiasso see plenty of smugglers and plenty of false-bottomed suitcases, but no one in the town, which straddles the Italian-Swiss frontier, had ever seen anything like this. Trussed up in front of the police in the train station were two Japanese men, and beside them a suitcase with a booty unlike any other. Concealed at the bottom of the bag were some rather incredible sheets of paper. The documents were apparently dollar-denominated US government bonds with a face value of a staggering $134bn (£81bn).

How on earth did these two men, who at first refused to identify themselves, come to be there, trying to ride the train into Switzerland carrying bonds worth more than the gross domestic product of Singapore? If the bonds were genuine, the pair would have been America's fourth-biggest creditor, ahead of the UK and just behind Russia. No sooner had the story leaked out from the Italian lakes region last week than it sparked a panoply of conspiracy tales. But one resounded more than any other: that the men were agents of the Japanese finance ministry, in the country for the G8 meeting, making a surreptitious journey into Switzerland to sell off one small chunk of the massive mountain of US bonds stacked up in the Japanese Treasury vaults.

In the event, late last week American officials confirmed that the notes were forgeries. The men, it appeared, were nothing more than ambitious scamsters. But many remain unconvinced. And whether fake or otherwise, the story underlines one important point about the world economy at the moment: that the tension and paranoia surrounding the fate of the US dollar has hit a new high. It went to the heart of the big question: will the central bankers in Japan, China and elsewhere continue to support the greenback even in the wake of the worst financial crisis in modern history, or will they abandon it as America's economic hegemony dissipates?

Dollar obituaries are nothing new. The currency has been presumed dead more times than Shane Macgowan. But like the lead singer of The Pogues, the greenback has somehow withstood repeated knocks and scrapes over the years and lived on, battered, bruised and a couple of teeth the lighter, to fight another day. In the 1970s and 1980s there were plenty predicting its demise, although at that point the main challenger was the Japanese yen. And in the years preceding this crisis, economists and investors including Peter Schiff and George Soros were lining up to declare the dollar's demise as the world's reserve currency. In the late 1990s, the creation of the euro gave dollar sceptics another stick to beat the currency with, and no doubt the European currency has claimed some of the prominence in its first decade.

Now, following the collapse of the global financial system, those warnings have become louder still, and ever more difficult to dismiss – because this time around there are threatening noises coming from those who actually have the power to do something about it. First came a paper from Zhou Xiaochuan, the governor of the People's Bank of China (PBoC), a couple of months ago, positing the idea of introducing the special drawing right (SDR) – a kind of internal currency at the International Monetary Fund (IMF) – as an international reserve currency. These calls were then repeated, with more force, by the Russian president, Dmitry Medvedev, who last week declared that the world needed new reserve currencies in addition to the dollar.

There's more. I strongly recommend that you read the rest, and hopefully I'll have an addendum to this post later this evening.

UPDATE: (As promised)

Here's some more interesting stuff on this incident.

On June 16, the site Seeking Alpha put up a list of what was termed "strange inconsistencies" in the story, but here's the pertinent paragraph (IMO)

Thus far, about the only piece of information that appears to be reliable as reported by various news sources regarding this huge mystery is the remarkable authenticity of the 249 seized bearer bonds in denominations of USD $500 million. If any of the other facts, as they are being reported, are remotely accurate, then the bearer bonds were likely counterfeit. Still, the interesting part of this story, at least to me, is that the smugglers seemed intent on being caught with the counterfeit bonds. This leads me back to my previous question. What possible reason would the smugglers have for wanting to be caught? One of the quickest ways to sabotage and usher in the death of a currency is to raise legitimate questions about its ability to withstand counterfeiting efforts. Prove that counterfeiting is not only possible but highly likely, and the world’s confidence in the sabotaged currency will undoubtedly plummet.

The comments to this piece are even more interesting, including a link to a story about scam run in 2004 using counterfeit $500k, $100M and $500 million-denomination 1934-dated bearer bonds.

And then there's another speculative post from The Market Ticker from yesterday. This one quotes a Reuters story:

A purported $134 billion in U.S. government bearer bond certificates seized by police near the Italian-Swiss border are fake, the U.S. Treasury said on Friday.

"Based on the photograph we've seen online, they are clearly fake. And not even good fakes," said Stephen Meyerhardt, a spokesman for the Treasury's Bureau of the Public Debt.

He added that there is only $105 million in Treasury bearer bond securities outstanding, so the $134 billion amount seized far exceeds the universe of outstanding securites.

However:

In the last two years, Italian authorities have seized some $800 million of U.S. bonds in the Como area in northern Italy.

Were they bearer bonds? And here's the key graph from that Reuters piece:

The forgery determination came a day after the Treasury warned U.S. banks against the potential for increased currency counterfeiting activity and large cash transactions by North Korea in an effort to evade U.N. sanctions aimed at cutting off financing for Pyongyang's nuclear weapons and missile programs.

Which kind of answers most of the "who, what, where, when and why" questions, doesn't it?

Except for these, from the Market Ticker piece:

So let's see if we can try to sort out what we're "learning":

• The bonds are declared fake by the Treasury, stating that there's only $100 million outstanding and obviously $134 billion have to be fake.
• Italy claims to have seized $800 million in real US Bonds in the last year.
• The last legitimate issue of paper US Treasuries (that is publicly admitted to) was in the early 1980s when bearer instruments were outlawed. All are now stated to be electronic (just a serial number and amount.)
• The two gentlemen are allegedly Japanese, and there are various stories about who they really are - from notorious counterfeiters who have served hard time for previous offenses to Japanese finance officials. Most notably, there has been no public statement from Italy about these gentlemen's actual identities.
• It appears from all reports that these two were detained but not arrested, with some reports that they were not only released but took the allegedly-fake instruments with them, even though Italian law precludes both your release and return of your fake instruments if you are caught with fake securities or currency.

This is stuff out of a Tom Clancy novel, and the longer it goes on and the more twisted the "explanations", the less sense it makes.

I find it incomprehensible that the Italian government released these two if they were actually caught in a massive counterfeiting operation with $134 billion in fake US Securities.

I find it equally incomprehensible that there was not an immediate indictment out of a US Prosecutor coming from such an event and a demand for extradition back to the United States.

And further, I find it equally incomprehensible that if the securities are in fact real, and Treasury is lying, that Italy would not impose the fine.

Only the latter scenario, however, covers what apparently has happened - the two "couriers", whoever they are, have been released and, according to some accounts, they took the allegedly "fake" instruments with them, and there has been no US indictment issued for counterfeiting the instruments.

Uh, can we have some truth here folks, because none of what is being reported adds up and my BS detector is ringing off the hook.

Mine too. (End of update.)