$134 Billion in Smuggled Bonds? Almost Surely a Scam

Includes: TBT, TLT
by: David Goldman

My inbox is bulging with gossip about the $134 billion in supposed smuggled bonds seized by Italian customs agents on June 5 from two Japanese men. The news is old, but William Pesek’s comment in Bloomberg yesterday morning gave the second-day story some legs.

The idea that $134 billion in U.S. Treasury securities held by some government have gone walkabout and somehow were stolen by a Japanese gang is fairly preposterous. The securities almost certainly are forgeries. Forged securities (except for the occasional bearer bond) never are traded, because it is too easy to verify authenticity. But there is a scam as old as the Spanish prisoner story involving fake collateral. I’ve seen purported certificates of deposit of nine-figure denominations forged with the letterhead of South American or Russian banks. The object was to get a brokerage account somewhere to accept them as collateral.

The most likely explanation is that the supposed Treasury securities were intended as props in a scam. Perhaps something resembling the Bernie Madoff operation required visual proof that the proceeds of a Ponzi scheme were invested in something real; perhaps the corrupt employee of a minor bank intended to use the securities as fraudulent collateral for brokerage loans. The fact that the Italian authorities stated that they required time to determine authenticity is very odd. An email to the Treasury Department should have taken care of that.

There may be an espionage angle; this is the sort of thing we’ve come to expect from the North Koreans. I am reliably informed that during one year not so long ago, North Korea’s single largest export was counterfeit Marlboro cigarettes. North Korea has been caught red-handed counterfeiting US currency. Why not government bonds?

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