Billion-dollar bond smuggling saga blows up

Secret deficits, North Korean counterfeiters, religious cultists -- $134 billion dollars worth of conspiracy theory

Published June 15, 2009 6:10PM (EDT)

North Korean counterfeiters, Filipino scamsters, religious cultists, and Ben Bernanke: the cast of characters rumored to be involved in the mystery of the $134 billion worth of Treasury bonds that two "Japanese citizens" attempted to smuggle from Italy into Switzerland a little over a week ago is growing at the speed of conspiracy theory light.

Karl Denninger, who has been opining on matters online since before the Web was a mere mote in Tim Berners-Lee's eye, wonders at The Market Ticker whether the U.S. Treasury has "has been surreptitiously issuing bonds to, say, Japan, as a means of financing deficits that someone didn't want reported over the last, oh, say 10 or 20 years."

I remain puzzled, and am not advancing the above theory as fact.

It is, however, one of the few explanations that actually fits the facts, and for that reason, I think we need some answers. If in fact previous administrations were issuing "off-book" Treasury debt in this fashion to sovereigns then implications are truly explosive as such issues are blatant and outrageous unlawful acts and would expose everyone involved to severe criminal penalties.

Sean Mayer, of Dead Cats Bouncing says "the significance of this story is that it highlights the very topical importance of retaining investor faith in a fiat currency; if the supply of money is suddenly perceived to be vastly higher than believed, whether as a result of policy or widespread fraud, confidence can be badly shaken."

Writing at Craig Meister fears that "that sovereign governments may be trying to dump US treasuries on the black market for fear that they soon will be worth very little."

Pam Geller at Atlas Shrugs tells us that if the bonds are actually fake, it is without question the work of nefarious North Korean counterfeiters. But a DailyKos diarist, problem is, spawns his own ramshackle theory tying the news to purported U.S. government market manipulation and speculates that such shenanigans may explain why "Bernanke and Geithner fear an audit of the Fed and full disclosure to Congress for their activities..."

But by far the most fascinating, and wide-ranging disquisition on the subject comes from Joseph Cannon at Cannonfire. Cannon provides pictures of the bonds, and drawing on documents that he says were once online but now aren't, suggests a notorious Filipino fraudster may be involved, along with a wacky Phillippines-based religious cult headed by "Queen Salvacion A. Legaspi." Some fine Internet sleuthing by Cannon discovers numerous references in the Phillipines to a stash of mysterious "Federal Reserve Bonds" dating back to the 1930s. There's even a YouTube video produced by the cult documenting a hoard of these very bonds some of which are worth $500 million a piece.

Which brings us the only new details reported over the weekend in the English-language mainstream press. Bloomberg tells us that:

The seized notes include 249 securities with a face value of $500 million each and 10 additional bonds with a value of more than $1 billion, the police force said on its Web site. Such high denominations would not have existed in 1934, the purported issue date of the notes, Mecarelli said. Moreover, the "Kennedy" classification of the bonds doesn't appear to exist, he said.

Cannon also digs up a note from the Federal Reserve Bank of New York from 2005:

The Federal Reserve is aware of several scams involving high denomination Federal Reserve notes and bonds, often in denominations of 100 million or 500 million dollars, dating back to the 1930s, usually 1934. In each of these schemes, fraudulent instruments are claimed to be part of a long-lost supply of recently discovered Federal Reserve notes or bonds.

Fraudsters often falsely claim that the purported Federal Reserve notes or bonds that they hold are somehow very special and are not known to the public because they are so secret. Fraudsters have attempted to sell these worthless instruments, or to redeem or exchange them at banks and other financial institutions, or to secure loans or obtain lines of credit using the fictitious instruments as collateral.

The Federal Reserve has never issued any bonds or notes with coupons attached. The Federal Reserve Bank of New York is not aware of any currency or debt stockpile of large denomination Federal Reserve notes from the 1930s and warns that any institution that pays out on such a claim does so at its own risk.

Of course, isn't that exactly what you'd suspect the Treasury or the Fed would say, if they had indeed been surreptitiously creating high denomination bonds or notes to fund secret deficits? We will keep watching this important story!

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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