The United States Treasury Department issues bonds as a form of debt financing. Government bonds are considered free of credit risk because of the government’s ability to raise taxes to service these bonds at maturity. The undeclared “bearer bonds” included 249 certificates worth $500 million apiece and 10 "Kennedy bonds" of $1 billion each.

There are few news reports these days that inspire confidence in the U.S. economy. Unemployment levels rose to a 26-year high of 9.5% in June and word of a second stimulus package (vehemently opposed by Obama) has investors balking at earnings projections and questioning whether we are in fact on the road to recovery. Amidst the worst recession since the Great Depression, a mind-boggling news story has emerged which poses questions pulled right from the pages of a Tom Clancy novel.

In early June, Italian authorities seized two Japanese men attempting to cross the border at Chiasso, 50 kilometers north of Milan, into Switzerland. Hidden within a false bottom inside their briefcase were $134 billion in undeclared U.S. bonds. The lack of explanations, as well as U.S. media coverage, about this inexplicable event has lead many to question whether there is more to this story than the powers that be would want us to believe.

As William Pesek of Bloomberg recounts, “These two guys were carrying the gross domestic product of New Zealand or enough for three Beijing Olympics. If economies were for sale, the men could buy Slovakia and Croatia and have plenty left over for Mongolia or Cambodia. Yes, they could have built vacation homes amidst Genghis Khan’s Gobi Desert or the famed Temples of Angkor.”

So the question emerges, who were these men? The bonds in their briefcases could classify them as one of America’s largest creditors, just ahead of the UK. One report claims that these were Japanese nationals working for the Finance Ministry. If this is true, it implies that Japan may have been attempting to dump their U.S. bonds somewhere else using Swiss financial institutions. Japan’s confidence in the U.S. dollar hinges on their belief that the U.S. government can repay such bonds. A news story such as this does not exactly promote belief in America’s economic stability.

Top Foreign Holders of U.S. Treasuries (March 2009)
Holder                        Total
China                         $767.9 Billion
Japan                         $686.7 Billion
Caribbean                     $213.6 Billion
OPEC                          $192.0 Billion
Russia                        $138.4 Billion
United Kingdom                $128.2 Billion

“They are clearly fakes,” said Stephen Meyerhardt, a spokesman for the U.S. Bureau of the Public Debt in Washington. “That’s beyond the fact that the face value is far beyond what’s out there,” he said. “No such ‘Kennedy bonds’ exist.” The total of Treasury paper “bearer” bonds outstanding is only $105 million. The Treasury has been issuing bonds solely in electronic form since 1986.

Clearly fakes, but then what purpose would two men such as these have for counterfeiting and transporting such a massive amount of U.S. debt? Another discrepancy is the fact that original and recent bank documents were seized as proof of their authenticity. Were banking institutions duped in this counterfeit ring as well? How much “counterfeit” U.S. debt exists in the international market? And why did it take nearly two weeks for this statement to be released if authenticity could be verified simply by looking at a photograph?

Italy’s Guardia di Finanz, a financial police agency, also expressed doubts about the bonds’ authenticity, especially the “Kennedy bonds,” but noted the others were so well made that it was hard to tell them apart from real ones.

Had the bonds been authentic it would have been a boon for Italy. The perpetrators could be fined 40% of the total value for attempting to smuggle them out of the country.

The Japanese nationals were subsequently released because they had committed no crime. Their whereabouts are unknown (read: missing) according to a reporter sent to Como by the Mainichi Shimbun to investigate the matter. Would the Italian financial police really release such sophisticated “counterfeiters” without tracking their whereabouts?

Market guru Karl Denninger thinks a more deceptive plot may be at hand:

You’re not going to walk into a bank with $130 billion in bearer bonds and cash them. Nor are you going to sell a bond with a $500 million face value to someone without them authenticating it. They will be authenticated before you get one dime out of them—no matter who you think you’re going to “give” them to.

So if they’re fakes and you’re “just screwing around,” there is no reason to hide them. Nor is there any particular reason to have authentic and recent original bank documents in your luggage with them, as has been reported.

…

Ok, who has $130 billion in bearer bonds? Remember, bearer instruments haven’t been issued by the Treasury since 1982, when they became illegal to issue, at least to U.S. institutions and residents (there was an exception carved out for Treasury instruments issued to non-U.S. residents in 1985—a time of high deficits). The answer to that question: it is rather unlikely that there remains $130 billion of legitimate U.S. Bearer issuance outstanding anywhere—to anyone.

The many unanswered questions have conspiracy theorists chomping at the bit, speculating as to the hows and whys of transporting such massive amounts of U.S. currency.

Could the U.S. have issued clandestine bonds to Japan in order to finance budget deficits in the past decades which went unreported? Was Japan trying to hand off the bonds due to concerns that the U.S. government would be unable to service the debt? Were the smugglers victims of a Nigerian counterfeit scam? Is foreign confidence in the American dollar in jeopardy? Where are the bond smugglers and the bonds?

And what about this German article that claims the bonds are legitimate?

Readers can draw their own conclusions from the facts of this fascinating story but the notion that something like this could have happened with barely any U.S. media coverage speaks volumes in itself.