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The Secret Vaults


This should have made my bullshit detector go off like a roman candle when I read it in Sorkin's book, "Too Big To Fail." Alas, call it a fail on my part:

Wilmustad understandably wondered how they were supposed to come up with $14 billion in the next several minutes. Then it dawned on them: the unofficial vaults. The bankers ran downstairs and found a room with a lock and a cluster of cabinets containing bonds – tens of billions of dollars’ worth, dating mostly from the Greenberg era. They began rifling through the cabinets, picking through fistfuls of securities that they guessed had gone untouched for years. In an electronic age, the idea of keeping bonds on hand was a disconcerting but welcome throwback. (p. 400)

Read the rest of the post. It's very enlightening. I worked for eleven years in finance and only once did I see a bearer bond. And this bond was brought in by a very old fellow. (He was a great client, too, but old nonetheless.) Bearer bonds are very rare. So, yes, this is very strange.


Sean Paul Kelley January 11, 2010 - 1:39pm
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( categories: Global Financial Crisis )

If it walks like a duck & quacks like a duck...

Good questions about the accounting.

Balance sheet might show these bonds, P&L statements would be more interesting as they show cash flows, not just assest & liabilities.

Synoia January 11, 2010 - 3:38pm
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They may have been registered bonds

During the time you were in the biz there were Bearer bonds with coupons, registered bonds where they mailed you a check and as you
know, Book entry bonds which are the norm today.

mcgrande January 11, 2010 - 4:08pm
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True, I'd forgotten about registered bonds. But again, those

were very rare as well. I think I maybe saw a dozen of them during my time in the biz. And I never saw a new issue being put out of Registered or Bearer Bonds, never once did I see one underwritten in my time.

"Sí che dal fatto il dir non sia diverso."

-Dante

Sean Paul Kelley January 11, 2010 - 4:16pm
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I maybe you had LARGE INSTITUTIONAL DVP ACCOUNTS

as versus the type like the old chap you mentioned, registered bonds still are out there (as far as muni bonds) bearers are gone and for the most part its BE. The older folks liked the physical delivery. some would loose them, replace them (registered) and add them to the bonds lost and refound and sell them both resulting in a short position after the settlement date and the check had been paid.

mcgrande January 11, 2010 - 4:28pm
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AIG Wasn't in the Bond Business

I am trying to think what part of their insurance empire would throw off billions of dollars of bearer bonds, presumably as collateral. Maybe among their many subsidiaries one of them got into the repo business, but then the Fed would have been dealing with them, and as a primary dealer given the size of the bond holdings.

The other question that was pointed out is what happened to the interest income? This could amount to $700 million annually. Where did this show up on the income statement, and was it used as some suggest as Ace Greenberg's slush fund? If so, how did he manage to cheat the rightful owners of their interest payments?

This is all extremely odd and bears a thorough audit and investigation. Too bad the company is now owned by the government, which is able to hide things for a long time.

Numerian January 11, 2010 - 5:32pm
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I can't understand

Why they didn't just make one of the leprechauns conjure the $14 billion for their release. The damn leprechaun cage was located between the bearer bond cabinets and the unicorn pens. Amatuers.

zot23 January 11, 2010 - 8:08pm
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Hmm.

Well, it absolutely couldn't be an indiscretion about how a great big hunk of drug money was laundered into the planetary economy - with people hunched with cramps of terror in bathrooms right this very minute at the thought that Note Will Be Taken.

Ah, what a pleasant thought.

No, there's probably an innocent explanation; heck, bankers are always misplacing billions and finding them later. Myself, I'm always finding change down the back of my sofa cushions.

"The best-informed man is not necessarily the wisest. Indeed there is a danger that precisely in the multiplicity of his knowledge he will lose sight of what is essential."

- Dietrich Bonhoeffer

Escher Sketch January 12, 2010 - 4:55am
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