Mysterious and Prohibited Bearer Bonds

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Bearer bonds are mysterious and prohibited in today’s modern world of registered securities. A bearer bond is a type of debt security that pays coupon interest to the holder, or bearer, of the bond. These bonds don’t have registered owners. For that reason, bearer bonds are also known as coupon bonds. People who own bearer bonds usually take physical delivery of them without the transfer agent middle man.

Bearer bonds are unregistered securities and clipped coupons must be submitted to the payment agent of the issuer. The person who holds a bearer bond is considered the owner. Bearer bonds were once issued by governments, corporations, and municipalities. Coupon interest of municipal bearer bonds is considered free from federal taxes.

Bearer Bond Issuers

In the early 1980s, there was still some demand for bearer bonds. Investors paid a higher price and accepted lower coupon interest rates to own them. The U.S. government discouraged the issuance of new bearer bonds with the passage of the Tax Equity and Fiscal Responsibility Act (1982) because it’s obviously difficult to keep track of physical securities. Computers changed the way that most people held securities by the 1980s and, today, most registered securities are held in street name at the owner’s broker-dealer, financial institution, or other custodian.

In years past, owning bearer bonds was considered a potential way to stash wealth, launder money,or transact business without attracting government scrutiny. These bonds were easily negotiated and, in some ways, like holding cash. The issuance of bearer bonds is discouraged in today’s debt markets but, every so often, stories about old bearer bonds make the front page.

Bearer Bonds in the News

For instance, UBS, the former Union Bank of Switzerland, was charged with helping U.S. customers evade taxes with bearer bonds in 2015. The U.S. government claims that UBS sold bearer securities to U.S. citizens as a way to avoid paying taxes. UBS previously settled a prior U.S. Department of Justice claim for USD 780 million in 2009.

Some years earlier, a social worker in the Philippines claimed to have found billions of bearer bonds issued by the U.S. government. Bloomberg reported the story in January 2000. According to the individual who found the bonds, an American plane carrying more than USD 300 billion in bearer bonds crashed near Davao City on the southern island of Mindano.

Bloomberg says the bearer bonds were issued at mid-point of the Great Depression with the seal of the United States and labeled Federal Reserve Bond. Reportedly, the bonds were originally issued in 1934 by the Federal Reserve Bank of Atlanta signed by Henry Morgenthau Jr., the Treasury’s Secretary at the time. The owner of the bearer bonds could request payment in gold bullion!

In 2010, Bloomberg reported that a Florida-based firm, World Holdings LLC, owned millions of bearer bonds issued by Germany to finance its participation in World War I. By the 1930s decade, Hitler’s government defaulted on payments. U.S. holders of the bonds demanded payment and took the matter to a U.S. appeals court. At that time, the U.S. government ruled that Germany had to pay investors as agreed.

Unfortunately, under the terms of a treaty written in 1953, holders of the bonds were required to demonstrate that the bearer bonds were owned outside of Germany by 1945 to claim repayment. Lawyers for the U.S. bondholders claimed they weren’t required to prove where the bonds were held if they didn’t accept the original terms of the 1953 London Debt Agreement. The post-war government of Germany didn’t want to pay the outstanding bonds and the matter rested on the bondholders’ failure to “validate” the bonds. By 2013, the bearer bondholders’ case (U.S. Court of Appeals for the First Circuit, No. 12-2143) was deemed unenforceable by the U.S. court and later dismissed.

Bearer Bond History

Bearer bonds were probably first issued after the Civil War to rebuild the nation. At the time, issuers liked the bearer bond format because they could issue relatively large sums and print fewer certificates. Investors also liked owning bearer bonds and, as the 19th century came to a close, issuers throughout the Americas and Europe issued them.

Bearer bonds have a coupon interest rate and maturity like other bonds but it’s up to the owner/holder to submit coupons for payment of interest. Unless the bearer bond issuer was the U.S. government, cashing in bearer bonds can be problematic now. Some people own or inherit very old bearer bonds. In many instances, the issuer isn’t around today and the bond certificates are no longer valid. Some collectors of defunct securities buy the bond certificates and coupons as collectibles.

How to Cash Bearer Bonds

It can be challenging to cash in mysterious and prohibited bearer bonds. According to the Tax Equity and Fiscal Responsibility Act (1982), it’s difficult to cash in bearer bonds because tax penalties and certain sanctions may apply at that time.

If you own bearer bonds or you acquired bearer bonds as part of an inheritance or gift, start by contacting banks in your area. If your issuer is still active today, the bank or custodian will verify your identity. You will then fill out tax forms, such as a W-9, along with your coupons and the bond certificate.

Alternatively, you can also contact the issuer to learn more about how to cash in a bearer bond. If your issuer has merged with another entity or changed its name over the years, you may need to do some research first. Contact the issuer at that time and make arrangements to deliver the bonds and required information to obtain payment.