From FT Alphaville:
So you thought bearer securities weren’t a thing anymore?
Bearer securities have been a thing since the dawn of finance (and specifically the dawn of the eurodollar security market).
BUT! They were supposed to have been phased out years ago due to their capacity for misuse in shady dealings, not to mention Die Hard plot lines — or so at least the popular narrative went. The phasing out came part and parcel with regulatory efforts focused on dematerialising and registering assets in common databases, with intermediaries at best playing the role of proxy owners on a trust basis with clients.
One fascinating insight from the ICIJ’s Panama Papers leaks, however, is that we may have over-estimated the degree to which bearer securities were phased out in the international system these last few decades. To the contrary, the papers point to the highly prolific and institutionalised use of bearer structures in the offshore tax haven world, at least up until the 2008 crisis took place. (Panama itself only got rid of the bearer structure at the end of last year).
Whilst it lasted this was a world of “white glove” services, wherein assets, contracts and agreements were maintained in segregated accounts, in physical bearer form or even as verbal gentlemen’s agreements based only on trust. As the rest of the world moved towards transparency — spurred by digitisation and intensive data accumulation — this was a world which seemingly regressed into the manual processes of the past, to the use of secret safes, secret vaults and documents transported in briefcases or, in their most digital form, scanned documents held in extremely private digital databases. We were offered a glimpse of how this world worked, of course, in the recent revelations about Barclays’s high-profile elephant PEP client, for which the FCA slammed the bank with a £72m fine.
Not that the issuance of bearer securities is limited to the private or offshore sector. The Bank of England is still an issuer of dollar-denominated “bearer notes” for the purpose of financing its foreign exchange position. The most recent note in that regard, a $2bn three-year eurobond paying a coupon of 1.25 per cent, was announcedissued on March 7. (Although, it must be stressed, the terms and conditions disadvantage bearer holders versus those who are registered, encouraging registration.)
Together there have been 10 operations of this sort under the Bank’s annual programme since March 2007. The BoE’s website states the decision to finance the BoE’s foreign exchange reserves with medium-term securities of this sort was announced on December 15, 2006.
Euromoney noted in February 2007 that the series marked the first dollar-denominated issuance for the Bank of England since 1996.
But the key thing to observe really is how bearer securities connect more generally to dealings in the euro-currency security market — i.e. those bonds/equities issued in one currency and circulated beyond the control of the central banks managing said currencies — and what role they play in obscuring the size and true going-ons of this extremely under-reported and little understood market....
I guessed,* when I saw her earlier "A Panamanian bombshell", that we might see more on bearer instruments (she bolded the word, that helped) but did not see the Eurodollar analogue even though she put that sting in the tail** of the earlier piece:
...But we shouldn’t forget that this is as much the story of the unbacked, unregulated and non-guaranteed eurodollar “store of value” system — which has been struggling to stay afloat ever since the 2008 crisis struck — as much as it is about tax havens per se.*Izabella seems as interested in the instruments as I am. Here's a riff off one of her 2013 FT Alphaville posts we titled:
Can You Trust the Bank of Sierra Leone's Bearer Bonds?
That, of course, is the first question any rational person would ask when reading FT Alphaville's "Once you turn base money into short-term debt, can you go back?".
I'd been lurking at Interfluidity on the Paul Krugman/Steve Randy Waldman debate/discussion that included the question of, as Ms Iz frames it "whether 'base money' and short-term debt are perfectly substitutable or not".
This got me thinking about currency that pays interest which leads naturally enough to The Bank of Sierra Leone, Sierra Leone's CB, which is just about the last government entity to issue debt in bearer form.
The most recent mention of these little beasties is: ...In 2015 she again looked at Bearers, this time at her personal blog, Dizzynomics, which we linked to in "Pssst, Are You In The Market For Sovereign Bearer Bonds? The Real Deal? Good as Gilt(s)?"
**Either Scorpions from 2010 or Taming of the Shrew from somewhat earlier.