Arrgh, Faulty Memory Leads To Embarrassing Correction
Original post:
A couple days ago I mentioned we were going to take a look at some of her recent writing and used a Twitter thread as a teaser:
The Recent Work Being Done By The FT's Izabella Kaminska Is Important...
Before getting into the main theme though, I have to highlight one of her articles for the paper (rather than the FT's flagship online-only property, FT Alphaville).
Her "Antique Chinese bonds are now in play" is interesting on a couple different levels:
Speculators and politicians are eyeing ways to use pre-communist debt to put pressure on BeijingThe first point of interest is the basic premise, when scripophily transforms into, not just activist investing, but geopolitical pressure.
Former US national security adviser Zbigniew Brzezinski wrote that Americans seeking to preserve the country’s global primacy must, as in chess, think several moves ahead, anticipating possible countermoves.
His advice springs to mind as tensions between the US and China over data security, trade and intellectual property theft escalate. Both sides are openly flexing their economic and military power. But geopolitical shifts rarely depend only upon visible leverage and America may yet hold a trump card.
What would happen if President Donald Trump took his rhetoric about “making China pay” for Covid-19 to its logical conclusion? Leading Republicans like senator Lindsey Graham say the US should consider cancelling the $1tn-plus China holds in US Treasury obligations to seek reparation. The obvious critique is that America’s credit rating would crater if it repudiated some of its debts. The US depends on external financing and cannot afford to alienate bond buyers. Even if other investors could be persuaded that a select Chinese-state-only default was justifiable, who could take over the financing burden?
Yet, none of this renders the “make China pay” policy dead in the water. In chess, new context empowers previously redundant pieces. And one such piece could turn out to be some $1tn-plus (when compound interest is accounted for) of yet-to-be-cancelled pre-People’s Republic of China debt ranging from the Hukuang Railways Sinking Fund Gold Loan of 1911 and the Reorganisation Gold Loan of 1913, to the so-called Liberty Bonds of 1937.
Long forgotten, these bearer bonds — denominated in sterling, Swiss francs, Russian roubles, Deutsche marks or US dollars — exist mostly in people’s private collections or attics. The most relevant were issued either by the former Republic of China or the preceding Imperial Chinese state to raise money for big development and infrastructure projects. Some were secured against revenues from Chinese natural assets like salt resources.....MUCH MORE
Regarding the first transformation I remember reading about a fund manager who discovered there were some still-outstanding bonds issued by one of the larger railroads, long past their maturation date that were payable in gold. He began to quietly accumulate a position and when he had purchased pretty much the entire float he went to the railroad and asked for his, now greatly appreciated, gold.
The railroad demurred, saying the actions of President Roosevelt in 1933 and 1934 had made any contracts that called for settlement in gold null & void and would he please go away.
The manager was persistent and eventually the railroad agreed to settle for an amount much smaller than the ounces of gold specified but still much larger than his investment.
The lesson here? Kids, read those indentures.
That's the first point.
The second is using matured, supposedly canceled debts to produce action by state actors.
I mentioned one famous example in "Bankers & Bolsheviks: International Finance and the Russian Revolution" which, in a story on the Imperial Russian bonds, tangentially mentioned the Chinese bonds Izabella focused on:
....Related, a 2009 post, "So a Sicilian mafioso walks into HSBC…":
...In a less sophisticated move, I once had a slightly deranged money guy insist that his $1 Billion of Japanese government bonds were good collateral. Here's one of the issues he proffered...
...For the longest time Carl Marks & Co. (or was it Herzog?) made markets in defaulted bonds, for some reason I remember the Kingdom of Serbs, Croats and Slovenes 8's of 1922.
It may have been a different S,C&S issue, I can't find any record of the paper. Off to Zagreb?
[try 'off too, Zagreb' -ed.]
Here's a quick story about this odd corner of the market, from Time Magazine, Aug 8, 1983:
...Foreign bonds are riskier because it is difficult to force payment or arrange settlements. The Wall Street firm Carl Marks & Co. is still fighting a class-action suit against the People's Republic of China to recover losses from Hukuang Railroad bonds issued by the imperial Chinese government in 1911. Last year a U.S. district court in Alabama ordered China to cough up to U.S. bondholders the unpaid principal plus the interest that has been mounting at 5% annually, a total of $41.3 million. Marks also has two suits against the Soviet Union involving $75 million in dollar-denominated bonds issued by the imperial Russian government. The bonds, held by U.S. investors, were repudiated by Moscow after the 1917 revolution. Daniel Collier, a Marks vice president, is not holding his breath. In his firm's offices, one of the Russian bonds is mounted, with a small hammer beside it, along with the words: IN CASE OF SETTLEMENT, BREAK GLASS.
Even if the court actions fail, some of the paper still has value. A Hukuang Railroad bond for 20 gold pounds ($96) that is in good condition is worth from $50 to $100 as a collector's item....As an aside I think Izabella has a fascination with bearer bonds, anonymous negotiable instruments that fit in the lining of your suitcase and that pay interest as you crisscross 1920's Europe gathering intelligence and paying-off your spies.
On second thought, that might be me.
Now on to the current stuff, her thinking on the intersections of technology, psychology, propaganda and media. We'll be looking at some of her FT Alphaville posts over the course of the weekend.
If interested here's one from May:
In Which The FT's Izabella Kaminska Comes Dangerously Close to Thoughtcrime
