It's kind of similar to people who had uninsured art in safe deposit boxes in the World Trade Center on 9/11.
In the old days you took $10,000 to your bank or broker and got a bunch of certificates. Then, as coupons become due, you detached them from the bond (they were actual, paper coupons) took them to your bank and deposited them like checks. Then, when the bonds came due, you presented them to the bank for redemption. If you sold the bonds, workers in the bank's vault a/k/a the cage handled shipping certificates from the seller's bank to the buyer's.
But bearer bonds stopped being issued in the early 80s. Now, the issuer's transfer agent keeps an electronic registry of who owns what and who is due interest payments. When you sell bonds, the transfer is made electronically on the books. There should be very few bearer bonds still outstanding.
Also, they got wet, it's not like they went up in smoke. Bottom line, I wouldn't expect losses from destroyed certificates to be a big number like tens of billions. If they can't salvage them, sounds like it could impact some people, and could be a legal scramble to see who ends up on the hook between DTCC, the banks, the customers, and their insurance companies.
How did they prevent fraud with bearer bonds? (The wikipedia page is remarkably silent.) Since no records of ownership are kept, the only evidence of ownership is the bond itself. And given their value there is a large incentive to make fraudulent ones.
Issuers don't have ownership records, but they do know the identity of every bond issued through the bond's serial number.
So the only way to create a fraudulent copy, would be to copy an existing bond and it's serial number. Of couse, since the original bonds were as good as cash, they were/are kept under pretty tight security.
Not impossible of course, but it did make it difficult to make counterfeit bonds. Also, many bonds had unique security features associated with the bond itself, similar to currency.
If it wasn't a sequential serial number, but rather a long random string then that would make a lot more sense. If your serial had been cashed in fraudulently then you would only find out when you tried to cash in the legitimate bond. There is still provides a massive incentive to steal numbers either from the bonds or the issuing company.
I'm somewhat sceptical of the security features. Obviously some would exist, but the huge value of the bonds makes forging them attractive. It mentions the bonds being held for many years (possibly decades) so the security features would have to last that long. In the UK they regularly change the bank notes withdrawing old ones from circulation and they are no longer accepted except at the Bank of England. The US doesn't seem to do this.
I think thats why people collect old bonds, as they were very ornate to make forging harder. Access to quality printing was less widely available, but I am sure there was fraud. However as you had to present coupons for interest and certificates for maturity, I suspect they would check them all together to check for duplicates, manually. I know a few people who worked in that kind of area who are old enough to remember will ask.
" Italian police said on Friday they had seized about $6 trillion worth of fake U.S. Treasury bonds and other securities in Switzerland, and arrested eight Italians accused of international fraud and other financial crimes."
(I know, not exactly what you were getting at, but it's actually one step better - not just creating forgeries of authentic bonds, but creating absolutely new entities)
Same way they prevent fraud with cash - paper certificates with features that are hard to copy. Also, the company has a record of what was issued and isn't going to pay off the same bond twice, or one that doesn't match what it issued. Doesn't stop people from trying -
After reading this article, I'm almost in tears when I realize what the mitigation step would have been for protecting those bearer bonds from moisture: Tupperware containers.
Bonds are never obsolete. My dad knew a guy whose family owned some sort of bond with a 150 year maturity. It was used to build a long-defunct racetrack in the Bronx, and is now a NYC obligation.
Is cutting out coupons a little silly? Sure. But the money is quite real!
If you think 150 years is a while, wait to you hear about perpetual bonds. The United Kingdom still pays out interest, four times annually, on bonds which predate the existence of the United States of America. (They could theoretically call most of them, but owing to unilateral changes in the terms over the years, the coupon is so low as to make calling them a losing proposition as opposed to paying down more conventional debts of the nation.)
"Consols still exist today: in their current form as 2½% Consolidated Stock (1923 or after), they remain a small part of the UK Government’s debt portfolio. As the bond has a low coupon, there is little incentive for the government to redeem it. Unlike most gilts, which pay coupons semi-annually, Consols pay coupons four times a year because of their age. As a result of their uncertain redemption dates, they are typically treated as a perpetual bond.
...
Given their long history, references to Consols can be found in many places, including literature such as Pride and Prejudice by Jane Austen, David Copperfield by Charles Dickens, Howards End by E. M. Forster, Vanity Fair by William Makepeace Thackeray, Of Human Bondage by William Somerset Maugham and The Forsyte Saga by John Galsworthy and in economics."
The oldest Gilt appears to be ISIN GB0000436070, issued in 1853:
ISS'D 1853. CALLABLE FROM 1/5/1905 @ PAR W/30 DAYS NOTICE. £8,093,266 CONVERTED INTO
4½% WAR LOANS. DAYCOUNT CHG TO ACT/ACT EFF 11/1/98.
The South Sea Bubble crisis happened in 1720, but it appears the company continued to manage the national debt until the 1850s, which corresponds nicely with this bond.
I wasn't criticizing bonds; I was criticizing bearer bonds -- i.e. bonds whose physical possession is the primary or only means of validating ownership.[1]
It is no excuse that the bond was issued with 150 years maturity. In most developed countries, bearer bonds were phased out, so this guy you refer to certainly had the option during that time to convert it into a safer, informational form.
If he simply likes clipping coupons so much that's he's willing to risk the loss (or at least hassle of proof of ownership) in the event that the physical bond is destroyed or lost, you're right -- it's his call to make, if that's indeed what he really wants, and it's really not enough to simply do the coupon clipping ceremonially (i.e. in a way that doesn't affect payment). I seriously doubt anyone has that exact preference though.
I don't know how you read my criticism as being about the "bond" part rather than the "bearer" part.
[1] Cash -- paper/coin notes of the central bank -- is a bearer instrument, and a bearer bond for some definitions of "bond", and it's for this reason that people are advised not to hold a lot of money in the form of cash at any one point in time.
I realize you're just being funny, the thing I don't get is why the 'vault' isn't air tight. I looked at renting a space that had been a bank, the old vault was literally welded open because it was air tight and if the door closed and locked it would take longer to re-open then a person could survive on the air inside.
In the old days you took $10,000 to your bank or broker and got a bunch of certificates. Then, as coupons become due, you detached them from the bond (they were actual, paper coupons) took them to your bank and deposited them like checks. Then, when the bonds came due, you presented them to the bank for redemption. If you sold the bonds, workers in the bank's vault a/k/a the cage handled shipping certificates from the seller's bank to the buyer's.
But bearer bonds stopped being issued in the early 80s. Now, the issuer's transfer agent keeps an electronic registry of who owns what and who is due interest payments. When you sell bonds, the transfer is made electronically on the books. There should be very few bearer bonds still outstanding.
Also, they got wet, it's not like they went up in smoke. Bottom line, I wouldn't expect losses from destroyed certificates to be a big number like tens of billions. If they can't salvage them, sounds like it could impact some people, and could be a legal scramble to see who ends up on the hook between DTCC, the banks, the customers, and their insurance companies.