Monday, January 21, 2008

Bearing bonds..

I thought I was done with Christmas presents and was looking forward to the next commercial occasion for gift exchanges: Valentine’s Day. Mother has made a custom of sending me a box of dark bitter chocolates, which every year I receive with a momentary guise of suspense, as if it’s from someone totally unexpected.

But no. I recently hosted an old friend from Oxford, a Renaissance man of sorts engaged in theater production, a revolution in the Middle East and daytime bond trading. So after the usual hugs, “it’s been aaages!!” and top-down scrutiny to confirm that we “haven’t changed at all,” he digs into his carry-on to find my Christmas gift.

With the aplomb of someone about to unveil a lost treasure, he presents me with a brown envelope, rumpled and torn, addressee’s name crossed out and hurried smudges with his to-do list. I salivate with excitement! I grab the envelope, tear whatever was left of it and reveal my present: A bearer bond! An original bearer bond, coupons and all, issued in 1928 by the State of Bahia in Brazil!

Hmm.. I sense something short of drooling enthusiasm in the audience! OK, let me defend myself. First of all, my bond is a fine-looking object. You have the name of the borrower (or issuer)—the State of Bahia—written on top in an imposing semi-circular header. The value of the principal (or face value) of 10 pounds sterling, is shown on each side, encased in a heart-shaped flowery frame. The bond’s 5% annual interest is prominently shown at the bottom, and it was collected biannually upon submission of small rectangular coupons attached to the document (see picture).

A dense calligraphy script spells out the terms and conditions in English and French—testimony of the dominance of British (and less so French) capital in financing infrastructure projects in Brazil, from railways to public utilities, during the 19th and early 20th centuries. Among the terms and conditions, you can find the maturity of the bond, an option for Bahia’s government to repay before the bond’s maturity date (a call option in modern finance jargon), and the government’s commitment to continue to meet its payment obligations “whether in time of peace or war and whether the bearers be subjects or Citizens of a friendly or hostile country.”

Still not convinced? Well, let me say my bond has an extra, special feature: It’s a bearer bond! Bearer bonds have been almost phased out in the United States for the following reason: Unlike other, “registered” bonds, which carry the name of the owner and which can only be transferred subject to their owner’s endorsement, anyone who finds and holds a bearer bond can go and collect the interest and principal. Without a specified owner, you could use these bonds in lieu of cash, and some saw this as an opportunity to hide some of their cash earnings for federal tax purposes. Moreover, bearer bonds were risky to hold, as they could be stolen or, let’s say, “found in some antique market in Oxford!” Yeah, I know what you’re thinking: Why don’t I take this bond, fly down to Bahia, cash it in and top it with a bit of bossa nova?

Truth is, as much as I want to deny it, my bond is pretty worthless. In 1943 it was annulled in the context of a debt restructuring plan between Brazil and its external creditors, a few years after the government went bust and declared default. Let us note it was not Brazil’s first time (nor the last!). My bond itself was issued in early 1928 as part of an earlier debt restructuring scheme, under which part of the money raised by the bond issue would be used to repay interest on Bahia’s foreign debt, which the state had stopped paying for some years.

It’s all kind of similar to you going on arrears on your mortgage and renegotiating the terms with your bank… only bigger and messier. And with the non-trivial difference that, whereas your bank can take back your home and say goodbye, in the case of foreign sovereigns it’s kind of difficult to take over their property short of declaring war on them (and winning).

Defaults are a fact of life and a look onto the subprime mortgage saga here in America reminds us that they are not just the plague of remote, exotic places with unpronounceable names. Indeed, Brazil’s economy is booming these days, with the country having more than enough foreign assets to repay its entire foreign debt, and with foreign investment at new highs.

Many of us wondering are of course whether Brazil might ever hit the wall again. But meanwhile, I prefer to relish the small artistic details of the State of Bahia’s badge, imprinted right in the middle of my bond’s header: It pictures a man, semi-nude, with a wheel and a sledgehammer (symbol of Bahia’s industry); a woman carrying the State flag (symbolizing the Republic); and a shield in the middle showing a boat sailing on. “Per ardua surgo”—I rise through difficulties.

Glossary: nominal value, coupon, maturity, debt restructuring, bossa nova, Bond, Bearer Bond.


Giordano said...

Nice description. I am interested in Brazilian Bearer Bonds. If you have any other contact with your friend and find out some more papers like yours I would like to have the opportunity to get a hold of one piece. I am a brazilian College teacher. My name is Giordano, and my email is

Carlos said...


I am a collector specialized in Brazilian bonds. Very interested to buy your piece!


tommy said...

I have some state of bahia bond to bearer, if anyone is intersted please contact me at