Battle Of The Bonds

The German central bank could owe billions of dollars for gold-backed bonds issued between 1924 and 1930.

For Ed Fagan–a New York class-action lawyer who successfully sued Swiss banks on behalf of Holocaust victims in 1998–it was the beginning of a new crusade. In April, he held a press conference in Frankfurt, and then walked to the German central bank to serve it with papers. On hand for the event were a dozen or so members of the media, a few curious passersby, and a strawberry farmer from Plant City, Fla., named Ronnie Fulwood–who, of all the attendees, had perhaps the largest stake in Fagan's latest cause.

Fulwood owns 13,357 German gold-backed bonds issued between 1924 and 1930 to help Germany pay reparations demanded by the Treaty of Versailles. Known as Dawes and Young bonds, after U.S. politicians who orchestrated the debt programs, the securities were part of one of the largest debt offerings in history. But they have also been in default since 1933. That explains why Fagan and Fulwood were in Frankfurt: to publicize their lawsuits against the German central bank and other agents of the government. According to the Americans, the value of the unfulfilled obligations on Fulwood's bonds alone is US$7.8 billion.

If you're finding action on the TSX a bit slow this summer, you might consider tracking down some German gold-backed bonds from the interwar years. It would be one of the most highly speculative, yet historically rich, investments you'll ever find.

Dawes and Young bonds are legendary among scripophilists (collectors of stock and bond certificates). In 1924, Germany was struggling to deal with the terms of Versailles, and an international committee hatched a plan to help it out of its dire financial straits: get big international banks to borrow money from western retail investors to lend to Germany. The banks brought together a small army of U.S. hometown bankers to encourage depositors to invest in German bonds, the first of which bore a 7% coupon. They were bigger than schnitzel: 107 separate issues of the bonds were floated between 1924 and 1930. “It was 1924–everyone wanted to be in on it,” says Jeffrey Weston, author of a book on the bonds and owner of a portfolio of them. More than a million investors bought them.

But after the crash of 1929, the Germans had trouble making the payments. In 1933, Hitler came to power, partly on a wave of popular resentment against Versailles, and stopped payments on the North American bonds. So the Dawes and Youngs were history–until after the Second World War. In 1953, international officials reached the London Debt Accord, which included a scheme under which holders of the bonds could exchange for new bonds that paid half the original coupon, or 3.5%. U.S. officials–mindful of the number of Americans who held the bonds–successfully lobbied to have written into the accord an option: debt holders could hang on to their old bonds and petition for payment, but they would have to wait 41 years to do it–enough time for Germany to pay off the reissued debt. That grace period ended in April 1994.

Two years before that, Weston, who lives in Nevada, began asking the German government how to make a claim. The Germans said they would honour the bonds as long as the holder could comply with certain requirements; among other things, they wanted to verify that Weston's bonds were not among a group of previously redeemed bonds looted from the Reichsbank by Russian soldiers in the dying days of the Second World War. Weston found the German request odd. According to his research, the Reichsbank had been destroyed before the Russians showed up. Some records suggested the material in the basement had been moved by the Germans to the potash mines of Thuringia, which were subsequently liberated by U.S. soldiers. Besides, Weston wondered, hadn't the German government testified in Senate subcommittee hearings held before ratification of the London Debt Agreement that all the records that could have helped tell good bonds from bad ones had been destroyed in the war? “How, suddenly, 50 years later, did they have a list?” Weston asks. “And nobody mentioned there was looting until seven years after the fact.” An attempt at compromise–Weston, along with eight other bondholders, asked the Bank of England to act as an intermediary–went nowhere. Weston wrote the German government demanding payment. And, he says, “that's when the German government panicked.”

The Germans sent out a communication to Interpol and the FBI that any Dawes and Young bonds in circulation had to be among those looted by the Russians, and that if any were found they were to be confiscated and returned to Germany. Weston had 120 in a Bank One in Ohio that were seized by the FBI; he was threatened with indictment by a grand jury for possession of stolen goods. In response, he filed a case against the U.S. attorney's office in New Jersey for return of the bonds. When the charge came to court, the judge called a weeklong break to ask Germany about the list of “good” and “bad” bonds. The reply from the Germans was that it wasn't in its best interest to provide the list–prompting the judge to throw the case out. Recalls Weston: “He said, 'This is nonsense. The Germans just don't want to pay. FBI, give the man his bonds back and don't bother him anymore.'”

German reluctance to pay would be understandable: Fagan and Fulwood's math puts the total outstanding liabilities at $500 billion. That might lead you to wonder: who in their right mind bets on a major country handing itself over to an obscure bunch of stock certificate collectors from a foreign country?

Fagan, perhaps not surprisingly, has little doubt either of the moral value or the strength of his case. “Many people in Germany are still using infrastructure paid for with the bonds, and the terms of the London Debt Agreement couldn't be more clear,” he says over the phone. “I think we have a 99.999% chance of winning.”

For those whose speculative impulse is tweaked, finding a Dawes bond is a matter of tapping into the scripophily network. Since the '70s, a trade in old stock and bond certificates has developed among collectors who appreciate their design or historical value. Many have websites where you might get your hands on a Dawes or Young. Who knows? If Fagan wins, it might turn out to be more than just a story to tell the grandkids.