--- begin forwarded text Date: Sun, 12 Feb 2006 06:54:02 -0500 To: Philodox Clips List <clips@philodox.com> From: "R. A. Hettinga" <rah@shipwright.com> Subject: Coupon Clipping, the Old-Fashioned Way <http://www.nytimes.com/2006/02/12/business/yourmoney/12bearer.html?_r=1&oref=slogin&pagewanted=print> The New York Times February 12, 2006 Investing Coupon Clipping, the Old-Fashioned Way By KEN BELSON MOST bonds these days are never touched by human hands. They are typically bought online and plunked into brokerage accounts, where they are registered and tracked digitally. Interest is automatically calculated, paid and reported to the tax authorities. Then there are bearer bonds, the old-fashioned kind that my 92-year-old cousin Lou owns. Like silver dollars made with real silver and stock tickers that spit out prices on strips of paper, these bonds are relics of an earlier age. They are impressive-looking documents, printed on fancy, perforated colored paper. In some ways, bearer bonds are like cash: the holder is the owner and the bonds need not be registered, a feature that makes them highly appealing to tax evaders and to criminals looking to steal them from their holders. Worry about theft explains why Lou did not want his last name or photograph used for this article. (Bearer bonds even worked their way into a Hollywood script. In the first "Die Hard" movie, the villains tried to steal hundreds of millions of dollars worth of them.) Many holders leave their bearer bonds for safekeeping with their brokers, who every six months clip the coupons that are attached to the certificates and collect the interest payments. They also keep track of bonds that are called or retired. Lou, though, keeps his bonds locked in a safe at a bank and clips the coupons himself. A feisty native New Yorker, he ran a small business in Manhattan, and he still likes to handle his own finances. "I had a broker, but I got so many phone calls, letters and distractions that I was happy to pay $50 to transfer the account," he said. But as Lou has discovered, bearer bonds aren't long for this world. The bonds are the victim of tighter tax laws and the growing digitalization of the financial industry, which increasingly shuns paper pushing. Since 1982, when lawmakers passed the Tax Equity and Fiscal Responsibility Act partly to foil tax evaders, few bearer bonds have been issued in the United States. (They remain popular overseas, however.) As a result, American bearer bonds will all but disappear when the remaining 30- and 50-year issues come due. "By 2013, most bearer bonds will go the way of the dinosaur," said John Colangelo, a managing director at the Depository Trust & Clearing Corporation, a settlement company that holds bonds on behalf of many financial institutions. The D.T.C. has a dozen or so employees working full time to clip coupons, redeem them and transfer the proceeds to the brokers, who credit their customers' accounts. That's a far cry from the situation in 1991, when the company handled 21 million bearer bonds, or 42 million coupons a year, and employed 600 people to get the work done. Since no new bonds are being issued, the number of bonds in the D.T.C. vault has fallen to about 700,000. (Most bonds have a face value of $5,000, so that is about $3.5 billion worth of securities, not including interest.) While the company has a well-honed system for dealing with bearer bonds, investors like Lou are having a harder and harder time handling them on their own. He has several bearer bonds issued decades ago by New York City agencies, including the New York City Housing Authority and the Battery Park City Authority. In the mid-1980's, he bought a bunch of them at a discount - about 50 to 60 cents on the dollar, because their coupon rates of 5 to 9 percent were considered low at the time. The bonds turned out to be a smart buy. Interest rates have generally fallen over the last 20 years, and because he lives in New York, he has not had to pay federal, state and local taxes on the municipal bonds. "I wish I had bought more of these bonds, because when interest rates dropped, I was doing better," Lou said. Over the years, the agencies have called many of Lou's bonds, in order to avoid paying relatively high interest rates. He has held onto as many of the securities as he can, but there are fewer and fewer places to redeem their coupons. Until late in the 1980's, Lou took them to his local bank and deposited them, along with his checks and cash. Nowadays, there are not enough bearer bonds around for banks to justify the expense of handling them. A pensioner, Lou does not want to spend the money to send the coupons by registered mail to a paying agent - typically the bank or broker that handled the original issue - in order to collect his interest. Besides, like many other people of his generation, he prefers to do things the old fashioned way: face to face. Or, as Mr. Colangelo put it, taking care of your own bearer bonds is "a throwback: you feel like you're engaged in handling your own assets." Lou is still in good shape, so he takes the subway to the financial district twice a year to find a teller who will take his coupons. That has become something of a quest. Many banks that handled the bonds have merged out of business. Some of the acquiring banks continue to accept coupons in person, but others have shut their windows and forced customers to send their coupons to a processing center. In December, I accompanied Lou on one of his bearer-bond jaunts. To redeem the coupons from his Battery Park City Authority bonds, we found the " J. P. Morgan Chase Bank Investor Services Receiving Window," which was behind an out-of-the-way door on the ground floor of 4 New York Plaza. Lou put his coupons, which look like raffle tickets, into a special see-through envelope and wrote his name and Social Security number on the outside. The teller spent five minutes checking a computer before handing him a receipt for a check that would be sent to him in about 10 days. That interest payment didn't arrive. He later received a note saying the bond had been called six months earlier. Lou had missed the advertisement in The Wall Street Journal announcing it, so, while he got his $5,000 principal back, he missed the chance to collect the last $215 interest payment. WE didn't have much more luck around the corner, at Deutsche Bank. There, a teller told us that Lou must now send his five coupons - worth $125 each - to its processing center in Tennessee. I called Nashville to find out more. An operator said that Lou could send the coupons in an ordinary envelope with a signed W-9 tax form. A lot of people are angry about the change. "We've been getting a lot of calls on this where people have gone to the old window and found it's not there anymore," she said of the New York location. It was small comfort to Lou, who ended up paying $10.32 in postage. On the ride uptown, we pondered technology, efficiency and how bonds issued by New York City agencies could no longer be redeemed in person in New York City. "It seems to me," Lou said, "that the coupons and the bonds are a contract, and if they are going to void part of the contract and make you send them in, they should reimburse you for the expense." It may be the way of the world, but that doesn't mean he has to like it. "It doesn't seem right," he said, "that I'm paying more and getting less service." -- ----------------- R. A. Hettinga <mailto: rah@ibuc.com> The Internet Bearer Underwriting Corporation <http://www.ibuc.com/> 44 Farquhar Street, Boston, MA 02131 USA "... however it may deserve respect for its usefulness and antiquity, [predicting the end of the world] has not been found agreeable to experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire' --- end forwarded text -- ----------------- R. A. Hettinga <mailto: rah@ibuc.com> The Internet Bearer Underwriting Corporation <http://www.ibuc.com/> 44 Farquhar Street, Boston, MA 02131 USA "... however it may deserve respect for its usefulness and antiquity, [predicting the end of the world] has not been found agreeable to experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'