The Debenture Game

The Debenture Game
from "the private banking system"

For over 100 years, the major European banks have bought and sold each others' short and intermediate term, interest bearing, senior debt obligations (the Debentures).

Historically, when European banks have had temporary liquidity available for investment, they have bought Debentures and earned interest income. Likewise, when European banks have needed temporary liquidity, they have sold their Debentures.

Such buying and selling of Debentures utilizes or provides liquidity in the same way United States banks buy and sell Federal Funds through the Federal Reserve Bank system (the FED).

The four major European banking families have always carefully managed and controlled Debenture trading. Each family operates a "Cutting House" that prepares Debentures for investment as if they were a bank. Because the Debentures are issued by very strong and reliable financial institutions, they are very safe and attractive short term investments.

In recent times, for reasons discussed below, large numbers of Debentures have been sold at a discount to investors, principally by Mandates who operate under contract with the Cutting Houses to issue new Debentures.

As communications improved, Debenture trading has been completed on a "Bank- To-Bank" basis by "Secure Telex Transmissions." The buying bank promises to pay for the Debentures, and the selling bank promises to deliver its Debentures using secure banking codes which authenticate each bank's commitment and which are known as Key Tested Telex (KTT).

With the advent of the KTT, hard copy of the Debentures are not always "physically cut", especially for bank-to-bank trading to satisfy liquidity requirements. In other circumstances, the hard copy is issued, as in the case of such a Guarantee/Debenture being used as a security for a Trading line-of- credit.

A Trader might also use a cash deposit as in the case of the specific program discussed here, to establish a line-of-credit to draw on - many times the actual amount of cash on deposit. The utilization of this line-of-credit to buy, sell, replenish the line-of-credit and disburse profit is referred to as "Trading". It actually is not so much trading, as it is a simple buy/sell transaction, many times, with profit being rolled back into the activity to enhance the overall yield.

Today, the buy/sell trades are accomplished at lightning speed in electronic "closed book" transactions. "Closed book" refers to the fact that when the Trader taps the credit line to buy a Debenture, he already has a funds buyer awaiting the instrument. The line-of-credit can only be used for one purpose, to purchase Debentures for resale, period! This is the reason that the trader's credit facility is willing to establish a Trading line-of-credit significantly larger than the credit instrument or cash deposit the line-of-credit is predicated upon. His bank knows that the credit line they have granted him may not be utilized until proof is obtained that said Bank Instruments have been pre-sold.

This procedure takes place through the D.T.C. (Depository Trust Corporation). The D.T.C. is the mechanism that verifies the institution managing the program (Trader/Program Facilitator) has the funds to purchase the instruments from the Cutting House Mandate. D.T.C. also verifies that the end buyer of the Debenture(s) has his funds committed for the repurchase. The committed funds of both the Trader and the Buyer show on a D.T.C. screen and the transaction moves forward - "closed book".

Various end buyers find the Debentures very attractive, because they have a relatively high interest rate, when compared to other instruments such as T-Bills, and additionally are purchased at a discount.

Again, the Debentures are only fresh cut after funds are first provided by an end buyer in the secondary market. Mutual Funds, Securities Firms, Pension Funds and Trust Funds have a tremendous appetite for the Primary Market, but are not allowed to purchase such until the instruments are registered - registration number, CUSIP number, term of issue, interest
rate, etc.

It is the fiduciary responsibility of the fixed income specialists for Mutual Funds, Securities Firms and Banks that typically portfolio these instruments to always protect their investor's principal, and as a result cannot purchase assets that do not exist yet.

Transacting Banks and their contracted Mandates (the Traders) are not allowed to trade in instruments with their own funds, but are allowed to undertake transactions for bank clients and thus earn fees for their bank services. In the program discussed here, the Trader uses only evidence of the availability of the investor's cash on deposit, blocked in the investor's own private commercial account at the designated bank, to establish a credit line substantially larger than the actual cash on deposit. The Trader then utilizes that line, or rather the enhancement of his already existing and substantial credit facility - created with numerous other investor deposits - to purchase and sell the Debentures in the manner described above.


At the conclusion of World War II, the Debenture trading assumed new significance. To reconstruct Europe, the United States provided substantial financial aid. In order to prevent vast amounts of U.S. Dollars from continuously circulating with no control and disrupting the stability of the U.S. Dollar, a series of financial agreements was developed among the European Banks which became known as the Bretton Woods Agreements.

As a part of these agreements, the FED has accommodations with the central banks that cause the banks to issue U.S. Dollar denominated Debentures which "capture" enormous amounts of U.S. Dollar denominated bank balances. Because the FED wants to capture U.S. Dollars in circulation outside the United States,rather than reduce the money supply in this country, it regularly denies any knowledge about such Debenture trading.

Under the accommodation, the European banks retain a portion of the U.S. Dollar proceeds from the sale of the Debentures, but transfer most of the proceeds to accounts owned by the FED. Upon maturity of each Debenture, the FED transfers the principal plus interest to the European bank's control to fund redemption of the Debentures. Thus, there is a continuous cycle of new debentures being issued to capture U.S. Dollars released both by redemption and by the current U.S. balance of payment deficit.

This is most likely the more compelling reason for the FED denying knowledge of these activities.

THEY DON'T WORK! And this is NOT because these programs are "scams" or "do not exist" as the SEC claims. But because the "Biggest Of All Brothers", will simply NOT ALLOW SUCH PROGRAMS TO FUNCTION WITHIN THE USA. There is a special law in the USA (and ONLY in the USA) on this topic, the "Securities Act from 1933". This law is a little "strange" to say the least... why spend time and paper to issue a law which forbids participation in "Prime Bank Investments" if .. "Prime Bank Investments" do not exist ??? If they do not exist, how could US residents or US companies participate in them anyway ? Issuing a law to regulate the participation in something that "does not exist" is one of the ways to know that such programs DO exist, but NOT for you in the good old USA. Our advice:

1. Don't get involved
2. Go offshore if you do.

Global Village Idiot's Guide
HYIP or Hype - Bank Trading Unmasked

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