Take Your Money Off The Grid – Forbes
Cyberattacks. Inflation. Pandemic. Is your money safe?
The question is asked by Simon Mikhailovich, a Russian émigré and entrepreneur who is in the business of selling a certain kind of safety. His New York City–based Bullion Reserve has wealthy families as clients. On their behalf his firm buys gold bricks from refineries, has them picked up by Loomis armored trucks and delivers them to guarded warehouses located on two continents.
For this worrywart it won’t do to buy shares of a precious-metals fund and then leave those shares in the custody of a bank. That bank is part of a fragile web in which wealth is represented by electronic blips. A lot of things could destroy the web: hackers, a loss of faith in government as a protector of wealth, a liquidity crisis, an electromagnetic pulse.
“What we are seeing is extraordinary events we thought would never happen. Travel is suspended, assets are frozen, war breaks out in Europe,” Mikhailovich says, all the while declaring that he is an optimist who is profoundly happy to be living in a peaceful democracy after spending his childhood in a very different kind of place. The bullion venture, he insists, “is not about doom and gloom. It’s about a reassessment of risk.”
Mikhailovich, 63, has been preoccupied with risk for most of his career, first with an insurance company, then with a hedge fund that speculated on debt derivatives and got stung by the Lehman failure, and now with his bullion operation.
Aren’t most financial assets backstopped? Don’t we have a Federal Deposit Insurance Corporation for bank accounts and the Securities Investor Protection Corporation for brokerage accounts? Mikhailovich scoffs. Their reserves are adequate to cover one institution, if that institution is small enough to fail. They would be overwhelmed by a system-wide failure.
“Storing your reserves in the financial system is like plugging your backup generator into a wall socket,” Mikhailovich says. “It works beautifully until the grid goes down.”
Gold, stored offline, is a different thing. “It’s cyber-immune. It’s indestructible. It’s not anybody’s liability.” Reflecting on his experience with Lehman Brothers, he adds: “It doesn’t have a counterparty risk.”
Bullion Reserves’ clients are entitled to withdraw their money, whenever they want, in the form of gold bars. Recently, a few have done exactly that. Mikhailovich posits that during a larger crisis, a lot more might withdraw gold and use it to buy financial assets at deep discounts.
An atavistic urge lies behind this man’s affection for the yellow metal. A century ago his ancestors fled pogroms in Ukraine and settled in Leningrad (now Saint Petersburg), where they were able to buy food because they had brought gold coins with them.
Their flight from disaster was not over. The German siege that began in 1941 killed a million people in their city. All four of Mikhailovich’s grandparents survived. It helped that they had important jobs; one was a surgeon in the Russian army’s medical corps, and another was an engineer who helped keep open a supply line across frozen Lake Ladoga.
In time the family resolved to get out from under communist rule. In the 1970s the door opened a crack.
“What prompted us was the realization that the Soviet system was unsustainable. There was a loss of confidence in the government, official corruption, a loss of moral fiber. People said, ‘If they [the apparatchiks] are stealing, why shouldn’t I steal?’ It is very difficult for an honest person to take advantage of a corrupt system.”
Just to ask for an exit visa was a risky business. Applicants had to begin the process by quitting their jobs; those whose visas were denied were left destitute. Mikhailovich, then a teenager, would wait in visa offices, watching some families emerge with papers, others in tears. Abuse from the officials was part of the process. They screamed at him. Predatel’! Traitor!
Traitor to what? Mikhailovich’s birth certificate said he wasn’t exactly a Russian. He was something different. A Jew.
Eventually, Simon, his two parents and his two grandmothers were allowed to leave. In 1979 they landed in Baltimore. His two years in a Leningrad engineering school translated into a year of credits toward his Johns Hopkins B.S. in political science.
He wanted to be an entrepreneur. Why not start a restaurant? His future wife admonished him to work in one first. Good advice, as it turned out, because he got a gig at a private club where one of the members, the chief executive of U.S. Fidelity & Guaranty, gave him a job interview.
His job at the insurer was all about the downside. He did workouts, winding down his employer’s misbegotten diversifications, which included a computer lessor and a travel agency. A decade later, in 1997, he persuaded UF&G to issue collateralized debt obligations. When the insurance company changed hands (it’s now part of Travelers), the new owner was looking to dispose of this ill-fitting part of its asset management business. Mikhailovich and a partner grabbed it.
The pair built the CDO work into a money manager with 19 employees overseeing $2 billion. It prospered in the financial crisis of 2008 with the help of some short sales. The money that Lehman owed them on a winning trade turned into a bankruptcy claim they sold for pennies on the dollar.
Mikhailovich wound down the portfolio. The partner retired. Mikhailovich could have comfortably done the same, but he was restless.
The idea for a new line of work came out of the ever more burdensome anti–tax evasion rules imposed by the U.S. government on foreign banks with U.S. customers. Despite his having meticulously complied with all the rules, Mikhailovich’s Swiss bank wanted none of this paperwork and ordered him out. Shortly after, he found himself wheeling a carry-on bag filled with gold bars down the sidewalk in Zurich. How much? All he says about that: “I hurt my back.”
Thus was born, in 2011, the bullion service. The timing was not great. Gold, peaking, began a long slide from which it has only recently recovered. After buying out some outside investors three years ago, the Mikhailovich family, which includes two grown daughters, owns it all. They have $340 million of metal under management; given what is going on in the world, a pickup in demand would seem to be in the cards.
Bullion Reserve’s selling proposition: Some of your assets should be off the grid. Grids, whether of the electrical variety or of the financial variety that relies on the electrical one, are unstable. A failure at any node can propagate across the whole network. That explains why New York went dark in 2003.
In a rural area two hours north of Mikhailovich’s office is a spot where a transmission line, perched on rusty pylons and stretching over a deserted road and a blackberry patch, feeds power toward the city. A terrorist wouldn’t even need a stick of dynamite to cause trouble. A power saw would do.
It’s possible, Mikhailovich ventures, that the next regional blackout will seriously damage the financial system. That’s far from certain, but quite possible.
You remember the financial crisis of 2008. Did you know there was another one in 2019? Overnight loans, fully collateralized by Treasury bills, spiked to an annualized interest rate of 10%.
If you missed this breakdown, it’s because the Federal Reserve papered over the problem by conjuring money with some mouse clicks. How long can it keep doing that?
“The government is inflating the largest bubble that has ever been inflated,” Mikhailovich says. “This is unsustainable.”
It’s possible that we are on the verge of a profound loss of confidence in government, or in its money. Also far from certain, but quite possible.
Look at Canada, Mikhailovich says. “There was civil disobedience. Rather than remove the trucks, the government responded by freezing people’s bank accounts. Not three weeks later the U.S. government deployed similar measures against a rival nuclear superpower.”
Mikhailovich alludes to a fellow native of Leningrad who has been building up reserves. Vladimir Putin is discovering that money in the form of foreign currency accounts is suddenly inaccessible. But the country’s hoard of gold is quite usable: “He can just take it to Shanghai.”