GATA issues national press release urging SEC to probe Morgan''s gold business


11:45a ET Sunday, January 5, 2003

Dear Friend of GATA and Gold:

GATA consultant James Turk, editor of The Freemarket
Gold & Money Report, has just published in his
newsletter an open letter asking the U.S. Securities
and Exchange Commission to investigate the substance
of Morgan Chase's involvement with gold, rather than
merely the source of rumors about that involvement --
the latter being the kind of investigation Morgan
Chase itself last week said it had asked the SEC for.

Further, with his customarily brilliant investigative
accounting style of journalism, Turk's letter to the
SEC lays out evidence that Morgan Chase may have been
financing Enron's most dubious deals with borrowed gold.

Turk's letter is appended here, and GATA supporters
are urged to send a copy of it to the SEC along with
their own request that the commission investigate
Morgan Chase's gold business as he proposes.

The commission's mailing address is:

U.S. Securities and Exchange Commission
450 Fifth St.
Washington, DC 20549

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

* * * * * * * * * * * * * * * * * * * * * * * * * *

JP Morgan, Enron, and Gold

By James Turk, Editor
The Freemarket Gold & Money Report
Letter 317, January 6, 2003

Copyright 2003 by The Freemarket Gold & Money Report

I have today mailed the following letter to
the Enforcement Division of the Securities
and Exchange Commission. It's about time that
we learn the truth regarding JP Morgan
Chase's activity in the gold market, the full
extent of its gold exposure, and whether it
used gold loans to fund the so-called
"disguised loans" that it arranged for Enron.
Perhaps the SEC will help us learn the truth
by investigating these matters and reporting
the results.

* * *

Dear Sir/Madam:

I am writing in regard to recent statements
made by the management of JP Morgan Chase
(JPM) relating to its activity in the gold
market. This is to ask for your determination
whether their statements are false or

On January 2nd JPM announced that it had
reached an out-of-court settlement with
several insurance companies regarding JPM's
involvement with Enron. You will recall that
these insurance companies had initiated this
litigation, alleging in their lawsuit brought
in New York federal court that certain
trading transactions between JPM and Enron
were shams, thereby negating the insurance
contracts covering these transactions.

In a press conference subsequent to their
January 2nd announcement, JPM management
commented on rumors relating to its activity
in the gold market. I refer to the following
CBSMarketWatch report by Luisa Beltran and
Greg Morcroft published on January 2, 2003:

"[JP Morgan Chase] executives said that,
despite persistent rumors to the contrary, it
has no exposure to the recent run-up in gold
prices. 'We don't have any real exposure to
gold. I don't know where that rumor keeps
coming from, but it's not true,' CEO Harrison
said. 'We have seen this rumor pop up again
and again,' added chief counsel McDavid, 'and
we have asked the SEC to look into it.'"

I have no specific knowledge about these
rumors, other than what I have learned from
the media. But I am very pleased to hear that
the SEC has been asked to investigate them.
In this regard, I am writing to bring the
following matters to your attention.

Given that these so-called rumors "pop up
again and again" as Mr. McDavid states,
perhaps they have some basis in fact. It is a
well-established truth that "buzz" about a
company will often circulate before an event.

For example, rumors about derivative problems
in Long Term Capital Management circulated
well before that company's collapse. More
recently, word of potential problems in Enron
circulated freely, much of which was reported
in the media. The protracted drop in Enron's
share price for several months before the
resignation of its CEO, which itself occurred
three months before that company's
bankruptcy, was an indication that the market
believed (as evidenced by that company's
declining share price) the rumors about
Enron's problems had some basis in fact.

In both of these instances, company
management denied that there was any
substance to the so-called "rumors" that were
circulating, as JPM management has now also
similarly done. I also bring to your
attention the decline in JPM's share price
that occurred last year while these rumors
about its gold exposure circulated.

Thus, your investigation into the rumors
about JPM's activity in the gold market is
timely, but the focus of your investigation
should not be, as JPM management implies, how
these so-called "rumors" started. Rather,
your investigation should determine whether
these rumors have any basis in fact. If they
do, then this is to also ask for your
determination whether the statements above by
Messrs. Harrison and McDavid are false or

To assist you, I would like to bring the
following matters to your attention:

1) The Wall Street Journal published an
insightful article about JPM and Enron on
January 25, 2002 ("Insurers Balk at Paying
Bank Up to $1 Billion in Claims On Complex
Transactions"). That article provides an
overview about the financing provided by JPM
to Enron, through Mahonia Ltd., a company
Chase Manhattan (one of JPM's predecessor
companies) established in the Channel

The article states:

"Prepaying for future delivery of a commodity
is known as a 'gold trade,' because it is the
way gold bullion has been trading for
centuries. In recent years, trading
companies, whether from Houston or Wall
Street, have been making more use of this
structure to buy and sell oil, natural gas
and other commodities. Some commercial banks,
including Chase Manhattan had to set up part
of these trades overseas because their
banking charters wouldn't allow them to take
delivery of commodities."

The article describes what is generally known
as a commodity swap, and gold is frequently
used in one side of the transaction. As an
ex-banker (1969 to 1980), I have some
knowledge about how these transactions work,
as banks are a facilitator for them.

When gold is used to finance a commodity
swap, bullion is borrowed from a central
bank, and sold to raise dollars, which are
then used to purchase the commodity on the
other side of the transaction (oil and gas in
the case of Enron). It is noteworthy that the
WSJ article specifically mentions a "gold
trade"; given this remark, anyone
knowledgeable about commodity swaps might
naturally assume that JPM/Mahonia was
arranging gold-for-energy swaps for Enron.

Thus, this WSJ article may be the original
source of the so-called "rumors" referred to
by JPM management. But importantly, this WSJ
article also suggests that these rumors may
have some basis in fact.

The article did not specifically state from
where Mahonia was obtaining the funding
needed to purchase the commodity contracts it
acquired from Enron (the so-called "disguised
loans" the insurance companies contended were
shams). Nor did a WSJ article published
August 13, 2002, ("Enron Probe Shines Harsh
Light on Financiers") disclose the nature or
the original source of the funding needed to
complete these commodity swaps, but this
later article does provide more information
about potential gold activities by JPM in its
dealings with Enron:

"In the world of commodities, particularly
gold trading, the 50-year-old Mr. Mehta
[Chase's and then JPM's head gold trader] was
well known. His successful marketing of
derivatives, and his enthusiasm for the use
of these instruments, helped the gold-hedging
business take off in the 1990s. Mr. Mehta and
his team executed [deals which] allowed Enron
to use an offshore vehicle known as Mahonia
to raise hundreds of millions of dollars from
J.P. Morgan."

Taken together, there are enough facts
disclosed in these two WSJ articles to
suggest that gold loans could be one possible
source of funding for Mahonia's commodity
swaps with Enron, and if so, these gold loans
could lead to the "gold exposure" denied by
JPM management.

2) An article about Enron in The New York
Times published on February 17, 2002, was
important for the following statement (note
the emphasis added by me):

"Partly because of the way the loans [by
JPM/Mahonia to Enron] were accounted for, the
company [i.e., Enron] reported A SURGE IN ITS
DURING ITS LAST FEW YEARS. When pressed about
the increase by skeptical analysts, Enron
officials said the numbers reflected hedges
for commodity trades, not new financing, the
analysts said."

The key point here is the "surge" in
derivative contracts entered into by Enron
"during its last few years." Each derivative
has two parties to the contract. To my
knowledge it has not been disclosed who took
the other side of the Enron contracts, but
the following information from the U.S.
Office of the Comptroller of the Currency
offers one possible answer.

According to its website, the OCC "charters,
regulates, and supervises national banks to
ensure a safe, sound, and competitive banking
system that supports the citizens,
communities, and economy of the United
States." As part of this responsibility it
collects information about the derivative
exposure of the nation's banks.

The disclosure by Chase Manhattan Bank
(before its merger with Morgan Bank) is
telling. In three years from December 31,
1997, to December 31, 2000, there was a surge
in Chase's gold derivative contracts from
$11.8 billion to $29.8 billion. Because of
the merger, it is not possible to determine
from the OCC reports Chase's derivative
activity for 2001. But looking at the
derivative exposure of JPM on a combined
basis subsequent to its merger, it is
noteworthy that after the Enron bankruptcy at
the end of 2001, the gold derivative activity
of JPM was unchanged -- at $41.0 billion
reported at December 31, 2001, and $41.0
billion as of September 30, 2002, the latest
reporting period available. Thus, Chase's
derivative contracts in gold surged while
Enron's derivative contracts surged, and then
remained unchanged after Enron collapsed.

This pattern suggests that it is possible
Chase (and JPM as its successor) was the
counterparty to Enron's derivative contracts.
Further, this growth in gold derivative
contracts provides further evidence to the
possibility I note above that gold was used
by Mahonia to fund the commodity swaps (the
so-called "disguised loans") that it entered
into with Enron.

The August 13, 2002, Wall Street Journal
article states:

"Mr. Mehta has had other high-profile scrapes
with controversy while at the bank. For
instance, Mr. Mehta came under fire for the
bank's earlier arrangements with Sumitomo
Corp., the Japanese trading company and the
employer of a copper rogue trader named Yasuo
Hamanaka who lost $2.6 billion in copper
trades. Mr. Mehta's team structured a number
of derivatives transactions that allowed Mr.
Hamanaka to raise money that didn't appear to
senior Sumitomo executives as debt, said
people familiar with the deals."

Thus, perhaps the rumors circulating about
JPM's gold exposure have some basis in fact.
In any case, the above material does
highlight the importance of your

I note again Mr. Harrison's statement: "We
don't have any real exposure to gold."
Perhaps in your investigation you can ask him
to define the term "real." That JPM has
exposure to gold is undeniable from the OCC
reports. And there are different kinds of
exposure from derivatives -- price risk and
counter-arty risk.

It may be that through its derivative
contracts, JPM believes it does not have any
price exposure to gold. However, while the
gold market has been generally quiescent and
its price relatively stable the past few
years, gold in recent weeks has become very

As we have learned from the collapse of Long
Term Capital Management, volatility
undermines what otherwise may appear to be a
safe derivatives position. So we will see in
the weeks and months ahead whether JPM's
derivative exposure to the gold price is
indeed under control.

Given the size of its position, it may be
difficult for JPM to keep its price risk
controlled. JPM's gold derivative exposure of
$41 billion of notional value represents 117
million ounces of gold -- a number that is
nearly 50 percent greater than all the gold
produced worldwide in a year. Thus it seems
likely that the gold market may not be able
to provide the liquidity JPM will need to
keep its gold derivative position in balance
in a period of increased gold price
volatility, which is a result that would
clearly negate Mr. Harrison's contention that
JPM does not have "any real exposure to

Then there is counterparty risk, which is
always present because the financial position
of companies changes. Counterparties deemed
creditworthy when JPM entered into derivative
contracts may no longer be financially as
strong as before. Further, if in fact the
simultaneous surge in Enron's and JPM's
derivative contracts was not just
coincidental and they were counterparties to
each other, one has to wonder whether JPM has
any ongoing exposure to Enron in these
derivative contracts.

It is noteworthy that JPM's most recent 10-Q
shows that derivative receivables rose $16.4
billion, or 23.0 percent, in the nine months
from December 31, 2001, to $87.5 billion as
of September 30. The net change is actually
25 percent when adjusting derivative
receivables as of December 31, 2001, to
reclassify to Other Assets the Enron-related
surety receivables from the insurance
companies in the case now settled.

Does this glaring (and potentially alarming)
surge in derivative receivables reported by
JPM reflect an inability of JPM's
counterparties to deliver under their
derivative contract commitments?

And perhaps more importantly, to help
evaluate the accuracy and therefore
reliability of Mr. Harrison's statement, what
portion of this derivative receivable relates
to gold?

The point is that certain aspects of JPM's
derivative disclosure appear to be
inadequate. Thus, this is to ask that you
make a determination in your investigation
whether JPM's disclosure about its gold
derivatives has been sufficient, and indeed
whether the statements by its management
about JPM's gold exposure are not false or

Lastly, your Internet site states: "The laws
and rules that govern the securities industry
in the United States derive from a simple and
straightforward concept: All investors,
whether large institutions or private
individuals, should have access to certain
basic facts about an investment prior to
buying it. To achieve this, the SEC requires
public companies to disclose meaningful
financial and other information to the
public, which provides a common pool of
knowledge for all investors to use to judge
for themselves if a company's securities are
a good investment."

To achieve this objective, the SEC must
investigate JPM in order to determine whether
it is providing the investing public with
sufficient disclosure on its gold exposure,
which from the OCC reports is undeniable.

Further, the SEC must determine whether the
statements above by JPM management are false
or misleading.

I look forward to reading and learning the
results of your investigation.

For the sake of disclosure, I do not have any
position in the stock of JPM.

Yours truly,

James Turk


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