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A good day for gold, if not for Steve Kaplan
1a EST Thursday, November 25, 1999
Dear Friend of GATA and Gold:
A column in the London Daily Telegraph this week
elaborates on the issue raised the other day by Ted
Butler at www.gold-eagle.com -- whether the bankers to
the mining industry have taken some of their clients
for a very costly ride.
The column follows.
Please post this as seems useful.
CHRIS POWELL, Secretary
Gold Anti-Trust Action Committee Inc.
* * *
Uncomplicated questions on gold casualties
By Anthony Hilton
London Daily Telegraph
November 23, 1999
A few years back Merrill Lynch in the United States
made a lot of money selling derivatives to the
financial controller of Orange County, a municipal
authority sandwiched appropriately enough between Los
Angeles and Disneyland. The problem with these
derivatives was that they went the wrong way and Orange
County was effectively bankrupted by the exposure.
Subsequently there was much huffing and puffing by
regulators and, though no wrongdoing was admitted by
Merrill Lynch that I can recall, there was a widely-
held view that the firm had been a bit overzealous in
selling sophisticated financial products to a
relatively unsophisticated local authority.
Orange County is being re-enacted right now in London.
This tim, the derivatives that have done the damage are
gold futures and options.
The sellers were the investing houses. The
unsophisticated investors were mining companies. No one
has a definitive list of the firms principally involved
in the selling but the names that crop up most
frequently in industry newsletters include Goldman
Sachs, Chase Manhattan, Republic National Bank,
American International Group, JP Morgan, and UBS. The
miners that have been caught allegedly include Ashanti,
Newmont, Barrick, and Placer Dome.
The financial derivatives these companies bought have
at worst bankrupted them and at best mortgaged their
future production and profits for months and years to
come. Clearly, when the managements bought these
products they did not anticipate this outcome. But the
question is whether, as in the Orange County case, they
had no idea that such a disastrous outcome was
possible, or whether they went knowingly into the risk.
If the miners were ignorant, it raises the question of
whether they were being sold appropriate products. One
then has to ask whether the rules governing the
behaviour of consenting adults in the wholesale markets
should apply to the investing houses, or whether they
should meet more demanding regulatory standards for
dealing with the unsophisticated.
Regulators in London are, publicly at least, pretending
nothing untoward has happened. Good luck to them. But
they should remember Murphy's Law.
This problem will not go away and will probably boil
over just as the Financial Services and Markets Bill,
designed to legitimise the financial Services Authority
and protect the City from scandals, is at a crucial
stage in the Commons. The reaction of the Government
and the Opposition if and when that happens will be
marvellous to behold, though I doubt it will do the
City much good.