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Section: Daily Dispatches

All That Glitters Is Not Gold
By Kelly Patricia O'Meara
Insight Magazine
March 4, 2002, edition
Posted February 8, 2002
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Even though Enron employees and the company's
accounting firm, Arthur Andersen, have destroyed
mountains of documents, enough information
remains in the ruins of the nation's largest corporate
bankruptcy to provide a clear picture of what happened
to wreck what once was the seventh-largest U.S.

Obfuscation, secrecy, and accounting tricks appear
to have catapulted the Houston-based trader of oil
and gas to the top of the Fortune 100, only to be
brought down by the same corporate chicanery.
Meanwhile, Wall Street analysts and the federal
government's top bean counters struggle to
convince the nation that the Enron crash is an
isolated case, not in the least reflective of how
business is done in corporate America.

But there are many in the world of high finance
who aren't buying the official line and warn that
Enron is just the first to fall from a shaky house
of cards.

Many analysts believe that this problem is
nowhere more evident than at the nation's bullion
banks, and particularly at the House of Morgan
(J.P. Morgan Chase). One of the world's leading
banking institutions and a major international
bullion bank, Morgan Chase has received heavy
media attention in recent weeks both for its
financial relationships with bankrupts Enron and
Global Crossing Ltd. as well as the financial
collapse of Argentina.

It is no secret that Morgan Chase was one of
Enron's biggest lenders, reportedly losing at
least $600 million and, perhaps, billions. The
banking giant's stock has gone south, and
management has been called before its
shareholders to explain substantial investments
in highly speculative derivatives hidden
speculation of the sort that overheated and
blew up on Enron.

In recent years Morgan Chase has invested
much of its capital in derivatives, including
gold and interest-rate derivatives, about which
very little information is provided to
shareholders. Among the information that has
been made available, however, is that as of
June 2000, J.P. Morgan reported nearly $30
billion of gold derivatives and Chase Manhattan
Corp., although merged with J.P. Morgan, still
reported separately in 2000 that it had $35
billion in gold derivatives. Analysts agree that
the derivatives have exploded at this bank and
that both positions are enormous relative to the
capital of the bank and the size of the gold

It gets worse. J.P. Morgan's total derivatives
position reportedly now stands at nearly $29
trillion, or three times the U.S. annual gross
domestic product.

Wall Street insiders speculate that if the gold
market were to rise, Morgan Chase could be in
serious financial difficulty because of its quot;short
positionsquot; in gold. In other words, if the price of
gold were to increase substantially, Morgan
Chase and other bullion banks that are highly
leveraged in gold would have trouble covering
their liabilities. One financial analyst, who
asked not to be identified, explained the
situation this way: quot;Gold is borrowed by Morgan
Chase from the Bank of England at 1 percent
interest and then Morgan Chase sells the gold
on the open market, then reinvests the proceeds
into interest-bearing vehicles at maybe 6 percent.
At some point, though, Morgan Chase must return
the borrowed gold to the Bank of England, and if
the price of gold were significantly to increase
during any point in this process, it would make
it prohibitive and potentially ruinous to repay the

Bill Murphy, chairman of the Gold Anti-Trust
Action Committee, a nonprofit organization that
researches and studies what he calls the quot;gold
cartelquot; (J.P. Morgan Chase, Deutsche Bank,
Citigroup, Goldman Sachs, Bank for International
Settlements (BIS), the U.S. Treasury, and the
Federal Reserve), and owner of, tells Insight that
quot;Morgan Chase and other bullion banks are
another Enron waiting to happen.quot; Murphy
says, quot;Enron occurred because the nature of
their business was obscured, there was no
oversight and someone was cooking the books.
Enron was deceiving everyone about their
business operations and the same thing is
happening with the gold and bullion banks.quot;

According to Murphy, quot;The price of gold always
has been a barometer used by many to determine
the financial health of the United States. A steady
gold price usually is associated by the public and
economic analysts as an indication or a reflection
of the stability of the financial system. Steady gold;
steady dollar. Enron structured a financial system
that put the company at risk and eventually took it
down. The same structure now exists at Morgan
Chase with their own interest-rate/gold-derivatives
position. There is very little information available
about its position in the gold market and, as with
the case of Enron, it could easily bring them down.quot;

In December 2000, attorney Reginald H. Howe, a
private investor and proprietor of the Website, which reports on gold,
filed a lawsuit in the U.S. District Court in Boston.
Named as defendants were J.P. Morgan amp; Co.,
Chase Manhattan Corp., Citigroup Inc., Goldman
Sachs Group Inc., Deutsche Bank, Lawrence
Summers (former secretary of the Treasury),
William McDonough (president of the Federal
Reserve Bank of New York), Alan Greenspan
(chairman of the Board of Governors of the
Federal Reserve System), and the BIS.

Howe's claim contends that the price of gold
has been manipulated since 1994 quot;by conspiracy
of public officials and major bullion banks, with
three objectives: 1) to prevent rising gold prices
from sounding a warning on U.S. inflation; 2) to
prevent rising gold prices from signaling weakness
in the international value of the dollar; and
3) to prevent banks and others who have funded
themselves through borrowing gold at low
interest rates and are thus short physical gold
from suffering huge losses as a consequence
of rising gold prices.quot;

While all the defendants flatly deny participation
in such a scheme, Howe's case is being heard.
Howe tells Insight he has provided the court with
very compelling evidence to support his claim,
including sworn testimony by Greenspan before
the House Banking Committee in July 1998.
Greenspan assured the committee, quot;Nor can
private counterparties restrict supply of gold,
another commodity whose derivatives are often
traded over the counter, where central banks
stand ready to lease gold in increasing quantities
should the price rise.quot; Howe and other quot;gold
bugsquot; cite this as a virtual public announcement
quot;that the price of gold had been and would
continue to be controlled if necessary.quot;

According to Howe, quot;There is a great deal of
evidence, but this is a very complicated issue.
The key, though, is the short position of the
banks and their gold derivatives. The central
banks have 'leased' gold for low returns to the
bullion banks for the purpose of keeping the
price of gold low. Greenspan's remarks in 1998
explain how the price of gold has been
suppressed at times when it looked like the
price of gold was increasing.quot;

Furthermore, Howe's complaint also cites
remarks made privately by Edward George,
governor of the Bank of England and a
director of the BIS, to Nicholas J. Morrell,
chief executive of Lonmin Plc: quot;We looked
into the abyss if the gold price rose further.
A further rise would have taken down one or
several trading houses, which might have
taken down all the rest in their wake. Therefore,
at any price, at any cost, the central banks
had to quell the gold price, manage it. It was
very difficult to get the gold price under control,
but we have now succeeded. The U.S. Fed was
very active in getting the gold price down. So
was the U.K. [United Kingdom].quot;

Whether the Fed and others in the alleged quot;gold
cartelquot; have conspired to suppress the price of
gold may, in the end, be secondary to the
growing need for financial transparency. Wall
Street insiders agree that as long as regulators,
analysts, accountants, and politicians can be
lobbied and quot;corruptedquot; to permit special
privileges, there will be more Enron-size failures.
Securities and Exchange Commission Chairman
Harvey L. Pitt, well aware of the seriousness of
these problems, recently testified before the
House Financial Services Committee that quot;it is
my hope there are not other Enrons out there,
but I'm not willing to rely on hope.quot;

Robert Maltbie, chief executive officer of and an independent analyst,
long has followed Morgan Chase. He tells Insight
that quot;there are a lot of things going on in these
companies, but we don't know for sure because
much of what they're doing is off the balance
sheet. The market is scared and crying out to
see what's under the hood. Like Enron, much of
what the banks are doing is off the balance sheet,
and it's a time bomb ticking as we speak.quot;

Just what would happen if a bank the size of
Morgan Chase were unable to meet its financial
obligations? quot;It's tough to go there,quot; Maltbie says,
quot;because it could shake the financial markets to
the core.quot;


Kelly Patricia O'Meara is an investigative reporter