Magazine article Insight on the News

All That Glitters Is Not Gold: Critics Charge That a `Gold Cartel' of Public Officials and Major Bullion Banks Has Suppressed the Price of Gold, Possibly Setting Key Banks Up for an Enron-Like Tumble. (Nation: Bullion Banks)

Magazine article Insight on the News

All That Glitters Is Not Gold: Critics Charge That a `Gold Cartel' of Public Officials and Major Bullion Banks Has Suppressed the Price of Gold, Possibly Setting Key Banks Up for an Enron-Like Tumble. (Nation: Bullion Banks)

Article excerpt

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. corporation.

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 market.

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 "short positions" 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: "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 gold."

Bill Murphy, chairman of the Gold Anti-Trust Action Committee, a nonprofit organization that researches and studies what he calls the "gold cartel" (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 www.LeMetropoleCafe.com, tells INSIGHT that "Morgan Chase and other bullion banks are another Enron waiting to happen." Murphy says, "Enron occurred because the nature of their business was obscured, there was no oversight and someone was cooking the books. …

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