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Chase financied enron borrowed gold Original Source Link: (May no longer be active)
also see http://www.google.com/search?hl=en&ie=UTF-8&oe=UTF-8&q=%22Morgan+Chase%22%2CEnron%2CBCCI&btnG=Google+SearchSubject: [infowars] Morgan Chase's financing of Enron may have involved gold swindles
also see http://www.google.com/search?hl=en&ie=UTF-8&oe=UTF-8&q=%22Morgan+Chase%22%2CEnron%2CBCCI&btnG=Google+Search
Brian wrote:
Date: Sun, 5 Jan 2003 22:00:59 -0600 (CST)
From: "Brian"
Subject: [toeslist] Fw: [GATA] SEC urged to probe substance of Morgan
To: undisclosed-recipients:;
from below:
Turk's letter to the SEC lays out evidence that Morgan Chase may
have been financing Enron's most dubious deals with borrowed gold
----- Original Message ----- From: To:
Sent: Sunday, January 05, 2003 8:59 AM
Subject: [GATA] SEC urged to probe substance of Morgan gold business,
not just origin of rumors
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 www.FGMR.com
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 misleading.
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 misleading.
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 Islands.
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
HEDGING ACTIVITY, ACCOMPLISHED USING FINANCIAL CONTRACTS CALLED
DERIVATIVES, 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 investigation.
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 active.
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 gold."
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 misleading.
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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