GATA (Gold Anti-trust Action)Lawsuit... Page 3
4. Gold Swaps by the ESF.
The DOJ's memorandum on behalf of the Secretary of the Treasury's motion to dismiss asserts (p. 3, n. 4) and re-emphasizes (p. 10, n. 7) the Secretary's contention "that in fact the ESF has no holdings of gold and has not traded in gold or gold derivatives since 1978." Mr. Greenspan wrote to Senator Lieberman (DOJ Ex. E): "The Federal Reserve does not, either on its own behalf or on behalf of others, including other government agencies, lend gold or silver, facilitate the lending of gold or silver, or trade in any securities, such as futures contracts and call and put options, involving gold and silver." None of these statements was made under oath. Read carefully, they do not exclude providing financial guarantees or other backing to bullion banks that do trade in gold and gold derivatives. Nor do these statements explain in any way the discrepancies between the relevant gold bullion accounts of the Fed and the ESF. Nor do they exclude -- perhaps quite by design -- the possibility that the ESF has engaged in gold swaps rather than conventional gold loans.
The plaintiff has recently discovered a highly relevant statement in the transcript of the Federal Open Market Committee's meeting on January 31, 1995, (www.federalreserve.gov/fomc/transcripts/1995/950201Meeting.pdf). Responding to a question by then Fed Governor Lawrence Lindsey about the ESF's legal authority to engage in a financial rescue package for Mexico, J. Virgil Mattingly, the Fed's general counsel, stated (P.A. 31; Ex. W, p. 69):
It's pretty clear that these ESF operations are authorized. I don't think there is a legal problem in terms of the authority. The statute [31 U.S.C. s. 5302] is very broadly worded in terms of words like ‘credit' -- it has covered things like the gold swaps -- and it confers broad authority. Counsel at the White House called the Treasury's General Counsel today and asked "Are you sure?" And the Treasury's General Counsel said "I am sure." Everyone is satisfied that a legal issue is not involved, if that helps. [Emphasis supplied.]
Ordinarily the term "gold swap" refers to the spot exchange of gold for cash or securities together with a promise that the transaction will be unwound at an agreed future date and price (P.A. 32). Gold swaps are sometimes used by central banks in the developing world to acquire needed foreign exchange, effectively offering gold as security for repayment. In recent years, however, gold swaps have also been used as an alternative to gold loans by certain central banks, which then earn interest on the cash or securities deposited with them while a bullion bank or other party has use of the gold. Another kind of gold swap is a "location swap" in which gold in one depositary or storage facility is temporarily swapped for that in another.
It is not clear whether Mr. Mattingly was speaking of ordinary gold swaps, location swaps, or some combination of the two. Nor is it clear whether he was referring to a program of gold swaps known to some or all participants in the meeting, or to one or more special transactions with respect to which he had issued an opinion, or to some other set of transactions. What is clear is that he was referring to gold swaps that, so far as the plaintiff is aware, have never been identified or disclosed in any other publicly available materials relating to the ESF or the Federal Reserve (see, e.g., P.A. Exs. K & V).
This reference to gold swaps was made only a few months after the Federal Reserve's decision to assume the two American seats on the BIS board. This decision, which was effectively hidden from the American people and all but a few members of Congress, coincided with the first incident of preemptive gold selling on the COMEX in excess of three standard deviations as set forth in the Mr. Bolser's statistical study (C. 48-50; P.A. Ex. Q). Mr. Speck's study dates the beginning of detectable anomalous selling pressures in COMEX gold just a few months earlier (P.A. Ex. T).
Far from limiting its role to providing financial guarantees or backing for gold derivatives as the plaintiff has alleged, Mr. Mattingly's statement suggests that the ESF has engaged -- almost certainly through the N.Y. Fed (P.A. Ex. V) -- in swapping out U.S. gold reserves to one or more bullion banks to facilitate the price manipulation scheme. Indeed, if the recent reclassification of the "Gold Bullion Reserve" held in the U.S. Mint at West Point to "Custodial Gold Bullion" reflects the combined total outstanding volume of these swaps (P.A. 29, Exs. U1 & U2), the ESF has covertly encumbered more than 20% of the total claimed official gold reserves of the United States.
5. Relationship of Gold Prices to BIS and FCX Gold Preferred Shares.
The plaintiff purchased 1200 depositary shares of Gold-Denominated Preferred Stock, Series II, of Freeport-McMoran Copper & Gold, Inc., at various times from 1995 through 1999 (C. 14). By its terms, each depositary share pays a quarterly cash dividend equal to the value of 0.0008125 ounce of gold and will be redeemed in February 2006 for the cash value of 0.1 ounce of gold. The quarterly dividends are cumulative, but to date all payments have been timely made based on the arithmetic average of the London PM gold price over the relevant preceding five-day period.
Historically there was a high correlation between gold prices and market prices for BIS shares on the Swiss Exchange (C. 87; P.A. 4, Ex. E). This correlation, which continued to manifest itself in the wake of the Washington Agreement (P.A. 4), rested in part on the approximately 200 tonnes of physical gold that the BIS holds for its own account, which at the date of the freeze-out announcement represented approximately 12 ounces of gold per share, equal to around $ 3400/share at $ 280/ounce gold (C. 87).
Article 20 of the BIS's Statutes provides (P.A. 1(E); BIS.A. Exs. D & E): "The operations of the Bank for its own account shall only be carried out in currencies which in the opinion of the Board satisfy the practical requirements of the gold or gold exchange standard." Since its founding in 1930, the BIS has used the Swiss gold franc of that date as its unit of account, making conversions against various currencies at market or historic rates against gold as appropriate (C. 69). The gold franc is defined under Article 4 of its Statutes as 0.29032258 grams fine gold, and is indicated on its financial statements by a "GF" prefix. The BIS's profit and loss statements and its balance sheets are always published in gold francs. Because the gold price acts directly on the these accounts, it similarly affects any calculation of net asset value per BIS share (C. 69-70).
In 1999, as a condition of membership, the BIS issued 12,000 new shares to new central bank members, including the European Central Bank, at an issue price of GF 5020/share, payable in gold or an equivalent amount in a currency acceptable to the BIS based on the market price of gold at the date of payment (C. 68; P.A. 14). At US$ 280/ounce, GF 5020 equals $ 13,119, or almost $ 4000 more per share than the freeze-out price paid by the BIS to its private shareholders, but still less than the NAV of $ 19,099 assigned by Morgan (C. 70).
In setting the freeze-out price for its private shareholders in current Swiss francs rather than gold francs, the BIS departed from both its statutes and all prior practice, particularly with respect to transactions on capital account (C. 70). At the assigned freeze-out price, the compulsory withdrawal represented a total cost to the BIS of approximately US$ 700 million, equal to almost 80 metric tonnes of gold at $ 280/ounce. At Morgan's calculated net asset value per share, the total cost would have doubled to 160 tonnes, or 80% of the BIS's gold reserves held for its own account.
Best Regards, J.T. |
