Gold price suppression scheme buster James Turk to join GATA in New Orleans


Thom Calandra's Stockwatch

Stock plunges a sign of worse to come;
investment banks face derivatives nightmare,
says critic

By Thom Calandra
Friday, August 16, 2002

Where there's red ink in a stock price, there's trouble -- and
that bodes ill for the largest U.S. investment banks.

There is overwhelming evidence this year that a company's
plunging equity is almost always a sign of worse to come.
Shares of Tyco dropped precipitously, to levels no one
thought possible, earlier this year. Only to keep falling,
again and again, on repeated rounds of horrible charges
leveled against the company's accountants and its top

The same can be said about shares of AOL Time Warner,
Vivendi, Elan Corp, Qwest Communications, the airlines,
the drug companies. In other words: most major industries,
with the possible exception of food and beverage companies.

Even at companies with no hint of bankruptcy or criminal
activity, the bell has tolled. Intel shares have lost half of
their worth since mid-January and show no signs of
rebounding. The same can be said of thousands of
technology and industrial companies whose sales growth
and economic margins have dropped drastically.

To be sure, some of the seemingly endless falls in stock
prices have stabilized, along with the stock market in general.
Tyco is getting credit for new leadership. Drugmaker Merck's
shares have regained 25 percent of their lost value in three
short weeks. AOL is cleaning house. And so on.

The big question for most of us is when other shoes will drop
on companies whose shares are reflecting deep trouble.
This applies, of course, to Vivendi and other media companies
that face a cash-flow crisis, always a red flag to banks and

The world's largest investment banks are almost surely next
on the hit list of endlessly falling equities. Standard & Poor's
Ratings Services just said it may cut credit ratings on Merrill
Lynch, Morgan Stanley, and J.P. Morgan Chase.

S&P's credit analyst pointed to "the deteriorating environment
for the profitability of the investment banking industry." Other
banks, Goldman Sachs Group and Lehman Bros., also face
downgrades in S&P's review of these big banks' short-term
credit ratings.

J.P. Morgan Chase and other large banks have suffered
rapid losses in the value of their common stocks. J.P. Morgan
has been hit especially hard, with its shares off as much as
40 percent since July 1 as the specter of derivatives-related
losses haunts the halls of the New York institution.

Bill Murphy, a gold advocate, has long warned his
subscribers about the dangers of a massive bank default tied
to tricky interest-rate and bullion derivatives. J.P. Morgan
Chase is the largest issuer of gold-linked derivatives in this
country. The contracts are designed to help gold companies,
central banks, and others manage -- and some say
mismanage -- the market for gold.

"The S&P credit counterparty downgrade of J.P. Morgan
Chase is significant," Murphy, editor of pro-gold publisher, tells me. Murphy is also chairman
of the Gold Anti-Trust Action Committee, a nonprofit group
that believes investment banks and government agencies,
including the U.S. Treasury Department, have been
depressing the price of gold for years in an effort to keep
interest rates low and currencies sound. The banks and
agencies also profit from gold-lending practices that
benefited for years from sub-$300 gold prices, Murphy
and his growing number of followers charge.

"Not only do the banks have potentially huge gold
derivative problems, but that could set off an interest-rate
derivative problem," Murphy said today. "Morgan has
something like $23 trillion in derivative positions on their
books, according to the Office of the Comptroller of the
Currency. It is the norm to account for 2 percent of those
derivatives to be at risk. That is a mighty big number."

Derivatives are financial instruments such as options,
futures, interest rate swaps, and variable-price contracts.
Murphy says the suffering stocks of J.P. Morgan, Goldman
Sachs, Lehman, and others are already reflecting a
coming nightmare in the banking world. "A credit downgrade
will increase their costs and make it harder and harder for
certain bullion banks to carry their enormous gold short-sale
positions," he says. "It will invoke credit committee

Murphy, who sees the $315 level for spot gold prices as
a line in the sand for the investment banks, says
counterparty derivative problems "could set off a daisy
chain of severe financial problems, or defaults. That is
what happened in the energy industry when Enron went

The price of spot gold Friday morning was little changed
at $314.25. "The smoldering gold volcano will explode,"
says Murphy, a former professional football player who
worked in the commodities and futures business before
moving to Texas to start LeMetropoleCafe.

"When the gold cartel took gold down in the past, it stayed
down for years and months," Murphy said. "Then it was
months and weeks. Now gold is popping back in days,
a day and hours."