Text of letter to Senator Gramm

July 20, 1999

Senator Phil Gramm
Senate Banking Committee
534 Dirksen Senate Office Building
Washington, D.C. 20510

Dear Senator Gramm:

We thank Madelyn Simmons for taking the time to contact
us, listening to what we have to say, and for
requesting our contentions in writing. It is with that
spirit and understanding that I am writing to you on
behalf of the Gold Anti-Trust Action Committee.

I have a financial Internet site,
www.lemetropolecafe.com, and write commentary about the
gold market for the quot;Caf.quot; I am a veteran trader in
the markets and it became apparent to me after the
Long-Term Capital Management bailout that the gold
market was being manipulated and the manipulation was
being carried out by various bullion dealers. The Gold
Anti-Trust Action Committee, a non-profit Delaware
corporation, was formed in January this year to
investigate this matter and we have retained one of the
top anti-trust law firms in the United States, Berger amp;
Montague of Philadelphia, to assist us in our quest to
learn the truth about what is going on behind the
scenes in the gold market.

Because of the way the Bank of England sale was
announced, we also suspect that the current
administration (perhaps the Federal Reserve or U.S.
Treasury) may be active in the gold market through a
trading account at Goldman Sachs and, therefore, may
have some role in the orchestration of a lower gold
price. If our assessment is correct, this account is
the responsibility of Peter Fisher of the New York
Federal Reserve. The relationship between the Federal
Reserve, the U.S. Treasury, Goldman Sachs, and the Bank
of England is strong and illuminating.

Throughout this letter I will bring to your attention
various news reports, statements by public officials,
and personal commentary that ties our suspicions and
allegations together. I hope that you will see that we
have quite the quot;duckquot; story here -- in that it looks
like a duck, quacks like a duck, etc. GATA asks that if
you find this letter to be credible, your committee
investigate whether what looks like a duck indeed is a
duck.

Our findings are brought to you in the spirit of proud
Americans who cherish democratic principles. For if our
suspicions are correct, these democratic principles are
being cruelly trampled. The few people and institutions
in the know in this scheme are gaining incredible
wealth at the expense of many. The manipulation of the
gold price is destroying mining companies and their
employees and shareholders, as well as whole countries
dependent on gold production.

We believe that this may be a a scandal more serious
than Watergate because so many people are suffering
unnecessarily even as the stability of the
international financial system is threatened. We
believe that to suppress the price of gold, the
quot;collusion crowdquot; has borrowed so much gold from
central banks and sold it into the market that it could
not be repaid as promised should the price of gold rise
quickly and unexpectedly. Last year gold mine
production was 2,529 tonnes. Later in this letter I
will refer to a sophisticated study indicating that the
gold borrowings were 8,000 tonnes two years ago and are
even larger today.

There was speculation last year that the investment
banks that bailed out Long-Term Capital Management
somehow assumed a 300-tonne gold position of the firm
because the position was too big to be covered at the
market. How would this same cabal help thousands of
tonnes of gold shorts get out of the market in a pinch?
Such a problem could result in a market calamity and
cause great stress for banking institutions. That is
why we believe these matters should be investigated by
the Senate Banking Committee.

Since last fall I have been documenting what led my
associates and me to believe that there has been a
coordinated effort to hold down the price of gold. But
it was the Bank of England's announcement of its plans
to sell gold that set off alarm bells around the world.
No other central bank has announced a gold sale prior
to its completion in more than 20 years, and the Bank
of England's announcement was made as the gold price
was storming past a key gold loan borrowing point and
interest in the gold market was finally rising again.
Gold share volume in various bourses was at its
greatest level in six years. It appeared that a long-
awaited gold rally was finally under way and the
quot;collusion crowdquot; might finally be losing its grip on
the market.

Yet, the night before the Bank of England's
announcement (May 6, 1999), I feared duplicity, and
this is what I wrote in my quot;Midas du Metropolequot;
commentary, titled, quot;XAU surges 46 percentquot;:

quot;We know 'the squad' are all lining up to try to
stifle a decent gold move to the upside one more time.
Deutsche Bank, Chase, Swiss Bank, and Goldman Sachs
were all there selling gold during today's session and,
when they had to, even throwing the kitchen sink at the
bulls' attack. Deutsche Bank has been especially
aggressive and noticeable in selling the past few days.

quot;We got word late this afternoon that their bullion
desk is calling clients saying that the gold market is
stopping at $290. I don't think Midas followers will be
surprised when we tell you that big sellers late in the
day today and taking on all bids were 'squad' honchos
Goldman Sachs and Deutsche Bank. 'The Battle for
Navarone' is an important stand for them, for if $290
is taken out to the upside, their longstanding bearish
position could begin to look a bit shaky.quot;

The next morning I awoke to the Bank of England. Since
then the price of gold has collapsed about $36 or 10
percent, and the sale has ignited a furor all over the
world and has fostered talk of conspiracy. Before I get
into the ramifications of the sale, the following
utterances by some of England's most notable officials
might raise an eyebrow or two:

Wire service commentary on July 14, 1999 (my comments
in parentheses):

quot;Asked in Parliament if it was right to sell off part
of Britain's reserves, Prime Minister Tony Blair
replied, `The gold price has been falling for two
years, so in fact if it carried on falling and we
didn't sell, we would lose money.quot;

He then declined to say if he would meet with the South
African gold industry delegation, but justified the
sale, quot;We did this on technical advice from the Bank of
England.quot; (Haruko Fakuda, CEO of the World Gold
Council, was told that the decision actually was a
political one and made by the British Treasury, not the
bank.)

Prime Minister Blair went on to say of criticism of the
bank's gold sales: quot;It is only the Conservative Party's
utter obsession with the euro in some bizarre way.
Given that Argentina and Switzerland are also selling
gold, what it has to do with the euro I do not know. It
is only that which is making them raise this issue. It
was done, as I say, on technical advice. It was carried
through perfectly sensibly and we actually got the best
deal for the country.quot;

How wrong can you get? The best deal the Bank of
England could have gotten would have been $30-$40 more
per ounce by carrying out the sale as all the other
major countries have done for 20 year.

But on Sunday, July 11, the chancellor of the
exchequer, Gordon Brown, was reported by the London
Times, to have said that the proposal to sell the gold
reserves quot;was put to ministers by officials, and, say
Treasury insiders, agreed to with little discussion.quot;

According to the London Times, the chancellor is said
to have been surprised and mortified by the reaction to
the gold sales by Thabo Mbeki, the new South African
president, who said that the sales would have a
quot;potentially disastrous effectquot; on South Africa.

OK, so what gives here? Prime Minister Blair said it
was a Bank of England decision. The Bank of England
says it was a Treasury decision. The Treasury says it
was only a Treasury decision of sorts and was made with
little discussion.

Good grief. A decision that may have disastrous effects
on South Africa, a new democracy the West is committed
to encourage, was made with little discussion and no
one will take responsibility for it. Yet it is so
important that Prime Minister Blair will not even
reconsider it, even though he does not even know who
made the decision in the first place. Meanwhile, the
mortified (but confused) chancellor of the exchequer,
Gordon Brown (just prior to the trip to England by the
African delegation) was all over the wire services
talking about the righteousness of the gold sales
decision while continuing to the proposed sale of gold
by the International Monetary Fund. The headline on the
Reuters dispatch read: quot;U.K.s Brown Sees Wide Support
for IMF Gold Sales.quot;

However, a Bloomberg audio report reveals that when
Brown was asked whether the Bank of England's gold sale
was 1) his decision 2) whether he was involved with it,
and 3) whether he was consulted, his responded that he
had been quot;consulted.quot; When asked who made the asset
allocation decisions on the quot;bank reserves,quot; he
answered, quot;The governmentquot; -- that is, the politicians.

So the British now say their decision to sell gold was
planned for some time and they made the announcement
just coincidentally as the price the price of gold was
taking off. The Bank of England became the first
central bank in more than 20 years to make an
announcement of this sort prior to the sale. The
British knew that this announcement would devastate the
market psychologically and send gold prices crashing,
and the gold price went almost straight down more than
$30 per ounce. This assured Britain the worst price
possible and cost the country hundreds of millions of
pounds.

Meanwhile, as my May 6 commentary indicated, somehow
the somehow the bullion dealers knew what was coming
and told their clients as much.

Now consider Federal Reserve Chairman Alan Greenspan's
comment on the Bank of England's gold sale, made before
a House Banking Committee hearing on the international
financial system on May 20:

quot;It's fairly evident that central banks are acutely
aware if they announce they're going to sell gold the
price will go down and they're getting a lower price,quot;
Greenspan said. quot;No self-respecting trader would ever
think of doing that sort of thing. The reason they do
it is they think it's important they do not take
advantage of the market.quot;

While he said he hasn't discussed the issue with his
overseas counterparts, Greenspan said: quot;It would be
inappropriate for a public institution to take
advantage of private market participants and
effectively sell into the market,quot; so they announce
their gold sales. quot;I can assure you it's not because
they're dumb,quot; he said.

But Greenspan said the United States should hold on to
its own gold stock. quot;This was debated in the United
States in 1976. The conclusion was we should hold our
gold. Gold still represents the ultimate form of
payment in the world. Germany in 1944 could buy
materials during the war only with gold. Fiat money in
extremis is accepted by nobody. Gold is always
accepted,quot; he said.

Something does not seem right here. Greenspan has
remarked publicly on many occasions that he is in
constant contact with the central bankers all over the
world, but though the Bank of England's decision had
been made for some time, he would have the world
believe that he had not discussed it with anyone prior
to its announcement.

Greenspan's comment about the Bank of England's not
wanting to quot;take advantagequot; of the market strains all
credibility, as no other central bank has conducted a
gold sale in this way in a long time. Is he implying
that all the central banks over the past 20 years that
announced their gold sales only after completing them
were unethical?

Perhaps he is! From The Wall Street Journal on July 16,
1999: quot;In a global survey by former Fed Vice Chairman
Alan Blinder, central banks rank `duty to be open and
truthful with the public' as the least important reason
for trying to build credibility.quot;

The Bank of England's gold sale has caused controversy
and suspicions in many quarters:

quot;London, July 6 (Reuters) -- Major gold miners seek
Blair statement on UK sales.

quot;Executives from some of the world's leading gold
miners demanded on Tuesday that British Prime Minister
Tony Blair answer rumors that UK gold sales were timed
to help out speculative short sellers in the market.

quot;The letter arrived as Britain sold 25 tonnes of gold,
the start of a programme intended to cut reserves from
715 tonnes to 300 tonnes during the next few years.

quot;Chairmen and chief executives at Canada's Placer Dome,
U.S. miners Newmont Gold and Homestake Mining, South
Africans Anglogold and Gold Fields, and Ghana's Ashanti
Goldfields sought Blair's response to rumors that
reserve sales were to bail out firms running short
positions in gold.

quot;The letter, a copy of which was faxed to Reuters,
quoted parliamentary remarks made by British opposition
MPs on June 16 suggesting Britain's announcement of
reserve sales had been to `save the bacon of those
firms running short positions.'

quot;`We believe it would be helpful for you to make a
public denial of these rumours or investigate them
publicly,' said the letter, signed on behalf of all the
companies by Placer Dome President and CEO John
Willson.quot;

There are valid reasons for these suspicions. One is
that many observers in London were saying that Goldman
Sachs had a 1,000-tonne short gold position on its
books in behalf of itself and various clients. That
information came to the attention of Lord Lange and
others in Parliament. In addition, the following is an
excerpt of pertinent discussion in the House of Commons
on June 16:

quot;Sir Peter Tapsell (Louth and Horncastle): I am glad to
have the opportunity to initiate a debate on the
proposed sale by the Bank of England of more than half
of this country's gold reserves. That decision was
announced by the Treasury on 7 May and has been widely
and critically discussed in the financial press, but
the Government have been strangely reluctant to defend
it or explain it in any detail to the House.

quot;I should start by making it clear that I have no
personal financial interest in the value of gold. I
have never purchased any gold bullion, gold sovereigns,
or shares in any gold mining company for myself, and I
have no connection with any mining company or any part
of the jewellery trade. However, I have always taken a
keen academic interest in the economic role of gold,
which has been of importance in every society in
recorded history. In the 1980s, in my capacity as a
stockbroker, I was required for some years to manage a
gold bullion fund, valued at many hundreds of millions
of dollars, for the previous sultan of Brunei, Sir Omar
Saifuddin. I was therefore able to add practical
knowledge of the gold bullion market to my academic and
political studies of it.

quot;I regard the decision to sell 415 of the 715 tonnes of
our gold reserves as a reckless act, which goes against
Britain's national interest. The sale of that crucial
element of the United Kingdom's reserve assets will
weaken our scope to operate independently, reduce our
influence in international financial institutions and
diminish the United Kingdom as a world financial power.

quot;I shall briefly set out eight of my main reasons for
opposing the decision. Later in my speech I shall
expand on some of those and add a few more.

quot;First, a move such as the one announced on 7 May was
always likely to destabilise the gold price, as Britain
is a leading G7 country whose example is likely to
influence other countries and because it was not
expected to sell gold. Market sentiment has become
overwhelmingly negative and the price has collapsed
from $287 per fine ounce immediately before the
announcement to $259 at the fix yesterday -- a fall of
10 per cent. That has reduced the value of our gold
reserves in a little over a month by about $650 million
from $6.5 billion to $5.85 billion at current prices.
The chancellor's announcement has so far cost this
country's taxpayers over 400 million pounds, which is
more than the cost to us of the Kosovo war......

quot;The immediate effect has been the loss of 400 million
pounds of our taxpayers' reserves, and so far the only
beneficiaries of this event have been the foreign
finance houses, which have been shorting the gold
market. As I said to my honorable friend, the member
for Rochford and Southend East (Sir T. Taylor), in all
friendliness, I am not a subscriber to the conspiracy
theory in any aspect of life, so I shall not go into
detail about the conspiracy theories that are widely
circulating in the city about that shorting of the gold
market, but it is often said that some of those famous
foreign finance houses have shorted gold to a huge
amount -- vastly greater than the tonnage of sales
contemplated by the Bank of England -- and that it was
therefore vital for them for the gold price to fall
substantially so that they could close their positions
and take huge profits. I do not know whether that is
true, although I think that there is no doubt that
several finance houses have been shorting gold in a
very large amount, so I suspect that the financial
press will pursue that point with vigour in the days
and weeks to come....quot;

And with vigor they have! This is just one of the many,
many commentaries castigating the Bank of England's
gold sale. Christopher Fildes wrote this for the
Spectator in London:

quot;Put a green baize cloth over the Treasury's parrot,
come down to the House and explain.

quot;The chancellor has yet to say a word to Parliament
about his clearance sale of the nation's gold. Instead,
a parrot in his office has been taught to say
`restructuring' and to go on saying `prudent.' Now the
first of his auctions has, predictably, misfired. The
market followed my advice and chanced its hand with
some cheap bids, and, after the auction, the price of
gold carried on sliding. The only winners are the big
international punters who have sold gold short and can
now (as I was saying a month ago) close their positions
at Britain's expense. It is time for Gordon Brown to
drape his parrot in a green baize cloth and give the
House of Commons some sort of explanation.

quot;He might usefully model himself on Nigel Lawson who, a
dozen years ago, was conducting a sale of his own. On
offer was the state's remaining shareholding in British
Petroleum, priced at 7.25 billion pounds, which made it
the world's largest share sale. While this was in
progress the markets in New York and London collapsed,
giving the sale's underwriters a bad bout of heartburn
which they mistook for heart failure. In the end the
chancellor could tell the House that he had received
his three objectives: `First and most important, to
allow taxpayers to secure the full proceeds of the sale
to which they are entitled; secondly, to ensure that
there are orderly after-markets; thirdly, to make sure
that the sale does not add to present difficulties in
world markets.

quot;Could today's chancellor make any of these claims? In
the British Petroleum debate, Chancellor Lawson rounded
on his critics: `The Labour Party is simply the friend
of Goldman Sachs.' Now there's a thing.quot;

GATA harbors no personal ill will toward Goldman Sachs,
but the firm's name has surfaced not only in London but
also everywhere GATA turns in our own investigation
about the manipulation of the gold market. So consider
this about Goldman Sachs:

* Former Treasury Secretary Robert Rubin is a former
Goldman Sachs CEO.

* Former N.Y. Fed Governor Ed Corrigan is a senior
partner at Goldman Sachs.

* London based senior partner Gavyn Davies is Goldman
Sachs' international economist and has close ties to
Prime Minister Blair. Davies' wife, Susan Nye, is the
chancellor of the exchequer's office manager.

* Dr Sushil Wadhwani, former director of equity
strategy at Goldman Sachs International (1991-95), sits
on the Bank of England's Monetary Policy Committee.

* Jon Corzine, former Goldman Sachs CEO, has close ties
to John Meriwether, chairman of Long-Term Capital
Management.

* Former Fed Vice Chairman David Mullins was an
investor in Long-Term Capital Management, which, of
course, was bailed out in part by Goldman Sachs.

It is not only GATA and certain members of Parliament
that find Goldman Sachs everywhere they turn in the
gold market. This is a July 8 column in the South
African Business Report by the columnist David Gleason:

quot;It is almost impossible in this dark week for the gold
mining industry to discuss anything other than the
apparently grim future for this most lustrous of
metals.

quot;Gold has been on a hiding to nowhere ever since it
reached those dramatic (and ill-judged) heights in
1980. And ever since central banks were persuaded that
they should sweat their gold assets, bullion banks --
led significantly in recent years by Goldman Sachs --
have been enjoying a wonderful feast.

quot;Gold's imbroglio started more than a decade ago when
gold producers figured that the clever thing to do was
to sell all or part of their future production, so
entrenching price levels a few months out. Since there
wasn't a gold futures market at the time, one had to be
created.

quot;So here was the opportunity (opening?) for smart
merchant/investment banks. The bigger and stronger
among them persuaded a few central banks to `lend' them
some of their gold reserve (at a lease rate that has
averaged a tad mopre than 1 percent), which they could
sell into the market, invest the proceeds at 5 percent,
while providing gold producers with the ability to lock
in prices. If, in this process, the investment banks
could also drive down the price of gold -- so that when
the time came to return to central banks the gold
they'd borrowed, they could buy it back cheaper in the
market -- well, so much the better.

quot;A side-effect, however, was that once central banks
made it clear they would not only entertain the idea of
lending their gold but would also sell some of it,
investors got the jitters. They began to desert bullion
and gold shares. That made gold producers increasingly
anxious. And that encouraged a new concern of the part
of central bankers.

quot;This is a circle not of virtue but of anxiety which
can easily turn to panic. Given our commitment to free
and open markets, you can't condemn a man for making
for a profit. It is the manner in which profits are
made and taken which attracts attention. Powerful U.S.
investors now believe the so-called `bullion banks'
have `conspired' to drive down the price of gold and it
is now in their interests -- because they are said to
have taken on such huge short positions -- to keep it
down.

This iquot;s probably the reason some of the banks --
specifically Goldman Sachs -- are able to offer five-
year lines of credit to inconsequential North American
producers.

quot;The only conclusion to be drawn from lending of this
kind is that Goldman Sachs must be satisfied the risk
element in the loans is virtually zero. How does any
bank arrive at that position? Because it knows or is
very confident that it is able to influence profoundly
what might otherwise be an uncertain feature.

quot;It is at times such as these that it is most difficult
-- and most required -- to keep a cool head and remain
confident that all cycles turn (even the unprecedented
Wall Street bull run will end one day). In bullion's
case, what is needed is a financial crack of some kind
-- like the imminent collapse of Long-Term Capital
Management in the States last year. It was rescued by a
consortium of leading U.S. banks when it held short
positions, it is said, of about 300 tonnes of gold.

quot;That was when the metal was expected to rally sharply.
When it didn't, the non-event attracted attention. Now
it is being said that LTCM escaped because of an `off-
market' transaction -- in other words a rigged trade to
ensure gold wouldn't suddenly reverse course and
accelerate. The 14 financial institutions that got
together to bail out LTCM have since been asked by the
U.S. General Accounting Office for detailed information
on how this was effected. And the same institutions may
soon be challenged by angry bullion investors who want
to know how the Counterparty Risk Management Group, led
by Goldman Sachs (which has already complained about
me) and J.P. Morgan to manage financial sector risks,
can be deemed anything other than a cartel whose
actions violate the Sherman and Clayton anti-trust
acts.quot;

As a result of the swirling rumors in London about the
large Goldman Sachs short gold position, it is has been
suggested by some that it may possibly be in part a
position for our own Federal Reserve. The Gold Anti-
Trust Action Committee thinks it is important for the
American people to know if the Federal Reserve is
trading gold or gold derivatives, lending gold, writing
gold calls, or seeking to influence the gold market in
any way.

We are calling for greater transparency in the gold
market just as U.S. Rep. James Saxton, vice chairman of
the Joint Economic Committee, calls for greater market
transparency in this April 19 committee press release:

quot;Reform Exchange Stabilization Fund Readied. Openness
and accountability would be mandated.

quot;WASHINGTON -- Legislation reforming the Treasury's
Exchange Stabilization Fund (ESF), the ESF Transparency
and Accountability Act, is being readied for
introduction, Vice Chairman Jim Saxton of the Joint
Economic Committee announced today. The ESF was
established in 1934 at a time when the dollar was
pegged to gold but has survived into the current era
of flexible exchange rates despite its lack of clear
objectives and its secretive operations.

quot;`This legislation will end the legacy of secrecy and
obscurity at the ESF,' Saxton said. `We need this kind
of secrecy in our nuclear weapons programs, not in our
international economic policy. The ESF is an important
part of U.S. international economic policy, but most
Americans have never heard of it. The American people
have the right to know how billions of their tax
dollars are being used.

quot;`Excessive secrecy is part of an even larger problem:
the lack of accountability to Congress or the American
people. Although it is part of the U.S. government, the
ESF and its operations (except for administrative
costs) are not subject to congressional appropriations
or approval.

quot;`The executive branch has virtually exclusive control
of the ESF, its policies and its operations. My
legislation would change this unhealthy lack of balance
in economic policy. The new ESF reform legislation will
mandate transparency by requiring the public release of
monthly statements from the ESF disclosing its
finances, operations, policies, and any related monthly
changes. Exceptions will be provided for information
that is market-sensitive or related to national
security....quot;

GATA's call for transparency is intertwined with
Saxton's. Peter Fisher is the No. 2 official at the
N.Y. Fed and is responsible for trading the Treasury's
Exchange Stabilization Fund. We think it is important
that he be called to testify before Congress as to
whether he is trading the gold market in any way. Our
research shows that he has the authority to do so.

Federal law says:

quot;Every Federal Reserve bank shall have power to deal in
gold coin and bullion at home or abroad, to make loans
thereon, exchange Federal reserve notes for gold, gold
coin, or gold certificates, and to contract for loans
of gold coin or bullion, giving therefor, when
necessary, acceptable security, including the
hypothecation of United States bonds or other
securities which Federal Reserve banks are authorized
to hold.quot;

Fisher is also said to be in charge of foreign custody
accounts at the N.Y. Fed. Many central banks house gold
at the N.Y. Fed. If the Fed is intervening in the gold
market, why should not the public be allowed to know
this? The public is usually informed when there is
intervention in the yen.

The quot;duckquot; story continues to gain credibility when one
ties what we have presented with the following Wall
Street Journal article about Peter Fisher, the N.Y.
Fed's connection to the bullion dealers and the LTCM
bailout. The incestuous nature of these entities is
apparent.

From The Wall Street Journal on Nov. 2, 1998:

quot;Long-Term Capital Bailout Spotlights a Fed `Radical'
By Jacob M. Schlesinger.

quot;On Sunday Sept. 20, Peter Fisher left his parents'
50th anniversary party to get the government's first
look at the books of Long-Term Capital Management LP.

quot;Mr. Fisher, the No. 2 man at the Federal Reserve Bank
of New York, was stunned by what he saw. The ailing
Long-Term Capital, the huge, secretive, and unregulated
investment partnership founded by John Meriwether, was
`a lot bigger than anybody thought,' he says, and far
more intricately interwoven with major markets and
major players. The fear of `this layer cake becoming
unglued' and putting the world's financial system at
risk, as Mr. Fisher puts it, led him and his boss, New
York Fed President William McDonough, to round up the
biggest names on Wall Street to inject $3.625 billion
into Long-Term Capital a few days later.

quot;The move thrust 42-year-old Mr. Fisher out of the
shadows where Fed staffers usually reside and into the
public spotlight. It also set off a barrage of
criticism for Mr. Fisher, his boss. and the Fed.

quot;W. Lee Hoskins, former head of the Cleveland Federal
Reserve Bank, sums up critics' reasoning: `A perverse
kind of incentive could be put in place that investors
can continue to make these bets on the hopes that the
government will limit the downside risk.' He adds: `As
a general rule, one should err on the side of letting
the market solve the problem.'

quot;Before the Fed was created by Congress in 1913, there
was no government entity charged with maintaining
financial stability. When the collapse of the
Knickerbocker Trust Co. threatened to unleash a panic
in 1907, the task fell to J.P. Morgan, the legendary
banker, to rally Wall Street to keep markets
functioning. In a sense, Messrs. Fisher and McDunough
are Mr. Morgan's successors.

quot;Mr. McDonough, 64, a former commercial banker, gets
the bigger office and the big title. Mr. Fisher's
primary job is to run the Fed's trading operation. When
Fed Chairman Alan Greenspan decides to cut interest
rates, Mr. Fisher and his staff actually do it by
buying and selling government securities to maintain
the desired rate in the market. When Treasury Secretary
Robert Rubin decides to help prop up the value of the
Japanese Yen, Mr. Fisher sells the dollars and buys the
yen.

quot;In that capacity Mr. Fisher is the Fed's eyes and ears
on the inner working of stock, bond, and currency
markets and is given a wide degree of latitude about
when certain events pose broader risks....

quot;In mid-September the New York Fed's traders were
witnessing unsettling developments. After Russia's debt
default and currency devaluation, investors were
shunning risky assets; even in the United States
trading volume was thin, and prices were volatile.

quot;`These shocks were, in their own way, not unlike what
the stock market suffered in October 1987,' Mr. Fisher
says.

quot;Amid the turmoil, Mr. Fisher heard frequent rumors
about numerous firms in trouble, but one name was
coming up with increasing frequencyquot; Long-Term Capital
Management in Greenwich, Conn. Thus it was that on
Sept. 20 he left his parents' party in Cambridge and
headed for Greenwich.

quot;After looking at Long-Term Capital's books, he
realized some of the recent bond market turmoil flowed
directly from the hedge fund's dumping its investments
to raise cash. It underscored how much worse the
markets would be if the firm collapsed. `I had an
epiphany,' he says. `I realized they would be in the
eye of the hurricane.'

quot;Based on that assessment, Messrs. Fisher and McDonough
spent the next three days putting the rescue plan in
place. On the night of Sept. 22, while Mr. McDonough
was returning from London, where he had delivered a
previously planned speech, Mr. Fisher summoned some of
the biggest names on Wall Street to the nearby imposing
stone headquarters of the New York Federal Reserve
Bank.

quot;He offered warm sodas and no food to his guests, who
stayed past 10 p.m. He spoke for just a few minutes at
the outset of the two-hour meeting, but what he said
was potent. He didn't ask any firm outright to do
anything. He didn't even hint at the possibility of
using public money. He just observed that a collapse of
the investment partnership could be chaotic for markets
and that there was a `public interest in a collective
industry option' to keep Long-Term Capital afloat,
according to participants in the session.

quot;The decision to give that nudge -- the crucial one --
appears to have been made largely by Mr. Fisher and Mr.
McDonough. Mr. McDonough consulted with Mr. Robert
Rubin and Mr. Greenspan by phone. But Mr. Greenspan
told Congress that the decision was based on `the
judgement of the officials at the Federal Reserve Bank
of New York.' The Fed's board of governors was informed
but not consulted.

quot;Critics complain that by pulling together the Wall
Street consortium, Messrs. Fisher and McDonough gave
Long-Term Capital's Mr. Meriwether good reason to
rebuff a buyout bid from billionaire Warren Buffet.
That bid would have wiped out Mr. Merriwether and his
partners, including a former Fed vice chairman, David
Mullins. The Fed's move left them with their jobs and a
10 percent stake in the partnership. Messers. Fisher
and McDonough say that it would have been inappropriate
for Fed officials to help Messrs. Buffet and Meriwether
negotiate terms of a buyout and that the rescue came
together only after the Buffet bid evaporated.

quot;`If you save a baby from getting hit by a truck, and
the baby gets slightly bruised, you're going to get
some criticisms for the bruises,' Mr. McDonough says.
`The baby we were concerned about was the credit
markets, not Long-Term Capital. And we think the risks
were worth it.'

quot;After Peter Fisher heard reports of distress at Long-
Term Capital, he sprang into action. Sept. 20: Fisher
leads a delegation of Fed and Treasury department
officials to meeting at Long-Term Capital headquarters
Sept. 22, 7:30 a.m.: Fisher gathers officials from
Goldman Sachs, Merrill Lynch, and J. P. Morgan at New
York Fed headquarters to discuss bailout. Sept. 22,
8:30 a.m.: At New York Fed, Fisher warns Wall Street's
biggest firms of market turmoil if bailout fails. Sept
23: Agreement reached at New York Fed around 6 p.m.quot;

The question GATA would like the Banking Committee to
investigate is whether the New York Fed is quot;bruisingquot;
another baby (the gold market) to help other financial
markets and thereby harming millions of innocent
parties.

A 12-year-old Wall Street Journal article involving
former Fed Governor Robert Heller is of particular
interest here.

quot;Have good intentions about intervening in markets gone
astray?

quot;Have Fed Support Stock Market Too

quot;By Robert Heller, Oct. 27, 1989.

quot;The stock market correction of Oct. 13, 1989, was a
grim reminder of the Oct. 19, 1987, market collapse.
Since, like earthquakes, stock market disturbances will
always be with us, it is prudent to take all possible
precautions against another such market collapse. In
general, markets function well and adjust smoothly to
changing economic and financial circumstances. But
there are times when they seize up, and panicky sellers
cannot find buyers. That's just what happened in the
October 1987 crash. As the market tumbled, disorderly
market conditions prevailed. The margins between buying
bids and selling bids widened; trading in many stocks
was suspended; orders took unduly long to be executed;
and many specialists stopped trading altogether.

quot;These failures in turn contributed to the fall in the
market averages; uncertainty extracted an extra risk
premium and margin calls triggered additional selling
pressures.

quot;The situation was like that of a skier who is thrown
slightly off balance by an unexpected bump on the
slope. His skis spread farther and farther apart --
just as buy-sell spreads widen during a financial panic
-- and soon he is out of control. Unable to stop his
accelerating descent, he crashes.

quot;After the 1987 crash, and as a result of the
recommendations of many studies, `circuit breakers'
were devised to allow market participants to regroup
and restore orderly market conditions. It's doubtful,
though, whether circuit breakers do any real good. In
the additional time they provide even more order
imbalances might pile up, as would-be sellers finally
get their broker on the phone.

quot;Instead, an appropriate institution should be charged
with the job of preventing chaos in the market: the
Federal Reserve. The availability of timely assistance
-- of a backstop -- can help markets retain their
resilience. The Fed already buys and sells foreign
exchange to prevent disorderly conditions in foreign-
exchange markets. The Fed has assumed a similar
responsibility in the market for government securities.
The stock market is the only market without a market-
maker of unchallenged liquidity of last resort.

quot;This does not mean that the Federal Reserve does not
already play an important indirect role in the stock
market. In 1987 it pumped billions into the markets
through open-market operations and the discount window.
It lent money to banks and encouraged them to make
funds available to brokerage houses. They, in turn,
lent money to their customers -- who were supposed to
recognize the opportunity to make a profit in the
turmoil and buy shares.

quot;The Fed also has the power to set margin requirements.
But wouldn't it be more efficient and effective to
supply such support to the stock market directly?
Instead of flooding the entire economy with liquidity,
and thereby increasing the danger of inflation, the Fed
could support the stock market directly by buying
averages in the futures markets, thus stabilizing the
market as a whole.

quot;The stock market is certainly not too big for the Fed
to handle. The foreign-exchange and government
securities markets are vastly larger. Daily trading
volume in the New York foreign exchange market is $130
billion. The daily volume for Treasury Securities is
about $110 billion.

quot;The combined value of daily trading on the New York
Exchange, the American Stock Exchange and the NASDAQ
over-the-counter market ranges between $7-$10 billion.
The $13 billion the Fed injected into the money markets
after the 1987 crash is more than enough to buy all the
stocks traded on a typical day. More carefully targeted
intervention might actually reduce the need for
government action. And taking more direct action has
the advantage of avoiding sharp increases in the money
supply, such as happened in October 1987.

quot;The Fed's stock market role ought not to be very
ambitious. It should seek only to maintain the
functioning of markets -- not to prop up the Dow Jones
or New York Stock Exchange averages at a particular
level.

quot;The Fed should guard against systemic risk, but not
against the risks inherent in individual stocks. It
would be inappropriate for the government or the
central bank to buy or sell IBM or General Motors
shares. Instead the Fed could buy the broad market
composites in the futures markets. The increased demand
would normalize trading and stabilize prices.
Stabilizing the derivative markets would tend to
stabilize the primary market. The Fed would eliminate
the cause of the potential panic rather than attempting
to treat the symptom -- the liquidity of the banks.

quot;Disorderly market conditions could be observed quite
frequently in foreign exchange markets in the 1960s and
1970s. But since the member countries of the
International Monetary Fund agreed in the `Guidelines
to Floating' in 1974, such difficulties have been
avoided. I cannot recall any disorder in currency
markets since the 1974 guidelines were adopted. Thus,
the mere existence of a market-stabilizing agency helps
to avoid panic in emergencies.

quot;The old saying advises: `If it ain't broke, don't fix
it.' But this could be a case where we all might go
broke if it isn't fixed.quot;

GATA believes it is reasonable to ask whether something
is amok in the gold market. We are not making any wild
accusations about the Federal Reserve. We are just
searching for some answers to valid questions.

Another compelling question concerns Fed Chairman
Greenspan's comments on July 24, 1998, before a House
Banking Committee and on July 30, 1998, before the
Senate Agriculture Committee that quot;central banks stand
ready to lease gold in increasing quantities should the
price rise.quot;

GATA and many in the gold industry would like to know
what Greenspan meant here. Was he signaling the bullion
dealers that the U.S. government and other governments
would not let the price of gold rise so that they could
short-sell gold with impunity?

The collapse of the price of gold is causing extreme
hardships around the world, yet the Clinton
administration has gone out of its way to support the
IMF gold sales idea. Meanwhile the opposition in
Congress to the IMF gold sale has created the most
unusual of political alliances.

Consider who is opposed to the IMF gold sale: 1) Rep.
Jim Saxton, chairman of the Joint Economic Committee;
2) Sen. Jesse Helms, Senate Foreign Relations Committee
chairman; 3) Sen. Tom Daschel, Senate minority leader;
4) Rep. Dick Armey; House majority leader 5) Tom DeLay,
House majority whip; 6) Democratic senators such as
Richard Bryan, Tim Johnson, and Harry Reid; and 7) the
Congressional Black Caucus.

While many of the leading figures in both political
parties are against the proposed IMF gold sale, who is
for it? Just the Clinton administration and its big-
money supporters who are short gold.

The reaction to the outrage of Africans and their
request for support from the Labor Party in Britain is
even stranger. Consider this recent story from the
London Daily Telegraph:

quot;Golden opportunity missed to show African solidarity.quot;

quot;Let them eat aid. New Labour's sympathy for the gold
miners of South Africa is strictly limited. You would
have thought that when the leader of their union turned
up in London, he would be feted all the way from
Islington to Millbank, which would be relabeled James
Motlatsi House in his honour. Not a bit of it.

quot;Sentiment counts for nothing when it conflicts with
the Government's suddenly invented policy of selling
off the gold reserves. In two months this prospect has
lowered the price of gold by one-tenth, and 100,000
miners stand to lose their jobs. Mr. Motlatsi is here
with Bobby Godsell from the Chamber of Mines to plead
their industry's cause. In the House of Commons this
week the prime minister could not find a single
sympathetic word for them. We had sold, so he said, on
the technical advice of the Bank of England, and got
the best deal for the country -- this country, that is.
Gold sales were just the Tories' latest obsession, and
their party had supported apartheid, so who were they
to talk?

quot;His flinty response was misleadingly worded. It is a
gold ingot to a china orange that this clearance sale
was not proposed by the bank. The official reserves are
not the bank's but the state's, and making policy for
them is the responsibility, with the bank as its agent
in the market. It has been left to make the best of a
bad job.

quot;New Labour's next good cause is to make the
International Monetary Fund sell gold and use the
proceeds to relieve poor countries of their debts. It
does not seem to cross ministers' high minds that some
of these countries have gold in the ground and make
their living, or hope to, by digging it out. There
would be no point in telling Zambia to dig for Special
Drawing Rights or Mali to open an internet cafe.

quot;Zambia and Mali (and, of course, South Africa) will be
represented here next week, when their governments will
try to make the industry's point for it. They are not
asking for aid. Africa's best hope must be to work its
way out of poverty -- if only the conceit and
condescension of New Labour will let it.quot;

It is understandable that many people recoil when they
hear the words quot;manipulation,quot; quot;collusion,quot; and
quot;conspiracy.quot; Yet many of the potential players in the
gold market manipulation have been charged publicly
with manipulations of some sort before, so why should
it not follow that they may be involved manipulating
the price of gold?

After all, anyone who has borrowed gold the past
several years at 1 percent interest and has sold it has
had the opportunity to re-invest the funds and earn
substantial returns and then return the principal at
much lower prices and reap windfall gains there too.

Let us examine some recent commentary about the
behavior of current bullion dealers and associated
parties:

1) Counterparty Risk Mangagement Group member Credit
Suisse:

quot;Tokyo, July 13 (Bloomberg) -- Credit Suisse Group,
Europe's sixth-biggest bank, was humbled today when
Japan indicated it may revoke the banking license of a
financial subsidiary -- the most severe punishment of a
financial firm since World War II.quot;

2) The Commodities Futures Trading Commission fined
LTCM bailout partner Merrill Lynch millions of dollars
for helping Sumitomo manipulate the copper market

3) Goldman Sachs is being investigated for its
underwriting fees.

quot;Washington, April 30 (Bridge News) -- The U.S.
Department of Justice served investment Bank Goldman
Sachs amp; Co. with a civil investigative demand Thursday
requesting information concerning an `alleged
conspiracy among securities underwriters to fix
underwriting fees,' according to a Securities and
Exchange Commission filing from Goldman Sachs released
today.

quot;The request from the Justice Department marks an
escalation of charges that were filed in a private
class-action suit in November, a source familiar with
the investigation told Bridge News.quot;

Consider this article from the July 1999 issue of
London's Business Age magazine:

quot;The recent dramatic fall in the gold price could have
been triggered by the Bank of England irresponsibly
signaling a massive unloading of bullion onto the
market, amid suspicions that a global cartel has been
attempting to manipulate values, writes David Guyett.

quot;When the Treasury announced in early May that it was
going to auction over half the nations 715 tonne gold
reserves, it caused eyebrows to be raised in many parts
of the world. It also triggered a steep decline in the
market price of gold from just below $290 an ounce to
$281.50.

quot;In the blink of an eye over $90 million was wiped off
the value of the gold the Treasury has earmarked for
sale. Ordinarily, central bank gold sales are conducted
in the utmost secrecy and are then routinely announced
after the event.

quot;This ensures a stable market price for the bank to
sell into. Effectively talking down the gold price by
announcing `future' sales is considered curious,
especially for a nation possessing a long history of
managing its gold reserves with skill and subtlety.

quot;More recently, Gordon Brown's public comments in
favour of the proposed sale of 10 million ounces of IMF
gold have merely added to the confusion.

quot;Unsurprisingly, the prospect of an additional large
official disinvestment saw an even more dramatic plunge
in the market price to under $260. The chancellor's
comments, said to be aimed at raising funds to
alleviate the horrendous debt burden of impoverished
third world nations, wiped a further $300 million off
the value of British gold reserves.

quot;While many market analysts ponder just what the
chancellor hopes to achieve by apparently cutting off
his nose to spite his face, an independent American
gold pressure group believe they know the answer.

quot;Formed earlier this year, the Gold-Anti Trust Action
Committee, known simply as GATA, claim the gold market
is in the grip of a powerful cartel of leading Wall
Street and European banks. These are said to have
colluded to manipulate the price of gold to their
commercial advantage.

quot;According to Bill Murphy, a commentator on the gold
market and GATA Chairman, up to 20 leading banks may be
party to a cartel arrangement. Murphy says that many of
these banks have leased gold from central and other
gold banks at strike prices as low as $290. The lending
banks, according to the insiders, charge little more
than 1 percent per annum as a leasing fee.

quot;This amounts to `a virtually interest-free loan,'
Murphy says. By selling the leased gold, the banks
receive a hefty cash `pool.' That is then invested in
U.S. Treasury securities or placed in other overseas
markets. With Treasury yields climbing above 6
percent, the net 5 percent `windfall' returns earned by
the borrowing banks generate huge profits. Later
covering their short positions at lower strike prices
will generate additional income.

quot;GATA believes that short sales of this type
collectively total as much as 8,000-10,000 tonnes.
Others believe it could be higher and amounts of 14,000
tonnes are mentioned. Meanwhile, one Wall Street bank
is rumoured to be short 1,000 metric tonnes, worth
about $9 billion. This is believed to be Goldman Sachs,
America's largest investment bank. Goldman refused to
comment but insiders at the bank deny the position is
as large as claimed.

quot;The risk of this short sale strategy is if the gold
price shoots up beyond the $290 level. With annual gold
mining production of 2,500 tonnes per year, it could
prove impossible for those short banks to buy
sufficient quantities of metal to repay back their
loans. Locked into a trap of their own making, this
could stampede the banks and cause the gold price to
skyrocket, turning easy profit into crippling losses.
Were just one of these banks to fail under the burden
of such losses it could trigger a systemic collapse of
the international economy.

quot;This, Murphy believes, is the underlying reason why
the Treasury took the unusual step of announcing a gold
auction in advance, and why Gordon Brown is so strongly
committed to an IMF sale. At the time the Treasury
issued its announcement, the gold price was preparing
to penetrate the $290 level. Forcing down the price
enables the banks involved to extricate themselves from
their now suspect trading positions.

quot;Murphy admits that he cannot prove his case. However,
he says the circumstantial evidence is overwhelming in
support of his view. Not least he points to testimony
given by Federal Reserve Chairman, Alan Greenspan, who
told the House Banking Committee last summer that
`central banks stand ready to lease gold in increasing
quantities should the price rise.'

quot;`What else could the Fed be up to?' Murphy asks, other
than the wholesale manipulation of the gold pricequot;

quot;Whether Murphy's group is ever able to prove that the
market is a rigged roulette wheel remains to be seen.
Meanwhile GATA's efforts constitute the only truly
independent attempt this century to penetrate the
mysteries of one of the most secretive of all financial
markets.quot;

Others are crying out for transparency, truthfulness,
and accountability:

quot;Basle, Switzerland, June 7 (Reuters) -- Nine months
after the near bankruptcy of U.S. hedge fund LTCM shook
the world, bank regulators still do not have the tools
to judge accurately the risks that financial market
speculators are running, the Bank for International
Settlements said on Monday.... The inference of the
rescue, the BIS commented, is that U.S. bank regulators
and LTCM's principal creditors considered that a non-
bank financial institution was `too complex to fail'
.... `This might be thought a worrisome message sent
out to much bigger banks and dealing firms with their
own proprietary trading operations,' the BIS said....
So intricate are the trading strategies used by
sophisticated investors such as LTCM that existing
statistics cannot readily measure how much market and
credit risk they are exposed to.quot;

GATA believes that Congress easily can investigate this
matter and get the answers that are necessary to
protecting the international financial system against
collapse.

If all the bullion dealers and parties involved in the
Long-Term Capital Management bailout are asked to
disclose their gold trading books, you easily could
determine if our suspicions are correct and if
excessive gold loans pose an unacceptable threat to
financial stability.

My former associate, Frank Veneroso of Veneroso
Associates, can assist your committee as he has
compiled the most comprehensive study on the gold loans
in the world. In his 1998 Gold Book Annual he
determined that the gold loans were about 8,000 tonnes
in total (7,000 to 7,500 tonnes of official swaps and
deposits and 500 to 1,000 tonnes of private deposits).
Since then he has received more information about the
positions of 9 bullion dealers. Three were about as
expected. Six were higher too substantially higher than
expected.

(END)

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