February 6, 2002. Olympic Special: Will the Enron Tar Baby Go for the Gold?

Barings and Long-Term Capital Management were brought down by unregulated and inadequately disclosed over-the-counter derivatives. Orange County, Procter & Gamble and Gibson Greetings suffered well-publicized losses on their derivatives bets. The role of these complex instruments in the Enron fiasco was elucidated at a hearing of the Senate Governmental Affairs Committee chaired by Senator Joseph I. Lieberman on January 24, 2002, in testimony by Frank Partnoy ( Summarizing Enron's use of derivatives versus LTCM's, he declared: "In short, Enron makes Long-Term Capital Management look like a lemonade stand."

Mr. Partnoy, a former OTC derivatives salesman for Morgan Stanley, is currently a professor at University of San Diego School of Law, where he specializes in financial market regulation, derivatives, and structured finance. He is the author of F.I.A.S.C.O. (Penguin, 1997, updated 1999), a highly entertaining account of his career in the derivatives business. Of the many books on OTC derivatives, his stands out on two counts: first, it explains derivatives in understandable language; and second, it details some of the worst abuses and chicanery associated with them.

In his Senate testimony, Mr. Partnoy put the blame for Enron's failure on: (1) its use of derivatives with off-balance sheet subsidiaries to inflate the carrying value of troubled businesses, to conceal losses on technology stocks, and to hide debt related to unprofitable ventures; and (2) abuses within its core and once profitable derivatives trading business, including using "prudency" reserves to smooth earnings and improper valuation methodologies to misstate gains and losses. Abuses in Enron's derivatives trading business are also the subject of a recent article in the Los Angeles Times (M. Hiltzik, "Enron's Web of Complex Hedges, Bets" (January 31, 2002) (

Looking to the future, Mr. Partnoy challenged the solons: "Congress also must decide whether, after ten years of steady deregulation, the post-Enron derivatives markets should remain exempt from the regulation that covers all other investment contracts." And he added: "In my view, the answer is no." According to a story a few days later in The Wall Street Journal (M. Schroeder, "As Enron's Derivatives Trading Comes Into Focus, Gap in Oversight Is Spotlighted," January 28, 2002, p. C1), Senator Lieberman has indicated that he will indeed hold a hearing on the very issue suggested by Mr. Partnoy. Others on the Hill have also heard the call. See, e.g., M. Schroeder, "Derivatives Cop Wanted, but Terms Vary," The Wall Street Journal, February 4, 2002, p. C1.

Before Enron and Mr. Partnoy hit Washington together, the last person to make large waves in Congress about regulating OTC derivatives was Brooksley Born, former chairwoman of the Commodity Futures Trading Commission, which has principal responsibility for administering the Commodity Exchange Act. On May 7, 1998, under her direction, the CFTC issued a Concept Release on OTC Derivatives ( soliciting information and public comment on whether its regulations applicable to these instruments should be revised and updated.

Five days later, the Treasury, Federal Reserve Board, and Securities and Exchange Commission jointly wrote Congress in opposition to the CFTC's initiative and to request legislation limiting its rule-making authority in this area (; The letter was signed on behalf of the Treasury by former secretary Robert E. Rubin, who prior to his government service headed Goldman Sachs, a derivatives powerhouse, which along with other major derivatives dealers worked vigorously to defeat the initiative.

This contretemps led to hearings before the Senate Agricultural and House Banking committees in July 1998. Ms. Born's testimony reviewed the history and development of the applicable regulatory framework, identified some of the major issues, problems and abuses evident in OTC derivatives, and explained the reasons for CFTC's decision to reexamine its existing regulations in light of recent huge growth in the volume of these derivatives (;

Historically, the CEA has been primarily directed at the regulation of standardized futures and options contracts traded on exchanges such as the COMEX and CBOT in order to deter market manipulation and to protect investors, especially at the retail and small producer levels. An amendment passed in 1974 at the request of the Treasury excluded from the CEA (7 U.S.C. s. 2(ii)): "... transactions in foreign currency, securities warrants, securities rights, resales of installment loan contracts, repurchase options, government securities, or mortgages and mortgage purchase commitments, unless such transactions involve the sale thereof for future delivery conducted on a board of trade."

Distinguishing modern OTC derivatives from more traditional exchange traded futures and options, Fed chairman Alan Greenspan testified that financial derivatives ordinarily involve markets where supplies of the underlying asset are so large that private parties lack effective market power, thereby in his view making regulation of this business under the CEA unnecessary and inappropriate. Then, pointing out that oil and gold derivatives are similar to financial derivatives in this respect, he made his widely quoted remark about gold leasing by central banks (;

The vast majority of privately negotiated OTC contracts are settled in cash rather than through delivery. Cash settlement typically is based on a rate or price in a highly liquid market with a very large or virtually unlimited deliverable supply, for example, LIBOR or the spot dollar-yen exchange rate. To be sure, there are a limited number of OTC derivative contracts that apply to nonfinancial underlying assets. There is a significant business in oil-based derivatives, for example. But unlike farm crops, especially near the end of a crop season, private counterparties in oil contracts have virtually no ability to restrict the worldwide supply of this commodity. (Even OPEC has been less than successful over the years.) Nor can private counterparties restrict supplies of gold, another commodity whose derivatives are often traded over-the-counter, where central banks stand ready to lease gold in increasing quantities should the price rise. [Emphasis supplied.]

The Treasury and the Fed prevailed in 1998. But the exercise heightened concern over the legal status of many OTC derivatives under existing laws and regulations. Legislation passed later in the year required the CFTC to stand down and directed the President's Working Group on Financial Markets, a/k/a/ the Plunge Protection Team, to study the matter further and report to Congress. For a discussion of the PPT, see B.D. Fromson, "Plunge Protection Team," The Washington Post (February 3, 1997) (

Under cover of a letter dated November 9, 1999, signed by former Treasury secretary Lawrence H. Summers, Mr. Greenspan, former SEC chairman Arthur Leavitt, and William J. Rainer, who had succeeded Ms. Born at the CFTC, the Working Group transmitted to Congress its report: Over-the-Counter Derivatives Markets and the Commodities Exchange Act ( According to the accompanying press release (, the Working Group "unanimously recommended changes to the Commodities [sic] Exchange Act that are designed to create legal certainty in the over-the-counter derivatives markets and reduce systemic risk." The release also contained a statement from the Working Group's chairman, Mr. Summers:

Our new financial system has to be based on old virtues. As we worked to clarify the legal framework for OTC derivatives, we were guided by time-tested principles of competition, efficiency and transparency. If enacted, these changes will strengthen the financial system by improving a segment of the market which helps American businesses to hedge and manage risk more effectively and reduces borrowing costs for both individuals and corporations.

The report adopted (at p. 16) Mr. Greenspan's distinction between derivatives "based on a rate or price determined by a separate highly liquid market with a very large or virtually unlimited deliverable supply" (e.g., oil or gold derivatives) and derivatives involving "non-financial commodities with finite supplies" (e.g., agricultural commodities). It added (id.):

There have also been several well-known efforts to manipulate the prices of certain metals by attempting to corner the cash or futures markets. Moreover, the cash market for many non-financial commodities is dependent on the futures market for price discovery. The CFTC should, however, retain its current authority to grant exemptions for derivatives involving non-financial commodities, as it did in 1993 for energy products, where exemptions are in the public interest and otherwise consistent with the CEA. [Footnote omitted.]

However, the report did not address by name any particular metals markets, nor did it contain any direct mention of gold or gold leasing by central banks. Similarly, the report also did not discuss in detail specific energy markets. Although both the gold and oil markets are very large and important, in other respects they are quite different, as indicated by the fact that gold is almost always in contango whereas oil is often in backwardation. For a detailed discussion of this point, see The Golden Sextant.

The CFTC's 1993 exemption for derivatives on energy products, authorized under amendments to the CEA contained in the Futures Trading Practices Act of 1992, represented former chairwoman Wendy Gramm's last hurrah before departing for a spot on Enron's board. However, in fairness to the wife of retiring Senator Phil Gramm, several other energy companies reportedly lobbied for this exemption as well. See, e.g., D. Morgan et al., "Gifts, lobbying built Enron's power," The Washington Post (December 25, 2001) ( In any event, the Republican power couple from Texas cannot be held responsible for the last paragraph of the Working Group's report (p. 35):

By contrast, the activities of derivatives dealers that are not affiliated with banks, brokerages, or FCMs [futures commission merchants] constitute a small share of the overall market, although the extent of their participation in certain markets, such as the market for energy derivatives, is quite significant. In light of their small market share and the apparent effectiveness of private counterparty discipline in constraining the risk-taking of such derivatives dealers, the Working group is not recommending legislative action with respect to such derivatives dealers at this time, but believes that continued monitoring of their activity is appropriate. [Footnote omitted.]

"Derivatives dealers," as the report points out (id.), "are entities whose business consists primarily of entering into derivative contracts with end users and other dealers. Derivatives dealers may also use OTC derivative instruments to hedge their own financial risks, including risks incurred to obtain desirable financing terms, and to speculate on market movements." Inexplicably, given its stated objective to "reduce systemic risk," the Working Group failed to address the heavy concentration of OTC derivatives in a handful of major dealers. As of December 31, 1999, reports by the Office of the Comptroller of the Currency ( covering all U.S. commercial banks with OTC derivatives reveal that Chase Manhattan Bank and Morgan Guaranty Trust held 11% of total bank assets ($4.5 trillion) but 62% of all derivatives (a notional almost $35 trillion), and the top four banks (add Bank of America and Citibank) accounted for almost 90% of all derivatives but just over 30% of total assets.

The recommendations in the Working Group's report provided the basis for the Commodity Futures Modernization Act of 2000, signed into law by President Clinton on December 21, 2000. The CFMA (copy at is a highly complex piece of legislation that substantially overhauls the CEA and amends various provisions of the federal securities laws. Memoranda available online from two major law firms summarize its provisions: Dechert Price & Rhodes ( and Simpson Thacher & Bartlett (

The CFMA provides generally for the deregulation of OTC derivatives through a complicated, multi-tiered system of exemptions and exclusions based on various criteria, including the financial and other qualifications of the contracting parties, the types of products or commodities involved, and the nature of the exchange, trading system or other facility through which transactions are executed. The act divides commodities into three groups: (1) excluded commodities (essentially financial), e.g., interest rates, currencies, equity and debt securities, indices; (2) agricultural commodities (not defined); and (3) exempt commodities, i.e., all commodities neither excluded nor agricultural, e.g., metals, energy products.

The act also creates three types of futures exchange. The "designated contract market" covers existing exchanges and is the only type that may offer products to retail customers on an unrestricted basis. Two new types are created for largely institutional clients ("eligible contract participants" or "ECPs"): (1) the "registered derivatives transaction execution facility" that is lightly regulated; and (2) the "exempt board of trade" that is largely unregulated. Both types may only deal in contracts on commodities that meet certain criteria, e.g., that the underlying commodity has a "nearly inexhaustible deliverable supply" or "has a deliverable supply that is sufficiently large" to make any contract on it "highly unlikely to be susceptible to the threat of manipulation."

Along with other major derivatives dealers, Enron lobbied hard for passage of the CFMA, and used a subset of its provisions known around the Capitol as the "Enron exemption" to expand EnronOnline. See, e.g., R. Manor, "Gramms regulated Enron, benefited from ties," Chicago Tribune (January 18, 2002) ( By the end, this Internet-based global trading system was doing 6000 transactions per day and offering over 2100 financial products involving not just energy products but metals, plastics, lumber, other commodities, bandwidth and even weather. See, e.g., B. Hale, "Enron's internet monster," BBC News (November 30, 2001) ( Enron's political contributions greased its route to bankruptcy even if they could not buy rescue from it.

By all accounts, last November former secretary Rubin, now a top official at Citigroup, telephoned Peter Fisher, the Treasury's current undersecretary for domestic finance, to suggest that he consider trying to dissuade the rating agencies from an impending downgrade of Enron's credit. Mr. Fisher, who in his prior job at the Federal Reserve Bank of New York had served as point man for the rescue of LTCM, demurred. Mr. Rubin's position with Citigroup, a major creditor of Enron, raises legitimate questions about his motives. More importantly, however, his suggestion belies any strong underlying belief in either financial transparency or the protection of individual investors. On the contrary, it shows a mind committed to the proposition that government officials may invoke their personal notions of the public interest surreptitiously to manipulate markets notwithstanding injury to private investors and without public disclosure of the benefits thereby conferred on their political friends.

Belief in this proposition probably does far more to explain passage of the CFMA than overt political contributions. Major markets targeted for derivatives deregulation -- interest rates, currencies, energy, and gold -- may be too large for private parties to manipulate, but they are all markets that governments regularly target with their own manipulative schemes. Prior to joining the Clinton administration, Mr. Summers described with academic rigor Gibson's paradox, i.e., the observed principle that in the absence of government interference, real long-term interest rates and gold prices move in an inverse relationship to each other. Gold leasing by central banks is the foundation for most gold derivatives, and their rapid growth since 1995 has corresponded with a breakdown in the operation of Gibson's paradox as long-term rates and gold prices fell in tandem. For more elaboration on this point, see Gibson's Paradox Revisited: Professor Summers Analyzes Gold Prices.

Derivatives are a powerful tool for pushing markets around, and the bigger the market, the greater the derivatives heft required. At virtually the same moment that Congress enacted the CFMA, the Fed approved the J.P. Morgan Chase merger, which by the OCC's figures at December 31, 2000, put 60% percent of the total notional OTC derivatives business of 400 reporting banks -- $24 trillion out of a total $40 trillion -- in one derivatives superbank that is also widely regarded as the Fed's bank. For a graphic display of the interest rate and gold derivatives of J.P. Morgan Chase, the nation's second largest bank, in comparison to those of Citibank, it largest, and all other commercial banks, see the charts near the end of Gold Regression Charts.

Talk about risk! LTCM, a private hedge fund, lost a mere trillion dollar gamble in derivatives despite being advised by the two Nobel laureates in economics who largely invented modern derivatives trading. When its troubles threatened to shatter the global financial system, the New York Fed felt compelled to organize a bailout. Unlike LTCM and other big derivatives losers, Enron was a major derivatives dealer. In both F.I.A.S.C.O. and his Senate testimony, Mr. Partnoy emphasized that major derivatives dealers have a huge edge over their customers no matter how large or sophisticated these institutions may be.

What is more, as the Enron case also illustrates, major derivatives dealers require good credit ratings and access to cheap funding. Today "too big to fail" is the best credit rating. It is not accidental that the OTC derivatives business outside the United States is also heavily concentrated in flagship banks like Deutsche Bank and UBS, the apparent purchaser in bankruptcy of Enron's energy trading business but not its trading book.

The following exchange between two seasoned investment professionals, John Neff and Mark Faber, reported in Barron's ("Roundtable 2002," January 21, 2002, p. 20) carries disturbing implications.

Mr. Neff: "Aren't there transparency issues in the emerging Asian markets?"

Mr. Faber: "In Asia, by and large, emerging economies don't have a lot of transparency. But where is the transparency in Enron? Where is the transparency in J.P. Morgan?"

The Enron affair makes painfully obvious that audited financial reports of large and complex enterprises, especially those with large OTC derivatives or other off balance sheet items, cannot be trusted to give an accurate representation of their true financial condition or the risks to which they are exposed. The federal government, of course, is the largest and probably most complex enterprise on the planet. As opaque as they were, Enron's accounting practices are likely no less misleading than Uncle Sam's.

Social Security is not indicted as a Ponzi scheme only because it is operated by federal officials and the ultimate suckers are Americans too young to vote or as yet unborn. Recent budget surpluses were not deficits only through the magic of a "unified" budget that applied income from trust funds, largely Social Security, to current expenses. But these problems are reasonably evident to those who care to look. In other areas, as demonstrated in a recent lawsuit by native Americans over trust funds administered on their behalf by the Secretary of the Treasury and Secretary of the Interior, federal officials are as secretive and duplicitous as Enron's.

No one knows where the many investigations of Enron may lead or what they may ultimately reveal. But there is little doubt that the smell of political scandal is in the air. Maybe that explains one of last week's more curious incidents. A visiting former politician told a top White House staffer that the last real audit of the nation's gold reserves took place more than a half century ago, and that only about 1000 tonnes remain of the 8500 supposed to be in Fort Knox. Fiction? Of course! The President is running for re-election despite suffering from previously undisclosed multiple sclerosis. What's more, he holds a Nobel in economics.

But right down to its numbers, the visitor's story appears drawn from the account of the late Edward Durrell as told by James Turk in "We Have a Right to Know," Freemarket Gold & Money Report (December 13, 1999) (; updated, "The US Treasury Responds," id. (April 10, 2000) ( [Note: As of December 31, 2001, the Treasury reported total gold reserves of 261.5 million ounces (8134 tonnes), of which 147.3 million ounces (4583 tonnes) were in "deep storage" at Fort Knox (]

Why this incident was inserted in last week's episode of The West Wing, NBC's popular TV series, has gold bugs guessing. The visitor was made to appear crazy by his belief in UFOs, but just as strange is resurrecting on national television today Mr. Durrell's fantastic account of nearly thirty years ago. Is Mr. Turk's current research into official statistics on gold, much of it published by GATA (, getting so close to the truth that it must be discredited? Is the American public being conditioned to receive some astonishing revelations about the nation's gold? Or, perhaps, is the current administration itself under clever attack in the post-Enron era?

By failing promptly to expose and renounce the Clinton administration's strong dollar/weak gold policy carried out in large part through manipulation of gold prices and use of derivatives, the Bush administration has effectively made this policy its own. The real White House should not underestimate the difficulty of disengaging from a Texas-sized tar baby. The fictional President Bartlet describes his goals in real life as ... "liberal" ... "Democratic" ... "Humanist" ... (M. Sheen, The Official Companion: The West Wing (Warner Bros., 2002), p. viii).

Are hidden forces coalescing to pin a gold scandal long in the making on the sitting administration? Is there a plan to tar George W. by putting a new Sheen on gold? Stay tuned for future episodes. Nothing makes better fiction than the truth.


January 24, 2002. New Commentary by John Ambrose Goodwin Hathaway

T. S. Eliot wrote ("Philip Massinger," The Second Wood,1920): "Immature poets imitate; mature poets steal." The famous literary critic Lionel Trilling gave Eliot at least one good review, writing in the September 1962 edition of Esquire (as quoted in The International Thesaurus of Quotations (HarperCollins, 1996), p. 508, and in R. Andrews, Famous Lines: The Columbia Dictionary of Familiar Quotations (Columbia Univ. Press, 1997), p. 368): "Immature artists imitate. Mature artists steal."

The bull market in gold must be starting to mature. Relying heavily on GATA's research, John Hathaway's most recent essay makes The Investment Case for Gold, but at least in its initial version posted yesterday gave no credit whatsoever to GATA. The following acknowledgment appears at the end of a revised version posted today: "The following web sites were helpful in the preparation of this article, and are excellent resources for additional information on the gold market, especially with regard to the issue of gold price manipulation:;; and"

While this acknowledgement may have corrected some of the offense to the Cafe and GATA, it is inadequate as far the proprietor of this website is concerned. The words "Copyright 1999, 2000, 2001 - Reginald H. Howe" on my home page, now updated to include the current year as well, are not merely decorative. Admittedly, taking material from The Golden Sextant without appropriate attribution is scarcely trafficking in stolen art. What is more, efforts to make the gold story more understandable to ordinary readers should be encouraged. But, as recent incidents involving historians Stephen E. Ambrose and Doris Kearns Goodwin have shown, writing for the mass market does not make plagiarism acceptable (or legal).

Particularly in the social sciences, appropriate and accurate citations are about more than merely giving credit where credit is due. They permit readers to do their own research into the same source materials. Mr. Hathaway's recent essay includes two charts from this site for which his readers might like URL's far more precise than a link to the home page.

The first of these charts presents the Dow/Gold ratio from 1915 to 2001, but with no explanation for the grey versus white shadings distinguishing different time periods. This chart, which comes from a publication by Golden Sextant Advisors LLC, was posted here as part of a short commentary entitled The Dow/Gold Ratio and the International Monetary Order. The shadings identify the different international monetary regimes of the past century. Their juxtaposition with the Dow/Gold ratio was intended to illustrate that official interventions to suppress gold prices during conditions of excessive monetary growth preceded the breakdown of both the gold exchange standard and the Bretton Woods system while at the same time driving the Dow/Gold ratio to unsustainable highs.

The second chart was extracted complete with title from my commentary dated August 13, 2001: Gibson's Paradox Revisited: Professor Summers Analyzes Gold Prices. According to the 1988 article by Barsky and Summers analyzed in depth in that commentary, Gibson's paradox operates in a truly free gold market as it did under the gold standard. Accordingly, gold prices should move inversely to real long-term interest rates, falling when rates rise and rising when they fall. To test this proposition, particularly for the period after 1984 not covered by Barsky and Summers, I requested Nick Laird, proprietor of, to prepare a chart which I titled: "Gibson's Paradox Revisited."

While the revised version of Mr. Hathaway's essay appropriately credits Nick for his work on the chart, nowhere does it indicate that the chart was my idea and constructed to my specifications to support my analysis of the article by Barsky and Summers. Nor does Mr. Hathaway provide a full citation to their article: "Gibson's Paradox and the Gold Standard," Journal of Political Economy (vol. 96, June 1988, pp. 528-550). Since these oversights did not mar his prior essay, Gold As Theater, which also incorporated with my express permission the Gibson's paradox chart, perhaps they can be attributed to inadvertence or misunderstanding.

Of course, I am pleased that a gold analyst of Mr. Hathaway's standing believes that "there is no more powerful evidence to support the notion that the gold price has been rigged than [the Gibson's paradox chart]." And I hope that someday a jury will get a chance to come to the same conclusion. If, as Seneca the Younger observed ("On Old Age," Moral Letters to Lucilius, 12.11, tr. Richard M Gummere, 1918), "The best ideas are common property," GATA's many researchers may take pride in the increasing acceptance of their findings on Wall Street. To the extent that Mr. Hathaway's essay reflects and reinforces GATA's work, it should help to break the chains on the gold market.

But next time that I have occasion to hoist a cold one in company with John, who really can be pretty good fun, I will guard my glass and recall these lines learned today from La Coupe et les lèvres (1821) by Alfred de Musset:

Je haïs comme la mort l'état de plagiaire;
Mon verre n'est pas grand mais je bois dans mon verre.


January 9, 2002. BIS Served Twice: German Translation of Complaint and New Case by Déminor

Pursuant to Judge Lindsay's order requiring service on the Bank for International Settlements under Article 5 of the Hague Convention (service by designated authority) rather than under Article 10 (service by mail), the Summons and Complaint, together with German translations of each, were served on the Bank on January 4, 2002, by the Appellationsgericht Basel-Stadt, the Swiss cantonal authority designated to make service in Basel. Thanks to Adam Hamilton and his staff at Zeal LLC, the German translation is now available at

In a press release dated January 7, 2002 (posted at under Recent Events together with an Explanatory Note), Déminor announced that on December 28, 2001, it had commenced proceedings in the Tribunal de Commerce at Paris against the BIS, the Banque de France, J.P. Morgan, and Barbier Frinault (Arthur Andersen) on behalf of 200 former BIS private shareholders aggrieved by the freeze-out. Déminor is a European-based firm specializing in matters of corporate governance and shareholder rights. News accounts of Déminor's action may be found at Yahoo! France (French language report from Reuters) and in the online version of the FT (story from its Zurich correspondent).

November 11, 2001. Thank You, GATA Soldiers, Merci!

With his usual efficiency, Chris Powell, GATA's stalwart secretary-treasurer, issued a report on the November 5 hearing late the same evening, after driving home to Connecticut from Boston. Our friend Vronsky has posted a copy at Gold-Eagle. In addition, Chris posted copies of two other stories, one by CBS.MarketWatch and the other by Dow Jones, both organizations having sent reporters to the hearing. I have nothing to add to these reports. The next words of significance about the case will come from Judge Lindsay.

The purpose of this commentary is simply to express my thanks to all those who have helped in the effort so far. I could not have brought this case at all, let alone brought it through last Monday's hearing, without the help of many people. Some are obvious: GATA chairman Bill Murphy, Chris, my business partner Bob Landis, and my discovery team, Mike Bolser, James Turk and Adam Hamilton. But no army goes very far with all officers and no troops. And in small armies especially, even the troops have to show the initiative of command. So it is in the GATA army, with many contributing not just money, but also time and effort to tracking down leads and information on many different fronts.

Another characteristic of the GATA army is its cosmopolitan nature: people -- some richer, some poorer -- of many different nations, races and religions, all cooperating to a common purpose: the defense of free markets, which is nothing less than the defense of liberty itself. The GATA army knows what it is fighting for and why. Its soldiers know the stakes in their war as well or better than any army that ever the took the field. They also know the odds, and sad to say, they know that the campaign ahead will be at best extraordinarily difficult.

None of this will be news to visitors to The Golden Sextant, but all of it was underscored in the many e-mails that I received both before and after the hearing. Some of these messages of support and encouragement arrived en français, which explains part of the title of this commentary. A group of French gold bugs congregates in le forum "Echo Bay" du site Boursorama ( Since this forum originated when Echo Bay Mines was a hot gold stock, they are veteran gold bugs, a fact made even more obvious by the name they call themselves: les insoumis-teigneux, which translates into the rebellious (or unsubjugated) bastards.

In preparing for the hearing, I came across what some might describe as historical trivia, but it may be interesting nonetheless, particularly to my French friends. What is more, some may find in these facts a deeper meaning -- one appropriate not only to today but also to the two big holidays soon to come. All three of these holidays mark historic turning points: the birth of Christianity; the birth of a colony that would challenge an empire and change the world; and the end of a war that brought carnage on a scale never before witnessed and set in motion political and monetary events that are still unfolding. Indeed, viewed in historic perspective, both the war on terrorism and the war on gold are in many ways unfinished business of World War I.

But back to my story. For those who have not seen it, there is a picture of Boston's spectacular new federal courthouse on the homepage of its website. Also featured there is the building's signature quotation: "JUSTICE IS BUT TRUTH IN ACTION." Attributed to Louis D. Brandeis in 1914 just before he left the practice of law to become the first person of Jewish faith to sit on the Supreme Court, the quotation is prominently inscribed in the main-entry rotunda at the base of the stairway leading up to the entrances to the courtrooms.

According to the brochure detailing the many quotations adorning the building, this particular quotation came from a speech involving "an issue of complex economics, a topic with which Brandeis grappled throughout his career." It was chosen for prominent display in the new courthouse to emphasize "the fact-finding role of the courts in the pursuit of justice." (S'il vous plaît, les Français, ne vous mettez pas à l'avance de moi.)

Having not yet found the speech from which the quotation was drawn, I cannot say precisely what economic questions the future Justice Brandeis was talking about. The Oxford Dictionary of Quotations attributes "Truth is justice in action" to Benjamin Disraeli in a speech to the House of Commons, 11 February 1851. Un petit mystère. But scholars are agreed. Le vrai auteur, c'est Joseph Joubert.

M. Joubert (b.1754; d.1824), a philosophe who lived through the French Revolution and the Napoleonic era, published nothing during his lifetime. He wrote his thoughts on scraps of paper. After his death, these papiers de la malle were collected, arranged and published privately in 1838 by his friend, Chateaubriand, a famous writer and statesman of the era. In 1791, Chateaubriand had visited America, where he explained his intention to search for a "Northwest Passage" to an astonished President Washington.

The book of Joubert's thoughts was later re-edited in several editions by his nephew, Paul Raynal. Many other editions followed, including a well-known English translation by Henry Attwell in 1877. A number of different editions of Pensées de Joubert are collected in the French literature section of Harvard's Widener Library. The organization and numbering of the chapters and verses is not consistent from one edition to another, nor are the various editions equally comprehensive. From M. Raynal's 5th edition (Paris, 1869), chapter 15 (De la liberté, de la justice et des lois), verse 16: "La justice est la vérité en action."

Here are some other nearby verses in the same chapter, plus my attempts at translations. Verse 15: "Liberté! liberté! En toutes choses justice, et ce sera assez de liberté." ("Liberty! Justice in all matters, and that will be enough liberty.") Verse 17: "La justice est le droit du plus faible. Elle est en nous le bien d'autrui, et dans les autres notre bien." ("Justice is the right of the weakest. It is for us the best of others, and for them our best.") Verse 18: "La justice sans force, et la force sans justice: malheurs affreux!" ("Justice without force, and force without justice: horrible misfortunes.")

The inscription by the other main stairway is also from a speech by another famous Supreme Court justice while he was still in practice in Massachusetts. In 1881, shortly before his appointment to the Supreme Judicial Court of Massachusetts, Oliver Wendell Holmes gave a series of lectures on the common law, including his famous maxim: "The life of the law has not been logic; it has been experience." Almost eerie in its similarity is Joubert's thought on the same subject in chapter 15, verse 30: "Les meilleures lois naissent des usages." (The best laws are born from established customs.")

It is a measure of the universal nature of true justice that one French philosopher should express so closely the sentiments of two great Supreme Court justices, and that these would be the same sentiments chosen years later by federal judges in Boston for special prominence inside their new courthouse in the "cradle of American liberty."

Oliver Wendell Holmes, Sr., The Autocrat of the Breakfast-Table, would likely have admired Joubert's talent for turning a clever phrase. It is a talent that the elder Holmes passed on to the younger, and it became a hallmark of his legal opinions. "Great cases like hard cases make bad law." With this sentence in Northern Securities Co. v. United States, 193 U.S. 197, 400 (1904), the first major Sherman Act case to come before the Supreme Court, Mr. Justice Holmes launched into his first great dissent. Although the government won the case in a 5-4 decision, the trust-busting Theodore Roosevelt, outraged that his new appointee had failed to support the government's position, thundered: "I could carve out of a banana a judge with more backbone than that."

If the justice had any spinal problems, they came from a bunch of Minié balls collected at Antietam and still lodged in the small of his back. After his third wartime enlistment expired, the young brevet colonel did not sign up for a fourth, feeling that he had done his part. It was a decision that would trouble Holmes in later life. When the "Great Dissenter" died in March 1935, three years after retiring from the Court at age 91, many of his countrymen felt that the greatest living American had just passed from the stage. At his burial in Arlington National Cemetery, with the President and all the Justices looking on, eight infantrymen fired a volley for each of his Civil War wounds: Ball's Bluff, Antietam, Chancellorsville.

On the Supreme Court together for sixteen years, Holmes and Brandeis frequently joined each other in dissenting opinions that in future years commended themselves to a majority of the Court and became law. The first wiretapping case, Olmstead v. United States, 277 U.S. 438 (1928), arose out of efforts to enforce the Volstead Act during Prohibition. On a five-to-four vote, in a ruling that would stand for almost forty years until Katz v. United States, 389 U.S. 547 (1967), the Court held that wiretapping did not violate the Fourth Amendment's ban on unreasonable searches and seizures. The two Massachusetts justices (along with Justices Butler and Stone) filed separate dissents, and this time Mr. Justice Brandeis got off the more memorable lines (277 U.S. at 479, footnote omitted):

Men born to freedom are naturally alert to repel invasion of their liberties by evil-minded rulers. The greatest dangers to liberty lurk in insidious encroachment by men of zeal, well-meaning but without understanding.

Today we honor all members of the military. In 1918, on the eleventh hour of the eleventh day of the eleventh month, the Great War ended. The date at once became a day of remembrance for those lost in the war "to save democracy" and "to end all wars." After arrival of the American Expeditionary Force on the Continent, in ceremonies at the tomb of the Marquis de Lafayette in Paris on July 4, 1917, Colonel Charles E. Stanton, in a statement often attributed to General John Pershing, announced:

Lafayette, nous y voilà. Lafayette, we are here.

Among the members of the AEF -- pour aider les poilus -- was my great uncle. Plus ça change.... Merci pour me supporter (et mon français).

October 2, 2001. Court Hearing Rescheduled to November 5, 2001

On October 1, 2001, Judge Lindsay entered the following SCHEDULING ORDER:

The clerk has scheduled for hearing, on Tuesday, October 9, 2001, the several motions to dismiss this action. Because of the number of such motions and the myriad issues they raise, I will require more time to study the parties' submissions. Accordingly, the hearing in this matter is rescheduled to Monday, November 5, 2001, at 2:00 p.m. SO ORDERED.

/s/ Reginald C. Lindsay, United States District Judge

September 29, 2001. Notice re Court Hearing on October 9, 2001

On September 27, 2001, Judge Lindsay rescheduled the hearing on defendants' motions to dismiss from 3:30 PM to 2:30 PM on Tuesday, October 9, 2001. The hearing will take place in Courtroom No. 11, 5th floor, United States Courthouse, Boston. New security procedures require presentation of two photo IDs to gain entrance. On the same day, the judge denied Plaintiff's Motion for Leave to File Second Affidavit and Plaintiff's Motion to Supplement Plaintiff's Second Affidavit, so those documents will not be before the court in connection with the hearing on the motions to dismiss.

September 27, 2001. Guest Commentary: Murray Pollitt on the Events of September 11, 2001

[Note: Murray H. Pollitt, P. Eng., is a Canadian broker and mining engineer long active in both the investment and operational sides of the gold mining industry. A little over a year ago, Mr. Pollitt gave The Golden Sextant permission to publish his Open Letter to Central Bankers. Now he has graciously permitted us to publish his recent letter to investment clients.]

More of man's inhumanity to man, presented with galvanizing intensity. In the aftermath, inevitable questions, and horror being replaced with anger and sorrow.

Life goes on, and so will the economy. But the recession will get worse no matter how much money they throw at it, and many of the big, index-driven stocks which depend on economic growth will go on hurting. Also a lot of market action will depend less on the New York tragedy and more on what lies ahead politically; random revenge would further inflame regional hatreds and anything with the faintest hint of a ground war would rekindle memories of Viet Nam. All the money printing will intensify the storm that has been brewing in the financial system for years and, as we have pointed out many times, the worst inflations come during periods of disruption, depression and so on. Tax revenues fall, government expenditures rise, deficits go up, confidence goes down. Trade gets trickier. Will Saudi Arabia always want to be paid for its oil in dollars?

In 1994 Barings, Britain's oldest merchant bank, had been speculating on the long side of the Japanese stock market, the Nikkei, although most (all?) Directors didn't know it. As the market drifted lower the Barings trader (the infamous Nick Leeson) tried to support the market using derivatives and massively built up the long position. Then, on January 17, 1995 an earthquake struck Kobe, in Japan's industrial heartland, destroying 25,000 buildings and killing over 3,000 people. Leeson continued to try to plug the market, but it fell sharply and Barings was toast in less than a month.

At the time people blamed the earthquake, but in retrospect the market was falling inexorably. It was then 18,000 and now it's 10,000; a number which has nothing to do with earthquakes and everything to do with economic reality. Likewise in the current situation, overwhelming as last week's events were, they will in time be seen only to have intensified trends already in place. And the most important trend already in place has to do with gold, the dollar and confidence in the financial system. For some time now the tide has been turning against the dollar and in favour of gold, in spite of the efforts of big governments, big commercial banks and even big mining companies (where leadership has aligned itself with the banks instead of the men underground) and the economic establishment. These efforts have included activities in the derivatives markets to "stabilize" gold at uneconomically low levels and have led to the establishment of significant short positions. A large proportion of gold held as a bank asset is really a receivable from a speculator or a mine that may, or may not, be able to produce it; a lot of the real stuff is in Uncle Harry's teeth. Much of the other real stuff remains in vaults (some is even under the rubble of the World Trade Center) and is likely to be subject to claims by more than one bank.

The same forces which are crying out for "support" for the stock market are almost certainly quietly working to continue to put a lid on the gold price, for the same perceived reason: to bolster confidence in the system (meaning first the dollar, then the euro and the yen.) These efforts may work for a short time, but long term they won't. Leeson wasn't the only one who tried to rig the Japanese market over the last decade, and the big banks certainly lost a lot of gold while holding the price down during the Vietnamese war. Everybody is worried about the stock market while nobody seems to worry about the financial system, but it should be the other way around.

Notwithstanding the economy, America will emerge stronger and even more united. The stock market will have its bumps, but it will take care of itself. The money printing will help some sectors: utilities have dividend yields that will look better and better compared to term deposits, food and energy will remain staples and higher gold prices will lead to a renaissance in that sector. Perhaps two years hence we will once again have a hot mining market. It's the money, our money, their money, that you have to watch out for. Because J P Morgan Chase has a huge reach and massive derivatives exposure, its shares should act as a proxy for the global financial system. If their price continues to decline, take out lots more insurance.