The ESF: Anything But the Naked Truth on Naked Calls

In a personal letter dated January 19, 2000, to Senator Joseph Lieberman (Dem., Conn.), Fed Chairman Alan Greenspan responded on behalf of the Fed to questions raised by GATA in an ad placed in Roll Call, the Congressional weekly newspaper, on December 9, 1999. His answers were discussed in three prior commentaries, Two Bills: Scandal and Opportunity in Gold, The Greatest Con: The Rubin Dollar, which also discussed some recent official studies on the Exchange Stabilization Fund, and Gold Shenanigans: Suspicion Shifts to the Treasury, which also analyzed the ESF's statutory basis and authority.

Now the Treasury Department has surfaced with two sets of purported answers: (1) a letter dated March 20, 2000, from Marti Thomas, an acting assistant secretary for legislative affairs, to a constituent of Congressman Sherrod Brown (Dem., Ohio); and (2) a letter dated February 23, 2000, from the department's inspector general, Jeffrey Rush, Jr., to Senator Mitch McConnell (Rep., Ken.). Read carefully, neither letter negates in any way the contention that the ESF is involved in the gold derivatives market, still less my suggestion that that it is writing naked call options on gold.

Question 1 in GATA's ad (www.egroups.com/group/gata/309.html) read:

Does the Federal Reserve or the Treasury Department, either on their own behalf or on behalf of others, including other government agencies, such as the Exchange Stabilization Fund, lend gold or silver, facilitate the lending of gold and silver, or trade in any securities, such as futures contracts and call and put options, involving gold and silver?

The Treasury Department's responses (www.egroups.com/group/gata/415.html):

By the Assistant Secretary. The Treasury Department does not, either on its own behalf or on behalf of others, including other government agencies such as the Exchange Stabilization Fund, lend gold or silver, facilitate the lending of gold and silver, or trade in any securities, such as futures contracts and call and put options, involving gold and silver.

By the Inspector General. The Treasury Department does not lend gold or silver, facilitate the lending of gold and silver, or trade in any securities, such as futures contracts and call and put options, involving gold and silver.

By its terms, question 1 identifies the ESF as a government agency separate and apart from the Treasury Department. Given the ESF's statutory history as a sui generis self-financing fund under the exclusive and unreviewable control of the Secretary of the Treasury and the President, this approach appears eminently justified. Not surprisingly, therefore, the assistant secretary adopts it by closely tracking the language of the question in the answer, which refers to the "Treasury Department" as distinct from "other government agencies such as the Exchange Stabilization Fund." Thus the answer states merely that the Treasury Department does not act as agent for the ESF in trading gold or gold derivatives. It says nothing about the such trading by the ESF directly or through other agents, e.g., a bullion bank such as Goldman Sachs.

The inspector general's answer omits any reference to agencies or the ESF. However, in an introductory statement he stated: "We perform annual audits of the United States Mint's Custodial Gold and Silver Reserves and Exchange Stabilization Fund, which are part of Treasury's operations." Thus it is possible that he considers the ESF to be part of the Treasury Department. However, nothing is said about the scope of the inspector general's audits of the ESF. In all likelihood these are confined, like the Congressional appropriations process, to the ESF's administrative expenses, and do not reach its operational funds or market activities. Indeed, given the statutory language governing the ESF and its legislative history, the situation could hardly be otherwise.

Question 9 in GATA's ad read:

Do the Fed or the Treasury Department or any other government agency ever own or deal in derivatives that are connected with precious metals? Do any of these agencies write call options against the Treasury's or Federal Reserve's gold holdings, or write naked call options? [Emphasis supplied.]

The Treasury Department's responses:

By the Assistant Secretary. The Treasury Department does not own or deal in derivatives that are connected with precious metals, nor do other government agencies write call options against the Treasury's gold holdings.

By the Inspector General. No.

Here the assistant secretary does not track the language of the question in the response. Instead, the answer refers only to the Treasury Department, making no mention of any other agency, let alone the ESF. What is more, the answer wholly ignores the reference in the question to writing naked call options on gold. In short, this answer is purposely constructed not to include a denial that the ESF is writing naked calls on gold, the precise charge that I have made in earlier commentaries. Nor does the inspector general's answer add any clarification regarding the ambiguity implicit in his response to question 1.

The Fed's answers not only carried the weight of being a personal response by Alan Greenspan, its chairman, to a sitting U.S. senator, but also were prefaced by a strong general policy statement: "Most importantly, the Federal Reserve is in complete agreement with the proposition that any such transactions on our part, aimed at manipulating the price of gold or otherwise interfering in the free trade of gold, would be wholly inappropriate." The acting assistant secretary of the Treasury Department attempted a similar statement, closing the letter to Mr. Brown's constituent: "More generally, I would like to underline that the Treasury Department does not seek to manipulate the price of gold, silver or other precious metals by intervening in or otherwise interfering with the market." Again, there is no specific reference to the ESF.

Other than the President himself, the Secretary of the Treasury is the only person with authority to speak to the policies of the ESF. His failure to come forward with a policy statement putting his personal prestige on the line as Mr. Greenspan did speaks volumes. Unlike an acting asistant secretary in the Treasury Department, Mr Summers has actual knowledge of the ESF's activities. But Mr. Summers also knows that legalese pushed to its most virulent extreme -- Clintonese -- is a very dangerous tool when employed to mislead a member of Congress. Shading the truth about what the ESF is doing in the gold market by relying on an ambiguous distinction between the Treasury Department and the ESF is simply too dangerous to be a realistic option for Mr. Summers in his communications with Congress, particularly on an important subject of which he has actual, complete and personal knowledge.

What the Treasury Department's responses have done is narrow the controversy. Accepting them as accurate means that the ESF is the only official U.S. government instrumentality yet to be accounted for with regard to allegations of recent manipulative activities in the gold market. Here are three simple questions for Mr. Summers:

1. Within the past five years, has the ESF traded, directly or indirectly, for its own account or through agents, in gold or gold derivatives, including but not limited to writing or selling naked or covered call options on gold?

2. If the answer to question 1 is affirmative and the ESF has traded through agents, who are the agents and on what exchanges or in what markets have they executed transactions on behalf of the ESF?

3. If the ESF has written or sold covered calls, either directly or through agents, what is the source, location and legal ownership of the gold bullion on which the calls were written or sold?

The only persons with statutory authority to answer these questions for the ESF are the Secretary of the Treasury and the President. Anyone else supplying answers must show that they are made with the full knowledge and approval of one or both of these authorized persons.

The responsibility for obtaining answers rests with Congress. What is more, both Democratic and Republican members are now recipients of weasel answers from the Treasury Department. Both major parties in Congress are thus fully on notice of credible, serious allegations that the current administration has turned the ESF into a political slush fund to aid its closest friends on Wall Street, starting with Goldman Sachs, former Treasury Secretary Robert Rubin's old firm, by giving them the inside track on a manipulative scheme to cap the gold price.

What is far more important, however, leading members of both parties are on notice that this alleged scheme is likely the linchpin of this administration's dollar support policy. Should it collapse, as all such schemes do, it is likely to take the dollar with it and plunge the nation into a financial crisis the likes of which have not been seen since the Great Depression. Congress has a choice: to exercise its constitutional responsibilities and demand the truth about the ESF, or to indulge explanations about it from lower level officials phrased in Clintonese. But either way, if the ESF is engaged in a scheme to support the dollar by manipulating the gold price, the piper will be paid: a lot now, or more -- maybe much more -- later.