- The Working Group on Financial Markets, also know as
the Plunge Protection Team, was created by Ronald Reagan to prevent a repeat
of the Wall Street meltdown of October 1987.
- Its members include the Secretary of the Treasury, the
Chairman of the Federal Reserve, the Chairman of the SEC and the Chairman
of the Commodity Futures Trading Commission. Recently, the team has been
on high alert given the increased volatility of the markets and what Hank
Paulson calls "the systemic risk posed by hedge funds and derivatives."
- Last Tuesday's 416-point drop in the stock market as
sent tremors through the global system. An 8% freefall on the Chinese stock
exchange triggered a massive equities sell-off that continued sporadically
throughout the week. The sudden shift in sentiment, from Bull to Bear,
has drawn more attention to deeply rooted "systemic" problems
in the US economy.
- US manufacturing is already in recession, the dollar
continues to weaken, consumer spending is flat, and the sub-prime market
in real estate has begun to nosedive. These have all contributed to the
markets' erratic behavior and created the likelihood that the Plunge Protection
Team is stealthily intervening behind the scenes.
- According to John Crudele of the New York Post, the Plunge
Protection Team's (PPT) modus operandi was revealed by a former member
of the Federal Reserve Board, Robert Heller. Heller said that disasters
could be mitigated by >>> "Buying market averages in the
futures market, thus stabilizing the market as a whole." This appears
to be the strategy that has been used.
- Former Clinton advisor George Stephanopoulos verified
the existence of The Plunge Protection Team (as well as its methods) in
an appearance on Good Morning America on Sept 17, 2000. Stephanopoulos
- Well, what I wanted to talk about for a few minutes is
the various efforts that are going on in public and behind the scenes by
the Fed and other government officials to guard against a free-fall in
the markets . . . perhaps the most important the Fed in 1989 created what
is called the Plunge Protection Team, which is the Federal Reserve, big
major banks, representatives of the New York Stock Exchange and the other
exchanges and they have been meeting informally so far, and they have a
kind of an informal agreement among major banks to come in and start to
buy stock if there appears to be a problem.
- They have in the past acted more formally. I don't know
if you remember but in 1998, there was a crisis called the Long term Capital
Crisis. It was a major currency trader and there was a global currency
crisis. And they, with the guidance of the Fed, all of the banks got together
when it started to collapse and propped up the currency markets. And, they
have plans in place to consider that if the markets start to fall.
- Stephanopoulos' comments have never been officially denied.
In fact, as Ambrose Evans-Pritchard of the UK Telegraph notes, Secretary
of the Treasury Hank Paulson has called for the PPT to meet with greater
frequency and set up "a command centre at the US Treasury that will
track global markets and serve as an operations base in the next crisis.
The top brass will meet every six weeks, combining the heads of Treasury,
Federal Reserve, Securities and Exchange Commission (SEC), and key exchanges."
>>> This suggests that the PPT may have been deeply involved in
last Wed's "miraculous" stock market rebound from Tuesday's losses.
There was no apparent reason for the market to suddenly "go positive"
following a ruinous day that shook inv. confidence around the world. The
editors of the New York Times summarized the feelings of many market-watchers
who were baffled by this odd recovery:
- "The torrent of bad news on housing is only worsening,
with a report yesterday that new home sales for January had their steepest
slide in 13 years . . . Manufacturing has already slipped into a recession,
with activity contracting in two of the last three months. How is it then
that investors took Mr. Bernanke's words as a 'buy' signal?"
- How indeed, unless other forces were operating secretly
behind the scenes?
- Market Rigging
- "Gaming" the system may be easier than many
people believe. Robert McHugh, Ph.D. has provided a description of how
it works which seems consistent with the comments of Robert Heller. McHugh
lays it out like this:
- The PPT decides markets need intervention, a decline
needs to be stopped, or the risks associated with political events that
could be perceived by markets as highly negative and cause a decline, need
to be prevented by a rally already in flight.
- To get that rally, the PPT's key component -- the Fed
-- lends money to surrogates who will take that fresh electronically printed
cash and buy markets through some large unknown buyer's account. That buying
comes out of the blue when short interest is high.
- The unexpected rally strikes blood, and fear overcomes
those who were betting the market would drop. These shorts need to cover,
need to buy the very stocks they had agreed to sell (without owning them)
at today's prices in anticipation they could buy them in the future at
much lower prices and pocket the difference.
- Seeing those stocks rally above their committed selling
price, the shorts are forced to buy -- and buy they do. Thus, those most
pessimistic about the equity market end up buying equities like mad, fueling
the rally that the PPT started.
- Bingo, a huge turnaround rally is well underway, and
sidelines money from Hedge Funds, Mutual funds and individuals' rushes
in to join in the buying madness for several days and weeks as the rally
gathers a life of its own. (Robert McHugh, Ph.D., "The Plunge Protection
- If a secret team is interfering in the stock market,
it presents serious practical and moral issues. For one thing, it disrupts
natural "corrections" which are a normal part of the business
cycle and which help to maintain a healthy and competitive slate of equities.
- More importantly, outside intervention punishes the people
who see the weaknesses in the stock market and have invested accordingly.
Clearly, these people are being ripped off by the PPT's back-channel manipulations.
They deserve to be fairly compensated for the risks they have taken.
- Moreover, artificially propping up the market only encourages
over -leveraged speculators and smiley-face Pollyanna's who continue to
believe that the grossly inflated market will continue to rise. Rewarding
foolishness only stimulates greater speculation.
- The tinkering of the PPT is sure to erode confidence
in the unimpeded activity of capital markets. It's astonishing to think
that, after years of singing the praises of the "free market"
as the ultimate expression of God's divine plan, these same conservative
ideologues and "market purists" favor a strategy for direct intrusion.
- The actions of the Plunge Protection Team prove that
it's all baloney. The "free market" is merely a Public Relations
Myth with no basis in reality. Saving the system will always take precedent
over ideology; just as the "invisible hand" will always be overpowered
by the manicured and mettlesome fingers of banking elites and Wall Street
big wigs. It's their system and they're not going to let it get wiped out
by some silly commitment to principle.
- The free market system is supposed to be "self cleansing"
through cyclical purges of over-inflated equities and over-extended speculators.
Do we really want "central planning" from an Unelected Market-Nanny
that re-jiggers the system according to its own economic interests?
- The Plunge Protection Team may wrap itself in pompous
rhetoric, but it operates like a Fiscal Politburo inserting itself into
the market in way that promotes the narrow interests of its own constituents.
It's an outrage.
- Besides, the market is so fragile it trembles every time
someone halfway around the world sells a fistful of equities. It needs
a good shakedown.
- The years of deregulation have taken their toll. The
market is resting on a foundation of pure quicksand. Collateralized debt,
rickety hedge funds, shaky sub-prime equities, and an ocean of margin debt
are just a few examples of deregulation's excesses. These untested debt-instruments
are presently bearing down on Wall Street like a laser-guided missile.
It'll take more than Hank Paulson and his PPT "plumber's unit"
to prevent the implosion.
- Wall Street needs to regain its lost credibility with
more regulation and stricter laws. The system needs a major face-lift.
Still, even as the markets rumble and shake, Paulson rejects any move towards
greater government supervision. According to the NYT:
- Henry Paulson and top financial regulators said the govt.
need not - - and should not -- provide greater oversight for the $1.4 trillion
hedge fund industry, or, by extension, the trillions of dollars more in
complex derivative transactions spawned by the industry.
- That stance is mostly free-market ideology run amok.
But it is also based on the unproven assumption that unregulated investing,
which dispersed risk and reduced volatility as markets surged, will continue
to do so when markets tank.
- The upshot is a one-sided bet for investors. They have
explicit assurances from regulators and policy makers that almost anything
goes when the markets are hot, and implicit assurances -- based on past
experience -- that the Fed would lower interest rates to contain a financial
crisis should one erupt.
- Unfortunately, there is no guarantee that easing up on
rates would have the same powerful effect in a future crisis as it had
in the past.
- The next crisis appears to be building around weakness
in the United States, not in Russia or Asia or South America. That means
money could flow out of the country if markets were rattled. That would
weaken the dollar and require speedy and complex remedial action by the
world's central banks - - not just a rate cut by the Fed.
- The Times is right. Paulson's "hands off" attitude
is a classic example of "free-market ideology run amok." A meltdown
in the Hedge funds industry or the derivatives market would bring the entire
economy crashing to earth. Paulson's Plunge Protection Team is a band-aid
approach to a much more serious dilemma. It's time for the government to
get involved and protect the small investor.
- Paulson has shown that he understands the problem; he
simply resists the solution. Just a few months ago he opined, "We
need to be vigilant and make sure we are thinking through all of the various
risks and that we are being very careful here. Do we have enough liquidity
in the system"?
- No, we don't, and Paulson knows it. That's why there's
a plan to fiddle with the system and try to "cheat the Reaper."
- But it won't work. This is the biggest equity bubble
in history. Neither increasing the money supply nor lowering interest rates
will fend off the impending catastrophe. We need to address the mushrooming
risk that has arisen from lending hundreds of billions in sub-prime loans,
and from overexposure in the hedge funds and derivatives markets.
- These things need to be confronted immediately as they
pose a "clear and present danger" which could set off a chain
reaction of defaults and bankruptcies.
- The world's markets are facing a global liquidity crisis
that will become more evident as the real estate sub-prime market continues
to deteriorate. This will undoubtedly be accompanied by larger and more
ferocious gyrations in the stock market.
- Does "Hans Brinker" Paulson really believe
he can stop the flood by sticking his well-burnished finger in the dike?
- It's All Uphill from Here on Out
- The US economy faces daunting challenges in the near-future:
- a steadily shrinking manufacturing sector, - increasing job losses in
housing, - a nascent currency crisis, and - a real estate market that is
in full retreat.
- Additionally, the "always dependable" U.S.
consumer is showing signs of fatigue, which is pushing investors towards
- This explains why "the SEC said it aims to slash
margin require- -ments for institutions and hedge funds on stocks, options,
and futures to as low as 15pc, down from a range of 25pc to 50pc.
- The ostensible reason is to lure back hedge funds from
London, but it is odd policy to license extra leverage just as the Dow
hits an all-time high and the VIX 'fear' index nears an all-time low -
- signaling a worrying level of risk appetite.
- The normal practice across the world is to tighten margins
to cool over-heated asset markets." (Ambrose Evans-Pritchard, "Monday
View: Paulson Reactivates Secretive support team to prevent markets meltdown,"
- This is yet another red flag. The stewards of the system
are actively seeking larger infusions of marginal debt just to keep the
faltering market on its last legs.
- That's not reassuring and it is clearly a step in the
wrong direction. It further illustrates the worrisome level of recklessness
at the top rungs of the decision-making apparatus.
- Converting the PPT into another Safety-net for Private
- The original purpose of the Plunge Protection Team was
to prevent another 1987-type "Black Monday" stock market crash.
This seems like a reasonable way to address the prospect of a major economic
collapse following a terrorist attack or a natural disaster. However, the
systemic weakness in the market and the great uncertainty surrounding hedge
funds and derivatives suggests that the PPL is probably being used to stabilize
an over-leveraged and thoroughly debauched system.
- If that's the case, then we need to know whether the
PPT really operates in the public interest or if it is just a stopgap for
big business to avoid a painful retrenchment?
- It's the corporate warlords and banking moguls who have
benefited the most from dismantling the regulatory system. The PPT creates
an additional "taxpayer-supported" safety net for dubious debt
instruments that are finally beginning to unravel. There's no reason why
the market should be manipulated simply to protect private investment.
It is a fundamental contradiction to the workings of a free market.
- According to Michael Edward: ("The Secrets of the
Plunge Protection Team," Rense.com):
- Since 911, there have been at least 3 major long-term
stock market rallies. In all 3 instances, when the markets opened all the
indexes began to quickly plunge. In each incidence, by early afternoon
the markets were brought back from the brink of collapse to the surprise
of everyone, including historical analysts . . .
- An event that should have sent markets spiraling downward
was the Enron, et al, unprecedented corporate accounting scandals. Yet
despite this, an unprecedented across-the-board markets rally began on
July 24, 2002. Once again, the European Press called it a "PPT rally."
- Edward goes on to say that outside the US it's "no
secret" that the market is being manipulated. He cites an article
in the UK Guardian (9-16-01) which states, "that a secretive committee...dubbed
'the plunge protection team'... is ready to coordinate intervention by
the Federal Reserve on an unprecedented scale. The Fed, supported by the
banks, will buy equities from mutual funds and other institutional sellers."
- There are myriad other examples which support Edward's
basic theory. As the NY Post's John Crudele said, "Over the next few
years, people like me suspected that Heller's plan was indeed in effect.
Whenever the stock market was in trouble someone seemed to ride to the
- Crudele is right, the market is being manipulated.
- This may explain why the Federal Reserve mysteriously
decided to stop publishing its M-3 report last year.
- Since the Fed is the "main resource" for buying
averages in the futures market "the money is injected into markets
via the New York Fed's Repo desk, which easily showed up in the M-3. .
- Without the useful resource of M-3," Robert McHugh,
Ph.D. says, "we need to find other tools to monitor when the PPT is
likely to intervene, and kill shorts."
- What? So by abolishing the M-3, the Federal Reserve has
removed its greasy fingerprints from the smoking gun of market meddling?
- It appears so.
- Trust in the Free Market is Wavering
- Whatever happened to the idea of completing the "market
cycle" and allowing markets to self-correct whether that meant belt-
-tightening or not? And, what about the ethical question of whether government
manipulation should be allowed in a "free market"?
- Also, by what authority do the government and the privately
owned banks interfere in the futures markets and shift momentum from the
prevailing trend? Is this a free market or a command economy?
- The precariousness of our present economic situation
has caused these dramatic changes and strengthened the conjugal relationship
between the privately owned Central Bank, major corporations and the state.
The market is more vulnerable now than anytime since the late 1920s, a
fact that was emphasized in a statement by the IMF just two months ago:
- "Financial markets have failed to price in the risk
that any one of a host of threats to economic security could materialize
and deliver a massive shock to the world economy. It is clear that risks
are on the downside of a sharper than expected slowdown in house prices
that would produce weaker-than-expected growth that would have implications
for global growth and financial markets." ("IMF: Risk of global
crash is increasing," UK Independent)
- Risk, overexposure, cheap money, shaky loans, a falling
dollar, low reserves and a confidence deficit -- these are the crumbling
cinder blocks upon which America's Empire of Debt currently rests.
- The possibility of a major disruption grows more likely
by the day. Consider the world's 8,000 unregulated hedge funds with $1.3trillion
at their disposal or the wobbly derivatives market and the effects that
a sudden downturn might have. Kenneth J. Gerbino put it like this in his
recent article "The Big Sell Off" on kitco.com:
- With a global market panic starting in a low interest
rate and, so far, low inflation environment, one has to be wonder about
the real reason for (Tuesday's) sell-off. Easy money almost everywhere
leads to leverage and speculation. Nowhere is this more prevalent than
in the global derivatives market. It is not out of the question that third
party defaults and risk aversion designed instruments that collapse and
go sour may someday overwhelm the financial markets.
- Latest figures from the Bank of International Settlements:
$8.3 trillion of real money is controlling $313 trillion in derivatives.
That's 38 to 1 leverage. These figures are just for the over-the-counter
derivatives and do not include the global exchange traded derivatives in
currencies, stocks and commodities which are another $75 trillion.
- "$8.3 trillion of real money is controlling $313
trillion in derivatives!"
- This illustrates the sheer magnitude of the problem and
the economy-busting potential of a miscalculation.
- That's why Warren Buffett calls derivatives "weapons
of mass destruction."
- If there's a fire sale in hedge funds or derivatives,
there's nothing the Plunge Protection Team or the Federal Reserve will
be able to do to stop a meltdown.
- The market will crash leaving nothing behind.
- We are reaping the rewards of a lawless, deregulated
system that has removed all the safeguards for protecting the small investor.
There is no government oversight; it's a joke.
- The stock market is a crapshoot that serves the sole
interests of establishment elites, corporate plutocrats, and banking giants.
- The small investor is trapped beneath the wheel &
getting squeezed more and more every day. He has no way to fix the markets
like the big guys and no lobby to promote his interests. He must arrive
at his decisions by researching publicly available information and then
plunking down his money.
- That's it. He'd be better off in a casino; the odds are
about the same.