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 Treasury Secretary Henry Paulson
calls �the systemic risk posed by hedge funds and derivatives.�
Last Tuesday�s 416-point drop in the stock market has sent
tremors through global systems. An 8 percent freefall on the Chinese stock
exchange triggered a massive equities sell-off which 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 may be 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
said, �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
U.K. Telegraph notes, Secretary of the Treasury Henry 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 Wednesday�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 investor 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 at a time 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 Team
Indicator�)
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 rejiggers 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 New York Times, �Henry Paulson and
top financial regulators said the government 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 diddle 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
which 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 U.S. 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� American consumer is showing
signs of fatigue, which is pushing investors towards foreign markets.
This explains why �the SEC said it aims to slash margin
requirements 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� UK Telegraph)
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 industry
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 which
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 9-11, there have been at least three major
long-term stock market rallies. In all three 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 on 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 rescue.�
Crudele is right; the market is being manipulated.
This may explain why the Federal Reserve mysteriously
decided to stop publishing its M-3 report. 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 Federal Reserve Banks, 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. No where 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
which 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 and 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.
Mike Whitney lives in Washington state. He can be reached at: fergiewhitney@msn.com.