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 has sent tremors through global system. An 8% 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, 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 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 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 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.” (NY Times)

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 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 911, there have been at least three 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 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 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 2 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, over-exposure, 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 crap-shoot 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.

By Mike Whitney

Email: fergiewhitney@msn.com

Mike is a well respected freelance writer living in Washington state, interested in politics and economics from a libertarian perspective.

Comments

gigi
22 Dec 07, 19:39

Market Manipulation

"He'd be better off in a casino; the odds are about the same"

Actually, from my experience over the last few years, the above statement is wrong - the dices are fully/100% loaded. The 'big funds', especially Fidelity, know exactly who's in the market and what positions they have. They know exactly (through computerized tracking) how much they need to squeeze the market up or down until the last braveheart/desperate daytrader gives up. I think this (using inside information) most of all is illegal behavior and should be investigated/prosecuted by SEC (if they really are in the business they claim to be)... And the jolts up/down of the market are created at the push of a button. Everything is computerized (besides the selling and buying of a stock is done internally - the manipulators sell and buy instantaneously, though their own accounts (but in different names)).

So, beware what you're getting into if you are a daytrader. Especially beware of trading with 'Fidelity'. They are the biggest MF's (1st M stands for Mother...) I know in this game.

Brian OH
16 Jan 08, 20:42

Market Manipulation

I agree entirely that market manipulation by US authorities

is morally wrong. As you say, they pay lip service to free

markets. My recollections in the weeks prior to 9/11 are

that a crash was imminent. I believe that the Dow fell

around 500 points in about the week prior to 9/11. The

Fed used 9/11 as an excuse to prop up the Stock Markets.

As far fetched as it sounds, I always wondered about the

full truth about 9/11. I guess if there is anything there

we will never find out. It is time in my opinion for a

class action suit against US authorities (PPT) for

manipulating what is ostensibly a free market. When PE

ratios get too high it is time for a correction. The Fed

preaches that, but acts differently.

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