Plunge Protection Team: The "Invisible Hand"
Thursday, June 11th, 2009
To the millions of tourists who have driven down San Francisco's Lombard Street, it is easily the "crookedest street in the world."
Steep and full of sharp turns, it's an oddity as recognizable as the city's Golden Gate Bridge.
But as familiar as that street is to everyone who has driven it or seen it in a movie, Lombard Street has nothing on the winding road that has been built between Washington and Wall Street.
Bailouts and back-room deals— it's as crooked as it gets.
And in a financial crisis that is by all accounts the worst of our generation, the deep connection between the two has become even more tightly twisted.
It's pretty obvious that the survival of one depends wholly on the survival of the other.
And while I've never been a big fan of conspiracy theories, this twisted alliance of power and greed has made me reconsider at least one... It's called the Plunge Protection Team.
The Plunge Protection Team Is No Myth
And according to the lore, it has been propping up the markets for the last 20 years.
And the truth is, if it didn't already exist, the current crisis is big enough to give birth to it, in my opinion.
But before I go any further, let me get something straight. . .
The Plunge Protection Team (PPT) is not some urban myth or Oliver Stone-style conspiracy theory.
The truth is it's hidden in plain sight, even though the U.S. Government prefers to be tight lipped about it.
Born out of the 1987 crash, the team is formally known as the Working Group on Financial Markets. It was created by Executive Order 12631, signed on March 18, 1988 by President Reagan.
And under Sec. 2 of the order, its "Purposes and Functions" were stated as follows:
(2) Recognizing the goals of enhancing the integrity, efficiency, orderliness, and competitiveness of our Nation's financial markets and maintaining investor confidence, the Working Group shall identify and consider:
the major issues raised by the numerous studies on the events (pertaining to the) October 19, 1987 (market crash and consider) recommendations that have the potential to achieve the goals noted above; and
. . . governmental (and other) actions under existing laws and regulations. . . that are appropriate to carry out these recommendations.
Working in secret, the group consists of
the President
the Treasury Secretary as chairman;
the Fed chairman;
the SEC chairman;
and the Commodity Futures Trading Commission chairman.
The seeds of the Plunge Protection Team were first planted by Robert Heller, a former Fed governor. Heller was a first-hand witness to the '87 crash, later writing:
Everybody's attention was tightly focused on containing the damage and preventing a spread of the financial disruptions throughout the financial system. Do not forget that at that time we were also dealing with a severe S&L crisis and almost 200 bank failures per year. Without swift supportive action on behalf of the Fed, the stock market crash could well have been the straw that broke the back of an already weak camel.
Now, if that doesn't sound a wee bit familiar, then you just haven't been paying attention.
Twenty-two years later, it's like a bad rerun— only this time, it's much worse.
Heller later left what some believe to be the calling card of the Plunge Protection Team, writing in the Wall Street Journal:
Instead of flooding the entire economy with liquidity, and thereby increasing the danger of inflation, the Fed could support the stock market directly by buying market averages in the futures market, thereby stabilizing the market as a whole.
Heller's plan, in short, was really quite simple— the government could bid up the futures until the market plunge reversed.
Since then, the PPT has been the number-one suspect in generating one "stick save" after another, especially at moments when all seemed lost.
Keep in mind, this type of manipulation is entirely possible if the bid beneath these futures is strong enough. Moreover, just imagine the type of reversal Goldman Sachs and JP Morgan could generate with a concerted effort to buy S&P 500 index futures late in the day.
Needless to say, it would be more than enough to turn the markets from red to green in the blink of an eye— which is an outcome that would undoubtedly work for both parties if it headed off a total collapse.
And if it buries a few shorts along the way, so be it.
The (In)Visible Hand
Given the dramatic bounce off of the March lows, the latest crisis has only raised more suspicions.
In fact, as recently as April, a number of observers noticed some unusual patterns in the "program trading" on the New York Stock Exchange, suggesting someone may indeed be working to "prop up" the market with large amounts of buying.
Even more suspicious was the fact that the largest trader — with a volume 5X higher than anyone else — was none other than Goldman Sachs. . . a firm that shares an extremely cozy relationship with the boys in D.C.
Never mind that unemployment is headed higher, foreclosures are still skyrocketing, and housing is nowhere near the bottom. That would only put a damper on things.
Instead, the markets have been sent higher on very light volume. Any trader will tell you that makes them even more susceptible to manipulation.
All of which bring us back to the Bernanke Fed and the current crisis. All along the way, the Fed has promised to "employ all available tools to promote economic recovery and to preserve price stability."
Is it really that hard to believe they would stick their hands into equities, after attempting to jawbone everything in their path in an effort to "fix" the crisis? I don't think it is— even though no one has proven it.
After all, desperate times call for desperate measures. And for these folks, the end justifies the means.
So, whether you believe in the Plunge Protection Team or not, at least recognize that markets are a lot less free than you imagine. At times, power and greed do work to goose the outcome, and this is likely one of those times.
Unfortunately, for us and for them, this is not exactly a sustainable condition— no matter how crooked the road may get.
Eventually, the markets will straighten it all out. And when they do, certain sectors are going to take an absolute drubbing.
Thursday, June 11th, 2009
To the millions of tourists who have driven down San Francisco's Lombard Street, it is easily the "crookedest street in the world."
Steep and full of sharp turns, it's an oddity as recognizable as the city's Golden Gate Bridge.
But as familiar as that street is to everyone who has driven it or seen it in a movie, Lombard Street has nothing on the winding road that has been built between Washington and Wall Street.
Bailouts and back-room deals— it's as crooked as it gets.
And in a financial crisis that is by all accounts the worst of our generation, the deep connection between the two has become even more tightly twisted.
It's pretty obvious that the survival of one depends wholly on the survival of the other.
And while I've never been a big fan of conspiracy theories, this twisted alliance of power and greed has made me reconsider at least one... It's called the Plunge Protection Team.
The Plunge Protection Team Is No Myth
And according to the lore, it has been propping up the markets for the last 20 years.
And the truth is, if it didn't already exist, the current crisis is big enough to give birth to it, in my opinion.
But before I go any further, let me get something straight. . .
The Plunge Protection Team (PPT) is not some urban myth or Oliver Stone-style conspiracy theory.
The truth is it's hidden in plain sight, even though the U.S. Government prefers to be tight lipped about it.
Born out of the 1987 crash, the team is formally known as the Working Group on Financial Markets. It was created by Executive Order 12631, signed on March 18, 1988 by President Reagan.
And under Sec. 2 of the order, its "Purposes and Functions" were stated as follows:
(2) Recognizing the goals of enhancing the integrity, efficiency, orderliness, and competitiveness of our Nation's financial markets and maintaining investor confidence, the Working Group shall identify and consider:
the major issues raised by the numerous studies on the events (pertaining to the) October 19, 1987 (market crash and consider) recommendations that have the potential to achieve the goals noted above; and
. . . governmental (and other) actions under existing laws and regulations. . . that are appropriate to carry out these recommendations.
Working in secret, the group consists of
the President
the Treasury Secretary as chairman;
the Fed chairman;
the SEC chairman;
and the Commodity Futures Trading Commission chairman.
The seeds of the Plunge Protection Team were first planted by Robert Heller, a former Fed governor. Heller was a first-hand witness to the '87 crash, later writing:
Everybody's attention was tightly focused on containing the damage and preventing a spread of the financial disruptions throughout the financial system. Do not forget that at that time we were also dealing with a severe S&L crisis and almost 200 bank failures per year. Without swift supportive action on behalf of the Fed, the stock market crash could well have been the straw that broke the back of an already weak camel.
Now, if that doesn't sound a wee bit familiar, then you just haven't been paying attention.
Twenty-two years later, it's like a bad rerun— only this time, it's much worse.
Heller later left what some believe to be the calling card of the Plunge Protection Team, writing in the Wall Street Journal:
Instead of flooding the entire economy with liquidity, and thereby increasing the danger of inflation, the Fed could support the stock market directly by buying market averages in the futures market, thereby stabilizing the market as a whole.
Heller's plan, in short, was really quite simple— the government could bid up the futures until the market plunge reversed.
Since then, the PPT has been the number-one suspect in generating one "stick save" after another, especially at moments when all seemed lost.
Keep in mind, this type of manipulation is entirely possible if the bid beneath these futures is strong enough. Moreover, just imagine the type of reversal Goldman Sachs and JP Morgan could generate with a concerted effort to buy S&P 500 index futures late in the day.
Needless to say, it would be more than enough to turn the markets from red to green in the blink of an eye— which is an outcome that would undoubtedly work for both parties if it headed off a total collapse.
And if it buries a few shorts along the way, so be it.
The (In)Visible Hand
Given the dramatic bounce off of the March lows, the latest crisis has only raised more suspicions.
In fact, as recently as April, a number of observers noticed some unusual patterns in the "program trading" on the New York Stock Exchange, suggesting someone may indeed be working to "prop up" the market with large amounts of buying.
Even more suspicious was the fact that the largest trader — with a volume 5X higher than anyone else — was none other than Goldman Sachs. . . a firm that shares an extremely cozy relationship with the boys in D.C.
Never mind that unemployment is headed higher, foreclosures are still skyrocketing, and housing is nowhere near the bottom. That would only put a damper on things.
Instead, the markets have been sent higher on very light volume. Any trader will tell you that makes them even more susceptible to manipulation.
All of which bring us back to the Bernanke Fed and the current crisis. All along the way, the Fed has promised to "employ all available tools to promote economic recovery and to preserve price stability."
Is it really that hard to believe they would stick their hands into equities, after attempting to jawbone everything in their path in an effort to "fix" the crisis? I don't think it is— even though no one has proven it.
After all, desperate times call for desperate measures. And for these folks, the end justifies the means.
So, whether you believe in the Plunge Protection Team or not, at least recognize that markets are a lot less free than you imagine. At times, power and greed do work to goose the outcome, and this is likely one of those times.
Unfortunately, for us and for them, this is not exactly a sustainable condition— no matter how crooked the road may get.
Eventually, the markets will straighten it all out. And when they do, certain sectors are going to take an absolute drubbing.
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