Wednesday, May 2, 2012

The Plunge Protection Team

"The Working Group on Financial Markets (colloquially the Plunge Protection Team) was created by Executive Order 12631, signed on March 18, 1988 by Ronald Reagan. The Group was established explicitly in response to events in the financial markets surrounding October 19, 1987 ("Black Monday") to give recommendations for legislative and private sector solutions "enhancing the integrity, efficiency, orderliness, and competitiveness of [U.S.] financial markets and maintaining investor confidence". The Group consists of the Secretary of the Treasury, the Chairperson of the Board of Governors of the Federal Reserve System, the Chairperson of the Securities and Exchange Commission, and the Chairperson of the Commodity Futures Trading Commission. "Plunge Protection Team" was originally the headline for an article in The Washington Post on February 23, 1997. Initially, the term was used to express the opinion that the Working Group was being used to prop up the markets during downturns. Financial writers for British newspapers The Observer and The Daily Telegraph, along with U.S. Congressman Ron Paul and writers Kevin Phillips and John Crudele, have charged the Working Group with going beyond its legal mandate. Charles Biderman, head of TrimTabs Investment Research, which tracks money flow in the equities market, suspected that following the 2008 financial crisis that the Federal Reserve/U.S. government was supporting the stock market. He stated that "if the money to boost stock prices did not come from the traditional players, it had to have come from somewhere else.” Moreover, several officials have suggested the government should support stock prices." Claims about the Working Group, which are labeled conspiracy theories by some writers, generally include that it is an orchestrated mechanism that attempts to manipulate U.S. stock markets in the event of a market crash by using government funds to buy stocks, or other instruments such as stock index futures - acts which are forbidden by law. In August 2005, Sprott Asset Management released a report that argued that there is little doubt that the PPT intervened to protect the stock market. However, these articles usually refer to the Working Group using moral suasion to attempt to convince banks to buy stock index futures. Former Federal Reserve Board member Robert Heller, in the Wall Street Journal, opined that "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." His statement has been used to claim that the Fed actually did act in that way. Some mainstream analysts call those claims a conspiracy theory, explaining that such claims are simplistic and unworkable. Author Kevin Phillips wrote in his 2008 book Bad Money that while he had no interest "in becoming a conspiracy investigator," he nevertheless drew the conclusion that "some kind of high-level decision seems to have been reached in Washington to loosely institutionalize a rescue mechanism for the stock market akin to that pursued...to safeguard major U.S. banks from exposure to domestic and foreign loan and currency crises." Phillips infers that the simplest way for the Working Group to intervene in market plunges would be through buying stock market index futures contracts, either in cooperation with major banks or through trading desks at the U.S. Treasury or Federal Reserve. On 06 October 2008, the working group issued a statement indicating that it was taking multiple actions available to it in order to attempt to stabilize the financial system, although purchase of stock shares was not part of the statement. The government may wind up owning shares in the firms to which it has provided loans, as they will receive warrants as collateral for these loans."(Wikipedia)