What Goes Up Must Come Down
Their very existence has been challenged for years by skeptics. But conspiracy theorists would have you believe they are omnipotent in the financial markets. Known as the Plunge Protection Team or simply, the PPT, some believe the group has existed ever since President Reagan issued Executive Order 12631 in response to the events that occurred on October 19, 1987. You may remember October 19th for that was a day of infamy, known in the history books as Black Monday. On that day the world financial markets collapsed.
It started in Asia where trading began with a rash of dramatic selling and continued across the globe. Unprecedented in magnitude, this event was something not felt since the great stock market crash of 1929. By the time it was over, the unthinkable, the unimaginable had happened. Panicked investors around the world had sold off almost a trillion dollars in shares with the Dow Jones Industrial Average taking the brunt of it. 22% or 508 points evaporated in a matter of hours for a total loss of 500 billion dollars. It had been a sweet 5 year bull run up until October 19, 1987. It all came to an end on Black Monday.
Is This For Real? Scott Nations Thinks So
Just for the record I'm not a conspiracy theorist. I consider myself to be open-minded. More like an idealist who believes in possibilities yet remains in touch with reality. So when a guest on CNBC recently suggested that the government manipulates the stock market, I listened with guarded interest. "The market is rigged!" argues Scott Nations of Fortress Trading, a market making firm based in Chicago, Illinois. Scott relayed an interesting story about Wall Street that was a plausible mix of conjure and reality. It begins after the 1987 meltdown. The federal government became worried about the effects of another colossal market crash and how disastrous the effects would be on the world economy.
The Snake Moves, Erasing Its Tracks With Its Tail
To thwart a repeat of Black Monday, Ronald Reagan issued as I mentioned earlier Executive Order 12631 on March 18, 1988. Thus was born the President's Working Group on Financial Markets or the Plunge Protection Team as it is known. Together they function as an orchestrated mechanism that includes the Secretary of Treasury, the Chairmen of the Federal Reserve Board and Exchange Commission as well as the Commodities and Futures Trading Commission.
These financial elites are the front line of defense in the event of a serious market decline. Hidden in plain sight, they supposedly operate the markets through stealth intervention, with a host of instruments at their disposal including the ability to use government funds to buy stock index futures - an act which is forbidden by law.
The PPT's Modus Operandi
The Treasury Department maintains a $40-billion (U.S.) Exchange Stabilization Fund to which the President's Working Group has access to buy, among other things, stocks and S&P 500 futures.
To further illustrate, let's say the market is down big time. Minus 700 points and counting as it was in September 2008. It's a free fall and the PPT decides the DOW Jones and S&P have crashed below key levels and need support. The decline must be stopped and reversed, or we run the risk of a worldwide financial collapse.
To spark a rally, the Federal Reserve would loan a few billions to a surrogate investment firm like Goldman Sachs. Goldman would then buy market shares through an anonymous account during a time when short interest is high. The result is a seemingly out-of-nowhere rally that sparks sudden fear in the shorts who've bet big that the market would continue to fall - except that it doesn't. And now they're forced to cover and buy the very stocks they were betting against, only at a much higher price - and buy they do.
It's a classic short squeeze scenario and they're caught in the middle. Those same people are now scrambling like mad to buy equities which only fuels the rally started by the PPT. It's brilliant - and rather simple. A huge market rally is now underway and the big players see it. Billions of dollars that had been waiting on the sidelines seize the opportunity and plow into stocks. Hedge funds, mutual funds and wealthy individuals rush the field and join the action which creates an even stronger wave of buying madness that may last for several days or weeks.
"We Do This For Your Own Good!"... But Is It Fair?
Now if this is really going on from time to time, then I have mixed feelings about it. While I applaud the efforts to prevent financial Armageddon, let's remember there is a law against acting in concert with others to rig the stock market. So if a clandestine group is manipulating events behind the scenes, wouldn't that present a serious moral and ethical dilemma? Wouldn't it also disrupt the natural flow of market corrections which is key to maintaining healthy competition in the business cycle? As the saying goes, "the road to hell is paved with good intentions". In other words, just because we can do something doesn't mean we should.
Juicing the economy to prop up markets may seem like a good idea to temporarily stop a decline, but what about the unintended long term consequences that could result from those actions? There would certainly be an erosion of confidence at home and abroad that the U.S. is not a free-market society after all. The short sellers would lose as well even though they skillfully spot weaknesses in certain areas and legitimately attempt to profit by shorting them.
What You Think Doesn't Matter - It's What You Can Prove That Counts
George Stephanopoulos, a former Clinton advisor, verified the existence of the Plunge Protection Team (as well as its methods) when he appeared on Good Morning America on September 17th of 2000. Stephanopoulos declared: "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. In 1989 the Fed 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. They have an informal agreement among major banks to come in and start to buy stock if there appears to be a problem. 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 if the markets start to fall again. They control it at whim."
After doing the research and learning more about the history of markets and derivatives, my personal opinion is that at times, there has been more than a little bit of intervention occurring within the stock market. The primary motivation I believe would be to prevent it from snowballing into a financial collapse or worst, another Great Depression. I agree when Scott Nations claims that the stock market is rigged and frankly it disgusts me. What about the necessity of allowing natural market self-corrections? Whatever happened to the ideal of "free market capitalism"? In this regard, neither privately owned banks nor the government should have any business interfering in the futures, equities or derivatives markets in an attempt to direct their trend.
I choose to believe Stephanopoulos. There's no doubt the PPT exist and is active: otherwise, how would you explain some of the powerful yet hardly justifiable sucker rallies we've experienced for the first half of 2009? Short interest was high, and many very wealthy institutional investors (let alone retail investors...) got burnt in 2008 and ran for whatever money they had left. I can't fathom they'd have the heart to reinvest that early in 2009 and with enough conviction to provoke rallies that powerful. The money injected at those times had to come from somewhere else...
At the same time investors (especially small retail investors) must remain cautious to safeguard from being taken advantage of. Major fraudsters such as Enron and more recently disgraced financier Bernie Madoff proved that government oversight is a joke. I have learned that due diligence always pays off but I can't help feeling the stock market is a crapshoot for the most part; a gamble basically with the small investor playing roulette according to the house rules. The only problem is that when it's the house rules, the house usually wins.
