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 |  Subject: The Plunge Protection Team--An Elite Group Protects the Financial Sector  Sun Apr 27, 2008 4:26 am | |
| Some people foolishly think that Washington's recent high-profile effort to steer, subsidize and protect the American financial sector is the beginning of something new -- a revolutionary development.
It isn't. Consider that the President's Working Group on Financial Markets – nicknamed “the Plunge Protection Team” by The Washington Post in 1997 & ndash; quietly observed its 20th birthday on Mar. 18.
“Quietly,” in fact, is an understatement. “Semi-secretly” would be more like it. The Working Group, or PPT, is much-pondered but reclusive group that has declined to submit to the federal Freedom of Information Act or to testify in detail before Congress about its activities. This is true even though its current chief, Treasury Secretary Henry M. Paulson Jr. – Federal Reserve Board Chairman Ben Bernanke is another prominent member -- made no secret of revving up its operations after he took took over at Treasury in 2006.
The curious reader will wonder: Just what does the PPT do?
Right now, Congress ought to able to pursue this basic question: Is the PPT a kind of committee for the extra-legal coordination, manipulation and subsidization of financial institutions and markets? Has it been stepping in when free-market forces have become too perilous to profits and asset values -- in financial crisis years like 1998, 2001 and 2007. Has Washington decided to protect the financial sector more than any other element of the U.S. economy?
Over the last decade or so, the Treasury Dept. and the Fed have both developed something of a scofflaw attitude toward strict interpretation of federal statutes and regulations. For example, both winked in the late 1990s, as federal regulators allowed Citibank to merge with Travelers Insurance, despite contrary law still on the books. Both winked in more recent years, as major banks set up huge multi-billion-dollar structured investment vehicles, or SIVs, to do on an off-the-books basis what they were not allowed under banking law. Now we have the federally funded J.P Morgan Chase takeover of Bear Stearns. The PPT may well have had a quiet role in some of these actions.
For the bigger picture, look back to the stock market crash of 1987 -- the sickening Oct. 19 fall when the Dow-Jones Industrial Average lost 508 points or 23.6 percent of its value in a single trading day. Alan Greenspan had just taken over as the Federal Reserve Bank chairman, and some believe that the Fed intervened to support the market the next day -- by either buying Standard & Poors futures or telling several collaborative broker-dealers to do so.
Tim Metz, in "Black Monday," contends that "some leaders and market makers at the New York Stock Exchange and Chicago Mercantile Exchange collaborated to save the stock market by rigging stock information and prices.” Tony Dye, a British fund manager, made a similar charge of intervention by U.S. authorities. London Sunday Telegraph, Mar. 22, 1998).]] Edward Chancellor, in his 1999 book, "Devil Take the Hindmost," noted that if these interventions occurred, they raised a major issue of “moral hazard.”
The likelihood they did occur is increased by the fact that a year after the PPT group's launch, a retiring Fed board member, Robert Heller, wrote a much-discussed article in The Wall Street Journal that in the case of an another emergency like 1987, there might be a better alternative than the Fed's usual remedy -- interest rate reduction. “Instead of flooding the entire economy with liquidity, and thereby increasing the danger of inflation, " Heller wrote, "the Fed could support the stock market directly by buying market averages in the futures market, thereby stabilizing the market as a whole.” No public mention was ever made of the Fed or the Working Group embracing the Heller scheme, but that may have happened privately.
Such accusations are a long way from being conclusive. But they do help explain the milieu in which the Working Group, or PPT, was set up by presidential proclamation – Congress had no role -- in March 1988. The proclamation authorized the Working Group to “enhance the integrity, efficiency, orderliness and competitiveness of financial markets” -- language that may have been intended to provide a broad and loose authorization for intervention in the 1987 mode, should it be required again.
Media discussion of the Working Group, negligible in 1988, rekindled after the tribulations over the Asian and Russian debt and currency crises of 1997 and 1998. Washington's ambitions to manipulate seem to have been on the upswing. In a January 1997 speech in Belgium, Greenspan indicated that the Fed could pursue “direct intervention in market events” -- a bold new legal interpretation.
A month later, The Washington Post ran a big article, revealing details never repeated by any other major publication. The article describes how the Working Group had set up a financial "war room;" assembled a global as well as national list of key emergency contacts, and carried out simulated emergency drills.
In the wake of the Sept. 11 terrorist attacks, media attention to possible government market intervention and manipulation refocused again -- though less in the United States than in foreign English-speaking media. The London Observer reported, later that September, the Working Group-cum-PTT was “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 if there is evidence of panic selling in the wake of last week's carnage.”
The group was cited again a half-year later. The authoritative Financial Times quoted a Fed official, who declined to be identified, but acknowledged that policy-makers had considered “buying U.S. equities” -- not just futures. The Fed, said the official, could “theoretically buy anything to pump money into the system,” including “state and local debt, real estate and gold mines, any asset.” That sounds much like the same broad conception of empowerment Greenspan had injudiciously taken note of in 1997.
Two months later, the Australian Financial Review weighed in, wondering whether a 234-point intra-day surge on the New York Stock Exchange could be attributed to the PPT: “There is a belief that this team represents a powerful and secretive hand that is ready to act any time the Dow looks ready to tank big time.”
After 2001-02, there was little mention of the PPT group for several years. But come 2006, when Paulson decided to renew the Working Group as a major player, the British financial pages, if not the American, renewed their interest. The London Telegraph described the PPT as a “shadowy body with powers to support stock index, currency and credit futures in a crash.” It added that the former Clinton aide, George Stephanopoulos, had earlier described the group as having “an informal agreement among the major banks to come in and start to buy stock if there appears to be a problem.”
http://www.washingtonindependent.com/view/the-plunge |
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