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cho
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Rigged Casinos and the Plunge Protection Team: Bernanke acknowledges greater intervention in the markets

Back on Saturday when I promised to write more about Kevin Phillips and his take on the Plunge Protection Team, I had little idea that the PPT would have such a public coming out party so soon.

This morning, according the to Wall Street Journal, Fed Chair Bernanke said “federal regulators, policymakers and private sector groups are already taking steps to address some of the concerns laid bare during the turmoil last year.”

Translation #1: The myth of the free market is debunked.
Translation #2: Investing in the US Stock Market is about as wise as gambling in a rigged casino.

Ironically, Bernanke and US Secretary of the Treasury Hank Paulsen were scheduled to address a seminar entitled "Mortgage Lending for Low and Moderate Income Households" in Arlington, VA at 7:30 this AM.

The President’s Working Group on Financial Markets aka the Plunge Protection Team

In his latest book, Bad Money: Reckless Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism. (New York, New York: Viking Press, 2008 ISBN 978-0-670-01907-6), Phillips talks about a shadow group known as the President’s Working Group on Financial Matters.

…the assistant managing editor (money and business) of U.S. News& World Report James Pethokoukis, described how in the last two hours of August 16, 2007, the Plunge Protection Team might have put the word out to a major institution or two to buy stock index futures: a 300-point Dow decline was relentlessly wiped away. He closed with the caveat that ‘there’s never been any official confirmation of this, and that people in Washington and on Wall Street ‘totally dismiss’ these reports, albeit confirming that back in late 2006 Treasury Secretary Paulson began to reinvigorate the working group. (60)

Dubbed the Plunge Protection Team by, according to Wikipedia, a copywriter crafting a headline for the initial Washington Post article about it, the PPT (no Virginia, that’s not an acronym for a powerpoint slideshow) was first created in 1988 by then President Ronald Reagan as a way to more systematically formalize the behind the scenes activities that rescued the stock markets during the October 1987 crash.

Although for many years its existence was denied and those who spoke of it were often labeled conspiracy nuts, now many in the business press speak openly about it and its alleged actions to finagle the Savings and Loan bailout, orchestrate the rescue of Citibank, ameliorate the disasters with the tech bubble, and salvage the stock market during the subprime August 16th meltdown. But what with the fixing of the Bear Stearns deal in spring 2008, the Plunge Protection team was clearly operating more obviously. Earlier this year the press reported President Bush convened in the Oval Office a meeting of the President’s Working Group on Financial Markets -- what Ambrose Evans-Pritchard, International Business editor of the UK Telegram, calls the “black arts unit.”

Why would its operations need to be hush hush? According to Phillips again,

Frequent intervention in nonemergency situations would only prompt unwelcome investigative reportage. Drawn-out credit-market problems could also increase that likelihood.
…Proof of federal orchestration could it be established, might lead to some very messy lawsuits.

Sidenote: For any one paying attention to the names of things, one worries about similarities between the President's Working Group on Financial Markets and the White House Iraq Group (WHIG) which Douglas Feith headed and which is almost certainly responsible for cooked intelligence on Iraq’s weapons of mass destruction.

What does the Plunge Protection Team do?

As John Crudele explained in a 06-20-06 New York Post article, “…a former Federal Reserve governor in 1998 proposed that the U.S. government be allowed to rig the stock market in case of emergency. ‘The stock market is certainly not too big for the Fed to handle,’ said Robert Heller, who suggested that the government secretly buy stock index futures to save Wall Street and the economy from catastrophe.”

According to Gary Dorsch's article,,Plunge Protection Team Working Overtime, August 9, 2007 of The Global Money Trends newsletter, “The PPT is empowered to intervene in stock index futures and the foreign currency markets in event of a crash.”

Back before the 2007 August panic based on the subprime fiasco, President “too-little too late” Bush repeated his usual late summer ritual (sleeping through PDBs in August of 2001, singing Happy Birthday to John McCain right after Katrina hit land in August of 2005 and dithering during the subprime meltdown in August 2007). According one view of the events

Recognizing the huge risks to the US economy, President Bush called for a special meeting of his economic advisors on July 27th, to discuss the stock market, which had plunged as much as 456 points the previous day.
However, the PPT wouldn’t stand idle and allow the panic swirling around the Wall Street power brokers to turn into a crisis. "The market understands that the Fed will act in due time, if and when evidence accumulates that action would be appropriate,” said St. Louis Fed chief Willian Poole on July 31st.

Or as Phillips describes it:

And revealingly, on August 15 and 16, at the peak of financial market nervousness, wave after wave of stock index buys kept the correction from reaching 10 percent at any market close and thereby establishing bear market or correction status.

This year, the Plunge Protection Team essentially orchestrated the rescue of Bear Stearns...Phillips wrote about it in the Washington Independent where he explains how the deal brokered to let J.P. Morgan bail out Bear Stearns by acquiring it at bargain basement prices. He suggests that the Senate, when questioning the Fed on its role, did not dig deeply enough into the plenary powers the PPT has afforded itself.

Former Fed Chairman Paul Volcker, a well-respected senior statesman, stated his concern bluntly. “To meet the challenge," Volcker said, "the Federal Reserve judged it necessary to take actions that extend to the very edge of its lawful and implied powers, transcending certain long-embedded central banking principles and practices.” hat tip to Tony Wilkrent

Golly gee. I sure wish my bank would be so accommodating to me if I ran the risk of defaulting on my mortgage!

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Comments

9-11

Hmmm...could the PPT have profited from advance knowledge of 9-11? Absolutely staggering sums of money (institutional sized - ie, governments) were moving through the derivatives markets and positioning themselves during the two weeks prior to 9-11.

(I'm not talking about the airline put options btw.)

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The plunge and the plunger

I have been suspicious of the conspicuous unwillingness of the Bush crowd to listen to Clarke and other intelligence advisors who were warning of an imminent attack. Did they perhaps practise "benign neglect" hoping for some kind of incident that would create the circumstances for their move into Iraq? What I can't buy is direct on the ground complicity by Cheney as some conspiracy theorists argue.

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carol

Great diary cho!

And really appalling. We have to do something to end the massive corruption that is destroying our country. Rigged casinoes indeed!

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New Brookings' Report:

I'm kind of piggy backing this on your article but it sounds like a very interesting study. Barry Ritholz has a blog on ecomic topics, The Big Picture, and he has posted a link to the Brookings' report along with a summary.

They have put together a housing + transportation affordability index. In other words what happens to the affordabiltiy of a home when you factor in the cost of a commute. This is something which has traditionally been overlooked by potential homebuyers. People would consider the estimated time to and fro their jobs but not whether they could afford the commute. Now with escalating gas prices this cost is a factor.

I think the index is a really interesting idea because it implicitly deals with the cost of suburban sprawl in dollar terms as well as a factor in air pollution etc.

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carol

More lovely quotes from the Dorsch and Crudle articles

Remember, Bernanke once proposed running the printing press and dropping currency from helicopters as an economic plan.

and this one....

At this point the debate is not about a soft landing or hard landing; it is about how hard the hard landing will be,” said Nouriel Roubini, professor of economics at New York University.

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I remember some amazing charts

on which were stamped the footprints of the PPT.

In the shape of a deep-throated "V", you knew when that shape appeared on an intraday chart of, for example, a composite index like the Nasdaq, that a gorilla named something like JP Morgan had just stepped up to bat.

There are responsiblities along with the privileges of being a Federal Reserve member bank, I'm sure!

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-----
"I hope we shall crush in its birth the aristocracy of our moneyed corporations which dare already to challenge our government in a trial of strength, and bid defiance to the laws of our country." - Thomas Jefferson

or... now adays...

a private equity fund... as Bernanke said this morning... shall we not forget:

"...and private sector groups are already taking steps..."

Rigged casinos.

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