Friday, March 09, 2007


Idealogy Cannot Exists On Its Own

Plunge Protection Team

I came across a very well written article entitled, "The secret maneuverings of the Plunge Protection Team" By Mike Whitney of Information Clearing House. I have highlighted some parts for discussion.

"The Working Group on Financial Markets, also known as the Plunge Protection Team, was created by Ronald Reagan to prevent a repeat of the Wall Street meltdown of October 1987. Its members include the Secretary of the Treasury, the Chairman of the Federal Reserve, the Chairman of the SEC and the Chairman of the Commodity Futures Trading Commission. Recently, the team has been on high-alert given the increased volatility of the markets and, what Hank Paulson calls, "the systemic risk posed by hedge funds and derivatives.” Last Tuesday’s 416 point drop in the stock market has sent tremors through global system. An 8% freefall on the Chinese stock exchange triggered a massive equities sell-off which continued sporadically throughout the week. The sudden shift in sentiment, from Bull to Bear, has drawn more attention to deeply rooted “systemic” problems in the US economy. US manufacturing is already in recession, the dollar continues to weaken, consumer spending is flat, and the sub-prime market in real estate has begun to nosedive. These have all contributed to the markets’ erratic behavior and created the likelihood that the Plunge Protection Team may be stealthily intervening behind the scenes. According to John Crudele of the New York Post, the Plunge Protection Team’s (PPT) modus operandi was revealed by a former member of the Federal Reserve Board, Robert Heller. Heller said that disasters could be mitigated by “buying market averages in the futures market, thus stabilizing the market as a whole.” This appears to be the strategy that has been used. Former-Clinton advisor, George Stephanopoulos, verified the existence of The Plunge Protection Team (as well as its methods) in an appearance on Good Morning America on Sept 17, 2000. Stephanopoulos said: “Well, 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….perhaps the most important the Fed in 1989 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 and they have been meeting informally so far, and they have a kind of an informal agreement among major banks to come in and start to buy stock if there appears to be a problem. They have in the past acted more formally… 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 to consider that if the markets start to fall.” Stephanopoulos’ comments have never been officially denied ... Robert McHugh, Ph.D. has provided a description of how it works which seems consistent with the comments of Robert Heller. McHugh lays it out like this: “The PPT decides markets need intervention, a decline needs to be stopped, or the risks associated with political events that could be perceived by markets as highly negative and cause a decline; need to be prevented by a rally already in flight. To get that rally, the PPT’s key component — the Fed — lends money to surrogates who will take that fresh electronically printed cash and buy markets through some large unknown buyer’s account. That buying comes out of the blue at a time when short interest is high. ... If a secret team is interfering in the stock market, it presents serious practical and moral issues. For one thing, it disrupts natural “corrections” which are a normal part of the business cycle and which help to maintain a healthy and competitive slate of equities. More importantly, outside intervention punishes the people who see the weaknesses in the stock market and have invested accordingly. Clearly, these people are being ripped off by the PPT’s back-channel manipulations. They deserve to be fairly compensated for the risks they have taken. Moreover, artificially propping up the market only encourages over-leveraged speculators and smiley-face Pollyanna’s who continue to believe that the grossly-inflated market will continue to rise. Rewarding foolishness only stimulates greater speculation. The tinkering of the PPT is sure to erode confidence in the unimpeded activity of capital markets. It’s astonishing to think that, after years of singing the praises of the “free market” as the ultimate expression of God’s divine plan; these same conservative ideologues and “market purists” favor a strategy for direct intrusion. The actions of the Plunge Protection Team prove that it’s all baloney. The “free market” is merely a public relations myth with no basis in reality. Saving the system will always take precedent over ideology; just as the “invisible hand” will always be overpowered by the manicured and mettlesome fingers of banking elites and Wall Street big wigs. ... Trust in the Free Market is wavering. Whatever happened to the idea of completing the “market cycle” and allowing markets to self-correct whether that meant belt-tightening or not? And, what about the ethical question of whether government manipulation should be allowed in a “free market”? Also, by what authority do the government and the privately-owned banks interfere in the futures’ markets and shift momentum from the prevailing trend? Is this a free market or a command economy?..."

My Take - The argument is based on the fact that free markets should be allowed to exist. Why? Why is that necessary? Different times in history and financial markets have different roles to play. 50 years ago a financial collapse is likely to be a localised event, not now. Localisation has now gone on to be globalisation. Localised event is now a domino-effect thingee around the world.

As a politician, bureaucrat and/or steward of good governance, nobody in those positions would want a total collapse of financial markets, as the rebuilding process may take decades. Maybe there is too much leveraged instruments out there. It is easy to be critical, to call for total free market movement when there are so many inherent faults within the financial system is irresponsible. Maybe there is too much leverage now and to allow for unmanaged falls could lead to catastrophies that many economies may not be able to recover from. We have to acknowledge that there is a herd mentality among certain fund managers and hedge funds even, and collectively they can take huge advantage over the rest of the markets by playing the trends together - who is to say that they are not acting in cahoots sometimes??!! Hence we do need a power player, to bring sanity back, and not allow any big domination or excessive manipulation by the one group of funds. The existence of PPT also signals as a threat to diminish any potential plans to corner or misguide the markets with criminal intent.
Countries with jobs usually do not have much war, starvation or violence. Countries with few jobs usually have lots of those, we don't want more chaos than what we have now.

Targeting the Americans for having PPT is very silly. The US has military and global economic leadership, I would expect them to have some sort of PPT. Capitalism yes, but free markets has to be redefined according to the times. The buggers who call for total free markets need to broaden the bigger picture. Its idealogical, but not practical. Just like most things in life, who practices pure Communism or pure planned economy anymore? Capitalism, free markets, planned economy are all models based on theories, not absolutes based on religious fervour.

Not many people know that Malaysia has one of the highest GDP percentage being listed, its in the high 80s. Other developed countries ranges from 50%-70%. What that means is that many countries' economic performance have a moderate to very high correlation to financial markets. If we have totally free markets and let's go bacl to the LTCM 98 debacle, nobody step in, KLSE was already in the 500-700 range after the implolsion, now you get another round of financial free markets correction, it would decimate demand and assets globally.The KLSE might even have gone to 200 not by its own fault in any way. So we need to think of repercussions, because unguarded corrections could kill off more than we could rebuild.

Yes, the shorts might be dealt a bad deal but its a "lesser evil" kind of scenario here. Its not just in saving major correctional phases, the PPT could also come it to deflate excessive liquidity by exhorting various central banks to tighten policies or soak liquidity. What we want is to lessen the pendulum swings on both extremes.

Sometimes things are not as bad as they seem. Chill man!!

5 comments:

doraiddd said...

my traders refer to this as the UNSEEN HAND... we can always 'smell' THEM but never see nor touch THEM...

perhaps when many small unseen hands work collectively, THEY leave just one giant handprint...

the yanks are the masters of this game. Our malaisesian ones are still a bit wet behind their unseen ears but slowly and surely, they're definately forward banking their burgeoning talents...

doraiddd said...

and another 10 bucks if......

DanielXX said...

I would have thought market mechanisms like trading curbs, circuit-breakers and uptick rules to prevent excessive shorting can all be considered methods to "prevent natural correction of the markets"? Yet they are accepted without much opposition. The existence of a PPT is merely recognition of the fact that a system operated and participated by humans is prone to destabilising swings occasionally. The main question is what makes these PPT team members think they can be judges and arbiters of when such market abnormalities should be corrected. Well, that's where implicit trust in the high-powered members comes in. It's better than having no measures and precautions at all.

Salvatore_Dali said...

i think we r all on the same page here ... better to have a ppt than none... the final argument being can we trust this group to act in "whose's best interest" ... the danger is if its the collapse of US economy vis a vis asian economies...hmmm ... but as all mkts are inter connected now, it does us no harm if they protect US mkts first anyway... nice to see paul-san roaming asia though .... yea, we finally exist

sopskysalat said...

Are we seeing PPT in action? A quick reversal from triple digits to nearly flat!

So far, I only remember HK intervened into the market to rescue them in asia financial crisis.