augieboo's PPT Archive (APPTA)

[augieboo]

Bernard, I don't usually even read Mauldin, because I find him boring and predictable. But in this one case I think he makes a very good argument -- most of which is lifted directly from Art Cashin.

[Bernard Ng]

I do not give any creditability to John Mauldin, just because that newsletter is a spam.

[Joe Stocks]

PPT- Mauldin is wrong. From SI.
To:mishedlo who wrote (233737)
From: UnBelievable Saturday, Apr 5, 2003 4:22 PM
View Replies (1) / Respond to of 233759

He Is Either Misinformed or Misinforming
The feat of misdirection that Mr. Mauldin has either fallen victim to, or is attempting to victimize his readers with, is the assumption that the PPT is hidden and secret. Such is not the case. It is hidden in the best hiding place of all, right out in full view.

He need only look as far as the Federal Reserve Bank of New York's Trading Desk, and then "follow the money".

As to arbitrage and program trading being why it couldn't work that exactly how it works. When the futures are bid up over fair value it causes the program trading firms to buy the market and sell the futures. This is exactly how and why the market goes up when the futures are bid up.

As to costing billions what does he think is done with the billions of dollars that the Fed creates each day through RP's.

The Trading Desk At The NY Fund Is the enabler and co-conspirator with the banksters (primary dealers) whose traders it is that place the trades which move the futures.

The traders who move the futures in ways consistent with the objectives of the Federal Reserve (particularly the FOMC) are employed by banks and securities firms recognized by the Federal Reserve Bank Of NY (FRBNY) as primary dealers.

The primary dealers are the organizations through which the Fed injects liquidity into the system when it engages in open market operations. Open market operations are one of the three ways in which the Federal Reserve implements monetary policy; the other two are determining the discount rate and determining reserve requirements. http://www.federalreserve.gov/FOMC/

Open market operations, which are conducted on behalf of the Fed by the trading desk of the FRBNY, involve adding or reducing reserves into the system by trading in government securities. “Most often, the transactions the Trading Desk engages in are short-term repurchase agreements (RPs), which are used in situations that call for temporary additions to bank reserves. With RPs, the Desk buys securities from the dealers, who agree to repurchase them by a specified date at a specified price. When the RPs mature, the added reserves are automatically drained. http://www.newyorkfed.org/pihome/fedpoint/fed32.html

RPs give the primary dealers cash that they use to influence the functioning of the markets. “At the New York Fed's Trading Desk, the staff starts each workday by gathering information about the market's activities from a number of sources. The Fed's traders discuss with the primary dealers how the day might unfold in the securities market and how the dealers' task of financing their securities positions is progressing.” (same as prior link).

So basically each day the trading desk coordinates the collusion between the major banks and securities brokerages (collectively “Banksters”) concerning the direction of the stock market.

Currently the primary dealers are:

ABN AMRO Incorporated
BNP Paribas Securities Corp.
Banc of America Securities LLC
Banc One Capital Markets, Inc.
Barclays Capital Inc.
Bear, Stearns & Co., Inc.
CIBC World Markets Corp.
Credit Suisse First Boston Corporation
Daiwa Securities America Inc.
Deutsche Bank Securities Inc.
Dresdner Kleinwort Wasserstein Securities LLC.
Goldman, Sachs & Co.
Greenwich Capital Markets, Inc.
HSBC Securities (USA) Inc.
J. P. Morgan Securities, Inc.
Lehman Brothers Inc.
Merrill Lynch Government Securities Inc.
Mizuho Securities USA Inc.
Morgan Stanley & Co. Incorporated
Nomura Securities International, Inc.
Salomon Smith Barney Inc.
UBS Warburg LLC.

http://www.ny.frb.org/pihome/news/opnmktops/2002/an020401.html

Traders employed by these organizations then intervene (ramp) the markets using this cash in a manner intended to ensure that the market functions with the Feds objectives.

The actual “heavy lifting” is done when the program trading firms react to the fact that the futures are trading in excess of fair value by buying the market and selling the futures.

But keep in mind that the Fed determines its objectives based on the input it has received from these firms concerning the condition of the markets and the types of interventions which are needed to keep them functioning “smoothly”.

Peter Fisher, Under Secretary Of The Treasury For Domestic Finance – is the person who as “liaison” between the Treasury Department and the FRBNY especially with regard to its open market operations. Prior to being appointed to this postion by George W. he was the Executive Vice President of the Federal Reserve Bank of New York where he serves as the manager of the System Open Market Account for the Federal Open Market Committee. http://www.treas.gov/press/releases/po369.htm

If he has any questions I'm sure Peter can answer them.

As to the $100,000 reward he should keep it. Maybe he can use it to get himself one of those edjumacatons.

[augieboo]

The Plunge Protection Team
A Hedge Fund's Secret Wish
Randomness and Responsibility
(from #msg-898335)

By John Mauldin
April 4, 2003 weekly e-mail

I have had so many letters of late asking me what I think of and/or know
about the existent of the so-called Plunge Protection Team, that mysterious
group of government officials who secretly prop up the stock market when it
drops too much, that I am going to jump in where wiser minds would just
leave the subject alone. It will offer a good opportunity for you to
understand concepts of arbitrage and how the markets really work. Plus, if
you can prove me wrong, I will show you how to get a quick $100,000.

Following the stock market crash in 1987, the government created something
called the President's Working Group on Financial Markets. The group, which
includes the Treasury secretary, Federal Reserve chairman, chairman of the
Securities and Exchange Commission and chairman of the Commodity Futures
Trading Commission, was formed to ensure the smooth operation of financial
markets.

Citing a Washington Post article, Carol Baum recently wrote about a 1997
article: "The Working Group's main goal, officials say, would be to keep
the markets operating in the event of a sudden, stomach-churning plunge in
stock prices -- and to prevent a panicky run on banks, brokerage firms and
mutual funds..."

"The thrust of the article is official's efforts to avert a liquidity
crisis, which is exactly what the Fed did when it flooded the banking
system with reserves following the 508-point plunge in the Dow Jones
Industrial Average on Oct. 19, 1987. How an effort to ensure adequate
access to credit to prevent a domino effect in the event of market meltdown
morphed into a cabal to prop up the stock market is anybody's guess. For a
window into the depths of the conspiracy theory, type "plunge protection
team" into Google and see what comes up."

Every time the market drops and then "mysteriously" rallies, knowing
individuals look at each other and nod, seeing the handiwork of the PPT
(plunge protection team).

Let's say it straight out. The plunge protection team does not exist. It is
an urban myth. Let me step by step prove it does not exist, and see if we
can learn something in the process.

Supposedly the PPT manipulates the market by buying S&P 500 and DOW and
NASDAQ futures when the market is dropping. Somehow, this supposedly forces
the market back up. The problem is that buying futures cannot drive the
stock market, which is obvious to real traders.

I talked with a few good friends about this article prior to writing it, to
get some background and ideas. Art Cashin, of CNBC fame, and one of the
real veterans of the markets, who ahs seen it all, wrote me the following
very clear thoughts:

"Suppose you have a lot of cash and would like to buy the S&P Index. In
the old days (circa 1980), you had two choices. You could buy each of the
stocks in the S&P according to its weighting. Then you would own a
"basket" of the 500 stocks. Or you could buy an S&P futures contract on
the S&P. Which should you choose?

"If you bought the 'basket' of stocks, you would get whatever aggregate
price improvement (or loss) that occurred while you owned the basket. In
addition, you would get any dividends paid. A slight negative would be
that it required 500 transactions (1 for each stock) and thus 500
commissions.

"If you bought the "futures," it would give you similar price action since
it would mirror the ups and downs of the basket and the index. A negative
would be that you would not get the dividends. Positives would be a single
transaction with more favorable margin requirements.

"By constructing a formula of the variables - total dividends, time left to
expiration and interest rates, etc. - you can determine if one of these
choices is cheaper than the other. This is called arbitrage.

"An old example of arbitrage was gold. If gold was selling at $300 in Paris
and $350 in London, one Rothschild might send in a pigeon to another
Rothschild suggesting A buy in Paris while B sold in London allowing the
firm to pocket the $50 (less transportation and currency conversion).

"The futures/basket formula gives you equilibrium or Fair Value. If stocks
(the basket) go up faster than the futures, you might sell the expensive
stocks and buy the cheaper futures. If the futures ran faster then you
would, do the opposite. This is called index arbitrage or sometimes
program trading....

"Anyway, the arbitrage between baskets and futures is now much bigger
thanks to the addition of Exchange Traded Funds (ETF's). So now you can
"arb" the basket against the futures or the S&P Index (ETF) (or any combo
thereof). It is a huge market."

* Trading desks do arbitrage program trading for a fraction of a percent on
a trade. Any attempt by the Fed to manipulate the market would just make a
lot of money for hedge funds and trading desks.

* The amounts of money required to attempt such a manipulation would be
huge. We are talking tens of billions of dollars if there was a true
collapse going on. The collective size of the trading community in the
world (hedge funds and "prop" desks - a prop desk is a proprietary desk for
an investment bank or broker-dealer) is in the multiple hundreds of
billions. It would require the willingness to lose billions of dollars
every time you took the plunge, so to speak.

* If the Fed or Treasury or some slush fund did buy stocks, it would inject
liquidity or more total money into the financial system or money supply.
Since the Fed openly manipulates the money supply every day in transactions
that everyone can see, in order for the Fed to hide the activity of the
PPT, they would have to take out liquidity by selling treasury notes.
Otherwise, the numbers at the end of the day or week would not add up, and
someone would notice. But if they were taking out liquidity and the money
supply did not go down, then someone would know something was up. You can't
hide these numbers, unless you can get a lot of clerks at the Fed and
elsewhere to agree to lie.

* You could not keep something of this size secret. Period. The orders
would have to be entered somewhere. The theory is that Goldman Sachs or
Citibank (or pick a firm) is part of this conspiracy. That means that
multiple traders and officers would have to be in the know. You cannot mask
trades of that size because it would essentially be the largest hedge fund
in the world. Someone would spill the beans. Can you imagine the signing
bonus from a book publisher if you could prove the existence of the PPT?

I hereby offer a $100,000 advance against 50% of the royalties to anyone
who can "show me the trades." Give me names and dates. I will write the
book, and we both become famous.

Further, can you imagine what political hay the opposition political party
would make of the proven existence of a PPT? Do you think that the Dems
wouldn't love to embarrass Bush with "proof" of his manipulation of the
market? Can you imagine Newt Gingrich or Tom DeLay (Republicans) not
beating up Clinton and Robert Rubin for crimes against the market and for
losing billions of dollars of tax-payer money?

If the President's Working Group was really the PPT, do you think every
former SEC and CFTC Commissioner (and there are maybe a dozen) would all
keep silent after they are out? Do you think their wives (or husbands)
would not tell all in a divorce hearing? Do you really think that if Harvey
Pitt would have allowed George W. to fire him if he could blow the whistle?

A Hedge Fund's Secret Wish

* I don't doubt there are all sorts of secrets that officials in our
government keep from us, and that all sorts of untoward things are done
every day in the government, that if we found out we would be shocked.

But if the PPT existed, it would be just too big to keep secret. If it were
small enough to be secret, it could have no effect upon the market. I don't
doubt for a second that if the Fed decided to buy stocks and was willing to
risk losing hundreds of billions, they could move the stock market up for a
period of time. But then what do they do? They own a bunch of stocks. Could
they ever sell without causing a crash?

Furthermore, if there is a PPT, they are the most incompetent team in the
world because the markets have indeed plunged. I can guarantee you this: it
is every hedge fund's most fervent wish that there was a plunge protection
team, because it would be a license to print money trading against them.
Imagine, having someone on the market with an unlimited bank account whose
objective was to lose money? Could it get any better?

Some would argue that the PPT does not lose money - that they are so good
they buy the stocks and wait until the market goes back up before they
sell. If there were individuals who had such god-like insight into the
future direction of the market, they would be running their own funds,
making tens of millions in annual fees, far more than they would make as a
bureaucrat. Further, as the bear market has moved the market down, the
losses would be in the hundreds of billions by now. That much loss cannot
be hidden, even if you have a printing press.

* If you believe in the PPT, it probably would do no good to mention that
the rules under which the Fed operates makes it illegal for them to
participate in such an operation, since you would assume they would not
follow their own rules.

Let's look at the Crash of 1987. At the end of the day, there was a huge
amount of futures buying, which some say is evidence of the Fed or other
group stepping in and stopping the bleeding. What really happened is that
the futures got so out of whack with the physicals that it was an obvious
arbitrage position, and Paul Tudor Jones, one of the largest and certainly
one of the more highly respected traders stepped in and began to cover his
huge short position. Jones was a legend. Once the word hit he was covering,
the crowd stormed in. No conspiracy. No hidden machinations. Just some
traders taking monster profits.

And that often is what you see when there are large and strange moves. Just
traders taking profit, either on the long side or short side. It is what
Chris Fuligni calls his TFTF trade: Too Far Too Fast. When the market moves
too much in one direction, traders take profits.

In my opinion, and as I have made the case for several years, this market
is too high compared to historical trends of value. In my opinion, it has
much further to go on the downside. But secular bear markets do not go
straight down to "fair value." It takes years of going down, with large
rallies back up and then more down before the bottom is finally reached. At
every step, there are advisors and investors who decide that "now" is a
good time to invest. There is no mass consensus.

Remember, over half the years within a secular bear market cycle are up
years, and most of those are up by 20% or more. As the fairly bearish Dan
Denning wrote in Strategic Investment today: "...confidence can be a heady
thing. If Hussein ends up dead and Osama bin Laden is captured, look for
10,000 on the Dow in short order. Euphoria is a powerful emotion."

Those who feel the market is over-valued have ample justifications. You can
go to Standard and Poor's website and look at their valuations. If you take
pro forma earnings (that is Earnings Before Interest and Hype) the current
P/E ratio is 18, which is high, but certainly within historical norms. But
if you look at actual "as reported" earnings, the P/E ratio jumps to 30.29.
That is in nose-bleed territory to the historical average of 15.

If you look at core earnings, the number is over 35. Core earnings subtract
options expense and pension fund overstatements. The new accounting
standards will probably mandate firms to start subtracting these items, so
the core earnings P/E ratio is a number that is increasingly going to be
seen by the investor.

Not fair, say the bulls. To get true historical comparisons, you have to
compare apples to apples. The new standards distort the actual
profitability of a company, and give us no fair historical comparison.

To that, I politely say bunk. Pre-1990, pension benefits did not have
nearly the impact that it does today, as there was not that much over-
funding and estimates of future earnings were far more conservative. It is
only in the decade of financial engineering, where a CEO could create a 10%
rise in his company earnings just by changing the assumptions of his
company pension fund that these elusive pension fund earnings started to
show up in the books in a significant way.

Of course, that helped the CEO's personal options, which again the company
did not have to expense. Options were not a big deal prior to 1980 and not
all that significant even until 1990.

Accounting standards always tighten up in bear markets. Investors become
more conservative. They are not willing to project earnings growth far into
the future. That is why the market drops.

If you go to Decisionpoint.com, you can see in one of the many hundreds of
charts available that if the P/E ratio for the S&P 500 were 15, about
average for the last century, the market would be at 420 today. As markets
have always over-corrected, generally to below single digit P/E ratios, if
it went to 10, the S&P 500 would be at 280, down 68% from here. That is
pretty ugly.

I believe we are going to single digit ratios. I also believe it will take
a decade or more. In that time, earnings will grow, and probably double or
more without having to be too optimistic. What happens in secular bears is
that earnings grow and P/E ratios drop. But it does not happen all at once.
It takes time.

We can be thankful for that, because if the markets were to drop 68% today,
we would be facing a depression as severe as our grandparents faced. It
would be ugly, ugly, ugly. Thus, in a kind of perverted logic, we should be
grateful for market cheerleaders, as they prop up the economy and stave off
a disaster scenario. But as individuals, we don't have to listen to them.

The point is that there are those who see the market as under-valued. When
it does not go up they blame hedge funds, short sellers and wicked analysts
for their losses. There are those who see the market as over-priced and
want the market to conform to their worldview, and they see rallies as
evidence of the Plunge Protection Team. The world is not as it should be,
and there must be some secret reason. That is especially true if they are
short and the market goes up.

The real reason is what Richard Russell says over and over, "The market is
the market. It just is." In a real sense, this is more scary than the
possible existence of a plunge protection team. It means we are subject to
the vagaries of a market which is out of anyone's ability to control. I bet
there have been a few times you wish someone could have made the market go
back up. In a world where anything can happen, risk control is everything.
It would be nice to know that I could count on some secret group to protect
my funds, but it doesn't exist. I am responsible for my own risk protection
and personal portfolio.

Randomness and Responsibility

Thus, we return to Art Cashin's final bit of wisdom: "People can't stand
two things - randomness and responsibility. On the first point we again
cite Voltaire: "If God did not exist, it would be necessary to invent him."
The premise is obvious and a truism - life must have order. The class
needs rules and a teacher. An occasional accident is acceptable, though
maybe not understandable. The logical (for many of us) existence of a
deity transmutes in the secular world into - someone is in charge. (The
government, the moneyed interests, some religious or ethnic group, etc.)

"Now factor in the inability to accept responsibility.

"If my horse doesn't win - the race was fixed - the horse was doped. The
variations are myriad. It can never be my fault or my miscalculation.
That could mean I was careless, or confused or hasty or maybe even wrong.
The latter is unacceptable so it must be someone else.

"Thus conspiracy theorists and the plunge protection theme. In four
decades, I've heard hundreds of theories. The collapse of the Hunt
Brothers' silver bubble was roundly blamed on a government conspiracy. As
time went on it was obvious there was no conspiracy - not there or in
hundreds of other cases. But....when your perfect game is ruined in the
final frame (bowling) or the final inning (baseball) - dashed hopes demand
a villain - an evil deus ex machina. They stole it from me, I tell ya!!"

[augieboo]

FROM THE SI "CLOWN FREE ZONE," ON THE PPT
To:ild who wrote (181094)
From: stan_hughes Thursday, Jul 18, 2002 12:28 PM
http://www.siliconinvestor.com/stocktalk/msg.gsp?msgid=17757226

<snip>

All I can say about the PPT is that:
(a) I for one believe it exists
(b) I believe they have been active in the market, despite all the official pronouncements to the contrary. I wouldn't expect them to admit it because doing so would run 110% counter to the notion of the US having the so-called "freest" markets in the world
(c) that GS and MER have the type of 'ties that bind' via Rubin etc. that make them the most likely straw men for PPT activity, much the same way JPM has been the Fed's front man in the agenda to demonetize gold
(d) that the FRB no doubt has ways and means far beyond my feeble comprehension to mask their activities, so I don't expect I'll ever be the guy to turn up a smoking gun
(e) that PPT intervention in this market might serve to alter the steepness of the trajectory, but it can't change the direction or hold it back indefinitely

Like I said, color me paranoid, I'm happier that way anyway

*******************************************

To:stan_hughes who wrote (181101)
From: Earlie Thursday, Jul 18, 2002 2:30 PM
http://www.siliconinvestor.com/stocktalk/msg.gsp?msgid=17758128

Stan:
I read your post carefully. I just want to note that I share each and every one of your beliefs respecting the PPT and the Fed/Treasury involvement with the markets. (and I am not completely paranoid,......yet).

While the available evidence on the PPT is more circumstantial,...

- like the currency traders and the S&P futures traders all becoming wildly bullish at exactly 2:21 pm and as if in concert, just holding hands and diving into the pits together, taking out every ask in sight,
- or like the pre-market futures being driven up on no discernible news darned near every morning of late.
- or like Robert Rubin's brilliantly orchestrated "resignation" (somebody made several fortunes in a single day in the futures on that flip flop action).
- or like that first non-telegraphed rate move by the Fed, (ANNOUNCED DURING TRADING HOURS) (whoever bought the big package of options just before that announcement needed a dump truck to haul off the winnings) which coincidentally occurred just after the banks were put up against the wall by Big Al and told that they WOULD participate in the LTCM bail-out.
- etc.

With respect to the gold markets, the evidence gathered by the GATA boys is irrefutable IMHO, and Venerosa's research is both brilliant and supportive.

Best, Earlie

*****************************************



(:

augie

[augieboo]

U.S. working group has not met to discuss markets
By Arshad Mohammed
(Adds details, quotes, background)

WASHINGTON, July 16 (Reuters) - The U.S. government has not convened its top-level working group on the financial markets to discuss the slide in U.S. stocks and does not try to manage the market's daily moves, the White House said on Tuesday.
ADVERTISEMENT

"They have not met with particular reference to stock market activity because we don't try to manage stock markets' daily movements," White House spokesman Ari Fleischer said of the President's Working Group on Financial Markets.

The group, which includes representatives from the U.S. Treasury, the Securities and Exchange Commission, the Federal Reserve Board and the Commodity Futures Trading Commission, was created after the 1987 stock market crash to promote close cooperation among key agencies at times of market volatility.

There were rumors in European markets on Tuesday that the group might have met to discuss the U.S. stocks slide.

Fleischer told Reuters there had been staff-level contacts among the group to discuss ways to improve corporate governance and protect employee pensions, something U.S. President George W. Bush had asked them to study in January, but that the heads of the agencies making up the group had not met recently.

The group typically meets when the markets are disorderly and there are concerns they may cease to function properly, but it can also meet in calmer times to address complex issues facing the financial markets.

The group issued a statement after the Sept. 11 attacks and it was particularly active during the Asian financial crisis.

The Bush administration's decision not to convene the group, unofficially nicknamed the Plunge Protection Committee, may reflect a view that the recent declines in the stock market to its lowest levels since 1997 are not of that order.

The stock market has fallen steadily over the last week because of a crisis of confidence in corporate America after accounting scandals at companies like Enron Corp (Other OTC:ENRNQ.PK - News), which has caused investors to doubt earnings reported by many companies.

However, the market has not suffered any dramatic one-day plunges like its 508-point loss in the "Black Monday" crash on Oct. 19, 1987 or its 554.26-point nosedive on Oct. 27, 1997, sparked by the Asian financial crisis.

The Dow Jones industrial average, which has fallen roughly 7 percent over the last week, was down about 165 points, or nearly 1.9 percent, at 8,474 at 4 p.m. EDT on Tuesday.

BUYERS 'RACING IN'

There was market talk in Europe on Tuesday -- dismissed by many players -- that the U.S. government may have tried to orchestrate Monday's stunning recovery on Wall Street by urging institutions to buy or by buying itself.

Stocks on Monday made their steepest plunge of the year and then rallied nearly 400 points for the Dow industrials to close down only 45.34 points at 8639.19.

A stock trader for a major investment bank on the Chicago Mercantile Exchange said the sharp rebound from deep declines on Monday was driven by institutional buying after stocks hit critical technical levels -- not by any market manipulation.

When the Dow Jones industrials breached its Sept. 21 lows and touched 8,244.87 with stock futures pointing to a 7,900 level, orders from investment banks Merrill Lynch (NYSE:MER - News), Goldman Sachs (NYSE:GS - News) and Lehman Bros (NYSE:LEH - News) and others flooded in, traders said.

"We were absolutely dead quiet going into the September bottom. It was kind of eerie on the floor. This was not suspicious, only savvy," one futures trader said.

Buyers knew that traders who had sold contracts "short" betting on further stock declines would have to start buying to cover their positions. Sure enough, the impact was explosive.

"It almost was like a gun that went off. When that Dow level was touched and held, buyers came racing in," he said.

The New York Fed called key market players in recent days to gauge what the market needed to hear from Federal Reserve Chairman Alan Greenspan in his testimony to the Senate Banking Committee on Tuesday to soothe investors, market sources said. One hedge fund adviser suggested this might have sparked the rumors of government intervention.

The New York Fed declined comment but said that as part of its role monitoring markets it speaks to participants daily on market conditions.

http://biz.yahoo.com/rc/020716/bush_markets_2.html


(:

augie

[augieboo]

Plunge Protection by Steve Saville
http://www.gold-eagle.com/editorials_02/milhouse070402.html

It has become fashionable to point the finger at something called the Plunge Protection Team (PPT) whenever the stock market suddenly reverses higher or fails to collapse in response to bad news. The PPT, which does actually exist although its proper name is the Working Group on Financial Markets, is headed by the Secretary of the Treasury and counts the Fed chairman as one of its members. The theory is that the PPT acts to prevent large declines in the stock market by buying S&P500 futures at critical times.

Manipulation happens in the stock market on a daily basis. Mutual funds, specialists, hedge funds, Wall St firms and large speculators are often deliberately trying to move prices in one direction or another. This manipulation does not alter the trend, but it can affect the path the market takes to get from point A to point B. Furthermore, we know that the US Government intervenes in the currency and bond markets and we can be pretty sure that it meddles in the gold market, so it is not much of a stretch to conclude that the Fed and the Treasury are also directly involved in stock market manipulation. This is particularly so since it was revealed earlier this year that the Fed contemplated "unconventional measures" to stabilise markets.

Further to the above, it is not difficult for us to believe that the PPT would intervene in the stock market. However, we have seen absolutely no evidence that such intervention has occurred. In our view, those who are pointing fingers at the PPT are misreading the market.

Trading would be very simple if we could make money by just buying in response to good news and selling in response to bad news. Unfortunately, markets don't work that way. All of the financial markets will regularly do the opposite of what you expect if your expectation is shaped by the 'news of the day'.

During the devastating stock bear market of 1974 the market would often rally in the wake of bad news. In fact, the news at that time was generally MUCH worse than any of the recent news while the upward reversals following the bad news tended to be more pronounced than the upward reversals we have seen over the past few months. There was no PPT in existence in the 1970s and, as such, no 'they' to blame for the rallies that occurred in the face of the deteriorating fundamentals.

As is the case now, the major stock indices were immersed in powerful downtrends during 1974 and each upward reversal was followed by a decline to new lows until the final capitulation occurred. In 1974 the final decline began when the Watergate scandal forced President Nixon to resign. This was the news from which there was no recovery and the market fell in almost a straight line until a major bottom was reached about 2 months later.

The PPT has enormous power and if it chose to make full use of that power it could certainly push the stock indices considerably higher. The Fed, a member of the PPT, has an unlimited ability to create dollars, so if it really wanted to the Fed could print enough currency tomorrow to buy the entire stock market. (There is, of course, a practical limitation to the Fed's currency-creating ability in that the more dollars it prints the weaker the US$ would become.) From what we've observed the PPT has not, to date, chosen to make direct use of its immense power as far as stock market support is concerned. For example, when the stock exchanges opened for business last year following the September terrorist attacks the market plunged for 5 straight days. The decline didn't end until a) the market had become more oversold than it had been at any time over the past 40 years, b) the small traders had capitulated and the commercial traders had covered a substantial part of their short position, and c) the S&P500 had dropped to within 10 points of major support as defined by the 1998 low. From such a position it would have been amazing if the market had not been able to mount a sizeable rally.

If ever there was a time that the PPT could have justified an intervention the period of September 17-21 last year was it, but it looks as though the market was allowed to fall until a massive oversold recoil became inevitable. There was, of course, indirect intervention in the form of interest rate cuts and money-supply expansion, an effect of which, as we noted at the time, would be higher gold and commodity prices in the months and years to follow.

As far as last week's action is concerned, there seems to be widespread surprise that the market was able to recover in the wake of the Worldcom news. However, was the market's performance following this news really so difficult to comprehend that unnatural forces become the most probable cause of this performance?

Prior to the reporting of the $3.6B 'mistake' in Worldcom's books the WCOM stock price had already fallen by more than 98% from its all-time high. In fact, WCOM's market cap, just prior to last week's news, made no sense if the results that had previously been reported by the company represented its true financial situation. The stock was way too cheap. Clearly, the specifics of Worldcom's creative bookkeeping came as a surprise but the market already knew, prior to the news, that something was horribly wrong at that company. It just didn't know the details.

The market (the S&P500 Index) is trending down and we expect this trend to persist until the majority of stocks have become fundamentally under-valued. However, within this downtrend there will be counter-trend rallies and there will be many occasions on which the market reverses higher following bad news. This is normal and is what the market must do if it is to maintain some semblance of hope (hope is what bear markets feed on). The final bottom could come quickly as a result of mutual fund investors giving-up en masse (perhaps in response to some devastating and truly unexpected news), or it could come slowly following a drawn-out slide (a death by a thousand cuts).

Regular financial market forecasts and analyses are provided at our web site:
http://www.speculative-investor.com/new/index.html
One-month free trial available.

Steve Saville
Hong Kong

July 4, 2002


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[augieboo]

Fed Ponders 'Unconvential' Methods To Combat Potentially Deleterious Effects of a Zero Bound Interest Rate Policy
Minutes of the Federal Open Market Committee, January 29-30, 2002

"The Manager also reported on developments in domestic financial markets and on System open market transactions in government securities and federal agency obligations during the period December 11, 2002, to January 29, 2002. By unanimous vote, the Committee ratified these transactions.

At this meeting, members discussed staff background analyses of the implications for the conduct of policy if the economy were to deteriorate substantially in a period when nominal short-term interest rates were already at very low levels. Under such conditions, while unconventional policy measures might be available, their efficacy was uncertain, and it might be impossible to ease monetary policy sufficiently through the usual interest rate process to achieve System objectives. The members agreed that the potential for such an economic and policy scenario seemed highly remote, but it could not be dismissed altogether. If in the future such circumstances appeared to be in the process of materializing, a case could be made at that point for taking preemptive easing actions to help guard against the potential development of economic weakness and price declines that could be associated with the so-called "zero bound" policy constraint."

Minutes of the Federal Open Market Committee, January 29-30, 2002

http://members.rogers.com/fallstreet1/plungeprotection/apr102p/apr102p.html

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[augieboo]

Executive Order 12631 establishing Working Group on Financial Markets

-----------------------------------

Text of Executive Order 12631
DATE: 03-18-88

31 -- Money and Finance

Working Group on Financial Markets

By virtue of the authority vested in me as President by the Constitution and laws of the United States of America, and in order to establish a Working Group on Financial Markets, it is hereby ordered as follows:

Section 1. Establishment. (a) There is hereby established a Working Group on Financial Markets (Working Group). The Working Group shall be composed of:

(1) the Secretary of the Treasury, or his designee;

(2) the Chairman of the Board of Governors of the Federal Reserve System, or his designee;

(3) the Chairman of the Securities and Exchange Commission, or his designee; and

(4) the Chairman of the Commodity Futures Trading Commission, or her designee.

(b) The Secretary of the Treasury, or his designee, shall be the Chairman of the Working Group.

Sec. 2. Purposes and Functions. (a) Recognizing the goals of enhancing the integrity, efficiency, orderliness, and competitiveness of our Nation's financial markets and maintaining investor confidence, the Working Group shall identify and consider:

(1) the major issues raised by the numerous studies on the events in the financial markets surrounding October 19, 1987, and any of those recommendations that have the potential to achieve the goals noted above; and

(2) the actions, including governmental actions under existing laws and regulations (such as policy coordination and contingency planning), that are appropriate to carry out these recommendations.

(b) The Working Group shall consult, as appropriate, with representatives of the various exchanges, clearinghouses, self-regulatory bodies, and with major market participants to determine private sector solutions wherever possible.

(c) The Working Group shall report to the President initially within 60 days (and periodically thereafter) on its progress and, if appropriate, its views on any recommended legislative changes.

Sec. 3. Administration. (a) The heads of Executive departments, agencies, and independent instrumentalities shall, to the extent permitted by law, provide the Working Group such information as it may require for the purpose of carrying out this Order.

(b) Members of the Working Group shall serve without additional compensation for their work on the Working Group.

(c) To the extent permitted by law and subject to the availability of funds therefor, the Department of the Treasury shall provide the Working Group with such administrative and support services as may be necessary for the performance of its functions.

The provisions of Executive Order 12631 of Mar. 18, 1988, appear at 53 FR 9421, 3 CFR, 1988 Comp., p. 559, unless otherwise noted.



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[augieboo]

Angels from on high drag markets to safer ground
By BRIAN HALE in New York
October 13, 2000 - Sydney Morning Herald
http://members.rogers.com/fallstreet1/plungeprotection/oct232000/oct232000.html


Nervousness hasn't cleared from Wall Street despite the
bounceback from Wall Street's near disaster mid-week after
IBM's result gave the short sellers a long start in their hunt for a
Red October.

The question, though, is whether Big Al (Greenspan) is pulling on
the end of the bungee cord. Uncertainty over the answer means
there still is almost as much red as green on the stock tickers,
showing that whatever the direction of the indices, lots of stocks
are going down rather than up and the shorts are keen for another
big down day.

There seem to be more of them around, too. It's not surprising.
Selling (shorting) stocks you don't own with the intention of buying
them back at a lower price and pocketing the difference has been
the best way to make money on Wall Street for two months.

At the moment it even seems like a lay-down misère because
there's a horde of margin investors who bought on borrowed
money and are now forced sellers, depressing share prices further
whenever stocks start to tumble.

At last count, which was at the end of September, margin debt had
edged higher again by $US3.2 billion to $US250.8 billion ($475
billion) - just 10 per cent down on the peak of margin debt in
March at $US278.5 billion.

It's a fair bet that every borrowed dollar was punted on technology
stocks. Almost everything else tanked long ago and no-one gears
up to buy shares in General Electric or General Motors. It is the
tech stocks that now are leading the way down, so when the techs
tumble, the margin calls multiply and the forced-seller "longs"
reinforce the move that the "shorts" want.

That is just what happened last week after the previous Friday's
rebound from a rout the day before: first on Tuesday, when the
major stocks and the indices recovered from their lows (with the
Nasdaq Composite dropping 2.32 per cent), and then again on
Wednesday.

That morning finally saw some real fear and panic on Wall Street
as the Dow Jones Industrial Average plunged 435 points (4.3 per
cent) and Nasdaq 187 points (5.8 per cent) in heavy volume in the
first 10 minutes of trading.

The quick drop took the Dow below the 10,000 level for the first
time since mid-March and dragged Nasdaq's Composite index to
a new low for the year of 3026 - a 40 per cent fall from the record
high it set earlier in the year - before the angels arrived with a
rebound that left Nasdaq down just 42 points (1.14 per cent) and
the Dow down 114 points (1.32 per cent) on the day.

That was followed on Thursday, the 13th anniversary of the 1987
crash, with a 247-point (7.8 per cent) rebound on Nasdaq and a
167-point (1.7 per cent) recovery by the Dow.

The thing is, no-one knows why. Traders were stunned at the
turnaround and so was everyone else. It sparked the usual chatter
from the usual suspects about market bottoms, Microsoft's
quarterly profit report, etc, etc, but that can be dismissed out of
hand, not the least because the software giant's result might have
been better than expected on the top line but was good only on a
superficial level.

What is clear is that the turnaround began (was engineered) in the
futures market. At the lows, futures on the Nasdaq 100 index - the
largest 100 companies in the Composite without the foreigners -
were down only 4.7 per cent while the index itself was down 6 per
cent.

Curious indeed, says Bill Meehan, the chief market analyst at
Cantor Fitzgerald, who accepts that a sharp reversal was likely as
the recent lows would be heavily defended with the put-to-call
numbers so extreme, but admits to being taken aback by the
Nasdaq's ability to close the gap in less than 90 minutes.

It took a lot of heavy buying by the major Wall Street houses to
close the gap, but no-one who wants to talk will admit the source
of the buying orders that, as Meehan puts it, made the lows well
defended on Wednesday, "... perhaps with a little help from the
market's friends".

Could it have been Wall Street protecting itself? Very unlikely.
Those who live and die on the Street of Dreams are not burdened
with altruism. Certainly nowhere near enough to unleash an
extremely aggressive buying attack in the futures pits right at the
maelstrom of the ugliest market opening of the year.

These are the people who had to be strong-armed by the Fed into
1998's rescue of the Long-Term Capital hedge fund, even though
its imminent collapse threatened a systemic failure of the US
financial system.

Could it have been the Fed? Would it have been the Fed?

Yes, it could. Back in February 1994 Fed chairman Greenspan
revealed for the first time that a global link-up of central banks had
prevented the 1987 sharemarket crash from becoming a broader
international financial disaster. He did not say the Fed had
intervened directly, admitting only that "containment" involved the
"prudent provision of liquidity to financial markets" - but, said Dr
Greenspan, "we are responsible for ensuring the stability and
integrity of national financial systems ... that is the essence of our
mandate, whether written in law or not".

A few years later The Washington Post revealed the existence of
an outfit called the Working Group on Financial Markets, known
informally as "The Plunge Protection Team".

Were we seeing a plunge in the first 10 minutes of trading on
Wednesday? No question. Would the Fed want us to know if the
PPT was in action? No way. The moral hazard is too great -
investors would know their backs, and their bottoms, were
protected.

But it's worth noting that no fewer than six Fed presidents and
governors were out speaking on Thursday, including Greenspan
himself, who was widely seen as the most bullish.

Still, John Vail, chief strategist at Fuji Futures, thinks the US
media's spin on Greenspan was as positively biased as its take on
Microsoft. Vail points out that when Greenspan talked about the
backwardation in oil markets as indicating oil prices would fall, he
talked only in terms of six-year futures (which are pretty illiquid) -
and while he "dissed" the notion that oil didn't matter to the
economy, he said he was watching closely to see if the spillover
inflation would move to higher levels from "modest".

The bottom line of all this is that while the US equity markets are
not back to exuberance, they're back from the brink.




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[augieboo]

Market Plunges and Fed steps in again http://www.nex.net.au/users/reidgck/NASDAQ.HTM#Market
Over a six day period, the high-tech NASDAQ stock index in the U.S. lost 17% of its value, dropping by November 13 2000 to below 2,900, its lowest value since November 3 1999.

In paper terms, it represented an evaporation of more than $1.7 trillion in share values since the all-time high of 5,123 in March 2000, or a drop of 44.3% in 8 months. In real terms, the fall in the Nasdaq stocks meant a disappearance in personal wealth of some DM 3.7 trillion - almost the total German GDP.

Many American families have been shifting funds from savings, to the stock market, especially the high flying Nasdaq stocks. That now, is on the brink of vanishing.

On November 13, (2000) U.S. election uncertainty threatened a dollar crisis, on top of a meltdown of the stock markets.

Enter the Federal Reserve with an injection of liquid funds, cash, into the banking system in the form of $3.01 billion in 28 day repurchase agreements, or repos.
Minutes later, it again injected $2.71 billion in overnight funds to the banks. It was enough to stop a Nasdaq meltdown, but not enough to push it above the psychologically important 3,000 level. To do that, the Fed activated its "Plunge Protection Team," the small group including Fed Reserve Chairman Greenspan, Treasury Secretary Summers, select insider Wall Street stock brokerages, such as Goldman Sachs, and key trusted banks such as Citigroup, whose Vice Chairman is former Treasury Secretary Robert Rubin.

The Plunge Protection Team went into full gear on Tuesday November 14. First the Fed injected another $2 billion early in the day. Then, minutes later, as if on cue, Goldman Sachs' market prophetess, Abby Joseph Cohen was brought out to tell the world press that the stock market was under valued, and should rise by "at least 15% by year's end."

Since the October 1987 stock market crash, Abby Cohen has been used to "predict" a rebound every time the markets were threatened. Wall Street insiders know her predictions mean Goldman Sachs and other major players have been told to buy, so a rush of speculative buying usually ensues. In addition, the process is leveraged via derivatives, or stock futures contracts on the Nasdaq or Dow Jones Industrial index.

On November 24, within minutes of the combined Fed and Goldman Sachs intervention, the Nasdaq was soaring, ending the day well above 3,100 for a daily rise of 5.7%.

According to informed market insiders, had the Fed and Plunge Protection Team not stepped in, there would have been a full-blown systemic financial crisis which would have soon spilled over into a dollar crisis.


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[augieboo]

- August 26, 1998: Time To Terminate The ESF, and IMF -http://www.cato.org/pubs/fpbriefs/fpb-048.pdf

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[augieboo]

Does The Plunge Protection Team Exist?
Rick Ackerman
October 31, 2001
http://www.marketwise.com
http://members.rogers.com/fallstreet1/plungeprotection/oct3101p/oct3101p.html

I'm not big on conspiracy theories, especially the ones that imply meticulous planning, hermetic secrecy and deft execution by Uncle Sam and his covert agents. Given their record of bungling, I firmly believe that Lee Harvey Oswald acted alone, that the Watergate burglary was not an elaborate scheme to eavesdrop on the Federal Reserve Open Market Committee, and that FDR was neither unsurprised nor gratified when the Japanese attacked Pearl Harbor. And while Lyndon LaRouche and his ilk evidently think the CIA and Trilateralist Commission run the world, I seriously doubt whether those two institutions combined possess the operational savvy to run a back-alley crap game. Remember, these are the same guys who tried to kill Castro with an exploding cigar, and who believed the Soviet Union was trouncing us in the Cold War until the day the Berlin Wall fell.

Even so, there is reason to believe that the U.S. government may be loosely in cahoots with some top Wall Street firms to ensure that the stock market does not spook investors too badly, or too often. Now this does not necessarily mean, as
some market-watchers now assert matter-of-factly, that there is a Plunge Protection Team which snaps into action whenever some crisis manager monitoring the market's vital signs on CNBC lifts a red phone at the White House.

To begin with, who could run an operation like that? With the possible exception of former Treasury Secretary Robert Rubin, no Cabinet-level honcho comes to mind who could conceivably be entrusted with such a difficult job. And who actually
believes that even Rubin could second-guess the markets any more successfully than, say, last month's top-rated guru in Hulbert's Digest?

How the 'Smart Money' Got That Way

So let's discard the svengali theory, as well as fanciful images of a White House powwow each day where guys who wear American-flag cufflinks map out contingency plans to administer the Heimlich if the tickertape should begin to
choke on some shard of disquieting news. However, what we should not rule out is the possibility that some of America's biggest and savviest financial institutions have pledged their utmost diligence in helping to support and stabilize U.S. financial markets whenever necessary. There are two reasons why this theory is not so farfetched as it might sound. First, the firms could make quite a bit of money at it. And second, they would not have to risk much of their capital to do so.

Anyone who doubts this could not have been watching the stock market closely last Thursday, when a weak and dispiriting opening hour mutated into a bullish rampage that did not relent until the final bell. During bear markets in particular, rallies draw that kind of explosive power not from routine buying, but from shorts panicking to cover positions gone horribly and painfully awry. So when the stock
market is quietly morose, as it was last Thursday, just one sizable buy order tossed into the S&P pit can have the effect of a Molotov cocktail, quickly engulfing shorts in the fires of hell. Keep in mind that, under certain conditions, a buy or sell order as small as 20 or 30 contracts can alter the course of the S&Ps over the very short-term. Just imagine what kind of pop Goldman Sachs, Morgan Stanley and Merrill Lynch could create, especially late in the day, if they were to simultaneously enter large buy orders for S&P contracts.

Scam Up-Close

This is exactly what has been happening in the S&P futures pit recently, according to friends of mine who have been close to the action, and it represents the refinement of program-trading techniques that have been used with increasing
effectiveness since the days of the 1987 Crash. The huge growth of electronic trading undoubtedly has helped to amplify the effect, since a vast, global universe
of traders, hedgers and speculators are effectively on a hair trigger, each seeking to be a step or two ahead of the stampede. Traders in the S&P pits are among the
first to see the buy programs coming, and it has happened often enough lately to cause them to pull their offers at the first hint that the usual suspects may be about to light the fuse. When the sellers then back away from their offers, the
lightened supply that results makes it possible for the S&Ps to lift effortlessly, kicking off a chain reaction of hedge-buying in other indexes, as well as in specific stocks and related securities and derivatives. Once the panic starts, it is a simple matter for the perpetrators to take sizable profits just minutes after the rally has begun. And if they should conspire to kick things off just before the final bell, they can position their offers in Asian and European markets so as to reap substantial profits with almost no risk.

Key to Distribution

There is an additional benefit to the institutional players that is tied to their long-term goal of easing out of the bear market at better prices than they would receive in an unrigged game. For, every time stocks spike higher following a buy program calculated to "run the shorts," the rally subsequently attracts bids below the market from those who missed the impulse wave. The initial rally will typically
have occurred on relatively light volume, for that is the very nature of a price spike.

But the "detumescence" period that follows can take days or even weeks, allowing institutional holders to distribute stocks into a steady stream of demand. Of course, this gambit cannot overcome the inexorable power of a bear market, only
forestall it. Over time, the bear will have its way, as each price spike on the chart eventually gives way to a lower low. My guess is that the current round of thimble-rigging will play itself out within a week or two at most. No doubt, the
scheme has succeeded thus far by getting the jump on seasonality factors. Which is to say, the "Christmas rally" has already occurred --in the form of buy programs that by now have milked the last dime from credulous buyers.

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[augieboo]

Greenspan, Fed Bailed Out Marts In September
By John Crudelle, New York Post -- April 2, 2002
http://members.rogers.com/fallstreet1/plungeprotection/apr202p/apr202p.html

WITH the economy looking extraordinarily weak back in January and Alan Greenspan just about out of room to cut interest rates, the Federal Reserve considered a variety of "unconventional" emergency measures.

Recently-released comments from the policy-making meeting that month show the Fed had what might seem to be a largely academic discussion about the other options available to it. This is an amazing revelation.

I've been giving hints about this sort of thing since September, but I believe the Fed's discussions were much more than just theoretical. I think the Central Bank actually stepped in and saved the stock market.

With the Fed taking an active role in the market, just about anything could happen - both good and bad.

The Fed's intervention in stocks is, to put it mildly, earth
shaking in a free-market economy that prides itself for
having equities that move up and down on their merits
alone.

Let me give credit where it is due. While I was on vacation
last week the Financial Times of London quoted a Fed
official who didn't want to be named as saying that one
of the extraordinary measures considered in January
was "buying U.S. equities." The FT quoted the official as
saying the Fed could "theoretically buy anything to
pump money into the system" including "state and local
debt, real estate and gold mines - any asset."

Including stocks.

There are lots of things wrong with the stock market
right now.

Despite a wobbly market these past two years, equity
prices are still much too high based on current earnings.
And the valuation of stocks isn't going to get any more
attractive when disappointing first quarter profits are
announced by companies in a few weeks.

But all of these things pale in comparison with the
impact of the Fed getting involved in the stock market.
Forget everything else - this is the most important thing
you need to consider right now if you are thinking of
getting into the stock market.

I've been writing about the Fed's involvement in the
stock market for some time. And I have some first-hand
knowledge that I can now add to the FT report.

I had a conversation with a very worried Fed official
back on Sept. 17, the day the stock markets reopened in
the U.S. following the Trade Center attacks. He was
bothered by the market's apparent lack of interest in
the Fed's rate cut that morning.

Our discussion moved on to the fact that the Fed could
easily intervene in the market by purchasing stock index
futures contracts. That's an inexpensive and apparently
foolproof way of rigging the market without leaving a
trace.

During that telephone conversation I pointed out that
just such a plan was proposed during another market
disturbance back in 1989 by Robert Heller, who had just
left his position as Fed governor.

Heller's suggestion, which was published in The Wall
Street Journal, seemed at the time like a trial balloon to
see how Wall Street would react to such an extreme
solution.

The good news was that nobody appeared to be bothered
by Heller's proposal even though it would turn the
free-market concept on its ear.

About midday on Sept 17 I faxed the Heller article to my
friend at the Fed.

There's no way of proving that the Central Bank took
any extraordinary action that day. But a stock market
that looked down for the count suddenly perked up.

And since then, equities have staged a good enough rally
so that Wall Street is already gloating about the new bull
market.

Is this good or bad news?

You'd think that the Fed providing a safety net for the
market would be extremely good news for investors. In
fact, it would be logical to assume that big losses in
stocks would be impossible if the Fed was aggressive in
the market.

But there are other things to consider.

The Fed will probably only come to the market's aid if
collapsing stock prices are endangering the nation's
economy and national security. This would give the
federal government an excuse to violate the premises of
the market economy. But there are a couple other
worries.

One is Japan tried this and it didn't work.

And then there's the big worry: The stock market in the
U.S. has worked very well without government
interference. In fact, our markets are so much the envy
of the world that foreign companies are anxious to list
their stocks on our exchanges.

If the FT and my suspicions are correct, Washington is
getting into dangerous territory.


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[augieboo]

The Exchange Stabilization Fund: How It Works (from the Cleveland Federal Reserve Bank) http://www.clev.frb.org/research/com99/1201.htm#table

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[augieboo]

Exchange Stabilization Fund
http://www.ny.frb.org/pihome/fedpoint/fed14.html

The Treasury Department's Exchange Stabilization Fund (ESF) buys and sells foreign currency to promote exchange rate stability and counter disorderly conditions in the foreign exchange market.

The ESF is used to provide short-term credit to foreign governments and monetary authorities and to hold and administer Special Drawing Rights.

ESF operations are normally conducted through the Federal Reserve Bank of New York in its capacity as fiscal agent for the Treasury Department.

The Exchange Stabilization Fund (ESF) of the United States Treasury was created and originally financed by the Gold Reserve Act of 1934 to contribute to exchange rate stability and counter disorderly conditions in the foreign exchange market. The Act authorized the Secretary of the Treasury, to deal in gold, foreign exchange, securities, and instruments of credit, under the exclusive control of the Secretary of the Treasury subject to the approval of the President.
When the United States adopted the revised articles of agreement of the International Monetary Fund (IMF) in 1978, Congress amended the Gold Reserve Act to provide that the dealings of the ESF were to be consistent with U.S. obligations to the IMF. The ESF also may provide short-term credit to foreign governments and monetary authorities. These ESF "bridge loans" are financed through swaps. That is, the dollars held by the ESF are made available to a country through its central bank in exchange for the same value of that country's currency.

The ESF is used to hold and administer Special Drawing Rights (SDRs), which are assets created by the IMF that the IMF lends to countries that need help to finance balance-of-payment deficits. SDRs were created to increase international liquidity and are permanent resources of the ESF after they are allocated to, or otherwise acquired by, the United States Treasury.

The Federal Reserve and the ESF
ESF operations are conducted through the Federal Reserve Bank of New York in its capacity as fiscal agent for the Treasury. The New York Fed, which executes foreign operations on behalf of the Federal Reserve System and the Treasury, acts as an intermediary for the parties involved when the ESF provides short-term financing to foreign governments. However, it neither guarantees, nor profits from, the loans.

Several times each day, the foreign exchange trading desk of the New York Fed provides current information on market conditions to the Treasury. Whenever necessary, the trading desk buys or sells foreign currencies on behalf of the Treasury, through the ESF, for intervention purposes. Treasury and Federal Reserve foreign exchange operations are closely coordinated and typically are conducted jointly. Operations on behalf of the Treasury are made under the legal authority of the Secretary of the Treasury and those for the Federal Reserve System under the legal authority of the Federal Open Market Committee, the central bank's policy-making group. The ESF does not provide financing to the Federal Reserve System for foreign exchange operations. Rather, the Federal Reserve participates with its own funds. The Treasury reimburses the New York Fed for expenses incurred in carrying out Treasury actions.

Since 1963, the Federal Reserve occasionally engaged in "warehousing" transactions with the ESF. In warehousing a transaction, the ESF sells foreign currencies to the Federal Reserve for dollars and simultaneously arranges to repurchase them, typically within a year. The dollars are immediately credited to the Treasury's account at the New York Fed, and the Federal Reserve invests the warehoused foreign currency, separate from its regular accounts, to earn a market rate of return. Any effect warehousing has on domestic bank reserves is offset by open market operations.

ESF accounts and activities are subject to Congressional oversight. The Treasury provides monthly reports on U.S. intervention activities and a monthly financial statement of the ESF to Congress on a confidential basis. In addition, the quarterly report to Congress by the New York Fed's manager of foreign operations, covering Treasury and Federal Reserve foreign exchange operations, is issued publicly by the New York Fed.

ESF Financing
The ESF was structured to be self-financing. Its resources, which are held in both dollars and foreign currency, include its original Congressional appropriation and retained earnings. The Gold Reserve Act of 1934 initially funded the ESF with resources resulting from the devaluation of the dollar, in terms of gold. Congress appropriated $2 billion of the resulting valuation gain to the ESF; $1.8 billion of that was later used to fulfill the initial U.S. quota subscription to the IMF.

Currently, the New York Fed invests ESF foreign currency balances in instruments that yield market-related rates of return and have a high degree of liquidity and credit quality, such as securities issued by foreign governments. In addition to interest earned on assets, the ESF's balance sheet also includes gains or losses on exchange operations.

During fiscal year 1999, the ESF had net loss of $275 million, which reduced its capital position (appropriated capital plus retained earnings) to $27.3 billion. As of March 31, 2001, total assets were $35.1 billion and included $14.4 billion in foreign currencies, $10.4 billion in SDRs, and $10.1 U.S. Government securities.


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[augieboo]

THROWING A LIFELINE TO SINKING MARKETS WORKED; HERE'S PROOF
By John Crudelle, New York Post -- October 20, 2000
http://members.rogers.com/fallstreet1/plungeprotection/oct2000/oct2000.html

I SUGGESTED in last Friday's column that the Federal Reserve should step in whenever the stock market flirts with real disaster. The column was timely. Stock prices had fallen sharply on Thursday. Then, with the help of mysterious buying the next morning, Wall Street made a nice recovery on Friday.

On this past Wednesday, again the Dow Jones industrial average was down - more than 400 points in morning trading. Suddenly, sources tell me, Goldman Sachs, Merrill Lynch and perhaps others threw caution to the wind and saved the market through heavy buying of Standard & Poor's and Nasdaq futures.

Stock prices closed lower Wednesday. But the suspicious and timely buying probably averted a crash.

You and I will probably never know whether the Fed was behind the futures purchases by those firms. And Alan Greenspan will never admit that he is interfering in the supposedly free market.

But we do know something.

From a story that ran in the Washington Post on Feb. 23, 1997, we learned of the existence of something called the Working Group on Financial Markets. The Washington Post said it was informally called the "Plunge Protection Team."

And while that other paper didn't seem to know what it had happened upon, it seemed pretty clear that someone in the government wanted investors to know that the Fed and others were watching out for them.

But do people really want government interference in financial markets? And is this safe?

After I wrote last Friday's column, I was inundated with e-mails from people who didn't think the Fed had the right to butt in and who thought I was nuts for suggesting it. First, here are some readers' comment. Then I'll respond.

* "Why don't we save Greenspan the trouble ... The Federal Reserve can just take the money they were going to spend and send it directly to all investors who lose money in the future." S.C.

* "What a wonderful world you want; a market where we can speculate to our greedy heart's content with no concern about equally out of balance consequences." D.F.

* "To put it mildly, I take strong exception to your article. I first thought it might be written with a sense of ironic humor, but as I skimmed through the article, I realized you were serious." G.M.

* "I almost always agree with your articles re: the markets and investing, but you're very likely mistaken on this one." S.E. Phd.

* "I've enjoyed your commentaries up until now ... but the one today is too much for me." M.T.

* "You're being facetious, right?" A.P.

* "To infer that Mr. Greenspan is responsible for my or anyone else's 401k is absurd. The bottom line is that the long-term PE ratio on the S&P 500 is about 15 and we are roughly twice that level now. The law of averages mandates that long-term trends will prevail." D.K.S.

* "Hey, that's what we need, the government speculating in S&P futures." B.H.

* "The thesis of your article is fundamentally flawed. It is not and should not be the role of the Federal Reserve to target the financial markets." another B.H.

* "I enjoyed your columns in the past. You lost me on this one. In case you are not joking, the reason we have this fraudulent bubble economy is because of ignored moral hazard on the part of government financial sc ... bags in the Fed and Treasury." M.G.

There were many letters that were unprintable.

My answer: Hey, excuse me for worrying that people will go hungry, lose their houses, have to pull their kids out of college and maybe even disconnect their cable TV.

Sure there's a bubble. And, yes, people have been greedily plowing their hard-earned money into the stock market like it was some guaranteed get-rich-quick scheme. But I also agree that, without a doubt, no arm of the government should mess with the financial markets, including the Federal Reserve.

But greedy investors aren't the only ones who'll be hurt when the stock market collapses. And as excessive as stock prices were when moving higher, they can do the same on the way down.

Let the Fed rescue the market if it wants to. It beats the hell out of the alternative.


(:

augie

[augieboo]

How Stocks Turned Back From The Abyss
By John Crudelle, New York Post -- April 5, 2000
http://members.rogers.com/fallstreet1/plungeprotection/april500/april500.html

SOMETHING happened at around 1 p.m. our time
yesterday that pulled the stock market back from the
edge of the cliff.

Traders say it was almost like divine intervention. One
minute the Nasdaq was down 11 percent -- say it out
loud, "Eleven percent in one day" -- and then it suddenly
rallied several hundred points in the matter of an hour.

The Dow followed suit. Down 500 points around
mid-day, the blue chip index's decline -- along with the
horrible showing of over-the-counter stocks -- was
destined to make yesterday's market an unqualified
disaster for investors and the country.

Then, traders said, someone started buying large amounts
of stock index futures contracts through two major
brokerage firms -- Goldman Sachs and Merrill Lynch.
These transactions are usually done on the QT so we
don't really know how many of these contracts were
purchased.

And unless the brokers tell, there is no way of knowing
which of their clients were making the purchases.
Goldman wouldn't comment on this and Merrill did not
return a call for comment.

But traders said enough were bought to catch everyone's
attention. In fact, the buyers seemed to want people to
know they had an appetite for stocks.

Then the market rebounded.

It didn't go all the way back. At the end of the day the
Dow Jones index had still lost lost 56 points or half a
percent on the day. And the Nasdaq lost another 74
points, or the equivalent of a 1.77 percent drop.
Yesterday's loss by over-the-counter stocks nearly put
the Nasdaq index back to ground zero for the year -- in
two days all but 2 percent of its gain for the year was
gone.

It was real nice of Goldman and Merrill to stick their
necks out like that. In fact, it was downright
uncharacteristic for Wall Street outfits to put the thought
of possible losses aside for the greater good.

Because of the purely unselfish nature of what went on,
traders are naturally suspicious. Hell, so am I.

"I think some one or more persons saved the market
today. There was a suspicious urge to buy stocks at an
opportune time," says one trader. "Why drive the Dow
up 350 points in a half hour? That's never serious buying.
That's someone trying to establish prices," he adds.

I'm especially suspicious when the market suddenly
rebounds at nearly the very same moment that a member
of the Clinton administration -- economic advisor Gene
Sperling -- is on TV telling investors not to worry.

And there's the obvious connection between Goldman
Sachs and the administration, the Wall Street firm having
given Robert Rubin to the Clinton administration as its
Treasury Secretary.

Plus, what better way to make investors not worry than
by having the stock market recover a lot of the ground it
had just lost. That gesture almost makes a guy want to
buy some stock -- bottom fish, if you are into sporting
analogies.

I'm not saying that government intervention in a
collapsing market is wrong. In fact -- except for the
obvious contradictions with the free-market system -- it is
politically and socially a very right thing to do.

I've written about this before. And I've mentioned that
Washington has had a secretive group call the Working
Group on Financial Markets, made up of investment
industry and government people, that would be in just the
right position to rescue the market.

Informally the folks on Wall Street call this the "Plunge
Protection Team." In February 1997, the Washington
Post did a piece on this team, just in case you don't
believe it exists.

And while I can't swear that Goldman and Merrill are
captains of that team, they sure acted like it yesterday.


(:

augie

[augieboo]

The 'Plunge Protection' Page http://members.rogers.com/fallstreet1/plungeprotection/plungeprotection.html

(:

augie

[augieboo]

Aaron L. Task -- What a Week: It Was All About Wednesday (excerpt)
By Aaron L. Task
Senior Writer
05/10/2002 06:04 PM EDT
URL: http://www.thestreet.com/markets/aarontaskfree/10021936.html

One day does not a market make. But one session did dominate this week, both in terms of market action and conversation topic.

Of course, I'm referring to Wednesday's blockbuster rally, which was widely attributed to better-than-expected earnings and a not-as-bad-as-feared outlook from Cisco (CSCO:Nasdaq - news - commentary) .

Alternative explanations for the rally included the market's extreme oversold position and hopes for a settlement between the New York attorney general and Merrill Lynch (MER:NYSE - news - commentary) , as well as long-held conspiracy theories about intervention by government entities, namely the Federal Reserve and/or U.S. Treasury.

Ike Iossif, president of Aegean Capital, an investment advisory firm in Chino Hills, Calif. "refuse [s] to believe in such things as the 'plunge protection' team," and there's no proof they exist. But Iosiff noted Wednesday's session had many of the same characteristics as past rallies that have encouraged such claims:

It occurred when market averages were "dangerously flirting with support areas perceived to be critical by institutional investors." (Actually, many had breached perceived support levels earlier this week or late last week, making a recovery all the more crucial from a psychological standpoint).

It originated in the futures markets (which is where the Fed would theoretically engage its open market operations), which pushed the cash markets to open at levels that compelled short-covering immediately at the opening.

It was based on very flimsy fundamental basis (certainly, many quibbled with the quality of Cisco's earnings, revenue and forecast).

Finally, and most tellingly, it didn't have any follow-through.

Specifically, Iossif referred to the lack of follow-through in international markets, where participants are more accustomed to government intervention in financial markets. At least they are less stunned or frightened by the concept. (There was a lot of recollection this week about the Hong Kong Monetary Authority's efforts to limit short-selling in 1998 and the Bank of Japan's myriad efforts to aid the Nikkei since its peak in 1989.)


(:

augie

[augieboo]

Preventing the 'plunge' -- A high-level committee behind the scenes fought against market meltdown
Sunday September 23, 2001
The Observer
http://www.guardian.co.uk/wtccrash/story/0,1300,556432,00.html
The dramatic drop in the markets last week could have been much worse if it hadn't been for a shadowy committee of some of the biggest names in banking.
Analysts say the Working Group on Financial Markets, nicknamed the 'Plunge Protection Team', was extremely successful in helping co-ordinate a response across the markets when they reopened last Monday.

The team was set up in the late Eighties by Ronald Reagan and came into its own in 1998 when it drew up an emergency response in the wake of the collapse of the giant hedge fund, Long Term Capital Management. In the past it has comprised Fed Chairman Alan Greenspan, US Treasury Secretary Paul O'Neill, the heads of the various US stock exchanges and the bosses of a handful of leading investment banks.

However, this time around no fewer than 35 individuals - including representatives of other central banks - are thought to have been in the team.

The challenge was to agree on how to react to the events. Harmony was in danger of being jeopardised when the members representing investment banks clashed with those representing the stock exchanges, who wanted an early resumption to trading. The banks, for their parts, were concerned that staff and infrastructure were too battered to resume in the same week as the attacks.

Eventually the investment banking lobby won the day and when the markets did open on Monday there was an unprecedented level of co-operation between the financial institutions. Short selling seems to have been kept to a minimum as the banks resisted the temptation to bet on the markets plunging.

Banks which had trouble settling - notably the Bank of New York - were accommodated.


(:

augie

[augieboo]

PPT Overview from Lone Ranger on SI http://www.siliconinvestor.com/stocktalk/msg.gsp?msgid=17666809
To:Zeev Hed who wrote (87729)
From: Lone Ranger Thursday, Jun 27, 2002 9:46 PM
View Replies (3) / Respond to of 87775

Zeev,
OT...but the best info I have found on the plunge protection team(PPT). Its not a joke nor a conspiracy. From Roger Arnold's email today, June 27, 2002.
Yesterday was a very bad day. The run in the market through the closing rally to bring the equity markets back to even for the day was the result of market manipulation; in my opinion. As a rational human being, understanding the guidelines within which markets interact I can draw no other conclusion; although I can not prove it.

There was a coordinated effort on the part of several investors to prop the equity markets in the US up at the open of yesterdays market by buying into the futures markets. This lets the equity traders know that there is willing money on the sidelines ready to buy in should the market fall. That signal in itself is usually all it takes to keep the short sellers out and calm the nerves of the traders considering selling. In other words it caps what could be a capitulation event. It removes the question of whether or not there are buyers by creating buyers. The futures buyers are in essence saying don't worry be happy we are here if you need us.

The question has to be asked however, who would do this?

The WCOM news broke after the equity exchanges in the US had closed for the day on Tuesday. Asian and European markets were down dramatically over the course of the next 16 hours. There was the largest single day flight into 2 year treasury notes by the opening in New York on Wednesday that I can ever recall experiencing, down 1/4% in yield. Gold had spiked up $5 in Hong Kong. The dollar was plunging against gold, euro and yen.

But, the buying interest in the equity futures in the US was inordinately large prior to the open, stayed relatively high all day and then spiked up again right at 2:15 eastern time. That is when the FED made its announcement of no move on rates. Apparently some of the traders had been speculating that the FED would lower rates. For whatever reason, the sell off began to accelerate dramatically at 2:15 and so did the futures buying. This isn't trying to catch a falling knife this standing in front of a freight train; you can't win.

This makes no sense at all. There is no legitimate trading model anywhere I am aware of that would have made this call. I can not create a model that would validate that as a strategy. There is an old saying in the equity markets; don't try to catch a falling knife. In this case they weren't just trying to catch the falling knife, gamble on a market bottom and turn around, they were literally containing the negative momentum by promising to buy stock that was plunging in price before it started plunging but after it became apparent that it would. This is the anti-investment model. This is the kind of model you build when determining the most efficient way of disposing of your wealth in the fastest way possible if your only choice was to do so through the equity markets. Am I making sense?

So, the question has to be asked who would do this?

The most logical scenario would require some sort of government intervention or government induced intervention. In 1988, following the October 1987 Dow plunge, an organization called the Working Group on Financial Markets was created by the President of the US. Since then it has become known as the Plunge Protection Team. There are links below for more information so I won't go into detail about how it works here.

The communications platform that creates the formal relationship the between the public sector, US Treasury, and private sector, US Federal Reserve, as well as equity, bond and commodities exchanges is the "Working Group".

It is important to understand the nuance here. A predetermined way of disseminating the Executive Administrations interests in the financial markets to those markets was created. In other words this group was not simply created to allow for an orderly collection of information for delivery to the administration. This is a working group, with workers on both sides. The group is designed to collect information from the private sector as well as deliver requests to the private sector. The group required an executive order to be created in order to provide everyone working within its framework an appearance of legitimacy while manipulating the markets.

This is generally how it would work: WCOM announces fraud and the world wide markets begin to sell off. The members of the "Working Group" don't have to wait for somebody to call them to tell them what to do. The creation of the group itself has already created the expectation of action to contain the crisis and the intended cooperation between public and private authorities to ensure its success. The exchange of phone calls I will now list need not happen as everyone involved would know what was expected of them.

Treasury Secretary O'Neill calls Fed Chairman Greenspan and says you better get your banks to start buying stock or anything else to support this market if you expect the tax payer to come in with a bail out package later. The implication is clear. The private sector banks had better put some of their capital at risk and even guarantee its loss in order to try to hold back the collapse if these banks are going to come to the Treasury if it doesn't work and ask for a tax payer bail out.

So Dr. Greenspan calls the member banks of the FED and other private institutions, JP Morgan, Merrill Lynch, Goldman Sachs, etc.; and says you guys better do what ever is necessary to support the markets. The cheapest and easiest way to support the markets without putting a lot of money at risk is to buy futures. In essence, make a promise to buy the stock should it begin to fall. The idea being that the stock won't fall because the sellers know there are buyers and won't panic trying to get out because of it. Ideally the crisis is then averted and no real money had to be exchanged.

The problem is that it was still manipulation. The treasury secretary just sold a tax payer bail out to the FED should it be necessary. The FED just bought a tax payer bail out in the future by putting capital at risk today. The point being that the futures buying was manipulated and not driven by market fundamentals.

Put another way :

Imagine you get together with 3 of your buddies to play poker and the four of you are sitting around playing 5 card stud. One player is called the Treasury. one the FED, one a professional card player (trader) and one just a plain old once a week with the boys card player (typical "long term" investor) As the night wears on the FED is beginning to lose more than the others. So, the dealer (treasury) tells the player (FED) that he'll give him 6 cards if agrees to split the pot with him should the player getting the 6 cards win and that if he continues to lose anyway the treasury will step in and give him money to keep playing. But stepping in to give the FED money to keep playing is a last resort. The rationale is that the FED is the richest guy at the table and as long as he can be kept in the game the game can continue.

Now there is no guarantee the player (FED) getting 6 cards will win every hand but the probability he will win an inordinate number of hands has increased dramatically versus the players only getting 5 cards.

If the players getting 5 cards know this is happening they would be fools to keep playing a game that is clearly manipulated. So, the key is to do this without the other players knowing this happening.

But, as the players keep playing the game it becomes apparent that something is wrong as one player (FED) begins winning consistently. So, the treasury only gives the FED 6 cards at those times during the evening that it looks like the FED may be losing too much.

The goal being to keep the game going but not let the other players know this is happening.

But of course the other players figure it out and begin to leave the game. The first player to figure it out of course is the professional. As soon as he sees the game is rigged his choice is to call the treasury out for a gun battle but the professional knows there is no upside in this and so he simply takes his money and leaves to find another game somewhere else in the world that isn't rigged.

This leaves behind 3 players now. Two of them have rigged the game and the third one can't figure out why he keeps losing. As the third guy wants to leave the FED and Treasury conveniently let him win a couple of hands to keep him in the game and keep the game going.

But the bottom line is that the there is no way the third player is ever going to win against the FED and Treasury and the question is how long does it take him to figure it out. The goal is to take the third players money without the third player knowing he was just had. When he is broke room is made at the table for the next sucker and the game continues.

But, the professionals are now nowhere to be seen. You see it was the professionals that were the real counterbalance to the Treasury and FED manipulation and when the losses the professional was incurring to the them became greater than what he could gain from the novice player he walks.

That is where we are today in the markets. I hope that made sense.

The real private sector job creating professional wealth is leaving the game. That is the real reason the dollar is falling. The US game is rigged and the professionals are cashing in their chips to play in a game denominated in another currency, gold or euro. They won't play in the Yen denominated game because it is even more corrupt than the dollar denominated game. Many of them will take a break from the game completely by taking their cash and parking it in gold or by buying waterfront property and lying on the beach waiting for the Treasury and FED to realize they over manipulated the markets.

Others Thoughts:

http://www.financialsense.com/Market/wrapup.htm
Here is a quote from Jim Puplava's article he wrote reagrding yesterdays market:

Today’s Market
In today’s market it appears obvious that the PPT was hard at work. I was literally having a conversation with someone when I looked up on my screen and watched the markets move from new benchmark lows into positive territory. The daily chart of the Dow Industrials looked like a NASA space launch and it was occurring in real time as I watched the numbers climb from the negative to the positive in a matter of a few minutes. It reminded me of a trip I took last year on a nuclear submarine when the ship’s captain took us from depths of 750 feet to 100 feet in a few minutes. I recall watching the depth meter on the con as the numbers quickly rolled up. I had that exact experience today. The gentleman I was talking to was a credit analyst and his screen was tuned into the same chart. It was a heroic effort that took the markets from the depths of the abyss. At the end of the day, however, it failed. The Dow and the S&P 500 both finished in negative territory while the Nasdaq managed a tiny gain.

It now appears necessary to intervene in the financial markets, the currency markets, the commodity markets, and into our credit system to keep things functioning. History teaches us that all intervention fails and that the markets eventually win out in the end. Intervention simply postpones the inevitable and creates new distortions."

Fed to prop up Wall St
Shadowy committee ready to pour billions into stock markets to avert shares meltdown

Richard Wachman and Jamie Doward Observer Sunday September 16, 2001

http://www.guardian.co.uk/Archive/Article/0,4273,4258005,00.html

The US Federal Reserve and Wall Street's powerful investment banks are preparing to spend billions of dollars to support the US stock market, which opens this week for the first time since last Tuesday's terrorist attacks on New York and Washington.

A secretive committee - the Working Group on Financial Markets, dubbed 'the plunge protection team' - includes bankers as well as representatives of the New York Stock Exchange, Nasdaq and the US Treasury. It is ready to co-ordinate 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 authorities are determined to avert a worldwide slump in share prices like the crashes of 1987 or 1929. Investment banks and their broking subsidiaries are to block short-selling by speculators and hedge funds by making it hard for them to obtain prices on favourable terms.

'Everyone is eager to avoid "contagion", where prices fall rapidly as investors react lemming-like to a falling index,' said one banker.

In addition, US regulators are prepared to ease rules that prevent companies from buying their own stock.

The 'plunge protection team' was established by a special executive order issued by former President Ronald Reagan in 1989. It is known to include senior bankers at leading Wall Street institutions such as Merrill Lynch and Goldman Sachs. It has acted before, in the early Nineties and during the 1998 LTCM hedge fund crisis.

Whether coordinated action by the US authorities and banking institutions will be sufficient to avert a large-scale sell-off on Wall Street this week remains to be seen.

Tony Jackson, director of UK equity strategy at investment bank ING Barings, believes there may be an emotional tide of support for Wall Street this week, but that it will be shortlived. He said: 'Some people are talking about a "patriotic rally" that could lift the Dow by 1,000 points on reopening. I don't think it will be that high, but it will certainly go up, perhaps several hundred points.

'But long term, the trend will still be down, perhaps 10 per cent from where it opens. Many companies will cut earnings forecasts now.'

Khuram Chaudhry, equity strategist at Merrill Lynch, believes that Wall Street could fall by as much as 10 per cent. 'You have to remember that things did not look that good before the attack on the World Trade Centre. There were already signs that American consumer confidence was deteriorating. I don't think people are now going to rush out to take foreign holidays or crowd the shopping malls.'

John Llewellyn, economist at Lehman Brothers, is worried that markets may prove disorderly, despite the best efforts of the authorities.

'There is a degree of synchronisation between the three major economies. The US and Europe are weaken ing in tandem, while Japan is in the doldrums. In the early Nineties Japan was in better shape. The global economy may end up in a worse condition than 10 years ago.'

But there are optimists too. Sonja Gibbs, chief equity strategist at Nomura International, believes 'the economic fundamentals will take a turn for the better in 2002'.

Robin Aspinall, equity analyst at broker Teather and Greenwood said: 'The Americans will want to show that the stars and stripes still fly over Wall Street.'

http://www.guardian.co.uk/Archive/Article/0,4273,4258005,00.html

DATE: 03-18-88
31 -- Money and Finance
Working Group on Financial Markets
By virtue of the authority vested in me as President by the Constitution and laws of the United States of America, and in order to establish a Working Group on Financial Markets, it is hereby ordered as follows:

Section 1. Establishment. (a) There is hereby established a Working Group on Financial Markets (Working Group). The Working Group shall be composed of:
(1) the Secretary of the Treasury, or his designee;
(2) the Chairman of the Board of Governors of the Federal Reserve System, or his designee;
(3) the Chairman of the Securities and Exchange Commission, or his designee; and
(4) the Chairman of the Commodity Futures Trading Commission, or her designee.
(b) The Secretary of the Treasury, or his designee, shall be the Chairman of the Working Group.
Sec. 2. Purposes and Functions. (a) Recognizing the goals of enhancing the integrity, efficiency, orderliness, and competitiveness of our Nation's financial markets and maintaining investor confidence, the Working Group shall identify and consider:
(1) the major issues raised by the numerous studies on the events in the financial markets surrounding October 19, 1987, and any of those recommendations that have the potential to achieve the goals noted above; and
(2) the actions, including governmental actions under existing laws and regulations (such as policy coordination and contingency planning), that are appropriate to carry out these recommendations.
(b) The Working Group shall consult, as appropriate, with representatives of the various exchanges, clearinghouses, self-regulatory bodies, and with major market participants to determine private sector solutions wherever possible.
(c) The Working Group shall report to the President initially within 60 days (and periodically thereafter) on its progress and, if appropriate, its views on any recommended legislative changes.
Sec. 3. Administration. (a) The heads of Executive departments, agencies, and independent instrumentalities shall, to the extent permitted by law, provide the Working Group such information as it may require for the purpose of carrying out this Order.
(b) Members of the Working Group shall serve without additional compensation for their work on the Working Group.
(c) To the extent permitted by law and subject to the availability of funds therefor, the Department of the Treasury shall provide the Working Group with such administrative and support services as may be necessary for the performance of its functions.

The provisions of Executive Order 12631 of Mar. 18, 1988, appear at 53 FR 9421, 3 CFR, 1988
Comp., p. 559, unless otherwise noted.

Other Links:

http://envirotext.eh.doe.gov/data/eos/reagan/19880318.html

http://commdocs.house.gov/committees/bank/hba63923.000/hba63923_0.htm

http://www.google.com/search?hl=en&ie=UTF-8&oe=UTF8&q=Workin...

Fed Statement

Remember it is everything after the but that is the real message:

The information that has become available since the last meeting of the Committee confirms that economic activity is continuing to increase. However, both the upward impetus from the swing in inventory investment and the growth in final demand appear to have moderated. The Committee expects the rate of increase of final demand to pick up over coming quarters, supported in part by robust underlying growth in productivity, but the degree of the strengthening remains uncertain.


(:

augie

[augieboo]

Plunge Protection Team, Brett D. Fromson, Washington Post
Staff Writer,
Sunday, February 23, 1997; Page H01
The Washington Post

It is 2 o'clock on a hypothetical Monday afternoon, and the Dow Jones industrial average has plummeted 664 points, on top of a 847-point slide the previous week.

The chairman of the New York Stock Exchange has called the White House chief of staff and asked permission to close the world's most important stock market. By law, only the president can authorize a shutdown of U.S. financial markets.

In the Oval Office, the president confers with the members of his Working Group on Financial Markets -- the secretary of the treasury and the chairmen of the Federal Reserve Board, the Securities and Exchange Commission and the Commodity Futures Trading Commission.

The officials conclude that a presidential order to close the NYSE would only add to the market's panic, so they decide to ride out the storm. The Working Group struggles to keep financial markets open so that trading can continue. By the closing bell, a modest rally is underway.

This is one of the nightmare scenarios that Washington's top financial policymakers have reviewed since Oct. 19, 1987, when the Dow Jones industrial average dropped 508 points, or 22.6 percent, in the biggest one-day loss in history. Like defense planners in the Cold War period, central bankers and financial regulators have been thinking carefully about how they would respond to the unthinkable.

An outline of the government's plans emerges in interviews with more than a dozen current and former officials who have participated in meetings of the Working Group. The group, established after the 1987 stock drop, is the government's high-level forum for discussion of financial policy.

Just last Tuesday afternoon, for example, Working Group officials gathered in a conference room at the Treasury Building. They discussed, among other topics, the risks of a stock market decline in the wake of the Dow's sudden surge past 7000, according to sources familiar with the meeting. The officials pondered whether prices in the stock market reflect a greater appetite for risk-taking by investors. Some expressed concern that the higher the stock market goes, the closer it could be to a correction, according to the sources.

These quiet meetings of the Working Group are the financial world's equivalent of the war room. The officials gather regularly to discuss options and review crisis scenarios because they know that the government's reaction to a crumbling stock market would have a critical impact on investor confidence around the world.

"The government has a real role to play to make a 1987-style sudden market break less likely. That is an issue we all spent a lot of time thinking about and planning for," said a former government official who attended Working Group meetings. "You go through lots of fire drills and scenarios. You make sure you have thought ahead of time of what kind of information you will need and what you have the legal authority to do."

In the event of a financial crisis, each federal agency with a seat at the table of the Working Group has a confidential plan. At the SEC, for example, the plan is called the "red book" because of the color of its cover. It is officially known as the Executive Directory for Market Contingencies. The major U.S. stock markets have copies of the commission's plan as well as the CFTC's.

Going to Plan A

The red book is intended to make sure that no matter what the time of day, SEC officials can reach their opposite numbers at other agencies of the U.S. government, with foreign governments, at the various stock, bond and commodity futures and options exchanges, as well as executives of the many payment and settlement systems underlying the financial markets.

"We all have everybody's home and weekend numbers," said a former Working Group staff member.

The Working Group's main goal, officials say, would be to keep the markets operating in the event of a sudden, stomach-churning plunge in stock prices -- and to prevent a panicky run on banks, brokerage firms and mutual funds. Officials worry that if investors all tried to head for the exit at the same time, there wouldn't be enough room -- or in financial terms, liquidity -- for them all to get through. In that event, the smoothly running global financial machine would begin to lock up.

This sort of liquidity crisis could imperil even healthy financial institutions that are temporarily short of cash or tradable assets such as U.S. Treasury securities. And worries about the financial strength of a major trader could cascade and cause other players to stop making payments to one another, in which case the system would seize up like an engine without oil. Even a temporary loss of liquidity would intensify financial pressure on already stressed institutions. In the 1987 crash, government officials worked feverishly -- and, ultimately, successfully -- to avoid precisely that bleak scenario.

Officials say they are confident that the conditions that led to the slide a decade ago are not present today. They cite low interest rates and a healthy economy as key differences between now and 1987. Officials also point to SEC-approved "circuit breakers" that were introduced after 1987 to give investors timeouts to calm down.

Under the SEC's rules, a drop of 350 points in the Dow would bring a 30-minute halt in NYSE trading. If the Dow declined another 200 points, trading would cease for one hour. No additional circuit breakers would operate that day, but a new set would apply the next trading day.

Despite these precautions, today's high stock market worries officials such as Fed Chairman Alan Greenspan, who in a speech in early December raised questions about "irrational exuberance" in the markets. Because the market declined following Greenspan's speech, government officials have become even more reluctant to comment on these issues for fear of triggering the very event they wish to forestall, according to policymakers.

A Brewing Concern

Greenspan had expressed similar thoughts a year ago at a confidential meeting of the Working Group. Treasury Secretary Robert E. Rubin and SEC Chairman Arthur Levitt Jr. also are concerned about the stock market's vulnerability, according to sources familiar with their views.

The four principals of the group -- Rubin, Greenspan, Levitt and CFTC Chairwoman Brooksley Born -- meet every few months, and senior staff get together more often to work on specific agenda items.

In addition to the permanent members, the head of the President's National Economic Council, the chairman of his Council of Economic Advisers, the comptroller of the currency and the president of the New York Federal Reserve Bank frequently attend Working Group sessions.

The Working Group has studied a variety of possible threats to the financial system that could ensue if stock prices go into free fall. They include: a panicky flight by mutual fund shareholders; chaos in the global payment, settlement and clearance systems; and a breakdown in international coordination among central banks, finance ministries and securities regulators, the sources said.

As chairman of the Working Group, Rubin would have overall responsibility for the U.S. response, but Greenspan probably would be the government's most important player.

"In a crisis, a lot of deference is paid to the Fed," a former member of the Working Group said. "They are the only ones with any money."

"The first and most important question for the central bank is always, 'Do you have credit problems?' " said E. Gerald Corrigan, former president of the New York Federal Reserve Bank and now an executive at Goldman Sachs & Co. "The minute some bank or investment firm says, 'Hey, maybe I'm not going to get paid -- maybe I ought to wait before I transfer these securities or make that payment,' then things get tricky. The central bank has to sense that before it happens and take steps to prevent it."

1987: A Case Study

The Fed's reaction to the 1987 market slide, which Corrigan helped oversee, is a case study in how to do it right. The Fed kept the markets going by flooding the banking system with reserves and stating publicly that it was ready to extend loans to important financial institutions, if needed.

The Fed's actions in October 1987 read like a financial war story.

The morning after the 508-point drop on Black Monday, the market began another sickening slide. Corrigan and other Fed officials strongly discouraged New York Stock Exchange Chairman John Phelan from requesting government permission to close the market. Phelan was concerned that if the market continued to erode, the capital of the NYSE member firms would disappear. Corrigan feared a shutdown would cause more panic.

"It was extraordinarily difficult around 11 o'clock," Corrigan recalled. "The market was at one point down another 250 points, and that's when the debate with Phelan took place."

Simultaneously, Corrigan and other central bank officials spoke privately with the big banks and urged them not to call loans they had made to Wall Street houses, which were collateralized by securities that could no longer be traded and whose value was in question.

A final critical moment came that day when the Fed decided not to shut down a subsidiary of the Continental Illinois Bank that was the largest lender to the commodity futures and options trading houses in Chicago. The subsidiary had run out of capital to provide financing to that market.

"Closing it would have drained all the liquidity out of the futures and options markets," said one former top Fed official involved in the decision. Investors use stock futures and options to hedge positions in the underlying stock market.

Recognizing the crucial role of banks if another financial crisis should strike, the Office of the Comptroller recently conducted an internal study of what damage a market decline would inflict on U.S. banks. The OCC declined to discuss the study or its conclusions.

At the SEC, one big worry is how to cope with an international financial crisis that begins abroad but quickly rolls into U.S. markets.

"We worry about a U.S. brokerage firm that is dealing with a Japanese insurance company, where we don't know how they are run or regulated," a SEC source said. To improve its ability to react in a crisis, the SEC and the Fed have begun joint inspections with their British counterparts of U.S. and British financial institutions with global reach.

The most drastic -- and probably unlikely -- move the SEC could take in a crisis would be to propose a market shutdown to the president. That would require a majority vote of the commission. If a quorum couldn't be mustered, the chairman could designate himself "duty officer" and go to the president or his staff.

"Closing the market is, of course, the last thing the commission wants to do," said a source familiar with the SEC's planning. "During a time when people are extremely worried about their investments, you are cutting them off from taking any action. . . . The philosophy of the commission is that markets should stay open."

Just the Facts

Gathering accurate information would be the first order of business for federal regulators.

"Intelligence gathering is critical," Corrigan said. "It depends on the willingness of major market participants to volunteer problems when they see them and to respond honestly to central bank questions."

The SEC, CFTC and Treasury have market surveillance units. They monitor not only the overall markets, but also the cash positions of all the major stock and commodity brokerages and large traders.

The regulators also are hooked into the "hoot-and-holler" system used to notify participants in all financial markets of trading halts. The hoot-and-holler system alerts traders and regulators when a halt is coming.

Relying on Quick Action

In the event of a sharp market decline, the SEC and CFTC would be in constant contact with brokerage and commodity firms to spot early signs of financial failure. If they concluded that a firm was going down, they would try to move customer positions from that firm to solvent institutions.

At least this team of crisis managers already has been through the Wall Street wars. Greenspan was Fed chairman in October 1987. Rubin has served as the co-head of investment bank Goldman Sachs & Co. Levitt has been both a Wall Street executive and president of the American Stock Exchange.

"I think the government is in good shape to handle a crisis," said Scott Pardee, senior adviser to Yamaichi International (America) Inc., a Japanese brokerage subsidiary, and former senior vice president at the New York Fed. "A lot depends on personal relationships. You have a number of seasoned people who have gone through a number of crises. So if something happens, things can be handled quickly on the phone without having to introduce people to each other."

Consider what happened at 11:30 p.m. Dec. 5, when Greenspan made his comments about irrational exuberance. Alton Harvey, head of the SEC's Market Watch unit, was called at home by officials of Globex, a futures trading system owned by the Chicago Mercantile Exchange. U.S. stock futures trading in Asia had fallen to their 12-point limit, they said.

Harvey immediately alerted his direct superior as well as his opposite number at the CFTC. More senior SEC and CFTC officials were informed as well. But there wasn't much to be done until the morning. So Harvey went back to sleep.

REACTING TO A PLUNGE

After the market crashed on Oct. 29, 1929:

* The Federal Reserve provided loans and credit to financial systems.

* President Hoover met with business, labor and farm organizations to encourage capital spending and discourage layoffs; he also promised higher tariffs.

* Federal income taxes were reduced by 1 percent by the end of the year.

After the market dropped 22.6 percent on Oct. 19, 1987, the Federal Reserve:

* Encouraged the New York Stock Exchange to stay open.

* Encouraged big commercial banks not to pull loans to major Wall Street houses.

* Kept open a subsidiary of Continental Illinois Bank that was the largest lender to the commodity trading houses in Chicago.

* Flooded the banking system with money to meet financial obligations.

* Announced it was ready to extend loans to important financial institutions.

What would happen today during a stock drop would depend on the particulars. Here are current guidelines:

* If the Dow Jones industrial average falls 350 points within a trading day, NYSE trading would be halted for 30 minutes.

* If the DJIA falls another 200 points that day, trading would stop for one hour.

* If the market declines more than 550 points in a day, no further restrictions would be applied.

SOURCE: The New York Stock Exchange, "The Crash and the Aftermath" by Barrie A. Wigmore

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