Tuesday, January 8, 2008

What is the Plunge Protection Team and What Do We Know About It?

Recently I had a number of discussions with people on the internet about the Plunge Protection Team (PPT), basically the slang term for Working Group on Financial Markets. Although many talk about the PPT and how it is busy manipulating the market, etc. I realized I did not know anything about it. So I decided to look into it.

What We Know For Sure

The Working Group on Financial Markets is real and was formed by Executive Order 12631 signed March 18, 1988. The group was formed in response to studies completed about the 23% decline in the markets on October 19, 1987 (Black Monday). The group is made up of :

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.

The Purpose of the Working Group is as follows:

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.

The Working Group on Financial Markets also has a number of published reports (see #1 and #2 as examples). Also if you google “Working Group on Financial Markets” you will find a number of references to the group.

Conclusion #1 - The Working Group on Financial Markets is real and has produced a number of reports.

What does the PPT do?

An article in the Washington Post 10 years ago by Fromson seems to be the source of belief that the PPT is involved in manipulating the markets. The article discusses some hypothetical scenarios and then discusses in broad terms how the PPT works. As a side note, this article seems to have created the name the “Plunge Protection Team”.

This article has been followed by many articles over the years both avowing and disavowing the existence of the the PPT.

There are a few that I found interesting.

The first from the Online Journal quotes Robert Heller, former Governor of the Federal Reserve Board:

Heller said that disasters could be mitigated by “buying market averages in the futures market, thus stabilizing the market as a whole.”

George Stephanopoulos, former Clinton aide, is quoted as saying on Good Morning America in 2000:

“Well, what I wanted to talk about for a few minutes is the various efforts that are going on in public and behind the scenes by the Fed and other government officials to guard against a free-fall in the markets. . . . perhaps the most important the Fed in 1989 created what is called the Plunge Protection Team, which is the Federal Reserve, big major banks, representatives of the New York Stock Exchange and the other exchanges and they have been meeting informally so far, and they have a kind of an informal agreement among major banks to come in and start to buy stock if there appears to be a problem. They have in the past acted more formally . . . I don’t know if you remember but in 1998, there was a crisis called the Long term Capital Crisis. It was a major currency trader and there was a global currency crisis. And they, with the guidance of the Fed, all of the banks got together when it started to collapse and propped up the currency markets. And, they have plans in place to consider that if the markets start to fall.”

Another article that I found interesting is a FOIA request by a journalist at the NY Post. An article recently done by John Crudele at the NY Post outlines is efforts to obtain the minutes of several PPT meetings via a Freedom of Information Act (FOIA) request. His requests were not successful as of this last summer after filing the FOIA request 12 months before.

If you are interested in articles that disavow the existence of the PPT there are a number as well, but try this one from Financial Sense.

The point behind all these comments and references is that there is no proof that the PPT manipulates the markets the way some people think, mostly because no one talks about it. There are comments about how the PPT works, but the details are hazy. Also there is no transparency to the actions of the PPT other than the periodic reports. This is unlike the Federal Reserve agency whose goal it is to manipulate the money supply. Everyone (that is interested) knows that one of the ways the interest rates and liquidity in the markets are managed is by using the Federal Open Market Committee (FOMC). That level of transparency does not exist for the PPT.

Conclusion #2 - Although it has been suggested that the PPT is actively involved in the manipulation of the stock market there is no conclusive data to support this position, mostly because no one talks about it.

However, with that said remember the famous line (amongst statisticians) from Carl Sagan “absence of proof is not proof of absence”.

Personal Note on the PPT:

With regard to the PPT, I strongly suspect that it has a lot more power than anyone lets on, but there is nothing written about it. This is very much like any of the intelligence services in the government or in a corporation. You really don't know what is going on because no one talks about it and the only way to conclusively find out what is going on is to float in those circles that know.

For example, I have been trying for 6 months to find out what is going to happen at XYZ company and I can't find out a thing. My wife works there, I have a lot of contacts there (I used to work there), and I can't find out a thing. It isn't that people will not tell me anything it is because they are not in the right circles to know anything other than their job.

Generally, if people think they know what's going on because they keep up with the news (from all the reputable and disreputable sources), they are naive. One has to surmise what is going on by the actions one sees, but that is not scientific proof. At best you have a working "model".

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