Where is the PPT When You Need It?

Urban myth or super-secret government agency pulling the strings behind the market? Rumors of the mysteriously-named Plunge Protection Team (PPT) persist despite no evidence of its existence having yet come to light.

The story goes like this – after the “Black Monday” market crash of 1987, President Regan formed the President’s Working Group on Financial Markets.^[1] Executive Order 12631 created this group which included the following officials:

• The Secretary of the Treasury or designee (serves as Working Group Chair)
• The Chairman of the Board of Governors of the Federal Reserve System or designee
• The Chairman of the Securities and Exchange Commission or designee
• The Chairman of the Commodity Futures Trading Commission or designee

The stated purpose and functions of this groups include :

• Recognition of the goals of enhancing the integrity, efficiency, orderliness, and competiveness of the U.S. markets to ensure investor confidence
• Consult with representatives of the various exchanges, clearinghouses, and self-regulatory bodies, and with major market participants to determine private sector solutions whenever possible

So – are the conspiracy theorists onto something when they claim that the President’s Working Group is just a front for a more sinister collective that covertly intervenes in the free operation of the markets?

In reality, the U.S. government – through federal agencies including the Federal Reserve – already intervenes in the markets. However, this is done openly and above board through the Federal Open Market Committee (FOMC), and this is a common practice with most central banks. Yes, the FOMC does set a target interest rate – it also buys and sells government securities in an attempt to influence the value of the greenback. However, these actions are a far cry from secret interventions in the stock markets.

So what evidence is there of the existence of the PPT? Well, nothing really. No “smoking gun” such as a memo or other physical evidence has ever been recovered. We have no emails from Fed Chairman Ben Bernanke to the Secretary of the Treasury suggesting the need to secretly buy frozen orange juice futures to ensure orange juice prices don’t plummet. And while I am sure given the state of the U.S. auto industry of late that the CEOs of the major manufacturers have appealed to various government officials for help, there is no evidence that the U.S. government has sanctioned what amounts to stock manipulation for troubled public companies.

While we may not yet have concrete, physical evidence of the existence of the PPT, the conspiracy buffs continue to point to historical events as proof of direct government involvement. The most common suggestion is that each time the market suffers a big loss, the market generally sees a rebound shortly afterwards. This – apparently – is proof positive that the markets are controlled by dark forces whose sole objective it is to protect the wealth of the country’s richest citizens.

Most market watchers would argue of course that this “bounce back” is simply the result of traders taking advantage of significant price drops to cover short positions and pick up quality assets currently under-valued. On the other hand, if there really is a Plunge Protection Team controlling events behind the scenes, then perhaps someone might want to tell them to get with the program.

It was a difficult time last week for the global markets, and the U.S. has not been immune to the troubles. The downward trend from the previous week continued today with first the Nikkei dropping over 4% to its lowest level since October of 2005; then the London FTSE adding 4% to its losses last week; Frankfurt and Paris are also down nearly 5%.

The Toronto Stock Exchange (TSX) has many inter-listed stocks with the NYSE and without sounding too melodramatic, has been hammered for the past week. The TSX has lost nearly 10% (or $150 billion) in the second week of January alone and the current week holds little promise based on Monday’s opening. The TSX has dropped a further 5% since the open today based largely on the growing acceptance of the inevitability of a U.S. recession.

While today is a holiday in the U.S. and the markets are closed, if the experience of the TSX is any indication, tomorrow is bound to be a barn burner. It is expected that U.S. traders will follow the lead of the rest of the world in reducing their exposure to U.S. stocks and this should add to the losses suffered last week in New York. On Friday the Dow Jones closed at 12,200 – its lowest level in over ten months. Some experts feel that we will soon be referring to this time as “the good old days”.

Getting back to the question of the Plunge Protections Team, let’s be honest – is it reasonable to believe that a secret group controlling the stock markets really exists? Actually, a better question is to ask if it is reasonable to believe that even if the PPT does exist, could it actually have a real effect on the markets?

And that brings us to the most compelling reason as to why a secret PPT is nothing more than a fanciful cocktail-hour legend. In order to orchestrate transactions behind the scenes with sufficient volume to affect the markets would require billions and billions of dollars. Even in an economy as large as the U. S., it would be impossible to maintain a secret slush fund of this size. Besides, if the Fed or even the President wants to influence markets, much more can be done through legislation and public announcements. Consider the influence the Fed has on the markets when it even suggests an interest rate cut is in the works – and all this the Fed can basically do for free!

And if this isn’t enough to convince you that the PPT is nothing more than an urban (or should I say fiscal) legend, consider how many people would be required to operate such an organization. Surely someone, at some point through the years, would have uttered some kind of confirmation.

So the next time someone says that little price rebound is the work of the PPT, just smile and nod. After all, what is there to worry about with the Plunge Protection Team on the job?

References

1. ↑ Executive Order 12631