Rigging the Market; the secret maneuverings of the Plunge Protection Team

By Mike Whitney

09/14/06 "Information Clearing House" -- -- “Every individual…generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.” Adam Smith, “The Wealth of Nations”

The Plunge Protection Team is a working group of high-ranking officials from the Dept. of the Treasury, Wall Street, and the Federal Reserve. Its purpose is to establish the protocols for preventing another incident similar to the stock market crash of 1987. In the event of a steep decline, the team is prepared to buy large amounts of equities in an effort to stabilize the market.

Some people believe that the government has no right to interfere in the activities of “free markets”. Others think it is a prudent way of staving off economic collapse. Still others believe that the intrusion of government, aided by the privately-owned Federal Reserve and the NYSE, naturally favors the larger institutional investors and creates an uneven playing field for small investors.

Whatever side one is on, it is proof-positive that “free markets” are merely a public relations myth with no basis in reality. The preservation of the system takes precedent over the lip-service to ideology; the “invisible hand” will always be overpowered by the manicured and mettlesome fingers of banking elites and Wall Street big wigs. This is their system and they’re not going to let it be obliterated by some foolish commitment to principle.

The Plunge Protection Team was first uncovered in comments by Clinton advisor, George Stephanopoulos on Good Morning America on Sept 17, 2001. Here’s what Stephanopoulos said:

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

Stephanopoulos comments are hardly shocking. They simply underscore the fact that “deregulation” has created an economic monster which requires more and more tinkering from the stewards of the system. Without the stopgaps provided by the Plunge Protection Team and the actions of similar organizations which forestall business bankruptcies, (bailouts) the whole over-leveraged system would quickly crash and burn. The irony is that the same corporate kingpins and banking moguls who’ve benefited the most from removing the rules for prudent investment are now trying to create a safety net for when it inevitably begins to unravel.

It won’t work. The numbers are too large. Trillions of dollars are presently held in shaky hedge funds and derivatives markets. If the market takes a steep and sudden downturn, there’s nothing anyone will be able to do.

John Crudele of the New York Post has done extensive research on the Plunge Protection Team (aka; the Working Group on Financial Markets) and provides the blueprint for “rigging” the markets when catastrophe hits. The idea came from an a former member of the Federal Reserve Board named Robert Heller who suggested that “instead of flooding the entire economy with liquidity, and thereby increasing the risk of inflation, the Fed could support the stock market directly by buying market averages in the futures market, thus stabilizing the market as a whole.”

Whatever happened to the idea of completing the “market cycle” and allowing markets to self-correct? What about the ethical question of whether government manipulation should be permitted in a “free market”? And, who gives the government and the privately-owned banks the right to interfere in the equities markets and snatch up zillions of futures in order to prop up the unstable and debt-ridden system.

No doubt, the supporters of these drastic measures are the same “market purists” who appear frequently on the business channel extolling the virtues of the “free market” in the most lyrical language as though they were gazing at the subtle and wondrous workings of the universe. Once the pretense is stripped away, they're exposed as unprincipled phonies trying to stitch together a faltering system on its last legs.

Crudele added that, “Over the next few years, people like me (meaning those who watch the financial world with a critical eye rather than a blind one) suspected that Heller’s plan was indeed in effect. Whenever the stock market was in trouble someone seemed to ride to the rescue.”

Crudele is probably right; there are back-channel ways to move the markets. Fed-master Bernanke even confirmed the role of the Plunge Protection Team in recent testimony to Rep Ron Paul (R-Texas). The larger question is whether the group operates in the public interest or merely tends to the needs of establishment elites who hold all the levers of power. Certainly, no one would object if the main goal was simply to remove some of the disruptive bumps in market activity. What’s worrisome is the conjugal relationship between the state and the privately-owned banking establishment which is designed to operate exclusively in the interests of its shareholders. This is a basic conflict of interest and puts the small investor at a real disadvantage. He has no way to lobby government to mettle in the markets. He must make his investment decisions on reasonable evaluations from publicly available information.

The same rule applies to bailouts as does to interfering with the equities markets. Bailouts only serve the interests of the ruling elite and undermine the credibility of the system. Whenever a major corporation or a hedge fund finds itself slipping into fiscal quicksand, the Counterparty Risk Management Policy Group (CRMPG) leans on the federal government to throw them a lifeline. The CRMPG is a mix of hedge funds and mega-banks who are the “self appointed” caretakers of the system. Here’s their statement:

“Since we know that financial shocks will occur in the future, and we no that no approaches to risk management or official supervision are fail-safe, we also know that we must preserve and strengthen the institutional arrangements whereby, at the point of crisis, industry groups and industry leaders, as well as supervisors, are prepared to work together in order to serve the larger and shared goal of financial stability.”

All very noble, but the bottom line is they serve the limited interests of corporate plutocrats who need taxpayer money to paper-over their business failures. The CRMPG is just a fancy-sounding lobby designed to prevent their colleagues from slipping into bankruptcy. Bailouts are a fundamental contradiction to free markets. If privately-owned corporations cannot succeed on their own merits they should be allowed to fail.

The Plunge Protection Team and the CRMPG illustrate the collusive relationship between the banking establishment, the uber-corporations and the state. They’ve worked assiduously to remove the safeguards which have traditionally protected the average investor from hucksters and scam-artists, and paved the way for a full-system breakdown. The market is more vulnerable now than anytime since the late 1920s, a fact that was emphasized in a statement from the IMF just days ago:

“Financial markets have failed to price in the risk that any one of a host of threats to economic security could materialize and deliver a massive shock to the world economy. It is clear that risks are on the downside of a sharper than expected slowdown in house prices that would produce weaker-than-expected growth that would have implications for global growth and financial markets.” (“IMF: Risk of global crash is increasing” UK Independent)

The country now faces the growing probability of an economic tsunami triggered by the rickety hedge funds, the falling dollar, and the rapidly deflating real estate bubble. The solid foundation of government oversight and regulation has been eroded by the persistent attacks of the corporatists and banking giants. The entire system is now on shaky ground. When the scaffolding starts to fall, the futile maneuverings of the Plunge Protection Team won’t make a bit of difference.