Trading Diary

The Working Group on Financial Markets, also know as the Plunge Protection Team, was created  by Executive Order 12631, signed on March 18, 1988 by United States President Ronald Reagan to prevent a repeat of the Wall Street meltdown of October 1987. Its members include the Secretary of the Treasury, the Chairman of the Federal Reserve, the Chairman of the SEC and the Chairman of the Commodity Futures Trading Commission.

Recently, the team has been on high alert given the increased volatility of the markets and what Hank Paulson calls “the systemic risk posed by hedge funds and derivatives.”

 These have all contributed to the markets’ erratic behavior and created the likelihood that the Plunge Protection Team may be stealthily intervening behind the scenes.

According to John Crudele of the New York Post, the Plunge Protection Team’s (PPT) modus operandi was revealed by a former member of the Federal Reserve Board, Robert Heller. Heller said that disasters could be mitigated by “buying market averages in the futures market, thus stabilizing the market as a whole.” This appears to be the strategy that has been used.

Former Clinton advisor George Stephanopoulos verified the existence of The Plunge Protection Team (as well as its methods) in an appearance on Good Morning America on Sept 17, 2000. Stephanopoulos said:

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

Stephanopoulos’ comments have never been officially denied. In fact, as Ambrose Evans-Pritchard of the UK Telegraph notes, Secretary of the Treasury Hank Paulson has called for the PPT to meet with greater frequency and set up “a command centre at the US Treasury that will track global markets and serve as an operations base in the next crisis. The top brass will meet every six weeks, combining the heads of Treasury, Federal Reserve, Securities and Exchange Commission (SEC), and key exchanges.”

“Gaming” the system may be easier than many people believe. Robert McHugh, Ph.D. has provided a description of how it works which seems consistent with the comments of Robert Heller. McHugh lays it out like this:

The PPT decides markets need intervention, a decline needs to be stopped, or the risks associated with political events that could be perceived by markets as highly negative and cause a decline, need to be prevented by a rally already in flight. To get that rally, the PPT’s key component — the Fed — lends money to surrogates who will take that fresh electronically printed cash and buy markets through some large unknown buyer’s account. That buying comes out of the blue at a time when short interest is high. The unexpected rally strikes blood, and fear overcomes those who were betting the market would drop. These shorts need to cover, need to buy the very stocks they had agreed to sell (without owning them) at today’s prices in anticipation they could buy them in the future at much lower prices and pocket the difference. Seeing those stocks rally above their committed selling price, the shorts are forced to buy — and buy they do. Thus, those most pessimistic about the equity market end up buying equities like mad, fueling the rally that the PPT started. Bingo, a huge turnaround rally is well underway, and sidelines money from Hedge Funds, Mutual funds and individuals’ rushes in to join in the buying madness for several days and weeks as the rally gathers a life of its own. (Robert McHugh, Ph.D., “The Plunge Protection Team Indicator”)

For the  Plunge Protection Team,There are no minutes of meetings, no recorded phone conversations, no reports of activities, no announcements of intentions. It is a secret group including the Chairman of the Federal Reserve, the Secretary of the Treasury, the Head of the SEC, and their surrogates which include some of the large Wall Street firms. The original objective was to prevent disastrous market crashes. Lately it seems, they buy markets when they decide markets need to be bought, including equity markets. Their main resource is the money the Fed prints. The money is injected into markets via the New York Fed’s Repo desk.

Yesterday when nasdaq touched 2398 and Dow touched 12558 the rally started.If it is a computer program the value to watch is the breaking of DOW 12560 and Nasdaq 2400(day traders please watch to put your calls).