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To what extent are the markets being rigged?

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Welcome to the behind-the-scenes world of The Plunge Protection Team

 “The Dow is a dead banana republic dictator in full military uniform propped up in the castle window with a mechanical lever moving the cadaver’s arm, waving to the Wall Street crowd.” 

 – Michael Bolser, Le Metropole Cafe  

The Plunge Protection Team is formally called the Working Group on Financial Markets (WGFM) and was created by President Reagan’s Executive Order 12631 in 1988 in response to the October 1987 stock market crash.  The WGFM includes the President, the Secretary of the Treasury, the Chairman of the Federal Reserve, the Chairman of the Securities and Exchange Commission, and the Chairman of the Commodity Futures Trading Commission.  Its stated purpose is to enhance “the integrity, efficiency, orderliness, and competitiveness of our Nation's financial markets and [maintain] investor confidence.” According to the Order: 

“To the extent permitted by law and subject to the availability of funds therefore, 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.”  

In short, taxpayer money is being made available to manipulate markets.  The shady history of the PPT was tracked by journalist John Crudele in a June 2006 New York Post series, in which he wrote: 

“Back during a stock market crisis in 1989, a guy named Robert Heller – who had just left the Federal Reserve Board – suggested that the government rig the stock market in times of dire emergency.  .  .  .  He didn’t use the word ‘rig’ but that’s what he meant.  Proposed as an op-ed in the Wall Street Journal, it’s a seminal argument that says when a crisis occurs on Wall Street ‘instead of flooding the entire economy with liquidity, and thereby increasing the danger 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.’” 

The PPT was to be the Roman circus of the twenty-first century, distracting the masses with pretensions of prosperity.  Instead of fixing the problem in the economy, the PPT could just “fix” the investment casino.  Crudele continued: 

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“Over the next few years .  .  .  whenever the stock market was in trouble someone seemed to ride to the rescue.  .  .  .  Often it appeared to be Goldman Sachs, which just happens to be where Paulson and former Clinton Treasury Secretary Robert Rubin worked.”  

For obvious reasons, the mechanism by which the PPT has ridden to the rescue is not detailed on the Fed’s website; but some analysts think they know.  An antitrust group called GATA (the Gold Anti-Trust Action Committee) has been tracking the PPT’s moves for many years.  Michael Bolser of GATA concluded in 2004 that PPT money is being funneled through the Fed’s “primary dealers,” a group of favored Wall Street brokerage firms and investment banks.  The device used is a form of loan called a “repurchase agreement” or “repo,” which is a contract for the sale and future repurchase of Treasury securities.  Bolser explained: 

“It may sound odd, but the Fed occasionally gives money [‘permanent’ repos] to its primary dealers (a list of about thirty financial houses, Merrill Lynch, Morgan Stanley, etc).  They never have to pay this free money back; thus the primary dealers will pretty much do whatever the Fed asks if they want to stay in the primary dealers ‘club.’ 

“The exact mechanism of repo use to support the DOW is simple.  The primary dealers get repos in the morning issuance .  .  .  and then buy DOW index futures (a market that is far smaller than the open DOW trading volume).  These futures prices then drive the DOW itself because the larger population of investors think the ‘insider’ futures buyers have access to special information and are ‘ahead’ of the market.  Of course they don’t have special information .  .  .  only special money in the form of repos.”

 

With Paulson’s new $700 billion credit card, the PPT obviously has access to much more money than in 2004 – enough money, no doubt, to buy large blocks of some key stocks.  Those purchases, in turn, would trigger the program traders’ computers, which follow like robots according to pre-set formulae.  Although thousands of stocks are publicly traded, only 30 stocks compose the Dow, making this trend-setting index fairly easy to manipulate.

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Several years after receiving my M.A. in social science (interdisciplinary studies) I was an instructor at S.F. State University for a year, but then went back to designing automated machinery, and then tech writing, in Silicon Valley. I've (more...)
 

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