Thursday, January 7, 2010

A Great Conspiracy: The Plunge Protection Team

Recently, a very poorly researched marketwatcharticle which includes the great quote:
Biderman acknowledged that he had no direct evidence that the Fed and other agencies have intervened in the stock market.

has been making the rounds recently as if proof that somehow this "plunge protection team" is rigging the market upward through illegal (or at least government sponsored) equity purchases. Of course, this is not only false on the facts, but it is absurd in reality.

The Working Group on Capital Marketswas established by Executive Order 12631 by President Reagan in response the the 1987 stock market crash and created an advisory group consisting of Secretary of the Treasury, the Chairman of the Federal Reserve, the Chairman of the SEC, and the Chairman of the CFTC (notice that private banks aren't on the team). This group was essentially tasked with ensuring that a future market meltdown wouldn't bleed over into the general economy through the creation of a panic (ie run on banks or a liquidity crisis in the markets). While many have charged this group with directly intervening in the stock market, none have been able to offer any concrete (or even remotely tangible) proof of this occurring.

A great Washington Post article from 1997 sums up the goals of what it labeled the Plunge Protection Teamas follows:
The Working Group's main goal, officials say, would be to keep the markets operating in the event of a sudden, stomach-churning plunge in stock prices -- and to prevent a panicky run on banks, brokerage firms and mutual funds. Officials worry that if investors all tried to head for the exit at the same time, there wouldn't be enough room -- or in financial terms, liquidity -- for them all to get through. In that event, the smoothly running global financial machine would begin to lock up.

Again notice how no mention is made to bankers being a part of this team.

The conspiracy theory that we have seen recently (and ironically throughout most of the market collapse) purported by market bears (who have been burned) is that the Plunge Protection Team (PPT) enters the stock market and buys shares whenever the market falls (or doesn't fall as the case may be). These accusations are so absurd in their lack of empirical support that a diary like this should never have to written in the first place. If this PPT was so powerful, how did the market ever fall from 1500+ to 666 in the first place? That fact alone should send the CTers away, but apparently it doesn't. Second, if the PPT was so omnipotent in their ability to perfectly understand the market, why was Lehman ever allowed to fail when it could have been purchased by the other PPT members for around $10 billion (which is far less money than it would take to manipulate the stock market and would have saved their own stock values from collapsing). Finally, the amount of cash needed to turn a plunge around would be so big that it would be easily noticed and able to be empirically shown as proof.

Instead of proof, what we have is an inane conspiracy theory that like its brethren (the faked moon landing, the lack of gold in Fort Knox, the birthers, etc) has absolutely no proof whatsoever and more importantly has a much more logical explanation....that when markets panic (ie blood in the street) is a great time to buy. In this case, after a long fall to 666 those left in stocks were not selling under any conditions and many intelligent investors saw the blood in the streets and began to buy. Under circumstances like these it is very easy for the market to go up (and quite quickly, although no quicker than many other historical bear market rallies). As a matter of fact even well known bears like Barry Ritholtz were calling for a market rally back in March of this year (is Barry on the PPT?).

Where the PPT was likely involved in this economic panic was back in 2008 when the decision was made to raise FDIC deposit insurance limits and to extend that protection to money market funds in an effort to stop runs. Those types of decisions are exactly what the PPT was designed to do and it appears they were quite successful in stopping an all out panic from ensuing. Sure, those policies had an impact on the stock market (although you wouldn't have known it if you continued to hold), but they were hardly direct injections of cash into the markets that the CTers would have you believe are being made after some secret phone call from Bernanke to JP Morgan.

Once again, what the conspiracy theorists lack in evidence they make up for in their zealous defense of their conspiracies.