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The Stock Market's Da Vinci Code

By Jonathan Moreland
Registered Rep magazine
March 1, 2006

Is the Federal government manipulating the equity markets?

For years, there have been whispers on Wall Street of secret
government-backed actions -- like stepping in to buy equity index
futures to prevent investors from catastrophic plunges.

It sounds like a crazy conspiracy theory for sure, but it is one that
has currency and won't go away. The conspiracy goes like this: There
is a group of federal government officials -- the Treasury secretary,
the Fed chairman -- plus senior NYSE officials who make up, the
Plunge Protection Team. It is said they intervene to put a floor
under stocks whenever they are at risk of penetrating important
levels of technical support, such as when the 50-day moving average
slips under the 200-day moving average. Technicians call this the
Death Cross, because, when that happens, it can trigger a larger,
steeper rout caused by ask-no-questions programmed selling, which can
lead to outright panic selling.

The conspiracy theory holds that these officials buy S&P 500 index
futures through major Wall Street trading desks, with money from the
Exchange Stabilization Fund, a $38 billion Treasury Department
account to buy currencies on the open market and secret government
offshore accounts. Believers say these activities are coordinated out
of the Fed's New York branch on Liberty Street in Manhattan, just a
block from the NYSE.

True believers -- many on the Internet, as might be expected -- point
to public statements by no less than Alan Greenspan. During a speech
given on Jan. 14, 1997, at a university in Leuven, Belgium, Greenspan
said: "We have the responsibility to prevent major financial market
disruptions through development and enforcement of prudent regulatory
standards and, if necessary in rare circumstance, through direct
intervention in market events."

Richard Russell, who has seen it all in his nearly 50 years of
publishing the Dow Theory Letters, is no conspiracy theorist by any
means. But even he has openly wondered about the remarkable ability
of the indices he tracks so closely to recover so consistently from
the technical trading fault lines they have flirted with so often in
recent years.

Russell told his 12,000 subscribers in mid-October of last year that
he has "never been a big believer in manipulation and the so-
called 'Plunge Protection Team.'" But, he proceeded to muse about the
events of a trading day that month. "Manipulation? This morning's
breadth on the NYSE was down by a big plurality of 1400, but the S&P
and the Dow were actually higher? This was truly extraordinary, and I
wondered whether possibly the Fed was buying S&P futures in an effort
to put a floor under the market."

What? The U.S. Federal Reserve putting a "floor" on stocks?

It has happened overtly in moments of crisis. In the days following
the Oct. 19, 1987 debacle, the Fed flooded the banking system with
money, announcing that it would be a willing lender of last resort
for important financial institutions and "encouraging" banks and Wall
Street houses to relax their loan covenants for a brief period. Fed
officials do appear to have helped prevent things from getting worse.
The 22.6 percent plunge in the Dow that day did not spread into the
deeper catastrophe it could have become. The Fed's action and
statements allowed cooler heads to start placing reasonable bets that
a bottom was nigh.

H. Robert Heller, a Fed governor between 1986 and 1989, had a front-
row seat to the stock market crash of 1987 and recalls what
happened. "Everybody's attention was tightly focused on containing
the damage and preventing a spread of the financial disruptions
throughout the financial system," Heller wrote years later. "Do not
forget that at that time we were also dealing with a severe S&L
crisis and almost 200 bank failures per year. Without swift
supportive action on behalf of the Fed, the stock market crash could
well have been the straw that broke the back of an already weak

But a surprising number of investors think the government's invisible
hand is active even in the absence of obvious threats, like the blow
up of Long-Term Capital Management in 1998 and the horrific Sept. 11
attacks. Specifically, diehard PPT believers claim that in three
months in 2002 (June, July and October) and March 2003, and again in
March, April and October 2005, equity indices were challenging widely
followed technical supports -- but miraculously recovered.

The avoidance of a stock market meltdown has stumped the logic of
many big-picture investors, too. The Economist magazine has been
sounding an alarm for years about the U.S.'s current account deficit
(now at a record 6 percent of GDP), the inevitable bursting of the
worldwide real estate bubble and the overindebted U.S. consumer and
government. More recently, rising interest rates and/or inflation, a
declining rate of corporate earnings growth, soaring energy and
commodity prices and enormously costly natural disasters have added
to strains on stock prices. Despite all this, the market has rallied
each time off its numerous, relatively recent technical fault lines.
For market bears the market's resilience is literally unbelievable.
So much so, that the only explanation is the existence of the Plunge
Protection Team. (The PPT is also purported to be active in the gold
markets, which has recently been setting record highs after being
depressed for two decades. But that's a whole other story.)

The first mention of "The Plunge Protection Team" was in a February
1997 article in the Washington Post. But surf the Web and you will
find numerous articles that treat the existence of the PPT as a
given. A Lexis/Nexis search yields 78 references; Google "Plunge
Protection Team," and you'll see nearly one million references as of
this writing -- and it's growing quickly. The Web is home to lots of
drivel, of course. But reputable sources wonder too.

The U.K.-based Guardian and Evening Standard newspapers are
particularly ready to give the PPT credit for actively intervening in
markets. There are plenty of other references, however, which tie
together publicly available information to reach intriguing
conclusions. For instance, an op-ed piece in the Wall Street Journal
in 1989 by Heller argued that the Fed should intervene directly in
the stock market to prop it up if faced with a potentially
catastrophic collapse. Heller even specifically proposed using the
leverage of stock index futures to give the Fed more bang for its
market-saving buck. (Heller, who conspiracists claim is the PPT
architect because of that article, chuckled when told of his supposed
role; he says he'd never heard of it.)

The latest instance of suspected PPT intervention came in an August
2005 report by Sprott Management, a well-considered Canadian firm
with CDN $2.5 billion under management : "It is time that market
participants, the media and, most of all, the government acknowledge
what should be blatantly obvious to anyone who reviews the public
record on the matter: These markets have been interfered with on
numerous occasions. Our primary concern is that what apparently
started as a stop-gap measure may have morphed into a serious moral
hazard situation, with market manipulation an endemic feature of the
U.S. stock market."

If there is a PPT, it may be hiding in plain sight. Following the
1987 crash, the Reagan administration looked for ways to formalize
responses to economy threatening market movers. The U.S. Executive
Order 12631, signed on March 19, 1988, by President Reagan,
established the "Working Group on Financial Markets." The order
states the purpose of the group as being "to identify and consider:
1) the major issues raised by the numerous studies on the events in
the financial markets surrounding Oct. 19, 1987; and, 2) the actions,
including governmental actions under existing laws and regulations
(such as policy coordination and contingency planning), that are
appropriate to carry out these recommendations."

Executive Order 12631 dictates that the Working Group be made up of
the highest profile money types in the government, explicitly naming:
the Secretary of the Treasury, the chairman of the Board of Governors
of the Federal Reserve, the chairman of the SEC and the chairman of
the Commodity Futures Trading Commission. To make sure this group has
the resources to carry out its will, the order further made the
Treasury responsible for providing the "support service" it needs --
but only "to the extent permitted by law and subject to the
availability of funds." (No one at any of these agencies would
comment for this article.)

So how did this team of crisis managers come to be viewed by some as
a secretive fraternity of government and business interests, secretly
manipulating stocks and gold and making a mockery of the concept of
free markets?

Brett Fromson, of the Washington Post, who went on to work for and the Wall Street Journal, was the one who wrote the
Washington Post story that came up with the PPT name. (He says a
clever copy desk staffer came up with the name for a headline.)
Fromson covered the Washington/Wall Street beat, which connected the
ongoing relationship between the political and financial capitals. "I
got the idea for the story after seeing that many of my sources were
often in meetings together. I realized there was an enormous amount
of planning going on." He adds, "The story resulted from a lot of
reporting and relied on the people I was talking with having a
relationship of trust" with him. Fromson said no called him after the
piece was published telling him that he got it wrong -- or that he
was insane.

Perhaps the only certainty about the PPT conspiracy theory is that it
is not going away any time soon. While every rebound by the indices
in the face of damning economic fundamentals and market technicals
deepens the conviction of PPT believers; not even a market crash will
likely convince them otherwise. After all, the market's massive slide
from 2000 through 2002 didn't even unwind the theory. Either way,
someone should make it into a movie. It might be called "Wall
Street's Da Vinci Code."


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