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The Stock Market's Da Vinci Code

Are a small cabal of Federal Reserve gnomes on Liberty Street keeping the market from crashing? Tales of the Plunge Protection Team just won't go away

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.”

The Invisible Hand

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 camel.”

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.”

Based on Fact?

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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