Plunge Protection

greenspun.com : LUSENET : TB2K spinoff uncensored : One Thread

THROWING A LIFELINE TO SINKING MARKETS WORKED; HERE'S PROOF Friday,October 20,2000 By JOHN CRUDELE

--------------------------------------------------------------------------------

I SUGGESTED in last Friday's column that the Federal Reserve should step in whenever the stock market flirts with real disaster. The column was timely. Stock prices had fallen sharply on Thursday. Then, with the help of mysterious buying the next morning, Wall Street made a nice recovery on Friday.

On this past Wednesday, again the Dow Jones industrial average was down - more than 400 points in morning trading. Suddenly, sources tell me, Goldman Sachs, Merrill Lynch and perhaps others threw caution to the wind and saved the market through heavy buying of Standard & Poor's and Nasdaq futures.

Stock prices closed lower Wednesday. But the suspicious and timely buying probably averted a crash.

You and I will probably never know whether the Fed was behind the futures purchases by those firms. And Alan Greenspan will never admit that he is interfering in the supposedly free market.

But we do know something.

From a story that ran in the Washington Post on Feb. 23, 1997, we learned of the existence of something called the Working Group on Financial Markets. The Washington Post said it was informally called the "Plunge Protection Team."

And while that other paper didn't seem to know what it had happened upon, it seemed pretty clear that someone in the government wanted investors to know that the Fed and others were watching out for them.

But do people really want government interference in financial markets? And is this safe?

After I wrote last Friday's column, I was inundated with e-mails from people who didn't think the Fed had the right to butt in and who thought I was nuts for suggesting it. First, here are some readers' comment. Then I'll respond.

* "Why don't we save Greenspan the trouble ... The Federal Reserve can just take the money they were going to spend and send it directly to all investors who lose money in the future." S.C.

* "What a wonderful world you want; a market where we can speculate to our greedy heart's content with no concern about equally out of balance consequences." D.F.

* "To put it mildly, I take strong exception to your article. I first thought it might be written with a sense of ironic humor, but as I skimmed through the article, I realized you were serious." G.M.

* "I almost always agree with your articles re: the markets and investing, but you're very likely mistaken on this one." S.E. Phd.

* "I've enjoyed your commentaries up until now ... but the one today is too much for me." M.T.

* "You're being facetious, right?" A.P.

* "To infer that Mr. Greenspan is responsible for my or anyone else's 401k is absurd. The bottom line is that the long-term PE ratio on the S&P 500 is about 15 and we are roughly twice that level now. The law of averages mandates that long-term trends will prevail." D.K.S.

* "Hey, that's what we need, the government speculating in S&P futures." B.H.

* "The thesis of your article is fundamentally flawed. It is not and should not be the role of the Federal Reserve to target the financial markets." another B.H.

* "I enjoyed your columns in the past. You lost me on this one. In case you are not joking, the reason we have this fraudulent bubble economy is because of ignored moral hazard on the part of government financial sc ... bags in the Fed and Treasury." M.G.

There were many letters that were unprintable.

My answer: Hey, excuse me for worrying that people will go hungry, lose their houses, have to pull their kids out of college and maybe even disconnect their cable TV.

Sure there's a bubble. And, yes, people have been greedily plowing their hard-earned money into the stock market like it was some guaranteed get-rich-quick scheme. But I also agree that, without a doubt, no arm of the government should mess with the financial markets, including the Federal Reserve.

But greedy investors aren't the only ones who'll be hurt when the stock market collapses. And as excessive as stock prices were when moving higher, they can do the same on the way down.

Let the Fed rescue the market if it wants to. It beats the hell out of the alternative.

* Please send e-mail to:

jcrudele@nypost.com



-- James (truth@askme.com), October 20, 2000

Answers

"Suddenly, sources tell me, Goldman Sachs, Merrill Lynch and perhaps others threw caution to the wind and saved the market through heavy buying of Standard & Poor's and Nasdaq futures. "

Whether or not they "threw caution to the wind" is a matter of opinion.

-- Buddy (buddydc@go.com), October 20, 2000.


Buddy,

I have already addressed this in the other thread, but I will do so again here.

If a major market player wanted to obtain the best price possible on his purchases, he would move cautiously into the market, so as not to push the market away from his buying point. The action described in Crudele's article is the EXACT OPPOSITE type of behavior.

Whoever was doing the buying on Wednesday was not interested in obtaining the best value for their dollar, they were interested in turning the market higher.

-- J (Y2J@home.comm), October 20, 2000.

That's interesting Y2J.

Now explain why we've had two straight days of a NASDAQ rally since then.

BTW, any major player knows they can't "move cautiously into the market."

-- Buddy (buddydc@go.com), October 20, 2000.


Buddy,

Can't you understand that what the markets do during times of normal operation are the result of dozens, if not hundreds, of variables? Can't you also understand that when a bull charges into a china shop, others in the shop are aware of the occurrence?

What I am saying is that when the market was PLUNGING on Wednesday, some entity made a deliberate move to reverse that drop. Who, other than the U.S. government in some shape (Fed, ESF, etc.), has both the financial capability and motive to conduct such a move?

Finally, would you consider Warren Buffet a major player? He seemed to have successfully moved cautiously into the silver market a few years back. Just how did he do that?

-- J (Y2J@home.comm), October 20, 2000.

THROWING A LIFELINE TO SINKING MARKETS WORKED; HERE'S PROOF

http://www.nypost.com/business/13898.htm

-- Where (to@find.it), October 20, 2000.



From a story that ran in the Washington Post on Feb. 23, 1997, we learned of the existence of something called the Working Group on Financial Markets. The Washington Post said it was informally called the "Plunge Protection Team."

http://washingtonpost.com/wp-srv/business/longterm/blackm/plunge.htm

Plunge Protection Team

-- (the@WashingtonPost.article), October 20, 2000.


"But I also agree that, without a doubt, no arm of the government should mess with the financial markets, including the Federal Reserve."

The biggest lie of them all is that the Federal Reserve System is a "part" of the government... They are a PRIVATE institution who "loans" money to the government...

Biggest bunch of crooks on the planet.

growlin' at the bank teller...

The Dog

-- The Dog (dogdesert@hotmail.com), October 23, 2000.


Hi all. Here's an "interesting" little article about derivatives. My interpretation of Greenspan's letter: "This is in writing, so our own heads won't roll. Quit farting around, hurry up and pass this bill, before all hell breaks loose, because it will, soon!"

My apologies if this was already posted elsewhere on this board...

Fair use, for educational purposes.

Friday October 20 7:10 PM ET

Greenspan, Summers Urge Action on U.S. Netting Bill

WASHINGTON (Reuters) - Federal Reserve Chairman Alan Greenspan (news - web sites) and Treasury Secretary Lawrence Summers on Friday urged Congress to act this year on legislation that would simplify the treatment of derivatives contracts in the event of the bankruptcy of a major financial company.

In a letter sent to House of Representatives Speaker Dennis Hastert and Senate Majority Leader Trent Lott, Greenspan and Summers said the bill would help reduce the impact of the failure of any one financial institution on the stability of the broader financial system.

``We believe this is a rare opportunity for the government to take an important tangible step to mitigate systemic risk and improve the integrity of our financial system,'' they said.

Derivatives are investments whose values are derived from an underlying financial asset, rate or index. They are widely traded among major banks, broker-dealers and other financial companies to manage and control complex business risks.

The legislation aims to allow the speedy resolution of derivatives contracts held by a bankrupt financial firm rather than having them tied up in bankruptcy court, where delay could spread the firm's problems to others involved in the deals.

Among other things, it would permit the ``netting'' -- or offsetting - - of all the derivatives contracts between a bankrupt financial firm and a counterparty to quickly arrive at a single outstanding claim.

``It would reduce the likelihood that incidents such as the near- collapse of Long-Term Capital Management in September 1998 would pose a broader threat to our financial system,'' Summers and Greenspan said.

The effort has near-universal support in Congress, but has become ensnarled in controversy surrounding a broader overhaul of U.S. consumer bankruptcy laws.

The House has already passed the broader bankruptcy bill, which contains the derivatives provisions, and the Senate may follow suit next week. But the White House has threatened a veto, making it unlikely to be enacted this year.

However, the derivatives measure was also introduced as a separate bill earlier this year, and supporters believe that vehicle may now represent its best chance.

``We are writing to urge that Congress pass ... a free-standing bill before the end of this legislative session,'' Greenspan and Summers said. ``It is important that we not miss this opportunity.''

-- Deb Mc (vmcclell@columbus.rr.com), October 23, 2000.


Oops, here's the URL: http://dailynews.yahoo.com/h/nm/20001020/pl/financial_netting_dc_1.htm l

-- Deb Mc (vmcclell@columbus.rr.com), October 23, 2000.

"What I am saying is that when the market was PLUNGING on Wednesday, some entity made a deliberate move to reverse that drop."

Pure speculation.

And from the original article:

"Suddenly, sources tell me, Goldman Sachs, Merrill Lynch and perhaps others threw caution to the wind and saved the market through heavy buying of Standard & Poor's and Nasdaq futures.

Stock prices closed lower Wednesday. But the suspicious and timely buying probably averted a crash."

Suspicious? "Sources tell me" ??? Any buying that occurred is on record. It certainly wouldn't be hard to find out which brokerages did the buying. Why does the writer need mysterious "sources" to find out?

" You and I will probably never know whether the Fed was behind the futures purchases by those firms. And Alan Greenspan will never admit that he is interfering in the supposedly free market."

That statement borders on libel. Although probably nobody cares.

-- Buddy (buddydc@go.com), October 23, 2000.



Some *rumors* that were in an Australian newspaper a week ago. Keep an eye on derivatives. A few paragraphs from that article....

http://hv.greenspun.com/bboard/q-and-a-fetch-msg.tcl?msg_id=003wZd

Behind the Street's PR machine, meanwhile, worries and fears continue to mount. Not about the fate of investors but the fate of the major investment banks and brokers.

In August, this column focused on the Perfect Storm that some insightful Streeters were predicting because a hitherto unnoticed hurricane was sweeping in just as the storm front battering Wall Street markets and technology stocks met the strong economy/Fed interest rate action storm.

Said institutional broker Donaldson, Lufkin & Jenrette strategist Tom Galvin at the time, "A serious credit crunch is unfolding behind the headlines. DLJ's leveraged finance specialists are increasingly concerned about the possibility of an impending financial recession rather than an economic recession".

In recent weeks the third storm hit. But the biggest waves so far have hit Wall Street and not corporate America. The junk bond market has sunk, taking with it billions of dollars of the investment banks' money, and the biggest whisper game right now is which firm is most underwater in the high-yield market.

The second biggest whisper before Friday was about reports of a central bank, possibly not far from New York, selling US Treasuries to raise funds for intervention in financial markets. Friday's rumour was that the Nasdaq market had been the beneficiary. That certainly would explain much, but wave-calming in the junk bond market would seem more needed right now. Barton Biggs over at Morgan Stanley (which coughed up to high-yield losses last week) believes the deteriorating financial position of many telecom companies and their falling coverage and credit ratios could prove a problem for institutional lenders and the banking system.

-- (Australian@financial.article), October 23, 2000.


Moderation questions? read the FAQ