Originally Published: 1/30/2008
THE PRESIDENT’S WORKING GROUP
ON THE STATE OF THE MARKETS
By The Issue Wonk
The Working Group on Financial Markets, also known as the President’s Working Group on Financial Markets, or just the “Working Group,” was created in 1988 by Ronald Reagan by Executive Order 12631. It was established in response to “Black Monday” – October 19, 1987 when the financial markets collapsed. Its directive is to give recommendations for legislative and private sector solutions for “enhancing the integrity, efficiency, orderliness, and competitiveness of [U.S.] financial markets and maintaining investor confidence.” In other words, it’s a federal government group designed to protect investors in the stock market.
The Working Group is made up of the following:
Secretary of the Treasury, who will chair the group. Currently this is Henry Paulson.
The Chair of the Board of Governors of the Federal Reserve System. Currently this is Ben Bernanke.
The Chair of the Securities and Exchange Commission. Currently this is Christopher Cox.
The Chair of the Commodity Futures Trading Commission. Currently Walter Lukken is the Acting Chair.
Brett D. Fromson, a staff writer for the Washington Post, published an article1 February 23, 1997 wherein he referred to the Group as the “Plunge Protection Team.” According to Fromson:
[The] quiet meetings of the Working Group are the financial world’s equivalent of the war room. The officials gather regularly to discuss options and review crisis scenarios because they know that the government’s reaction to a crumbling stock market would have a critical impact on investor confidence around the world.
. . .
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.
Some suggest that the Working Group is a scheme to manipulate the U.S. stock market by using government funds to buy stocks and other instruments. In 2006 Crudele noted:
Stocks have been moving steadily upward since July, when Paulson took over the Plunge Protection Team (and the Treasury). And one of the reasons could be that . . . there is less risk in stocks if the government is providing a safety net.2
Crudele followed this up in August 2007 commenting on the stock market’s problems. The stock market had been getting hit hard because of mortgage delinquencies. On August 1st the Dow Jones Industrial Average made a “suspicious” 150-point gain in the final 20 minutes of trading which, according to Crudele, The Wall Street Journal said came “out of nowhere.” He quoted it:
Wall Street traders and analysts couldn’t cite a specific catalyst for the quick rally, although a wave of pre-placed electronic orders to buy and an earlier pullback in crude oil prices seemed to help.3
Crudele found that those electronic orders first came from Goldman Sachs, where Treasury Secretary Paulson had been the Chair, “and was quickly followed by orders to buy stock index futures contracts from Merrill Lynch, Deutsche Bank and Citigroup.” Crudele called this a “concerted effort” that could only be orchestrated by the Working Group.3
Crudele isn’t the only one who’s suspicious of this government control of the markets. Bell, in 2005, summarized his article on “The Invisible Hand” as follows:
The U.S. government is manipulating all major U.S. financial markets – stocks, treasuries, currencies. This article shows how it is possible and how it is done, why it is done, who specifically is doing it, when they do it, and where they get the money to do it.4
most people probably believe that the major capital markets in the U.S. are basically true markets with, occasionally, maybe very occasionally, a little bit of rigging here and there. But evidence shows that the opposite is the case – the rigging is fundamental with a little bit of true markets here and there.4
Bell asserts that this is possible because individual investors in the market hold a very small share. The majority share is held by huge mutual funds, pension plans, and life insurance funds, groups which can easily manipulate the market. “A handful of players can dominate if they coordinate their actions.” Bell said:
Programmed trading in an utterly concentrated stock market pretty much guarantees the possibility of systematic and continual market rigging. But to accomplish this, and coordinate it with the currency and Treasury markets, some sort of orchestrating mechanism would need to exist. It does; it is known as the President’s Working Group on Financial Markets, occasionally referred to in the business press as the Plunge Protection Team. . . Presumably Plunge Protection doesn’t hold . . . ad hoc conference calls and meetings just to be passive bystanders. Executive Order 12631 specifically authorizes them to coordinate buying: “The Working Group shall consult, as appropriate, with representatives of the various exchanges, clearninghouses, self-regulatory bodies, and with major market participants to determine private sector solutions wherever possible.” So not only is the fix in, it is legal.4 [Emphasis added.]
Would you be surprised to know that much of the money for market infusion is coming from the military-industrial complex? Federal government contractors operate under Cost Accounting Standards, defined in their pension plans.
This gives them stock portfolio insurance. . . Should the pension funds of the federal government contractors lose money in their investments . . . they can simply make up the difference by adding it . . . to subsequent items sold to the federal government. The vast sums of federal tax money devoted to plugging the holes in the pension fund for the largest Pentagon contractor, Lockheed Martin. . . [shows how] the military-industrial complex [is] linked to the stock market through the Lockheed Martin pension fund, and by extension through all the others covered by the same law.4
Bell also asserts that currency and Treasury markets are “pumped up.” He explains that U.S. Treasury holdings by Japan and China (see Major Holders of Treasury Securities) are esentially a consequence of a trade imbalance between them and the U.S. “with the balance heavily tilted” toward those two (2) countries. To maintain this imbalance, Japan and China must keep their currency pegged against the U.S. dollar “at a lower rate than it might otherwise be.” This keeps the price of their products low to U.S. consumers. In order to keep this going, Japan and China’s central banks “keep their currencies cheap by buying a corresponding amount of dollars, thus supporting the dollar against their currencies. The dollar may essentially collapse against the euro, but not against the yen and the yuan.” With the dollars the Japanese and Chinese central banks have bought, they then buy U.S. Treasuries. “This has the effect of pumping the price of Treasuries too.”4
Bell provides extensive descriptions of the various machinations used by the U.S. to manipulate the markets, including using the tax code and pension fund laws. I suggest you read the entire article to get a better understanding. But the most important thing to understand is that all of this is legal due to Executive Order 12631.
Perhaps this manipulation is why President George W. Bush has been so insistent about giving taxpayers a choice of paying into the stock market rather than the Social Security Trust Fund. Allowing payments into market funds in lieu of Social Security would create huge funds with vast amounts of money, making market manipulation even easier.
While the Working Group has issued only three (3) reports since its inception in 1988,5 in February 2007 it released a set of principles and guidelines entitled “Common Approach to Private Pools of Capital. Guidance on Hedge Fund Issues Focuses on Systemic Risk, Investor Protection.”6 Sonnenschein Nath & Rosenthal, an American law firm that helps “clients seize profitable marketplace opportunities,” said of this report:
The President’s Working Group on Financial Markets (the “PWG”) released a positive and thoughtful set of ten fundamental principles . . . as part of its ongoing effort to guide U.S. legislators, as they consider and address public policy issues associated with the rapid growth of private pools of capital, including hedge funds and private equity funds (collectively, “Funds”). The PWG concluded that market discipline, governed by institutional investors and managers of Funds, together with statutory limitations restricting access to Funds to wealthy investors, are for the most part sufficient means by which to mitigate industry risks, thereby sending a clear message to Congress that additional and targeted regulation of the hedge fund industry is unnecessary. [Emphasis added.]7
That these pools and the purchase by the government of futures contracts is at work in Bush’s current “stimulus package” doesn’t appear to be in question. Evans-Pritchard said that the President’s Working Group:
appears to have powers to support the markets in a crisis with a host of instruments, mostly by through buying futures contracts on the stock indexes (DOW, S&P 500, NASDAQ and Russell) and key credit levers. And it has the means to fry “short” traders in the hottest of oils. . . [A] mood of deep alarm has taken hold in the upper echelons of the [Bush] administration. “What everyone’s looking at is what is the fastest way to get money out there,” said a Bush aide.8
Maybe this fast infusion wouldn’t be necessary if former Social Security taxes were being pumped into private funds.
1 Fromson, Brett D. Plunge Protection Team. Washington Post, February 23, 1997.
2 Crudele, John. Treasury’s Paulson Plays With the Plunge Protectors. New York Post, October 26, 2006.
3 Crudele, John. Hey, Hank, Let’s Sit Down and Chat About Things. New York Post, August 9, 2007.
4 Bell, Robert. The Invisible Hand (of the U.S. Government) in Financial Markets. Financial Sense, April 3, 2005.
5 The President’s Working Group on Financial Markets. Hedge Funds, Leverage, and the Lessons of Long-Term Capital Management, April 1999. Over-the-Counter Derivatives Markets and the Commodity Exchange Act, November 1999. Terrorism Risk Insurance, September 2006.
6 President’s Working Group. Common Approach to Private Pools of Capital. Guidance on Hedge Fund Issues Focuses on Systemic Risk, Investor Protection. U.S. Treasury, February 22, 2007.
7 Sonnenschein Nath & Rosenthal. President’s Working Group Finds Market Discipline Trumps Government Regulation. Sonnenschein.com, February 28, 2007.
8 Evans-Pritchard, Ambrose. Bush Convenes Plunge Protection Team. The Telegraph, 1/11/08.
© The Issue Wonk, 2008