STATE MARKET INTERVENTIONS
Is Washington keeping the Dow meltdown from being a complete disaster?
by John Crudele / February 7, 2018
“Did Washington save the stock market this week? It’s hard to make the case that anyone helped Wall Street on Monday, given the fact that the Dow Jones industrial average ended with a 1,175- point loss, equal to 4.6 percent — on top of last Friday’s 666-point decline.
But the Dow and other indexes were in complete collapse right before the start of Monday’s final hour of trading. At one point, the Dow, which represents only 30 stocks but is still a widely followed indicator, tumbled to a loss of about 1,600 points. That’s more than twice as large as the biggest Dow point decline ever. But then something happened. Someone started arbitrarily and aggressively buying stocks and the decline was halved.
Monday will still go down as a Wall Street massacre, but that anonymous superhero buyer or buyers made it a lot less bloody. Stocks opened sharply lower on Tuesday and then again on Wednesday. But each time aggressive buying by a superhero or heroes changed the outcome, if maybe only temporarily. Who was the market’s superhero? I’m going to tell you a story and then you decide.
Toward the end of his time in office in 1989, Ronald Reagan created something called the President’s Working Group on Financial Markets. There had been a stock market crash in 1987 and a near-crash in 1989, so everyone was worried. The Working Group was ostensibly an advisory body that was meant to help regulators and the president understand the markets. The members would write papers, have coffee, confer and come up with solutions. But some of us thought it was something much more, and the Working Group unofficially became known as the Plunge Protection Team.
That notion was strengthened in late ’89, when a guy named Robert Heller, who had just left his position as governor of the Federal Reserve, gave a speech that was later published in the Wall Street Journal that proposed that the Fed should rig the stock market in times of emergency. Heller suggested that the Fed — through, I suspected, its favored brokerage houses — would purchase stock index futures contracts as a way to stop a market collapse in its tracks.
Heller said that since the Fed already rigs the bond market through securities purchases, the stock market would be easy to control. Nobody has ever proven that the Fed and its friends actually protect Wall Street against plunges. It is, you might say, the Loch Ness monster of the financial world — people get glimpses of something but never see a clear picture.
That’s what happened during the financial crisis of 2007 and 2008. Telephone records I obtained back then showed numerous calls between then-Treasury Secretary Hank Paulson and contacts on Wall Street on days when the stock market was tanking and the decline needed to be stopped. The action in stocks on those days looked a lot like what happened this week — sharp reversals that came out of nowhere.
“…the CSRC, which is also known as the ‘National Team‘…”
Since then other countries overtly rig their stock markets. Japan and China don’t even hide their actions. The US Plunge Protectors are going to have their work cut out for them. Rigging the stock market works for a while — but if the equities markets are overpriced, eventually the bubble bursts. And, you guessed it, people who are in the know tend to make out better than those who aren’t. Now you know.”
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