How Much Does the Government Really Manipulate Markets?

August 20, 2007 – On Monday, October 23, 2006, reporter Deborah Solomon wrote in the Wall Street Journal:

“Mr. Paulson is chairman of the Working Group, which coordinates government policy on financial markets and includes the heads of the Federal Reserve, Securities and Exchange Commission, and Commodity Futures Trading Commission. Mr. Paulson has insisted that they meet about every six weeks. Before his arrival, the group met every few months and sometimes as infrequently as once a quarter.”

The Working Group on Financial Markets, consisting of the U.S. Secretary of Treasury, The Federal Reserve, the SEC, and the Commodity Futures Trading Commission, is also known in other circles as the Plunge Protection Team (PPT). The very existence of the Plunge Protection Team, and its supposed interference in stock markets, has been a hotly contested topic, with some people even doubting that it actually intervenes in markets altogether. The PPT has been accused of a widespread number of actions, from buying massive amounts of futures to prop up stock markets and prevent further panic during this recent correction to spurring Central Banks all over the world to release rumors about selling gold to artificially depress the price of gold and thus keep the dollar’s heartbeat, however feint, still alive. I for one, believe that it does exist and believe that it does manipulate markets to serve its own agenda. To what extent they manipulate markets is anybody’s guess however. If I had to guess, I would say it’s somewhat more than the disbelievers think but less than what the believers presuppose. Certainly we can conclude that the government is not forthright about its participation (or others may say, interference) in the markets.

If we follow this transcript of dialogue from a recent Congressional hearing between Senator Ron Paul and Fed Reserve Chairman Ben Bernanke, it’s extremely hard to believe that the Chairman of the Federal Reserve would really be as clueless to the proceedings of the Working Group as he claims to be. Note that Bernanke’s comments about how often the Plunge Protection Team meets directly contradict the Wall Street Journal’s report earlier this past October. Not to say that the WSJ is infallible, but it seems incredulous that Bernanke would not even be aware of how often the PPT meets. Note that below, Bernanke generally remains vague and evasive in his answers to Senator Ron Paul, an approach that would lead me to suspect that the PPT is much more proactive, rather than just advisory, in its role in the U.S. and global stock markets.

Now for this curious exchange between Senator Ron Paul and U.S. Fed Reserve Chairman Ben Bernanke.

From the Hearings on Monetary Policy and the State of the Economy before the Committee on Banking and Financial Services, U.S. House of Representatives, 109th Congress, second session, on July 20, 2006 (click here for the full transcript of this session at FRASER, the Federal Reserve Archival System for Economic Research)

MR. PAUL: Good afternoon, Chairman Bernanke. I have a question dealing with the Working Group on Financial Markets. I want to learn more about that group and actually what authority they have and what they do. Could you tell me, as a member of that group, how often they meet and how often they take action; and have they done something recently? And are there reports sent out by this particular group?

MR. BERNANKE: Yes, Congressman. The President’s Working Group was convened by the President, I believe, after the 1987 stock market crash. It meets irregularly, I would guess about four or five times a year, but I am not exactly sure. And its primary function is advisory, to prepare reports. I mentioned earlier that we have been asked to prepare a report on the terrorism risk insurance. So that is what we generally do.

MR. PAUL: In the media you will find articles that will claim that it is a lot more than an advisory group you know, if there is a stock market crash, that you literally have a lot of authority, you know, to impose restrictions on the market. And we are talking about many trillions of dollars slushing around in all the financial markets, and this involves Treasury and, of course, the Fed, as well as the SEC and the CFTC. So there is a lot of potential there.

And the reason this came to my attention was just recently there was an article that actually made a charge that out of this group came actions to interfere with the prices of General Motors stock. Have you read that, or do you know anything about that?

MR. BERNANKE: No, sir, I don’t.

MR. PAUL: Because they were charging that there was a problem with General Motors, and then there was a spike in GM’s stock prices. But back to the issue of the meeting. You tell me it meets irregularly, but there are minutes kept, or are there reports made on this group?

MR. BERNANKE: I believe there are records kept by the staff. These are staff mostly from Treasury, but also from the other agencies.

MR. PAUL: And they would be available to us in the committee?

MR. BERNANKE: I don’t know. I am sorry, I don’t know.

By the way, for those of you unaware of what specifically Senator Paul was referring to in his comments about GM stock, about two months ago, very curious behavior surrounded GM stock. As negative report after negative report was being released about the general state of affairs at GM, a star analyst at Goldman Sachs (which coincidentally happens to be the firm where U.S. Secretary of Treasury Hank Paulson’s was formerly CEO) upped his price target for GM. His buy rating on GM stock was based on some ludicrous rationalization that GM could potentially enforce sizable wage and benefit cuts during negotiations with the United Auto Workers for a new labor contract. It didn’t matter that across the board, GM was hemorrhaging financially. This one piece of news that GM could POTENTIALLY stem its financial woes based upon expense cuts was somehow strong enough for the analyst to up his price target a whopping 31% from $29 a share to $42 a share.

I read that analyst’s report about GM and couldn’t find one solid fundamental reason that backed his whopping upgrade of the stock. Do you want to guess what price GM’s shares topped out at after the Goldman Sach’s upgrade? GM’s stock made a monumental run right after the release of this upgrade in less than a month’s time from about $30 a share to about $39 a share. Just some more food for thought when inexplicable analyst upgrades, stock price movements, and intraday market swings have puzzled you. Perhaps there is a glimmer of truth to the conspiracy theorists’ rants and raves about the Plunge Protection Team. In the end, nobody but the members of the Working Group on Financial Markets, aka the Plunge Protection Team, will ever know the true answer.

[tags]working group on financial markets, general motors, ben bernanke, hank paulson, plunge protection team,politics and stocks[/tags]

Leave a Reply