PPT update: US authorities believe the roaring bull market is just a suckers' rally

Discussion in 'Wall St. News' started by just21, Oct 30, 2006.

  1. just21


    Monday view: Paulson re-activates secretive support team to prevent markets meltdown

    By Ambrose Evans-Pritchard
    Daily Telegraph London
    Last Updated: 12:09am GMT 30/10/2006

    Monday view: Paulson re-activates secretive support team to prevent markets meltdown Judging by their body language, the US authorities believe the roaring bull market this autumn is just a suckers' rally before the inevitable storm hits.

    Hank Paulson, the market-wise Treasury Secretary who built a $700m fortune at Goldman Sachs, is re-activating the 'plunge protection team' (PPT), a shadowy body with powers to support stock index, currency, and credit futures in a crash.

    Otherwise known as the working group on financial markets, it was created by Ronald Reagan to prevent a repeat of the Wall Street meltdown in October 1987.

    Mr Paulson says the group had been allowed to languish over the boom years. Henceforth, it will have a command centre at the US Treasury that will track global markets and serve as an operations base in the next crisis.

    The top brass will meet every six weeks, combining the heads of Treasury, Federal Reserve, Securities and Exchange Commission (SEC), and key exchanges.

    Mr Paulson has asked the team to examine "systemic risk posed by hedge funds and derivatives, and the government's ability to respond to a financial crisis".

    "We need to be vigilant and make sure we are thinking through all of the various risks and that we are being very careful here. Do we have enough liquidity in the system?" he said, fretting about the secrecy of the world's 8,000 unregulated hedge funds with $1.3trillion at their disposal.

    The PPT was once the stuff of dark legends, its existence long denied. But ex-White House strategist George Stephanopoulos admits openly that it was used to support the markets in the Russia/LTCM crisis under Bill Clinton, and almost certainly again after the 9/11 terrorist attacks.

    "They have an informal agreement among major banks to come in and start to buy stock if there appears to be a problem," he said.

    "In 1998, there was the Long Term Capital crisis, a global currency crisis. At the guidance of the Fed, all of the banks got together and propped up the currency markets. And they have plans in place to consider that if the stock markets start to fall," he said.

    The only question is whether it uses taxpayer money to bail out investors directly, or merely co-ordinates action by Wall Street banks as in 1929. The level of moral hazard is subtly different.

    Mr Paulson is not the only one preparing for trouble. Days earlier, the SEC said it aims to slash margin requirements for institutions and hedge funds on stocks, options, and futures to as low as 15pc, down from a range of 25pc to 50pc.

    The ostensible reason is to lure back hedge funds from London, but it is odd policy to license extra leverage just as the Dow hits an all-time high and the VIX 'fear' index nears an all-time low – signalling a worrying level of risk appetite. The normal practice across the world is to tighten margins to cool over-heated asset markets.

    The move is so odd that conspiracy buffs are already accusing SEC chief Chris Cox of juicing the markets to help stop the implosion of the Bush presidency.

    As it happens, I used to eat Mexican enchiladas with Mr Cox 20 years ago at a dining club in Washington, where California Reaganauts gathered to plot the defeat of Communism. Die-hard Republican he may be, but I can think of nobody less likely to betray the public trust in such a way.

    So one is tempted to ask if Mr Paulson and Mr Cox know something that we do not: whether other hedge funds are in the same sinking boat as Amaranth Advisers and Vega Asset Management, keel-hauled by bets on natural gas and bonds.

    Or whether currency traders with record short positions on the Japanese yen and the Swiss franc are about to learn the perils of the Carry Trade, a high-stakes game of chicken where you bet against fundamentals with high leverage to make a quick profit. Everybody knows it will blow up if the dollar goes into free fall.

    They had a fright last week when US growth for the third quarter came in at just 1.6pc, and new house prices plummeted 9.7pc year-on-year in the sharpest drop since the property crash of 1981.

    The dollar dived from 119.65 to 117.57 yen in a heartbeat. With $2.9trillion of derivatives now trading daily on the currency markets alone – according to the Bank for International Settlements – is this the start of the most vicious short squeeze ever seen?

    The futures markets have priced in a 77pc chance of a flawless soft-landing for America's obese economy, now living 7pc of GDP beyond its means off foreign creditors. They are counting on moderating oil prices, and – a contradiction? – another year of torrid world growth. Nice if you can get it.

    They have not begun to price in the risk of recession, typically entailing a drop in the S&P 500 stock index of 28pc from peak to trough. Evidently, the equity markets assume the Fed can and will rescue them by slashing rates in time, if necessary.

    They should examine a recent report by the New York Fed warning that whenever the yield on 10-year Treasuries has fallen below 3-month yields for a stretch lasting over three months, it has led to each of the six recessions since 1968.

    The full crunch hits 12 months later as the delayed effects of monetary tightening feed through, even if the Fed starts easing frantically in the meantime. By then it is too late. "There have been no false signals," it said.

    As of last week, the yield curve was inverted by 29 basis points, was continuing to invert further, and had been negative for over three and a half months. If the Fed is right this time, the recession of 2007 is already baked into the pie. Those speculative positions may have to be unwound very fast.

  2. 'Languish'...

    I don't think these guys have had a day off since the low in May...



    HAVE STOP <img src=http://www.enflow.com/p.gif> WILL TRADE
  3. The recent Dow rally looks like a fake. S&P is still way off its peak, and it matters way more that Dow.

    This PPT group better have unlimited resources. It is one thing to handle these failed hedge funds one a time, but what about 100s at a time.

    I read an interesting book where author says that we have guards for known reason for crashes, but what about the new ones. Just imagine 100 of LTCM sot Armanaths all of a sudden in a leveraged, illiquid and bleeding situation. Send chills down spine, doesn’t it.
  4. Hi Red'...


    Only if i am not short... :D


    HAVE STOP <img src=http://www.enflow.com/p.gif> WILL TRADE
  5. to quote a funny post on another board, "would a $2 trillion mkt sell order move the market?"
  6. This is scary S*** so close to Halloween. The disastrous underpinnings this article uses to back the need for the PPT are very real (dollar collapse). Very little is known about the PPT but I highly doubt it is only major banks that are involved in providing bids. IMO Joe taxpayer has much more invested in this market than he could ever know.

  7. FED Trader: "Hi there. Where are you in EUR/USD?"

    Citi Trader: "On how much?"

    FED trader: "Oh, about 2 trillion USD."

    Citi Trader: "Ummm... I'm not sure my boss is going to let me make that market. Let me check."

    (clicks off on phone, and screams to the room to buy vol like its the end of the world.)

    Citi Trader: "Ummm.... I dunno. maybe you want to tell me your side?"

    FED Trader:"Well, I was gonna buy USD/sell euros but I think I've changed my mind... will call you back."

    Citi Trader:"Sure... I understand. Bye".


    (not that anything like this has ever happened in my presence. nope. Some fictionalizaton, of course)

    no offense towards the citi guys...
  8. nice to know we trade in "free" markets,eh?...........so much for the anti-conspiracists whom don`t believe in the PPT & the republican ramp.
  9. ... So ROTFLMAO...

    :D :D :D

    HAVE STOP <img src=http://www.enflow.com/p.gif> WILL TRADE
  10. ntt


    Last summer some people asserted the PPT or Working Group had raised the stock price of General Motors (see for example http://www.lewrockwell.com/decoster/decoster114.html).

    And here's yet another crumb of info on the Working Group.


    From the Hearings on Monetary Policy and the State of the Economy Committee on Financial Services, the U.S. House of Representatives July 20, 2006, Washington, D.C.

    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.

    #10     Oct 30, 2006