The Plunge Protection Team, The Fed & The Investor Costs

The "Plunge Protection Team" is the colloquial name for the Working Group on Financial Markets (WGFM). The Working Group was established by the executive order of President Reagan in 1988, in the aftermath of the stock market plunge of October, 1987.

The group reports to the President, and the official members of the group include the Secretary of the Treasury, the chairman of the Federal Reserve, the chairman of the SEC, and the chairman of the CFTC. In other words, the group members are the four most powerful financial officials in the United States. In practice, the committee can be composed of senior aides and officials that have been designated by those top officials.

According to Treasury Secretary Mnuchin, the WGFM met by telephone on the afternoon of December 24th, to discuss the ongoing plunge in U.S. stock indexes. The very next trading day, the Dow Jones index experienced its largest ever single day point gain, closing up over 1,000 points. The following day, more than half of the 1,000+ points in gains were temporarily lost - until there was a late day reversal that came out of nowhere, and the Dow climbed by over 600 points to close with another gain.

Coincidence?

There is no doubt that the Plunge Protection Team does exist, and that it convened on Christmas Eve. The hotly debated question is whether the WGFM does more than just talk and persuade, and whether it can and does actually intervene in the markets on a more direct basis when needed.

While the popular view is one of the Working Group itself actually spending the money, that is not necessarily the issue in practice. If the Treasury, Fed, SEC and CFTC act in cooperation, with each using their fullest emergency powers by executive order but without full disclosure to the public - what can they actually do and what are the limits?

This analysis does not attempt a definitive answer, but rather examines the implications of two "what if" scenarios:

1) What if the WGFM can and does directly intervene in the markets?

2) Alternatively, what if the WGFM can accomplish something similar to the effects of such an intervention through the full utilization of the powers of its members?

As will be explored, the price of stopping plunges for the good of the financial system is borne by individual investors, with three forms of losses. There is also a fascinating degree of overlap with the individual actions of one of the group members - the Federal Reserve - which can create the same three types of investor losses as part of ongoing cycles of crisis and the containment of crisis.

This analysis is part of a series of related analyses, an overview of the rest of the series is linked here.

The WGFM & Wild Conspiracy Theories

The purpose of the Working Group on Financial Markets is to attempt to change market prices. It is the Treasury, Fed, SEC and CFTC working together to change prices from what they would otherwise would be, in order to maintain stability and keep plunges from happening.

We don't know what of the many open powers of the member organizations are being used. Keeping in mind that executive orders have frequently been used in recent decades to exert broad new powers in areas that used to require legislation, and that many executive orders relating to national security are indeed kept secret from the public - we simply don't know what executive orders may have been issued over the years with regard to the WGFM, or what its emergency powers actually are.

The greatest misconception about the Plunge Protection Team is that it is some sort of conspiracy theory, with mysterious individuals secretly meeting and wielding great power. The truth is that the Working Group on Financial Markets is the open collaboration of the most powerful group of financial entities in the United States.

As it happens, their meetings often are secret, they do not release their minutes, we don't know their full mandate, we don't know their full powers - but we do know by definition that their job of maintaining stability and preventing market plunges means intervening - in some form or combination of forms - to keep prices substantially higher than they otherwise would be.

I personally don't know whether the intervention of the Working Group on Financial Markets created or contributed to the 1,000 point surge in the Dow on December 26th, 2018, or the 600 point recovery the following day. If they did intervene - I further can't say that I know the specifics of how they did it.

That said, if the WGFM did intervene -  it wouldn't be conspiracy theory in action. It would the Treasury, Fed, SEC and CFTC successfully doing exactly what they are supposed to be doing - by executive order of the President of the United States. At least temporarily interrupting the momentum of a major breakout to the downside that threatened financial stability is exactly what the WGFM is supposed to do, it is why the group was created in the first place.

So, where things get really interesting is when we consider not conspiracy theorists, but those who are the opposite of conspiracy theorists, and who dismiss out of hand the idea that a "Plunge Protection Team" could actually exist, or that it could reverse the trend lines for the major indexes by some form of market intervention.

This may seem the most reasonable perspective on the surface. But, as a start, to take that perspective is to deny the unquestionable fact of the existence of the Working Group on Financial Markets, while calling the Secretary of the Treasury a bald-faced liar with regard to the Christmas Eve phone meeting. To deny that the WGFM could actually do anything, is to assert that Treasury, Fed, SEC and CFTC acting in combination and with the full powers of the presidency behind them - are helpless to intervene in markets.

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Disclosure: This analysis contains the ideas and opinions of the author. It is a conceptual and educational exploration of financial and general economic principles. As with any ...

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