byJapan Focus John Embry
and Andrew Hepburn provide a valuable entry into
the world of finance. The two analysts illuminate
the shadowy trail of the "Plunge Protection Team"
in its apparent mission to rig the American stock
Their account is backed
up by considerable indirect evidence, as
well as statements by credible insiders. If
their account is correct, it means that US markets look
a lot like the Japanese markets that were
long derided for being subject to repeated official
manipulation. A more
important conclusion may be that US markets are
even shakier than many believe.
that the two analysts follow is long, dating to
just after Black Monday, October 19, 1987. On that
day, the US stock market abruptly crashed. The Dow
Jones average dropped by 508 points, to 1738. It
threatened to do even worse the next day when,
after a brief rally, it went into reverse.
The markets seemed on the edge of a
meltdown, but the abyss failed to open up. This
lack of a meltdown has generally been attributed
to the Federal Reserve Board's (FRB) steady hand
and promises of liquidity. But sophisticated
research on the events of those two days indicates
that a sudden and unprecedented rise in the Major
Market Index (MMI) sparked a recovery across the
board. There is good reason to suspect that this
recovery was the result of concentrated buying by
a few firms.
It was after this crash that
the President's Working Group on Financial Markets
was put in place to prevent destabilizing
declines. The Plunge Protection Team was
institutionalized in 1989 as a follow-up from this
working group, and originally included the top
public-sector financial authorities.
role was apparently tested with the Friday,
October 13, 1989 stock crash. In this case, too, a
sudden rush of aggressive buying of index futures
contracts via the MMI saved the day. There appear
to have been a considerable number of
interventions in the wake of that, with the group
expanding to include the heads of major banks.
Thus, for example, the markets after
September 11, 2001, received a heavy dose of
intervention. The need for this intervention was
so great that its outlines emerged quite clearly
in the press.
The Japanese, not
surprisingly, appear to be part of the scheme as
well. The authors show that there was plenty of
consultation between Japanese financial
authorities and their American counterparts in the
lead-up to the Iraq War. There are also strong
indications that the markets were not left
unfettered to render their own verdict on the
wisdom of the war, in the anxious days leading up
to its outbreak.
There is abundant
evidence adduced in the article. It is important
to note that the authors are not against
intervention per se. They note that letting
plunging markets fix themselves could result in
economic chaos. But they do warn that the secrecy
and growing involvement of private-sector actors
threatens to foster enormous moral hazards.
Major financial institutions may be acting
as de facto agencies of the state, and thus not
competing on a level playing field. There are
signs that repeated intervention in recent years
has corrupted the system.
manipulation of the system took place on Alan
Greenspan's watch as chairman of the FRB. The
authors don't discuss the fact that Greenspan is
to retire at the end of next January and the White
House is having trouble finding a replacement in
whom the markets will believe.
It may be
that no credible candidate wants to take the baton
from Greenspan at a time when it seems likely that
the market will implode. Observers note that
earlier changes of the FRB chair have generally
been followed by much buffeting in the markets as
they test the new maestro.
are common. Present risks include the American
housing bubble blowing out, oil prices exploding,
and inflation blowing in, at a time when the twin
deficits of trade and budget are already in the
This situation points to the
likelihood that the Plunge Protection Team will be
working overtime early next year.
For the full report,
in pdf format, please click here
introduction, and the report, are republished with
permission from Japan Focus)