Rubin Should Teach Paulson Secret PPT Handshake: Caroline Baum

http://www.bloomberg.com/apps/news?pid=20601039&sid=a87VERwuZP8c&refer=home

July 31 (Bloomberg) -- Where is the PPT?

If that acronym, short for Plunge Protection Team, doesn't immediately conjure up images of government officials and representatives of large Wall Street banks (think Goldman Sachs) conspiring to support the stock market, you don't spend enough time with the black-helicopter crowd.

The idea that there is a cabal of government and private- sector individuals who secretly support the stock market in times of distress does have a small basis in fact. Following the 1987 stock market crash, President Ronald Reagan formed a high- level Working Group on Financial Markets to discuss options in the event of a financial crisis and disorderly markets. The group consists of the secretary of the Treasury and the chairmen of the Federal Reserve, the Securities and Exchange Commission and the Commodity Futures Trading Commission.

Reporter Brett Fromson described the inner workings of the group and coined the term Plunge Protection Team in a 1997 Washington Post article.

Anyone who can't prove that the PPT doesn't exist is immediately dismissed as a pawn of the government or a part of the cabal. Yours truly has been accused of both by the conspiracy theorists (CTs).

What is their proof that the PPT exists? To a person, these folks haul out two presumably incontrovertible pieces of evidence: one, a mention of the PPT by ABC's George Stephanopoulos on TV shortly after the Sept. 11 terrorist attacks; and two, a 1989 Wall Street Journal op-ed by former Federal Reserve Governor Robert Heller.

Inside Information

Let's start with Stephanopoulos, who was an adviser to President Bill Clinton. PPT CTs maintain that Stephanopoulos ``verified'' the existence of the PPT in 2001 when he explained what was going on ``behind the scenes by the Fed and other government officials to guard against a free-fall in the markets.''

He went on to reveal the formation of the PPT by the Fed (wrong, it was President Reagan) in 1989 (wrong, it was 1987) and expose its workings in the 1998 ``global currency crisis'' (wrong, it was a stock- and credit-market meltdown) originating at Long-Term Capital Management ``with a currency trader'' (wrong, it was relative value trades that went awry). He said all the big banks, under the Fed's guidance, got together to prop up the currency market (wrong, to rescue LTCM). ``And, they have plans in place to consider that if the markets start to fall,'' Stephanopoulos said.

Heller Connection

Rather than reveal any dark secrets about the existence of the PPT, Stephanopoulos showed his complete lack of fluency with previous PPT Close Encounters of the Third Kind.

The other ``conclusive'' piece of evidence is the Heller op-ed in the Wall Street Journal that appeared in October 1989, following a mini-crash in the U.S. stock market. Heller wrote that the Fed ``should be charged with the job of preventing chaos in the market'' at times when the spread between bids and offers widens to the point that no trading takes place.

He went on to say that the Fed already intervenes in the currency market (not often, actually, and at the behest of the Treasury) and the government securities market (true, although only to stabilize one price, the federal funds rate).

Instead of pumping reserves into the banking system in a crisis, ``wouldn't it be more efficient and effective to supply such support to the stock market directly?'' Heller said.

Clarification

The idea sounded kind of loopy, especially since stocks aren't on the list of securities the Fed is empowered to buy, according to the Federal Reserve Act of 1913 and subsequent amendments. So I called Heller yesterday to drill him on his views.

Back in those days, ``I was not comfortable with how things were proceeding,'' in terms of the pressure on banks to lend to investment banks in a crisis, Heller said. (This was before the Glass-Steagall wall separating the two came down.) Under the circumstances, he advocated ``intervention in the futures market,'' buying S&P 500 contracts or another index.

``If markets cease to function -- if bid-ask spreads widen a lot -- under those circumstances it makes sense for government to step in,'' Heller said in a phone interview.

So did Heller have any evidence that anyone at the Fed or elsewhere had run with his idea? He said no. How about some inside info on the PPT since he seemed to be a member in good standing?

``I didn't know a cabal existed until a reporter called me up and asked me about the PPT, saying `you invented it,''' he said.

Trader Bob

Yes, I know. I'm either hopelessly naive because I believe him (the CTs believe Stephanopoulos, don't they?) or a pathetic tool of the government.

All last week, with the Dow Jones Industrial Average down 586 points, or 4.2 percent, in its worst week in more than four years, I kept waiting for the PPT to make an appearance.

Instead, Treasury Secretary Hank Paulson, who reportedly has reactivated the President's Working Group, was dispatched to calm financial markets on Friday, saying the subprime mortgage mess did not ``pose a threat to the overall economy.''

Clinton Treasury Secretary Robert Rubin must have forgotten to teach his former Goldman colleague the secret PPT handshake. Otherwise, how to explain Paulson's verbal damage control when the situation called for action?

Trader Bob was always a ``go with'' kind of guy, waiting until the dollar had bounced in 1995 before instructing the Fed to intervene in the foreign-exchange market. Maybe Hank's sticking to the Rubin playbook.

I enjoyed your Cramer vs. Cramer expose on your blog.