Ellen Brown, November 3rd, 2008
“The Dow is a dead banana republic dictator in full military uniform propped up in the castle window with a mechanical lever moving the cadaver’s arm, waving to the Wall Street crowd.”
– Michael Bolser, Le Metropole Cafe1
It was another surreal week on Wall Street, with the Dow Jones Industrial Average rising a thousand points while the economy continued to sink into its worst financial crisis since the Great Depression. Most of this stellar climb occurred on Tuesday, October 28, when the Dow rose some 900 points, making it the largest one-day stock market rise since the Great Depression. The climb was especially remarkable in that it occurred in just the last two hours of trading, on no particularly good news. Commentators attributed it to an expectation of a half point interest rate cut by the Fed the following day, but the likelihood of a rate cut was not new news two hours before closing, and previous rate cuts have not evoked that sort of dramatic response. When the cut was actually announced, the market yawned and proceeded to drop.
Meanwhile, gold -- the “go to” investment that at one time could be counted on to go up when the economy was tanking -- had its worst month in 25 years. Gold rounded out the month by dropping $60 in a little over a day. Gas prices also ended 31% lower than a mere six weeks ago, all just in time to assure voters on November 4 that their fears of rampant inflation and stock market collapse were unfounded.
The Stepfordville-like stability of the market may have been engineered for another reason: to divert Congress from reconsidering its $700 billion bailout bill, which is proving to be as disastrous for the taxpayers as it is lucrative for the banks. The bankers are manning the lifeboats as the taxpayers go down with the Titanic. In an October 29 article in The Nation titled “Bailout = Bush’s Final Pillage,” Naomi Klein wrote:
“When the Bush administration announced it would be injecting $250 billion into America’s banks in exchange for equity, the plan was widely referred to as ‘partial nationalization’– a radical measure required to get the banks lending again. In fact, there has been no nationalization, partial or otherwise. Taxpayers have gained no meaningful control, which is why the banks can spend their windfall as they wish (on bonuses, mergers, savings . . .) and the government is reduced to pleading that they use a portion of it for loans. . . .
“By purchasing stakes in these institutions, Treasury is sending a signal to the market that they are a safe bet . . . [b]ecause the government won't be able to afford to let them fail. . . . That tethering of the public interest to private companies is the real purpose of the bailout plan: Treasury Secretary Henry Paulson is handing all the companies that are admitted to the program – a number potentially in the thousands – an implicit Treasury Department guarantee. . . . [F]or the banks, the best part is that the government is paying them – in some cases billions of dollars – to accept its seal of approval. . . .
“[T]he market is being told loud and clear that Washington will not allow the country’s financial institutions to bear the consequences of their behavior. This may well be Bush’s most creative innovation: no-risk capitalism. . . . Meanwhile, every day it becomes clearer that the bailout was sold on false pretenses. It was never about getting loans flowing. It was always about turning the state into a giant insurance agency for Wall Street – a safety net for the people who need it least, subsidized by the people who need it most.”
William Greider, writing in The Nation on the same day, discussed a stinging letter sent to Henry Paulson by Leo Gerard, president of the United Steelworkers, comparing the sale of very similar bank stock to the American public and to billionaire Warren Buffett, who got a much better deal. Greider wrote:
“The swindle of American taxpayers is proceeding more or less in broad daylight, as the unwitting voters are preoccupied with the national election. Treasury Secretary Hank Paulson agreed to invest $125 billion in the nine largest banks, including $10 billion for Goldman Sachs, his old firm. But, if you look more closely at Paulson’s transaction, the taxpayers were taken for a ride – a very expensive ride. They paid $125 billion for bank stock that a private investor could purchase for $62.5 billion. That means half of the public’s money was a straight-out gift to Wall Street, for which taxpayers got nothing in return. . . .
“If the same rule of thumb is applied to Paulson’s grand $700 billion bailout fund, Gerard said this will constitute a gift of $350 billion from the American taxpayers ‘to reward the institutions that have driven our nation and it now appears the whole world into its most serious economic crisis in 75 years.’
“Is anyone angry? Will anyone look into these very serious accusations? Congress is off campaigning. The financiers at Treasury probably assume any public outrage will be lost in the election returns.”2
And just to make sure that public outrage is buried, the Plunge Protection Team (PPT) has been busily painting the arid landscape of the U.S. economy with roses and dewdrops.
For anyone who still doubts the PPT’s existence and ability to control markets, this article will expand on one I posted a week ago on the group and its behind-the-scenes activities. As noted in my earlier article, the PPT is formally called the Working Group on Financial Markets (WGFM) and was created by President Reagan’s Executive Order 12631 in 1988 in response to the October 1987 stock market crash. The WGFM includes the President, the Secretary of the Treasury, the Chairman of the Federal Reserve, the Chairman of the Securities and Exchange Commission, and the Chairman of the Commodity Futures Trading Commission. Its stated purpose is to enhance “the integrity, efficiency, orderliness, and competitiveness of our Nation's financial markets and [maintain] investor confidence.” According to the Order:
“To the extent permitted by law and subject to the availability of funds therefore, the Department of the Treasury shall provide the Working Group with such administrative and support services as may be necessary for the performance of its functions.”3
In short, taxpayer money is being made available to manipulate markets. The shady history of the PPT was tracked by journalist John Crudele in a June 2006 New York Post series, in which he wrote:
“Back during a stock market crisis in 1989, a guy named Robert Heller – who had just left the Federal Reserve Board – suggested that the government rig the stock market in times of dire emergency. . . . He didn’t use the word ‘rig’ but that’s what he meant. Proposed as an op-ed in the Wall Street Journal, it’s a seminal argument that says when a crisis occurs on Wall Street ‘instead of flooding the entire economy with liquidity, and thereby increasing the danger of inflation, the Fed could support the stock market directly by buying market averages in the futures market, thus stabilizing the market as a whole.’”4
The PPT was to be the Roman circus of the twenty-first century, distracting the masses with pretensions of prosperity. Instead of fixing the problem in the economy, the PPT could just “fix” the investment casino. Crudele continued:
“Over the next few years . . . whenever the stock market was in trouble someone seemed to ride to the rescue. . . . Often it appeared to be Goldman Sachs, which just happens to be where Paulson and former Clinton Treasury Secretary Robert Rubin worked.”
For obvious reasons, the mechanism by which the PPT has ridden to the rescue is not detailed on the Fed’s website; but some analysts think they know. An antitrust group called GATA (the Gold Anti-Trust Action Committee) has been tracking the PPT’s moves for many years. Michael Bolser of GATA concluded in 2004 that PPT money is being funneled through the Fed’s “primary dealers,” a group of favored Wall Street brokerage firms and investment banks. The device used is a form of loan called a “repurchase agreement” or “repo,” which is a contract for the sale and future repurchase of Treasury securities. Bolser explained:
“It may sound odd, but the Fed occasionally gives money [‘permanent’ repos] to its primary dealers (a list of about thirty financial houses, Merrill Lynch, Morgan Stanley, etc). They never have to pay this free money back; thus the primary dealers will pretty much do whatever the Fed asks if they want to stay in the primary dealers ‘club.’
“The exact mechanism of repo use to support the DOW is simple. The primary dealers get repos in the morning issuance . . . and then buy DOW index futures (a market that is far smaller than the open DOW trading volume). These futures prices then drive the DOW itself because the larger population of investors think the ‘insider’ futures buyers have access to special information and are ‘ahead’ of the market. Of course they don’t have special information . . . only special money in the form of repos.”5
With Paulson’s new $700 billion credit card, the PPT obviously has access to much more money than in 2004 – enough money, no doubt, to buy large blocks of some key stocks. Those purchases, in turn, would trigger the program traders’ computers, which follow like robots according to pre-set formulae. Although thousands of stocks are publicly traded, only 30 stocks compose the Dow, making this trend-setting index fairly easy to manipulate.
While the Dow is being propped up by the PPT through massive buying, the gold market is held down by massive short selling, since gold is considered a key indicator of inflation. If the gold price were to soar, the Fed would have to increase interest rates to tighten the money supply, collapsing the housing bubble and forcing the government to raise inflation-adjusted payments for Social Security.
Most traders who see this manipulation going on don’t complain, because they think the Fed is rigging the market to their advantage; but unwary investors are being induced to place risky bets on a nag on its last legs. The people become complacent and accept bad leadership, bad policies and bad laws, because they think things are still “working” for them economically. Worse, there are insiders to this scheme who must find it difficult to resist the temptation to capitalize on their favored positions. As Chuck Augustin observed in a June 2006 article titled “Plunge Protection or Enormous Hidden Tax Revenues”:
“Today the markets are, without doubt, manipulated on a daily basis by the PPT. Government controlled ‘front companies’ such as Goldman-Sachs, JP Morgan and many others collect incredible revenues through market manipulation. Much of this money is probably returned to government coffers, however, enormous sums of money are undoubtedly skimmed by participating companies and individuals.
“The operation is similar to the Mafia-controlled gambling operations in Las Vegas during the 50’s and 60’s but much more effective and beneficial to all involved. Unlike the Mafia, the PPT has enormous advantages. The operation is immune to investigation or prosecution, there [are] unlimited funds available through the Treasury and Federal Reserve, it has the ultimate insider trading advantages, and it fully incorporates the spin and disinformation of government controlled media to sway markets in the desired direction. . . . Any investor can imagine the riches they could obtain if they knew what direction stocks, commodities and currencies would move in a single day, especially if they could obtain unlimited funds with which to invest! . . . [T]he PPT not only cheats investors out of trillions of dollars, it also eliminates competition that refuses to be ‘bought’ through mergers. Very soon now, only global companies and corporations owned and controlled by the [financial] elite will exist.”6
A research firm reporting on the unexpectedly high quarterly profits of Goldman Sachs in March 2004 wrote cynically:
“[W]ho does Goldman have to thank for the latest outsized quarterly earnings? Its ‘partner’ in charge of financing the proprietary trading operation -- Alan Greenspan.”7
Henry Paulson headed Goldman Sachs before he succeeded to Treasury Secretary in June 2006, following in the footsteps of Robert Rubin, who headed that major investment bank before he was appointed Treasury Secretary in 1995, just in time for Goldman and other investment banks to capitalize on the drastic devaluation of the Mexican peso. An October 2006 article in the conservative American Spectator complained that the U.S. Treasury was being turned into “Goldman Sachs South.”8
In his October 28, 2008 letter, United Steelworkers president Gerard wrote to Henry Paulson:
“The recipients of the first wave of gift-giving include Goldman Sachs. It has been widely reported that you have surrounded yourself with former Goldman employees as well as individuals from other Wall Street firms. Yet it has never been revealed whether in fact you and they have fully divested yourselves of your Wall Street holdings. Doesn’t it seem just a wee-bit of a conflict of interest for those setting the price of the investment to be either so directly linked to the firms receiving the investments or, even worse, direct beneficiaries of the decision to overpay with taxpayer money? . . .
“Out in the real economy, we need our government to invest in creating sustainable shared prosperity – not play Santa Claus to the scoundrels who have laid waste to the American Dream.”
Where is the public outrage? As the fog of the election lifts from our plundered nation, we wait to see.