Pay No Attention To That

Man behind the curtain.

Soon after the stock market crash of 1987, Ronald Reagan formed the high level Presidents Working Group On Financial Markets. It was formed in an effort to "enhance the integrity, efficiency, orderliness, and competitiveness of U.S. financial markets and maintain investor confidence."

No one disputes that the group exists, but some dispute what it is that the group does. The term Plunge Protection Team was coined by the Washington Post in 1997 and PPT is now used to refer to the Working Group.

In an interview on ABC's Good Morning America in 2001, George Stephanopoulos, a top advisor to President Clinton, described the PPT as "the Federal Reserve, big major banks, representatives of the New York Stock Exchange and the other exchanges, and there – they have been meeting informally so far, and they have kind of an informal agreement among major banks to come in and start to buy stock if there appears to be a problem."

Now there's a problem, but the problem is with the banks themselves. They can't afford to buy stocks and futures contracts to stop the plunge, but the U.S. Treasury can. The $700 billion bailout (or TARP or FAILout, whatever you want to call it) has given the Treasury the power to do almost anything it wants.

Today, Treasury Secretary Hank Paulson announced that the first $250 billion will be spent buying equity stake via preferred shares in 9 major banks, which kinda sucks for you if you own common stock in those banks 'cause you just got dilluted by about 10 - 15%. And kinda sucks for you if you believe that markets should be left to function on their own, without intervention. Also kinda sucks since I thought the taxpayer's money was going to be spent buying 'troubled assets' (the TA part of TARP) so banks could clean up their balance sheets and start lending. Suckered again.

I already lacked trust and confidence in Wall Street, and now I have less of both with each new accounting rule change, bailout, receivorship, conservatorship, and nationalisation. Intervention is the order of the day. Where does it end and what are the consequences? Only time will tell.

The invisible hand is now as plain as day, and the wizard doesn't even bother with a curtain.