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Wednesday, November 19, 2003, 10:04:55 AM, you wrote:
I> What do you think they did with the unlimited credit when they were bankrupt? They went out and bought futures and stock to support the market and increase the value of their portfolios.
I> ----- Original Message -----
I> From: Dan Goncharoff
I> To: realtraders@xxxxxxxxxxxxxxx
I> Sent: Tuesday, November 18, 2003 8:43 AM
I> Subject: Re: [RT] Re: Fed supporting market
I> Why is the Fed providing liquidity at a time of high risk, when free markets may otherwise no longer function properly in the short term, be worse than a branch of the government making an
I> active decision to buy futures. Providing liquidity allows the market to function; buying futures favors one side of the market over the other. In my view, buying futures is as bad as selling
I> futures -- it means the government is taking sides.
I> Ensuring the proper functioning of the market is one of the stated functions of the financial markets is one of the purposes of the Fed.
I> Regards
I> DanG
I> Ira wrote:
I> I thought that it was aimed at government intervention in the markets. It may not be the same as buying futures, it is worse.
I> ----- Original Message -----
I> From: Dan Goncharoff
I> To: realtraders@xxxxxxxxxxxxxxx
I> Sent: Tuesday, November 18, 2003 7:18 AM
I> Subject: Re: [RT] Re: Fed supporting market
I> Providing liquidity to the markets is not the same as buying futures, which is the charge leveled in the original message.
I> Regards
I> DanG
I> Ira wrote:
I> The fact is it did happen in 1987. The fed told the banks to give unlimited credit.
I> ----- Original Message -----
I> From: Dan Goncharoff
I> To: realtraders@xxxxxxxxxxxxxxx
I> Sent: Tuesday, November 18, 2003 5:21 AM
I> Subject: Re: [RT] Re: Fed supporting market
I> Have you ever seen it claimed in a respected source? If so, I would be interested in the reference, because I have long sought such a mention in the established press, without success.
I> AFAIK, it is just foolish gossip.
I> Regards
I> DanG
I> BobsKC wrote:
I> It is commonly accepted knowledge in the business world and while I most
I> certainly have not personally observed the practice, I have no recall of
I> the White House ever denying it, either. If the market tanks, so does
I> Bush. Do you not believe that he has the means to prevent this?
I> Bob
I> At 02:57 PM 11/17/2003 -0800, you wrote:
I> This is a strong statement, variations of which I've heard
I> many times with no factual support. Is there any support here?
I> regards,
I> tbr
I> > the Fed has shown in the past how it can hold up
I> markets via futures purchases
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washingtonpost.com: Plunge Protection Team
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Plunge Protection Team
By Brett D. Fromson
Washington Post Staff Writer
Sunday, February 23, 1997; Page H01
The Washington Post
It is 2 o'clock on a hypothetical Monday afternoon, and the Dow Jones
industrial average has plummeted 664 points, on top of a 847-point slide
the previous week.
The chairman of the New York Stock Exchange has called the White House
chief of staff and asked permission to close the world's most important
stock market. By law, only the president can authorize a shutdown of U.S.
financial markets.
In the Oval Office, the president confers with the members of his Working
Group on Financial Markets -- the secretary of the treasury and the
chairmen of the Federal Reserve Board, the Securities and Exchange
Commission and the Commodity Futures Trading Commission.
The officials conclude that a presidential order to close the NYSE would
only add to the market's panic, so they decide to ride out the storm. The
Working Group struggles to keep financial markets open so that trading can
continue. By the closing bell, a modest rally is underway.
This is one of the nightmare scenarios that Washington's top financial
policymakers have reviewed since Oct. 19, 1987, when the Dow Jones
industrial average dropped 508 points, or 22.6 percent, in the biggest
one-day loss in history. Like defense planners in the Cold War period,
central bankers and financial regulators have been thinking carefully
about how they would respond to the unthinkable.
An outline of the government's plans emerges in interviews with more than
a dozen current and former officials who have participated in meetings of
the Working Group. The group, established after the 1987 stock drop, is
the government's high-level forum for discussion of financial policy.
Just last Tuesday afternoon, for example, Working Group officials gathered
in a conference room at the Treasury Building. They discussed, among other
topics, the risks of a stock market decline in the wake of the Dow's
sudden surge past 7000, according to sources familiar with the meeting.
The officials pondered whether prices in the stock market reflect a
greater appetite for risk-taking by investors. Some expressed concern that
the higher the stock market goes, the closer it could be to a correction,
according to the sources.
These quiet meetings of the Working Group are the financial world's
equivalent of the war room. The officials gather regularly to discuss
options and review crisis scenarios because they know that the
government's reaction to a crumbling stock market would have a critical
impact on investor confidence around the world.
"The government has a real role to play to make a 1987-style sudden market
break less likely. That is an issue we all spent a lot of time thinking
about and planning for," said a former government official who attended
Working Group meetings. "You go through lots of fire drills and scenarios.
You make sure you have thought ahead of time of what kind of information
you will need and what you have the legal authority to do."
In the event of a financial crisis, each federal agency with a seat at the
table of the Working Group has a confidential plan. At the SEC, for
example, the plan is called the "red book" because of the color of its
cover. It is officially known as the Executive Directory for Market
Contingencies. The major U.S. stock markets have copies of the
commission's plan as well as the CFTC's.
Going to Plan A
The red book is intended to make sure that no matter what the time of day,
SEC officials can reach their opposite numbers at other agencies of the
U.S. government, with foreign governments, at the various stock, bond and
commodity futures and options exchanges, as well as executives of the many
payment and settlement systems underlying the financial markets.
"We all have everybody's home and weekend numbers," said a former Working
Group staff member.
The Working Group's main goal, officials say, would be to keep the markets
operating in the event of a sudden, stomach-churning plunge in stock
prices -- and to prevent a panicky run on banks, brokerage firms and
mutual funds. Officials worry that if investors all tried to head for the
exit at the same time, there wouldn't be enough room -- or in financial
terms, liquidity -- for them all to get through. In that event, the
smoothly running global financial machine would begin to lock up.
This sort of liquidity crisis could imperil even healthy financial
institutions that are temporarily short of cash or tradable assets such as
U.S. Treasury securities. And worries about the financial strength of a
major trader could cascade and cause other players to stop making payments
to one another, in which case the system would seize up like an engine
without oil. Even a temporary loss of liquidity would intensify financial
pressure on already stressed institutions. In the 1987 crash, government
officials worked feverishly -- and, ultimately, successfully -- to avoid
precisely that bleak scenario.
Officials say they are confident that the conditions that led to the slide
a decade ago are not present today. They cite low interest rates and a
healthy economy as key differences between now and 1987. Officials also
point to SEC-approved "circuit breakers" that were introduced after 1987
to give investors timeouts to calm down.
Under the SEC's rules, a drop of 350 points in the Dow would bring a
30-minute halt in NYSE trading. If the Dow declined another 200 points,
trading would cease for one hour. No additional circuit breakers would
operate that day, but a new set would apply the next trading day.
Despite these precautions, today's high stock market worries officials
such as Fed Chairman Alan Greenspan, who in a speech in early December
raised questions about "irrational exuberance" in the markets. Because the
market declined following Greenspan's speech, government officials have
become even more reluctant to comment on these issues for fear of
triggering the very event they wish to forestall, according to
policymakers.
A Brewing Concern
Greenspan had expressed similar thoughts a year ago at a confidential
meeting of the Working Group. Treasury Secretary Robert E. Rubin and SEC
Chairman Arthur Levitt Jr. also are concerned about the stock market's
vulnerability, according to sources familiar with their views.
The four principals of the group -- Rubin, Greenspan, Levitt and CFTC
Chairwoman Brooksley Born -- meet every few months, and senior staff get
together more often to work on specific agenda items.
In addition to the permanent members, the head of the President's National
Economic Council, the chairman of his Council of Economic Advisers, the
comptroller of the currency and the president of the New York Federal
Reserve Bank frequently attend Working Group sessions.
The Working Group has studied a variety of possible threats to the
financial system that could ensue if stock prices go into free fall. They
include: a panicky flight by mutual fund shareholders; chaos in the global
payment, settlement and clearance systems; and a breakdown in
international coordination among central banks, finance ministries and
securities regulators, the sources said.
As chairman of the Working Group, Rubin would have overall responsibility
for the U.S. response, but Greenspan probably would be the government's
most important player.
"In a crisis, a lot of deference is paid to the Fed," a former member of
the Working Group said. "They are the only ones with any money."
"The first and most important question for the central bank is always, 'Do
you have credit problems?' " said E. Gerald Corrigan, former president of
the New York Federal Reserve Bank and now an executive at Goldman Sachs &
Co. "The minute some bank or investment firm says, 'Hey, maybe I'm not
going to get paid -- maybe I ought to wait before I transfer these
securities or make that payment,' then things get tricky. The central bank
has to sense that before it happens and take steps to prevent it."
1987: A Case Study
The Fed's reaction to the 1987 market slide, which Corrigan helped
oversee, is a case study in how to do it right. The Fed kept the markets
going by flooding the banking system with reserves and stating publicly
that it was ready to extend loans to important financial institutions, if
needed.
The Fed's actions in October 1987 read like a financial war story.
The morning after the 508-point drop on Black Monday, the market began
another sickening slide. Corrigan and other Fed officials strongly
discouraged New York Stock Exchange Chairman John Phelan from requesting
government permission to close the market. Phelan was concerned that if
the market continued to erode, the capital of the NYSE member firms would
disappear. Corrigan feared a shutdown would cause more panic.
"It was extraordinarily difficult around 11 o'clock," Corrigan recalled.
"The market was at one point down another 250 points, and that's when the
debate with Phelan took place."
Simultaneously, Corrigan and other central bank officials spoke privately
with the big banks and urged them not to call loans they had made to Wall
Street houses, which were collateralized by securities that could no
longer be traded and whose value was in question.
A final critical moment came that day when the Fed decided not to shut
down a subsidiary of the Continental Illinois Bank that was the largest
lender to the commodity futures and options trading houses in Chicago. The
subsidiary had run out of capital to provide financing to that market.
"Closing it would have drained all the liquidity out of the futures and
options markets," said one former top Fed official involved in the
decision. Investors use stock futures and options to hedge positions in
the underlying stock market.
Recognizing the crucial role of banks if another financial crisis should
strike, the Office of the Comptroller recently conducted an internal study
of what damage a market decline would inflict on U.S. banks. The OCC
declined to discuss the study or its conclusions.
At the SEC, one big worry is how to cope with an international financial
crisis that begins abroad but quickly rolls into U.S. markets.
"We worry about a U.S. brokerage firm that is dealing with a Japanese
insurance company, where we don't know how they are run or regulated," a
SEC source said. To improve its ability to react in a crisis, the SEC and
the Fed have begun joint inspections with their British counterparts of
U.S. and British financial institutions with global reach.
The most drastic -- and probably unlikely -- move the SEC could take in a
crisis would be to propose a market shutdown to the president. That would
require a majority vote of the commission. If a quorum couldn't be
mustered, the chairman could designate himself "duty officer" and go to
the president or his staff.
"Closing the market is, of course, the last thing the commission wants to
do," said a source familiar with the SEC's planning. "During a time when
people are extremely worried about their investments, you are cutting them
off from taking any action. . . . The philosophy of the commission is that
markets should stay open."
Just the Facts
Gathering accurate information would be the first order of business for
federal regulators.
"Intelligence gathering is critical," Corrigan said. "It depends on the
willingness of major market participants to volunteer problems when they
see them and to respond honestly to central bank questions."
The SEC, CFTC and Treasury have market surveillance units. They monitor
not only the overall markets, but also the cash positions of all the major
stock and commodity brokerages and large traders.
The regulators also are hooked into the "hoot-and-holler" system used to
notify participants in all financial markets of trading halts. The
hoot-and-holler system alerts traders and regulators when a halt is
coming.
Relying on Quick Action
In the event of a sharp market decline, the SEC and CFTC would be in
constant contact with brokerage and commodity firms to spot early signs of
financial failure. If they concluded that a firm was going down, they
would try to move customer positions from that firm to solvent
institutions.
At least this team of crisis managers already has been through the Wall
Street wars. Greenspan was Fed chairman in October 1987. Rubin has served
as the co-head of investment bank Goldman Sachs & Co. Levitt has been both
a Wall Street executive and president of the American Stock Exchange.
"I think the government is in good shape to handle a crisis," said Scott
Pardee, senior adviser to Yamaichi International (America) Inc., a
Japanese brokerage subsidiary, and former senior vice president at the New
York Fed. "A lot depends on personal relationships. You have a number of
seasoned people who have gone through a number of crises. So if something
happens, things can be handled quickly on the phone without having to
introduce people to each other."
Consider what happened at 11:30 p.m. Dec. 5, when Greenspan made his
comments about irrational exuberance. Alton Harvey, head of the SEC's
Market Watch unit, was called at home by officials of Globex, a futures
trading system owned by the Chicago Mercantile Exchange. U.S. stock
futures trading in Asia had fallen to their 12-point limit, they said.
Harvey immediately alerted his direct superior as well as his opposite
number at the CFTC. More senior SEC and CFTC officials were informed as
well. But there wasn't much to be done until the morning. So Harvey went
back to sleep.
REACTING TO A PLUNGE
After the market crashed on Oct. 29, 1929:
* The Federal Reserve provided loans and credit to financial systems.
* President Hoover met with business, labor and farm organizations to
encourage capital spending and discourage layoffs; he also promised higher
tariffs.
* Federal income taxes were reduced by 1 percent by the end of the year.
After the market dropped 22.6 percent on Oct. 19, 1987, the Federal
Reserve:
* Encouraged the New York Stock Exchange to stay open.
* Encouraged big commercial banks not to pull loans to major Wall Street
houses.
* Kept open a subsidiary of Continental Illinois Bank that was the largest
lender to the commodity trading houses in Chicago.
* Flooded the banking system with money to meet financial obligations.
* Announced it was ready to extend loans to important financial
institutions.
What would happen today during a stock drop would depend on the
particulars. Here are current guidelines:
* If the Dow Jones industrial average falls 350 points within a trading
day, NYSE trading would be halted for 30 minutes.
* If the DJIA falls another 200 points that day, trading would stop for
one hour.
* If the market declines more than 550 points in a day, no further
restrictions would be applied.
SOURCE: The New York Stock Exchange, "The Crash and the Aftermath" by
Barrie A. Wigmore
© Copyright 1997 The Washington Post Company
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