Monday, February 18, 2008

More on PPT - The Jedi of Wall Street


RIGGING STOCK MARKETS IS EVEN OK ABROAD

By JOHN CRUDELE
The New York Post

February 14, 2008 -- IF you still don't believe me that the US government has an organization called the Plunge Protection Team that intervenes in the stock market, consider this:

* A former Federal Reserve official proposed just such a market-rigging operation decades ago.

* US Treasury Secretary, Hank Paulson, publicly brags that he has revitalized a group that some - including me - thinks is capable of rigging the market.

* Paulson has admitted on TV that he regularly discusses financial trouble spots with "market participants," perhaps even at the Wall Street firm he once headed.

* A former official of the Clinton Administration confessed on television that a rigging operation existed at least 10 years ago - I personally have discussed this sort of effort after 9/11 with a Fed official.

If you still don't believe, then read this story written from Brussels the other day by Reuters and pay special interest to the part that I highlighted.

BRUSSELS, Feb 11

(Reuters) - Finance leaders from the Group of Seven industrialized nations discussed collective action to calm markets if price moves become irrational, Eurogroup Chairman Jean-Claude Juncker was quoted as saying on Monday.

Juncker, who chairs the Eurogroup - the monthly meetings of euro zone finance ministers and the European Central Bank - told the Luxemburger Wort newspaper in an interview that turbulence on financial markets could continue for months.

"We are not yet at the end of the market crisis," Juncker was quoted as saying. "The corrections will drag on for a few weeks, months.

We have agreed in Tokyo that if there are irrational price movements in the markets, we will collectively take suitable measures to calm the financial markets," he said.

Asked what form such collective action may take, he said:

"Whoever has a strategy, should not set it out. Otherwise it will lose its effect if it is explained."

Finance ministers and central bankers from the G7 - the United States, Canada, Japan, Britain, France, Germany and Italy - said on Saturday in Tokyo that financial-market turmoil was serious and persisting.

There are justifiable motives for coming to the aid of a crippled bond market, and even a panicked stock market.

And there are even circumstances when outright rigging the stock market would be a noble gesture - like after the terrorist attacks in the US.

And I can even understand that such an operation needs to be secret, as Juncker suggests.

But there are serious drawbacks.

First, a clandestine rigging operation corrupts the free market operation that is the foundation of this country's financial system.

And there is the very real possibility that such an intervention will be abused for private gain.

But the worst problem is this: if stocks are jacked up to unreasonable levels through intervention, anyone buying the pumped-up stocks stands to lose lots of money.

And the small circle of people who know what's going on will be spared.

Juncker has now spilled the beans. If you are a small investor, be careful you don't slip on them.

And I have this question for my fellow members of the press.

Paulson has repeatedly mentioned in speeches the activities of the Plunge Protection Team, which is officially known as The President's Working Group on Financial Markets. But he's never specific.

I've asked to interview Paulson but he continues to refuse, even though he regularly appears on TV and even re cently was quoted in a major puff piece in The New York Times.

Why hasn't any journalist yet asked him about the Working Group's role?

Is Paulson only granting interviews to reporters who agree not to bring up that sensitive topic?

*

The Dow scored triple-digit gains on both Tuesday and yesterday, which is not surprising since it is options expiration week.

I documented last year that these big gains tend to happen in weeks when options and futures contracts are about to expire and traders desperately try to roll them over profitably into new contracts.

The big gains happen, that is, unless some major bad news event confounds traders' ability to move stocks higher.

The next options expiration occurs on Thursday, March 20 - one day earlier than normal because of the market holiday on Good Friday.

And the March expiration is one of those triple witches - when index options and futures as well as regular stock futures all expire.

If you feel like playing along at home, get ready for another short-term trade that week.

*

It's great that the big thinkers are trying to keep people from losing their homes by changing the terms of defaulted mortages.

But these humanitarian efforts have a price.

Remember, investors own most of the mortgages that Washington is planning to adjust or temporarily keep out of default.

If future investors don't trust the deals they are getting on these mortgage-based securities, they either won't invest in home loans or they will demand higher interest rates to compensate for the increased risk.

So everyone could end up paying higher rates to borrow money in the future.

And that's not going to help revive the housing market.

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