Speculation About Whether the Fed Manipulates the Stock Market Becoming More Mainstream

Even during the pre-Lehman days of the financial crisis (yes, Virginia, there were three acute episodes before the Big One), blogs and professional investors in my various e-mail conversations would discuss the idea that the Fed had a “plunge protection team” which would intervene to stem market routs. Over the years, this sort of talk among various investors (and these aren’t small fund operators; I’ve seen this point of view from fund managers and prime brokerage managers at very large, well-known firms) seems to have gone from being seen as conspiracy theory to being at least common, if not prevalent, among equity investors.

Let me stress that I’m an agnostic on this topic. On the one hand, it’s completely plausible that the Fed would see it as desirable to intervene in the markets during times of extreme upheaval; it’s “unusual and exigent circumstances” powers give it the authority to accept, as former central banker Willem Buiter put it, a “dead dog” as collateral for loans. On the eve of the Lehman bankruptcy, the Wall Street Journal even got a bizarre leak from a Fed official saying it would accept equities as collateral for lending (the language of the press release at the time said no such thing). The Greenspan and Bernanke (presumed soon to become the Yellen) put, of lowering interest rates to stop markets from falling; the idea of a Plunge Protection Team would just be an extension of this policy.

So if you accept the proposition that the Fed could and might well prop up a tanking stock market, might it not intervene at other times to further policy aims? Even before the crisis, top Fed officials have made it clear that they regard rising stock prices as a boost to economic growth, both directly (through the wealth effect) and indirectly (through the confidence fairy).

And I’d been hearing rumors long before the crisis. As I wrote in 2000, in a review of Robert Shiller’s Irrational Exuberance:

Finally, the chapter on policy implications finesses the tough questions, namely whether this bubble is likely to end badly and should the authorities (namely Federal Reserve chairman Alan Greenspan) have intervened…A May 8 Wall Street Journal article depicts him as almost obsessed with stock prices, first thinking they were too high, then believing them justified by productivity growth, and recently considering whether inflated asset prices might overheat the economy…. Finally, traders in the S&P pits claim that the Fed (called “the Turk”) trades S&P futures to influence price levels. If true, the Fed has had a direct hand in the state of the market.

The flip side is that all investors have to point to is what seems to be increased frequency of events that they regard as suspicious. Their list includes:

Markets holding at technically important support levels, not in a jagged price pattern of orders around the critical price, but a hard floor, as if someone with unlimited firepower had put in a bid

Aggressive shot squeezes on bank stocks, starting with March 2009, when the Treasury announced various “sop to the big bank” programs, such as the stress tests and the “Public-Private Investment Partnership” (which as we predicted, never got off the ground)

Frequent, more specific complaints of “unnatural” trading action

Now of course, this could be due to the rise of high-frequency trading and the SEC taking a far more permissive view than in the stone ages of my youth as to how information is disseminated (ie, methods are allowed that clearly give certain parties a meaningful time advantage).

But so far, this grumbling hasn’t made it out of the admittedly large investor ghetto. So I was intrigued to see Pam Martens write up some data points that align with the concerns of the stock market pros in a post titled, New York Fed’s Strange New Role: Big Bank Equity Analyst. If the Fed isn’t dabbling in the stock market, why does it need this sort of expertise? Key sections from her write-up:

But the New York Fed itself is helping to fuel suspicions about what’s going on within its cloistered walls…. Of the 12 regional Federal Reserve Banks, the New York Fed is the only institution with a trading floor and highly sophisticated trading platforms. But despite multiple requests, the New York Fed will not provide a photo of the full trading area. Photos of its gold vault and currency vault are on line, but photos of the trading area is off limits…

The resume of Kathleen Margaret (Katie) Kolchin is also noteworthy…she works for the Federal Reserve Bank of New York, “performing equity research on the large cap US and European banks. Throughout her career as an Equity Research Analyst, Katie has covered various sectors, including Global Consumer Products, Global Real Estate, and Metals and Mining, at UBS Securities and also at a boutique investment bank.”

Even more curious is the resume Kolchin has posted at LinkedIn. The resume states that the New York Fed has an “internal equity research team,” of which she is the Senior Analyst. The team’s coverage includes Bank of America, Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan, Morgan Stanley, UBS, and Wells Fargo… she has “Developed a sell-side style research platform, including work product branding, distribution strategy, and internal client marketing presentations…” Kolchin adds that she uses her “capital markets experience and contacts” to garner insights into the market’s reaction to “stock and bond prices.”

“Branding”? “Distribution”? “Marketing”? Stock prices? What’s going on here. There are famous, long-tenured bank analysts all over Wall Street….How is this the job of the New York Fed?

I too am curious as to what the justification is for this sort of position. Since when are stock prices part of the Fed’s job description?

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  1. MyLessThanPrimeBeef

    If the Fed can figure out a way of making the stock market go up always without ever crashing, for what reasons should we object to that?

    Perhaps we object to the inequality of a rising market, as it currently stands, with the 0.01% owing more shares of the stock market than the 99.99%.

    But if it’s inequality we are talking about, we should start thinking about wealth tax and GDP sharing.

    And if the Fed can’t do that, if it can’t make it always go up without crashing, it’s like a little learning is a dangerous thing. Perhaps it should stay away from playing with fire*.

    *The expression is probably one of the oldest, I believe. It might have been coined – I use the term loosely – when the Southern Ape first discovered fire, with not a few burned, careless apes.

    1. George Hier

      Why build widgets, when the stock market offers easy, guaranteed returns?

      Why open a small business, when you can put your seed money on the stock market and earn easy, guaranteed profits.

      Why go to college, when you can put your money on the stock market instead, etc, etc.

      The Magic Fed Money Machine would crowd out all productive economic activity. The knock-on effects are predictable. Eventually the collapse of the real economy would punch the magic out of the stock market, or it would simply cease to be relevant to anything.

      See Argentina’s MERVAL stock index for an example of hyperinflation in prices matching hyperinflation in currency.

      1. scott

        Too bad that the stock market has on average over the last century beat inflation by 1.5% a year.

        Yes guaranteed profits, but after you pay the Fed’s their third of your profits you’re still losing money based on how inflation was calculated when Clinton took office (at least 7% a year).

        Oh, and when JPM and GS go short the market, it will be too late to get your money out.

  2. Clive

    Not much difference in practice to me for Central Banks to prop up (either covertly or overtly) equity markets because they overtly prop up certain varieties of fixed income right now.

    The ECB will currently take baseball cards (sorry, peripheral sovereign debt) in its current game of sovereign debt hokey-cokey. As will the BOJ for JGBs. And don’t even get me started on the “eligible collateral” which the BoE will take as part of “Funding for Lending” http://www.bankofengland.co.uk/markets/Pages/FLS/default.aspx

    As an interesting aside, the BOJ is shirking somewhat from outright equity purchases — but then again, it has the advantage of pliant proxies such as the Government Pension Investment Fund to call on to do it’s dirty work
    http://www.ft.com/cms/s/0/895b9e48-51c6-11e3-adfa-00144feabdc0.html?siteedition=uk#axzz2lk2fulqY which makes me wonder, and this is pure speculation (pun intended) whether, if the Fed really was intent on doing this kind of equity market support, what agencies they could apply behind-the-scenes strong-arm tactics to in order to conceal its true operations. There’s no sovereign wealth fund or public pension holding. But the TBTF banks would seem obvious candidates, you could probably add GE Capital and even materially significant market constituents like Apple / Google to the list. So long as their purchases were in “strategically linked” sectors and only added up to a couple of % of the total market cap of the companies they were supporting, they could probably get away with it.

    What is, from my perspective, of upmost importance is to determine *why* this might be done and for what *duration*. Related, but slightly different, is how to exit from any positions which accrue.

    If the reason “why” is to satisfy Bagehot’s call to respond to a liquidity crisis by “lend(ing) freely at a high rate, on good collateral” then I, like Yves said in the intro, could be persuaded to be agnostic about the whole thing. The “duration” question is answered by the “why” — it goes on as long as the liquidity crunch and then the central banks — or their agents if they want to be coy about intervening — sell their collateral back in to the stock market certainly at par and maybe even at a profit.

    I really don’t think that the “we’re in a liquidity crisis” reason can wash now though. So even if the central bank was intervening in the stock market, it has precious little justification for doing so now. What would be a good justification absent a liquidity crunch ? I’m really stuck for a satisfactory answer on that one.

    The Bank of England never openly ‘fessed up to equity purchases. But the following report does give an useful insight into central bank thinking on the general subject of, to cut it into popular language “how can taxpayers money be safeguarded while we play at being a hedge fund ?” Because, at the risk of repetition, whether it’s fixed income or equity, it really doesn’t matter. It’s the potential for losses which the taxpayer has to eat that’s the problem.

    The Bank of England’s response to this vexing conundrum ? Well you can plough your way through the full report of you’ve got a bad case of insomnia:
    http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/qb100201.pdf but the short version is “don’t worry dear long suffering taxpayer, it’s all taken care of in the haircut we apply and so long as we calculate that correctly there’s nothing to worry about”.

    Oh, so that’s alright then.

    1. RBHoughton

      Speculating on the duration, one wonders whether the Pentagon’s publication of AirSea Battle plans against China and the ‘response’ this week from Beijing “we see no advantage in maintaining our US Treasuries,” might provide a possible background to Fed thinking.

  3. Fiver

    The Fed has been managing equities from roughly March 2009. Oil too, early on, and at times later, to keep it fairly reasonably priced most of the time – and room too for hefty profits with the near permanent ‘war’ premium. It will do whatever it takes to maintain itself and the status quo. Not to be trusted. No sir.

  4. JTFaraday

    “Since when are stock prices part of the Fed’s job description?”

    Since it became our de facto national central planning board?

  5. Adriannzinha

    It is something of a deep irony to think that while Obama and Congress serve up their one-dish meal of austerity to the populace, the fed is about the only apparatus providing any nominal stimulus.

    Granted that stimulus destroys savers what with near-zero or even negative real rates of returns on fixed income instruments (tips, treasuries, cd’s). However it has made credit cheaply available to businesses even if businesses themselves have hardly passed the easy credit baton to consumers.

    Imagining our situation today as it is given the mass of austerity, interest rates of more typical 4-6% would likely create even more pain for the countless indebted consumers such as students with their loans, the homeowners with mortgages who survived the 2008 bloodbath, etc.

    1. JTFaraday

      “It is something of a deep irony to think that while Obama and Congress serve up their one-dish meal of austerity to the populace, the fed is about the only apparatus providing any nominal stimulus.”

      Putting it that way makes it sound like the Fed is somehow noble, “the only adult in the room,” and not also actively managing the President and Congress.

      Whereas anyone who paid any attention to people who have spoken out about the Clinton Administration, for example– like Brooksley Born who sought to regulate the derivatives market (central to the 2008 crisis) or then Labor Secretary Robert Reich– knows that the trio of Greenspan, Rubin, and Summers actively managed the President and Congress during the Clinton Administration.

      Now certainly they made it worth his while– Bill Clinton being the first US President to get fabulously wealthy off the Presidency– so it’s not like our elected representatives were/ are personally opposed to being actively managed, just that they were/ are being actively managed.

      I’m sure we can find examples from the Obama Administration as well, as when for example, Summers cut the size of Christina Romer’s recommended stimulus. And no doubt Obama is motivated to follow Clinton into the hundreds of millions of dollars strata, therefore he broadly does as Clinton did and we should not be surprised.

      But the Central Bank and its industry and academic colluders as “the only adults in the room” the way some technocrats, even those posing as “progressives,” want us believe? No. The evidence does not support this claim.

      By the way, what do we think student loan rates currently are?


  6. Hugh

    Look at the condition of our economy and then look at the DOW at 16,000. There is an obvious equity bubble being blown, and I thought the consensus has been for the last few years that it is being blown by the Fed via the Greenspan-Bernanke-soon-to-be-Yellen put. What we are seeing is just how extensive the Fed’s repertoire is for these puts: a trillion dollars a year in QE, the grease of ZIRP, paying interest on reserves borrowed through ZIRP, designated liquidity providers (like Goldman), the dollar swaps program (recently made permanent), and now this trading floor we are hearing about.

    Some of this is for the benefit of banks and bank stocks, some more generally for the equity markets. None of it is for the economy where we live. It’s important to remember with regard to this trading floor and its potential to pump up bank stocks that the Fed is a private banking cartel and this would be an example of the cartel protecting/promoting itself.

    Something I have always wondered about is how the shadow banking system figures into the Fed’s calculations and activities. The short answer is I don’t know. For instance, my memory is in the aftermath of the 2008 meltdown, Money Markets were guaranteed by Treasury, not the Fed. The Fed did run an asset backed Commercial Paper liquidity facility for them (with $217 billion in activity), but a direct lending program which was set up never went operational. So the Fed offered some assistance but it was not on par with what it did for the regular banking system.

    did set up a program but it never became operational because, I assume, of the Treasury program.

  7. William Neil

    Interesting post, Yves. It sent me scrambling back to Kevin Phillips’ work, specifically, his 2008 book “Bad Money,” with the modest subtitle “Reckless Finance, Failed Politics and the Global Crisis of American Capitalism.”

    Phillips’ index has four references to what he calls “The Plunge Protection Team” and I refer NC readers to his fairly extensive discussion of its existence and how it might work, since it has never been officially confirmed. He begins by noting that he broached the topic in his 1994 book “Arrogant Capital,” saying that he had heard a rumor that the Fed, with its institutional shielding from auditing, had been buying stock futures during periods of market turbulence.

    In “Bad Money,” he raises the possibility that the actual group doing the purchases is “sheltering” behind the “President’s Working Group on Financial Markets” set up by President Reagan in the wake of the 1987 crash. These three pages in Bad Money are intriguing (58-60), and fill in some of the details with comments by others who have been close to the operations alleged. A few pages later, saying that Secretary Paulson had reinvigorated the plunge protection team, Phillips says this: “On August 15 and 16th (2007), at the peak of financial market nervousness, wave after wave of stock index buys kept the correction from reaching 10 percent at any market close and thereby establishing bear market or correction status.”

    I’ve always found Phillips’ evolution on the political economy to be fascinating, from Right to perhaps slightly left of center, and I have a sense that because of his residence in Connecticut, and his contacts and interests, he would be a magnet for information of this sort.

    I think he handles the material well, and suggests that it is not farfetched, if one thinks about the importance of finance historically, and the evolution of various forms of market interventions. After all, if Robert Schiller is right, that at crucial times markets are irrational, then why should the Fed stand by helplessly and have a repeat of 1929? That wouldn’t be my take on this alleged technique, because in my mind it really does cross a huge line to outright manipulation, with many legal and constitutional ramifications, not to mention the further abolition of cherished “free market” idealizations.

    Phillips’ comments on this do deserve a closer look, however, and I regret his retreat from American public life after “Bad Money” – you could sense it coming from his frustrations with politics. He openly stated that he took a break from his traditional interests to work on his colonial history revisionism – “1975.”

    Come back, Kevin Phillips.

    1. Justicia

      Phillips book was where I first encountered the term PPT. Apparently, the PPT was in operation in the late ’80s:

      “Plunge Protection Team” was the nickname given to the Working Group by The Washington Post in 1997. The team was initially perceived by some to have been created solely to shore up the markets or even manipulate them. The team was created in response to the 1987 market crash.”

      Investopedia, http://www.investopedia.com/terms/p/plunge-protection-team.asp

  8. Anarcissie

    It has been my perhaps erroneous impression that back in 1987, when the stock markets were cratering, the Fed (or someone) told the specialists of the NYSE that they could borrow as much money as they liked as long as they used it to stop the crash. I thought at the time this was very impressive, because it profoundly changed the stock market game, because now, while an individual company or investor could still wipe out, the market as a whole could not. Is my impression incorrect? Because if it’s not, then the Fed manipulating the stock market is not at all a new thing. On the contrary, it would be the default assumption.

  9. Schofield

    Yet more grotesque evidence of an Asymmetrical Democracy where its thought rational and acceptable money can be conjured from nothing to goose the incomes of the predominantly wealthy but it’s an austerity programme for the majority because it’s irrational and unacceptable to think money can be conjured from nothing for public goods, services and social welfare net provision. The Federal Reserve needs abolishing and a Central Bank devised that will reflect genuine democratic governance.

  10. Ishmael

    Loaning money to specialists is totally different than buying or supervising the buying directly.

    In one word why the Fed should stay out of the stock market — misallocation. Misallocation of capital caused the direct fall of the Soviet Union and any company I have ever been that fails one of the main reasons is misallocation of capital.

    Many tend to believe if the Fed will do this (and maybe the Fed believes in its own omnipotence and that is a sure sign of its hubris and coming failure) then the market will rise for ever or at least not fall. Sorry, that is just not the way that math and physics works. I could line out 100 reasons why this is a bad idea but in the end such schemes always fail (check out the South Seas or Mississippi Companies).

    As far as does the Fed do this. Ahh, yeah. Here is a direct example. In August 2007 any trader in the market then knows that date. The market was getting ready to take the big dive. It was just tettering. Fed’s answer was a surprise rate cute announced before the market opened on triple witching. Traders that were short which was a big chunk of the market – I lost $40,000 that day – lost big time. It was obvious in hindsite that certain parties knew the prior day because out of no where the market turned around and started market up from about 2 pm till close.

    Since then it has now become public knowledge that the little prick Tim Geitner called all his buddies at the big banks and told them what was going to happen.

    In the end you destroy the markets as a place that companies come to raise money to grow and instead just becomes a big on-line casino with money leaving small hands to big. Second reason this is a bad idea.

    In the end there will be an external event outside of the Fed’s control which causes the market to fall (last time Lehman next time I have a few ideas) and either the Fed has to step away or own the whole market. Third reason this is a bad idea.

    In 1937 the event was the failure of Creditanstaldt which caused the market to collapse. These failures lead to people stop believing in the whole rule of law. Fourth reason this is a bad idea.

  11. susan the other

    When Larry Summers recommends a bubble model for the economy because there never is sufficient natural demand, things are getting close to the truth about capitalism and the fake free market. The economy has been juiced on counterproductive stimulus ever since 1941. Equities draining labor dry. In 1987 the crash wiped out 20 million jobs and everyone was noticing that it was no problem for rich corporations; equity was somehow protected as the country suffered a “jobless recovery.” We are now suffering a jobless economy. And the stock market is soaring. 80 years of fake demand. The NYFed has probably been the biggest puppeteer of them all.

    And wasn’t it the NYFed 4 or 5 years ago who issued a “white paper” (what a euphemism) to state judiciaries on the best way to judge the legal issues on the separation of notes and mortgages? Saying it’s no problem if the two get separated, no problem even if the note is lost. All that is needed is the mortgage and it doesn’t need a proper chain of allonges. What an amazing and improper intrusion that was – and not into the equities markets but directly into the judicial system.

    1. susan the other

      Betcha it was the NYFed who first concocted the propaganda that the separation of note and mortgage is OK because the note is assumed to follow the mortgage (even if it has been lost). Before that little twist it was long established case law that the mortgage followed the note – no note, no mortgage. I wonder if the NYFed ever weighed in on the unimportance of demolished titles and land registries.

    2. jack

      “When Larry Summers recommends a bubble model for the economy”

      Wasn’t Fed created to eliminate or at least smooth the bubbles (aka malinvestment)? It certainly chose a peculiar way to go about it: it rewarded malinvestors.

  12. William Neil

    Let’s assume for the moment that there is such a thing as the “Plunge Protection Team,” which uses Federal Reserve Funds – and private funds too? – to intervene in various financial markets to mitigate or head off very steep plunges. Wouldn’t the evolution in the type of funds/indexes make this much easier today than that famous attempt in fall of 1929 where a prominent private investor and Exchange official conspicuously walked the floors of the NY Stock Exchange buying when everyone was selling? That would have been, according to the late John Kenneth Galbraith, the Vice-President of the NY Stock Exchange, Richard Whitney, acting on the afternoon of Thursday, October 24th, “Black Thurday,” in the wake of a meeting of private sector leaders held at 23 Wall Street.

    That might have been more open and honest; where would the public/private boundaries lie in a contemporary PPT? And the fact that it is completely unofficial? If it exists, isn’t the type of buying it is alleged to have undertaken very skewed across the social/economic spectrum? It immediately takes my mind to those very strict and prominent boundaries on public political action that both parties adhere to: no intervention in labor markets, the line that can’t be crossed, whether it is for a liveable minimum wage and all that is due labor not only from missing inflation adjustments, but, as Dean Baker has written, from missing productivity adjustments, labor’s missing share, which would put the federal minimum wage in the $16-$23 per hour range; and then of course, the “CCC” or “WPA” option on public job creation…whether the job is public or created in the private sector using public money, a line that Paul Krugman shies away from…and which both parties have worked so hard to erase from the public memory of the New Deal era.

    Thinking about the possible existence of that PPT makes contemplation of other types of “intervention” not undertaken seem even more cruel, more hypocritical. State intervention? But whose “State” is it?

  13. Bob

    This is the insider trading platform of all insider trading platforms. When you know which stock, fund, market, etc. the Fed is going long or short on, the profits are guaranteed.

    Nice racket they have there.

  14. Garrett Pace

    Did not the same thing happen in 1929, where deep pocket investors very publicly jumped in to preserve asset values?

    Since markets are a confidence game, the leverage of the PPT comes from publicity – that is, their effect is muted if no one knows they are doing it.

  15. Preston

    Historically, the “Plunge Protection Team” sits behind secret, hidden closed doors at Morgan Stanley in NYC. Today, no doubt there is, if needed, clone redundancy elsewhere, e.g., across the river in New Jersey, below Denver’s airport, and simply aboard US Naval vessel(s), incl. a submarine.

  16. jsn

    I think I read here in comments recently what purports to be Lilly Tomlin quote. “no matter how cynical you get, you just can’t keep up!”

    Is it possible the market is just another completely artificial narrative put out by the condominium of Federal Government and our “free press”? Between all the bailout programs listed in the article and a trading desk backed with the ability to issue fiat, has “mark to model” become “mark to target”?

    They have the power, so why not? And if so, what would it take to unmask the charade?

  17. clarence swinney

    President Obama begged, pleaded but it was Republican filibusters of Judicial and Executive -branch nominees which created the Nuke. The last straw was when the Republican leadership
    announced, publicly, their intention to filibuster all of Obama’s nominees to the DC Circuit
    court simply because they didn’t want a Democratic president able to fill any more vacancies.
    Since WWII, there have been 168 Filibusters. 82 were on Obama nominees in five years.
    We will be served better without 168 from both parties out of Congress.

  18. Samuel Conner

    Perhaps the Fed would like to learn how to gently deflate bubbles by short-selling into them, and wants to be able to, as needed, justify itself to its Congressional overseers by having excellent equity research. The market cannot remain irrational longer than the Fed can remain solvent.

  19. Doug

    Definitely spooky action at various technical support levels. Lots of overall market leverage by goosing overnight futures or options / vix. A few of the regular comments on ZH over the years about the NY Fed Markets Group:



    2009 Congressional questioning of FED General Counsel (audit the FED):


  20. Conscience of a Conservative

    The Fed and its experts seem to be saying they hav no solutions to propping up the economy other than throwing cheap money at wall street and generating asset bubbles. And they point to rising stock prices as one key measure of success in the debate of whether Fed policis work.

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