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?