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I happened to come across several articles written by New York Post business writer, John Crudelle and a number of others. They believe fervently in an organization known as the “PPT”, or “Plunge Protection Team”, which was allegedly created by Presidential order, in 1987, after the 22% one day market crash that year. Mr. Crudelle, along with some private economists, and Congressman Ron Paul, apparently, all believe in this conspiracy. These folks are not fools, so it is worth giving serious consideration to whether or not it really exists. 

The official name is the “President’s Commission on Working Capital Markets”, but PPT believers allege that it has devolved into a conspiracy between the biggest banks in the nation (primary dealers of the Fed), the Chairman of the SEC, Treasury Secretary and Federal Reserve Chairman to control markets. Allegedly, the PPT’s original mission was to infrequently intervene, only in emergency situations, when the falling markets might get out of control, by using cash injections, delivered by the Federal Reserve, through its various money delivery “windows”, such as the repo loan window, and, now, the secretive dealer discount window, term auction securities window, etc. 

According to PPT theorists, the organization is now dedicated to using the Fed balance sheet to produce trading profits for its private players, by manipulating markets up and down, and doing the “pump & dump” while using taxpayer funds to pay the costs of the program. I don’t know if PPT really exists, but, if it does, it certainly explains a lot. When you look at the history of money given out at the so-called “repo” window, and the amount of free cash that is floating at any one time, there does seem to be a distinct relationship to the rising and falling of the stock market.

After reading some of the articles, I began thinking about the $700 billion bailout. I took the time to recalculate the Federal Reserve balance sheets, and suddenly realized that it has accepted almost exactly $700 billion worth of toxic mortgage paper, in return for ostensible loans that many of the big banks cannot possibly repay. It just so happens that that is the sum of money they want to extract from Congress. You can’t help but see that the so-called “loans”, given by the Fed to the banks, have changed the composition of its balance sheet dramatically. The Fed’s assets went from nearly 100% liquid Treasury bills, to mostly illiquid “cash for trash” mortgage bonds. The illiquidity of the mortgage bonds would mean that the Fed could no longer raise sufficient funds to adequately support the PPT conspiracy, if, in fact, that is what it wants to do. 

I call the illiquid securities “cash for trash” because the Fed has given treasury bills or cash in exchange for these distressed mortgage backed securities. They are supposed to hold the bonds for a very short time, but, in fact, most of the cash for trash loans have been endlessly renewed, month after month. Assuming, however, that Congress passes the bailout bill, the U.S. Treasury will have authority to buy these same bonds permanently, removing a headache for the Fed, and freeing up its balance sheet to continue funding for the market manipulation that PPT theorists allege.

Let’s indulge ourselves, for a moment, and assume that PPT does exist. If so, the $700 billion bailout is not only for insolvent banks. They already have gotten rid of these toxic assets by placing them with the Fed, and obtaining endlessly renewable Fed loans in return. It appears to be a bailout of the Federal Reserve, itself. The Fed, of course, according to PPT theory, acts as the PPT’s private slush fund. Money is taken out to pump up stock prices, and then taken back in so that prices will fall. The PPT players profit on the movements of the market, induced by this activity.

If all of this is true, maybe, Bernanke and Paulson don't want to admit the embarrassing facts?  How could they go to Congress and say,

“I’m sorry, but we need more money at the Fed. Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS), Bank of America (NYSE:BAC) and JP Morgan Chase (NYSE:JPM) aren’t able to manipulate markets as effectively as they would like. So, please, could you help us?” 

According to PPT theory, the Fed has been used as a slush fund to support stock manipulation for over 21 years now. The U.S. Treasury was forced to try to partially recapitalize the nearly insolvent Federal Reserve by selling $100 billion in new Treasury Bills, last week. The giveaways, to primary dealers and others, have taxed the Fed to the breaking point. 

Whatever the truth or falsity of PPT theory may be, one thing is clear. Mismanagement of the nation's central bank, in the form of giving out loans that cannot be repaid, is so severe that the central bank  itself is now virtually insolvent. Some of the banks who borrowed tens of billions of dollars are now bankrupt (Lehman Brothers), and will never repay. Fed will be stuck with that cash for trash. Most other banks are too shaky and close to bankruptcy to ever repay. Instead of foreclosing, as a bank would do to an individual, the Fed has responded by endlessly renewing the loans. The loans have become gifts, and the Fed has run out of money, because it has also become nearly insolvent. And, let’s not forget, if PPT theory is true, without heavy use of public funds, the PPT players cannot generate large private profits. 

The Federal Reserve has been paying very close to par value for these distressed assets, even though a lot of the assets are only worth $0.22 on the dollar, or even less, in the private market. It has only taken a very small “haircut” to accept them. That is, no doubt, why Ben Bernanke slipped up and admitted he wants the U.S. Treasury to pay much more than fair market value. Otherwise, either the banks or the Federal Reserve will be forced to write down big losses when the mortgage paper is transferred onto the balance sheet of the U.S. Treasury.

So, is the $700 billion being disguised as a bailout for banks, when it is really for bailing out the Federal Reserve? Is it a way of avoiding the embarrassment of walking into Congress and admitting the truth of the need for Congress to authorize issuance of new Treasury bills to recapitalize the nation’s central bank? Will the stock market drop sharply if the Fed “slush fund” is not recapitalized? Will recapitalization of the Federal Reserve allow it to create a series of false rallies to allow people-in-the-know to dump equities into a temporarily rising stock market? 

I don’t know the answer to these questions. But, the arguments made by people who believe in the so-called “PPT” are interesting. If true, it would serve to explain a lot of the irrational market action we all observed over the past years. One thing I do know. Dow Jones’ Marketwatch reported that China has announced new regulations that order Chinese banks to temporarily not lend money to American financial institutions, because of the danger of default.

If the story is correct, given that China has so many dollars, previously continued to accumulate more and more, and has always required private banks to hold large dollar reserves, this may mark the beginning of the end for the U.S. dollar.

Source: Is the $700 Billion Really for Bailing Out the Fed?