The Plunge Protection Team, The Fed & The Investor Costs

Dec. 30, 2018 11:22 AM ET29 Comments
Daniel Amerman, CFA profile picture
Daniel Amerman, CFA
1.55K Followers

Summary

  • The Working Group on Financial Markets (WGFM) was established by an executive order in 1988, and includes the Treasury, Fed, SEC and CFTC.
  • The "Plunge Protection Team" (WGFM) is not a conspiracy theory, and interrupting the momentum of a breakout to the downside that threatens financial stability - is its job.
  • The Federal Reserve's use of unconventional monetary policies has in some ways made it a much more powerful version of the WGFM.
  • Both the WGFM and the Fed can cause three types of investor losses in the attempts to maintain economic stability and financial system stability.

The "Plunge Protection Team" is the colloquial name for the Working Group on Financial Markets (WGFM). The Working Group was established by the executive order of President Reagan in 1988, in the aftermath of the stock market plunge of October, 1987.

The group reports to the President, and the official members of the group include the Secretary of the Treasury, the chairman of the Federal Reserve, the chairman of the SEC, and the chairman of the CFTC. In other words, the group members are the four most powerful financial officials in the United States. In practice, the committee can be composed of senior aides and officials that have been designated by those top officials.

According to Treasury Secretary Mnuchin, the WGFM met by telephone on the afternoon of December 24th, to discuss the ongoing plunge in U.S. stock indexes. The very next trading day, the Dow Jones index experienced its largest ever single day point gain, closing up over 1,000 points. The following day, more than half of the 1,000+ points in gains were temporarily lost - until there was a late day reversal that came out of nowhere, and the Dow climbed by over 600 points to close with another gain.

Coincidence?

There is no doubt that the Plunge Protection Team does exist, and that it convened on Christmas Eve. The hotly debated question is whether the WGFM does more than just talk and persuade, and whether it can and does actually intervene in the markets on a more direct basis when needed.

While the popular view is one of the Working Group itself actually spending the money, that is not necessarily the issue in practice. If the Treasury, Fed, SEC and CFTC act in cooperation, with each using their fullest emergency powers by executive order but without full disclosure to the public - what can

This article was written by

Daniel Amerman, CFA profile picture
1.55K Followers
Daniel R. Amerman is a Chartered Financial Analyst and the author of a number of books on finance and economics. Articles by Mr. Amerman or referencing his work have appeared in numerous publications and websites, including Reuters, MarketWatch, U.S. News & World Report, MSN Money, Seeking Alpha, Business Insider, ValueWatch, Nasdaq.com, Morningstar.com, TalkMarkets and Financial Sense. Two of his books on securities analysis were published by McGraw-Hill (and subsidiary): Mortgage Securities, and Collateralized Mortgage Obligations: Unlock The Secrets Of Mortgage Derivatives.  Mr. Amerman is a finance MBA with over 30 years of professional financial experience. As an investment banker he did groundbreaking work in such areas as CMO/REMIC originations as part of portfolio restructurings for financial institutions, and the creation of synthetic securities for institutional clients. As an independent quantitative analyst, he has provided structural, analytical and mathematical verification services for investment banks, trust departments, and rating agencies. More information is available at danielamerman.com.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This analysis contains the ideas and opinions of the author. It is a conceptual and educational exploration of financial and general economic principles. As with any financial discussion of the future, there cannot be any absolute certainty. While the sources of information and the calculations are believed to be accurate, this is not guaranteed to be true. This educational overview is not intended to be used for trading purposes, those making investment decisions should do their own research and come to their own independent conclusions. This analysis does not constitute specific investment, legal, tax or any other form of professional advice. If specific advice is needed, it should be sought from an appropriate professional. Any liability, responsibility or warranty for the results of the application of the information contained in the analysis, either directly or indirectly, are expressly disclaimed by the author.

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