Did the White House Rig the Stock Market?

I don't have the storytelling chops of, say, Oliver Stone, but I'll do my best here: Last Thursday, the stock market was deep in the red all day, with the Dow trading down more than 300 points at its nadir because of investor fears about the mortgage credit crisis. Then as the session drew to a close, the stocks staged an amazing comeback. That huge deficit was nearly erased as the market finished with a miniscule 16-point loss for the day. Then on Friday, stocks soared after the Federal Reserve announced a surprise cut in the discount rate.

Now most traders attributed that Thursday comeback to rumors that Federal Reserve Chairman Ben Bernanke had seen enough and the central bank would take some action the next day. Others around the blogosphere had a different theory—make that "conspiracy theory." The Adventures of Citizen X blog wondered if the comeback was "a result of investors working through their worries (in a couple of hours no less) or government intervention?" The blog at Greenback Consulting, a stock trading firm, was also full of questions:

"All of a sudden, around 2:00 or 3:00 some buyers stepped in and started buying up everything in sight. Before long it was 4:00 and the Dow was in positive territory. Who was the mysterious buyer? Perhaps it was the Plunge Protection Team averting a financial disaster. It looks even more convincing in light of the Fed's actions the following morning. If anyone knew what the feds next move was going to be it would be the Plunge Protection Team. If this group really does exist, it would make me really reluctant to be a long term bear...Every time things get profitably bad (for the bears) some government dudes come in and ruin the party. History makes a pretty convincing circumstantial case for the Plunge Protection Team, but maybe its just a series of coincidences."

Yes, the Plunge Protection Team is real, except its actual name is the President's Working Group on Financial Markets, or PWG. (The nickname comes from an old Washington Post headline.) After the 1987 stock market crash, President Reagan authorized the creation of the PWG—consisting of the Treasury secretary, the Fed chair, and the heads of the Securities and Exchange Commission and the Commodity Futures Trading Commission, so that top regulators and economic policy chiefs could formally consult with one another in event of a financial crisis as well as prepare a plan of action in case of a financial markets meltdown. For instance, it might advise the president to temporarily close the markets, as happened after the 9/11 terrorist attacks.

But maybe Plunge Prevention Team would be a better moniker if you believe those who think the group's mandate goes far beyond acting as an information clearing house and instead actually directs large institutional investors—or maybe even foreign sovereign funds run by cash-rich nations in the Middle East and Asia—to buy stock index futures as a way of propping up the stock market and ending a panic.

Now there's never been any official confirmation of this. But former White House aide George Stephanopoulos has said in the past that the White House and the PWG have the authority to prop up the stock market and probably did so after 9/11. And former Fed governor Robert Heller has suggested that the government should do just such a thing. So maybe the conspiracy theory worked like this: After Treasury Secretary Hank Paulson, Bernanke, and the others watched the carnage unfold last Thursday, the word was put out to several selected players to buy index futures with the knowledge that the Fed would cut the next day as sort of financial guarantee.

My take: The people I have talked to in Washington and on Wall Street totally dismiss all this. Says one financial insider: "I haven't heard a single person suggest anything like that until you called me." A longtime White House official also scoffed at the idea, though he did confirm that Paulson has attempted to reinvigorate the PWG with more meetings. But Paulson apparently sees the PWG as more of an economic policy discussion group, not a market manipulation apparatus. So until I hear something more solid, I am writing this off as either cynicism or wishful thinking gone wild.

Tags: economy | Ben Bernanke

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