The Plunge Protection Team Blog

I hope everyone is watching the Senate Banking Committee discovery session on the Bear Stearns bailout:

Lawmakers opened hearings Thursday into the dramatic rescue of Bear Stearns, with top officials of the Federal Reserve and the Treasury Department defending their actions to save the Wall Street giant from bankruptcy.

The officials said the sudden collapse of the nation's fifth largest investment bank would have had unpredictable but likely severe consequences on the nation's health. In short, stock prices may have plunged, and the resulting turmoil would have lowered home prices and credit for homeowners and businesses might have dried up, the officials said.

While there were risks to taxpayers and to financial regulators from the bailout, these paled in comparison to the economic risks, the officials said.

"Are there risks here? Yes, but the risks are modest in comparison to the substantial damage to the economy and economic well-being that potentially would have accompanied Bear's insolvency," said New York Federal Reserve President Timothy Geithner, who played a central role in the 96 hours of behind-the-scenes rush to rescue Bear Stearns.

We now know where the Bernanke Put lies for the investment banks: at $2 a share. I'll have to do a little research, but this devastating fall seems to be faster than most of the fly-by-night internet companies in the 2000 dot-com crash. And this is an 80+ year old Wall Street institution.

As part of the transaction, the Federal Reserve, which engineered last week's emergency bailout of Bear, will provide up to $30 billion of Bear Stearns' less liquid assets. "JPMorgan Chase stands behind Bear Stearns," said Jamie Dimon, chairman and chief executive of JPMorgan. "Bear Stearns' clients and counterparties should feel secure that JPMorgan is guaranteeing Bear Stearns' counterparty risk. We welcome their clients, counterparties, and employees to our firm, and we are glad to be their partner."

Congratulations Bear Stearns' shareholders. The Plunge Protection Team has stepped in and backstopped JP Morgan to make sure you still have a little value left in those shares. I bet that isn't giving BSC shareholders much comfort this weekend as they wait to see the decimation in their accounts in the morning. Of course, if you still hold shares of BSC after all the very public warning signs, we can't say we have much sympathy for you. Most other companies would have been allowed to go out of business, so you should be thankful for the $2 the PPT let you keep.

Meanwhile, the rest of us who are crazy enough to keep some of our assets in US Dollars are also seeing our account decimated by the socialization of downside risk and the mad money printing going on. The dollar is making fresh lows against Gold, the Euro, and many other currencies.

In other news, I'm sorry about the massive spam attack this site had while I was on my business trip. I've installed some spam trapping software, so hopefully we'll be fine until the new site is up.

The PPT is popular these days. When asked what she would do to help the economy at Monday's debate, the presumptive democratic presidential nomineee, Hillary Clinton, urged President Bush to convene a meeting of the Plunge Protection Team:

I understand that that's a real risk. So I was hoping to be able to do it through spending, but the crisis has gotten too deep, and what happened in the markets globally today is a huge wakeup call.

The president should convene the working group on financial markets. He should ask the secretary of treasury to do this immediately. I know that there's been talking going on, but the president's proposed stimulus package is not adequate. It is too little too late and it doesn't give enough money to the people who are hardest hit by the increased costs in energy and everything else.

I don't know about you, but it makes me worried to see a potential president so eager to use the PPT before she's even in office. I'm guessing this blog will get a lot of use in the coming years.

Dow 13,000 acts kind of like a bat signal for the PPT to come to our rescue. Everytime it's been breached, the fed shortly follows with some sort of emergency statement or action. That's why we here at the PPT blog have been so surprised by this last breach of Dow 13,000.

It happened on 1/4/2008, and it's taken the PPT a whole SIX DAYS to come to our rescue. Will they bring the DJIA back to 13,000 or is this one plunge protection too many?

Today, Bernanke let the "Women in Housing and Finance" know that the Fed is about to unleash a torrent of money printing:

The Committee will, of course, be carefully evaluating incoming information bearing on the economic outlook. Based on that evaluation, and consistent with our dual mandate, we stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks.

Can anyone say.... INFLATION? A couple of markets got this speech figured out right: "Gold rallies to new record high on Bernanke comments", "Crude reduces losses after Bernanke comments"

I wonder if Bernanke owns any gold? He sure has been good for gold prices.

One of the low points of Bush's press conference today was his announcement that help was available for subprime loan holders via a call to 800-995-HOPE. The funny thing is, this number is so jammed that you don't even get a traditional busy signal -- you get the "all lines are jammed" fast busy signal.

Maybe this subprime problem is much, much worse than even the Plunge Protection Team thought. How can we expect them to be able to solve the problem if they can't even get enough phone lines to handle the inquiries?

From the looks of the stock market rally today, everyone is still living in fantasyland.

We all knew this was coming unfortunately. Once the DOW cracked 13,000 on the downside, the PPT had to act and act they have.

From the Wall Street Journal (subscription required):

The Bush administration and major financial institutions are close to agreeing on a plan that would temporarily freeze interest rates on certain troubled subprime home loans, according to people familiar with the negotiations.

Details of the plan, which could be announced as early as next week, are still being worked out. In general, the government and the coalition have largely agreed to extend the lower introductory rate on home loans for certain borrowers who will have trouble making payments once their mortgages increase.

I'm curious as to who is going to pay the difference between the now-locked teaser rate on these loans and the actual interest rate that the holders of these loans is expecting to receive. I have a bad feeling it's going to be paid by us.

I've been getting asked if the Plunge Protection Team was the driving force behind the crazy rally on Tuesday.

Honestly, I don't think so. Tuesday's rally and today's lack of follow through are the first signs to me that we may be truly entering a bear market. That is the sort of one-day-wonder short covering spectacular rally you see in bear markets. You only need to look back to what happened after the Nasdaq cracked in March of 2000 to see many instances of this.

Does this mean I think we fall down 20%+ in the near future? I'm not sure. The timing on this thing is tricky since the housing market moves slowly and the banks even slower. The more negative news that keeps trickling out, the more pressure they'll be on stocks.

The "animal spirits" want their traditional year-end rally, and they'll keep looking for it at every turn. I'm more inclined to think we stay pretty flat from here through the end of the year with the real fireworks to come next year.

Wow, what a shocker! The Fed cut interest rates. I guess no one was predicting that one. The more interesting news is the market's reaction to their statement:

The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 4-1/2 percent.

Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance. However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction. Today’s action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time.

Readings on core inflation have improved modestly this year, but recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.

The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.

So, we are supposed to take this change in statement as an indication that the Fed is now being "vigilant" on inflation and won't be destroying our currency quite as quickly in the near future... at least that's what the CNBC "experts" were telling us.

Now, if the Fed was truly becoming more hawkish and markets believed them, we would expect the following reaction:

• Gold down
• Dollar up/Euro down
• Stocks down

Instead, we go the exact opposite on all these fronts. Has Bernanke already lost all credibility this early into his tenure?

This reaction doesn't bode well for future inflation in our opinion. If the Fed has already lost control of the market's perception of them as an inflation fighter, we could be royally screwed.

Thanks Ben. Thanks a lot.

How well does it pay to have a direct line to the Plunge Protection Team? Just ask Goldman Sachs whose shares are hitting a new all time high today in anticipation of some free love from their friends on the PPT:

The first arrow on the lower part of the chart indicates the day when Goldman started trading up in advance of the fed's "surprise" discount window cut on options expiration Friday. Do you think someone at Goldman knew? Hmmm... I wonder.

It's also curious just how good their results were for the quarter. If the CEO of your company was in direct communication with the Fed and an unnamed member of the Plunge Protection Team, do you think you might have a good idea on what trades to place to take advantage of the fed's "surprise" announcement?

Wall Street has totally bought into Goldman's "specialness" now. The record high in GS today shows Just look how eagerly anticipated today's cut is and how certain insiders and non-insiders are of it happening.

This should come as no surprise to PPT readers, but it tuns out that Bernanke and Paulson have been meeting at least once a week during the last few months: (hat tip to John Crudele at the NY Post)

...Wharton School lecturer Ken Thomas requested Bernanke's calendar under the Freedom of Information Act and the Fed complied...

Well, Thomas has analyzed Bernanke's record of meetings and found that he and Paulson are damned near bosom buddies - a lot more bosomy than Ben was with Paulson's successor.

According to the documents, Bernanke has met with officials of the Treasury Department 66 times, or 3.5 times a month, during his tenure. That includes the last months of John Snow's tenure as head of Treasury and Paulson's ongoing term. The breakdown of those meetings is interesting.

The Fed chairman met with Snow, who wasn't previously employed on Wall Street, only eight times before the former Treasury head resigned. But Paulson met 58 times with Bernanke. That averages out to 4.1 meetings a month for Paulson, says Thomas, but only 1.6 times a month for Snow.

This is just more evidence to support what we all know is true: the Plunge Protection Team is on the move and in full market manipulation mode.

Did anyone see the breakout to lifetime highs of Goldman Sachs, Paulson's previous firm, today? The last time we saw some interesting price action in GS was during the August swoon when Goldman began recovering prior to the rest of the stock market -- the leak from the PPT was in. Could we see another "surprise" 50 basis point cut this week? After all, the Goldman guys need a big bonus this year, don't they Mr. Paulson?

Well, it's official. You can't short this market unless you want to do battle with the men behind the printing press.

Take a look at some of this morning's headlines:

• Home sales crater on credit squeeze -Sales of single-family homes at 10-year low; inventories highest in 20 years
• Merrill Woes Suggest Trouble for U.S. Economy

So the DJIA was down about 150 odd points this morning and through much of the afternoon. Then we saw a pattern that has become so familiar to us lately:

A huge spike in the futures within an hour or so of the trading day close. Suspicious, no? Yet, it is happening with such regularity these days you can pretty much trade it and make real money betting on it.

Was this the PPT interceding again to keep markets at all time highs? Did Ben Bernanke call his friends at Goldman and Lehman to let them know he'll be knocking 50 more basis points off the fed funds rate next week?

Will the PPT stand by while the stock market drops a percent or two? Not if they can help it. We'll have more analysis this weekend on this, now-becoming-suspicious, late day buying pattern.