PPT, Pimco, fiscal policy

[kent nickell]

Some elements to watch for 2010... This article relates to the plunge protection team (PPT) which is thought to be funneling huge amounts of taxpayer money into the stock market to prop it up... esp financial stocks to try and keep the banks capitalized... This and other actions by the Fed such as buying huge amounts of toxic mortgages with taxpayer money bring up the question of whether they are dabbling too strongly in fiscal policy.... The Feds mandate is mainly to deal with monetary policy which relates to the amount of money available to the economy by increasing money supply and influencing interest rates.... Fiscal policy which is how taxpayer money is spent is a mandate for Congress... (elected officials rather than a few bureaucrats in the Fed)

Also as a major vote of declining confidence in the Fed, PIMCO, a huge well connected bond fund is recommending scaling back in Treasuries which is a major vote for the Fed to consider fiscal constraint.... The bond market will be the wall that our deficit spending will run into....


http://www.marketwatch.com/story/time-for-fed-to-disprove-ppt-conspiracy-theory-2010-01-05

MarketWatch First Take

Jan. 5, 2010

Time for Fed to disprove PPT conspiracy theory

Commentary: Analyst charges that government is manipulating markets

By MarketWatch

WASHINGTON (MarketWatch) -- The massive stock-market rally in the past nine months is mostly due to secret government buying of stock-index futures, a respected stock-market analyst said Tuesday.

Charles Biderman, chief executive of TrimTabs Investment Research, is the latest and most credible person to charge that the Federal Reserve and the Treasury (in league with top Wall Street firms) is rigging the stock market on a daily basis.

Pimco Hits the Pound

Pimco's decision to pull out of gilts knocks the pound lower, and political uncertainty will only make matters worse.

In a special report released Tuesday, Biderman said the $6 trillion increase in U.S. stock-market capitalization since March can't be explained by the usual sources of funds flowing into the market -- such as mutual funds, direct retail investment, pension funds, hedge funds or foreign purchases. Read more about Biderman's theory.

The only logical explanation for the extent of the rally, he suggested, is secret buying by a government committee known colloquially as the Plunge Protection Team. It's like the dark matter that astrophysicists conjecture must be there, even if we can't detect it.

The PPT was established by President Ronald Reagan in 1988 after the 1987 stock crash to coordinate the government's response to market meltdowns. It consists of the Fed chairman, the Treasury secretary, the head of the Securities and Exchange Commission and the head of the Commodity Futures Trading Commission.

Biderman acknowledged that he had no direct evidence that the Fed and other agencies have intervened in the stock market. But he worried about what will happen to the market if the PPT has been buying and suddenly stops.

It's hard to believe that the Fed could keep such a conspiracy a secret for 20 years or more.

The Fed, of course, is a major player in the fixed-income markets, buying and selling billions in Treasurys, agency bonds and mortgage-backed securities. It's taken on hundreds of billions in assets from Bear Stearns, American International Group Inc. and many unnamed banks to which it's lent money. Presumably, all of those positions are duly reported by the central bank each week.

But the Fed has never said it is buying equities or equity futures. Doing so would likely violate the Federal Reserve's investment policies, and could violate federal law if not disclosed properly.

Aside from the legal issues, the PPT would have operational constraints. It's hard to believe that the Fed could keep such a conspiracy a secret for 20 years or more. An operation big enough to manipulate markets for months on end would be big enough to develop leaks.

With so much money at stake, anyone with direct knowledge of the conspiracy (such as a $30,000-a-year administrative aide) would be highly tempted to blow the whistle.

Yet Biderman's accusation of PPT market manipulation is another argument in favor of a complete public audit of the Fed's books. As any casual reader of this site's community boards knows, there is a widespread belief that the PPT does manipulate stock prices on a daily basis to enrich its pals and screw individual investors.

It would be useful to prove them wrong. And if they are right, the PPT should be put out of business.

--Rex Nutting, Washington bureau chief

 

[kent nickell]

Re: PPT, Pimco, fiscal policy

http://www.bloomberg.com/apps/news?pid=20601068&sid=a8y.D2wWmjUs


New York Fed Faces House Subpoena Over AIG Bailout (Update1)

By Hugh Son


Jan. 13 (Bloomberg) -- The Federal Reserve Bank of New York may be forced to deliver documents related to American International Group Inc.?s government bailout after the chairman of a House oversight committee said he would issue a subpoena.

Edolphus Towns, the New York Democrat who runs the Oversight and Government Reform Committee, said yesterday in a statement he would issue a subpoena for New York Fed records concerning the decision it made to fully reimburse AIG?s partners. Banks including Goldman Sachs Group Inc. and Societe Generale SA were among beneficiaries of AIG?s rescue, called by lawmakers a ?backdoor bailout? for financial firms.

The New York Fed, run by Timothy Geithner when AIG was rescued, had resisted since November calls to provide documents without a subpoena, Darrell Issa, the ranking Republican on the oversight committee, said yesterday in a letter. The New York Fed asked AIG to withhold the disclosure of information about the bank payments to the public, according to e-mails provided by Issa to Bloomberg News last week.

?This subpoena will provide the committee with documents that will shed light on how and why taxpayer dollars were used for a backdoor bailout,? Towns said in his statement.

Geithner, now President Barack Obama?s Treasury secretary, was asked by the oversight committee last week to testify in public hearings about what he knew of the New York Fed?s efforts to limit disclosure of the payments. Thomas Baxter, general counsel of the New York Fed, said last week that Geithner wasn?t aware of the issue because the lawyer didn?t think it merited Geithner?s attention.

Relevant Information

The New York Fed will ?work with the committee to provide relevant information as appropriate,? said Deborah Kilroe, a spokeswoman for the regulator. Late yesterday, Kilroe and an oversight committee spokesperson didn?t respond to calls asking if the subpoena had been issued.

Meg Reilly, a spokeswoman for the Treasury Department, declined to comment on whether Geithner would testify. She said last week that while at the New York Fed, Geithner ?was recused from working on issues involving specific companies, including AIG,? after he was nominated for the secretary post on Nov. 24, 2008. The e-mail correspondence between the New York Fed and AIG released last week begins on Nov. 24, 2008.

While AIG ?has been cooperative? and provided correspondence between the insurer and the New York Fed, the regulator refused to provide confidential documents, Issa said.

?Consistent with the New York Fed?s past practices, in the absence of a subpoena, we have included only public documents in our production,? current President William Dudley said in a Nov. 17 letter, according to Issa.

Barofsky?s Audit

The New York Fed directed Neil Barofsky, the government?s lead bailout watchdog, to withhold confidential documents from Issa as well, according to a letter provided by the California Republican. Barofsky wrote yesterday in the letter that his office obtained the documents as part of a November audit of the U.S. rescue of New York-based AIG. Issa had asked Barofsky to provide data from his audit for the House investigation.

?The Federal Reserve has directed us not to provide you with the documents that it has provided to us,? wrote Barofsky, the special inspector of the U.S. Troubled Asset Relief Program. ?We regret the Federal Reserve?s position in this matter.?

Geithner made the decision to pay banks 100 cents on the dollar for their AIG swaps tied to subprime mortgages even though the underlying assets had declined in value, according to Barofsky?s audit. The insurer?s bailout ?provided AIG?s counterparties with tens of billions of dollars they likely would have not otherwise received,? Barofsky wrote.

?Head on a Platter?

?Who do we hold accountable for these lost billions, and what?s wrong with the system that the New York Fed can hand out your tax dollars in these quantities and not think it?s particularly important to make sure it?s the right amount,? Issa said yesterday in an interview on Bloomberg Television. ?I think the American people deserve somebody?s head on a platter.?

AIG proposed to disclose that it fully reimbursed banks to retire the contracts in December 2008. The New York Fed crossed out the reference in a draft of a regulatory filing, according to the e-mails, and AIG excluded the language when the filing was made public Dec. 24, 2008.

The insurer was pressured by lawmakers and the Securities and Exchange Commission to disclose more details and in March released a statement listing banks and the payments they received. An AIG filing in May listed individual transactions and identified some of the securities tied to the swaps.

?No Effort to Mislead?

?Our focus was on ensuring accuracy and protecting the taxpayers? interests during a time of severe economic distress,? Baxter said last week in a statement. ?All information was in fact disclosed that was required to be disclosed by the company, showing that counterparties received par value. There was no effort to mislead the public.?

AIG?s first rescue was an $85 billion credit line from the New York Fed in September 2008. The bailout was expanded three times and is now valued at $182.3 billion. That includes a $60 billion Fed credit line, an investment of as much as $69.8 billion from the Treasury and up to $52.5 billion to buy mortgage-linked assets owned or backed by the company.

To contact the reporter on this story: Hugh Son in New York at hson1@bloomberg.net