Did the Plunge Protection Team “Save” the Day?

We almost had another Black Tuesday today (albeit on Thursday). The stock market fell almost 10% before rallying to recover more than two thirds of the losses. As Bloomberg reported:

“The Dow Jones Industrial Average plunged almost 1,000 points before trimming its drop and ended down 347.80 points, or 3.2 percent, at 10,520.32. About $700 billion of U.S. stock- market value was wiped out in less than 10 minutes, according to data compiled by Bloomberg.”

Now the SEC and CFTC are looking at allegations of “unusual trading” to explain what happend – although it’s a good bet that Greece’s exploding debt problem played a part.

Dow Jones Industrial Average - May 6, 2010

The SEC may also want to investigate the Plunge Protection Team, or the President’s Working Group on Financial Markets (although they most certainly won’t). The group was established after the stock market crash in 1987 to make legislative and private sector recommendations. The Plunge Protection Team, a term first used by The Washington Post in 1997, is a “conspiracy theory” that the Working Group on Financial Markets uses government funds to buy stocks in the event of a crash to avoid an all out panic.

The idea, according to Jonathan Moreland, is to “intervene to put a floor under stocks whenever they are at risk of penetrating important levels of technical support, such as when the 50-day moving average slips under the 200-day moving average.” I think it’s safe to say that today’s 1000 point drop counts.

But that’s all a conspiracy theory, right? Well maybe, I can’t say for certain. But the Working Group on Financial Markets did release a statement in October of 2008 regarding the financial crisis that stated the following:

“Conditions in U.S. and global financial markets remain extremely strained.  The President’s Working Group on Financial Markets (PWG) is working with market participants and regulators globally to address the current challenges and restore confidence and stability to financial markets around the world.”

What exactly do they mean by that? The document mainly discusses the role of other government institutions and is fairly vague overall, so it’s hard to know. Regardless, it’s needless to say that our government can be just a tad bit secretive from time to time. So if the Plunge Protection Team does exist, it would mean the late recovery today is no sign that we’re out of the woods. And even if it doesn’t exist, well, losing almost 350 points isn’t anything to pop open the champagne about.

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