Plunge Protection Team
The Washington Post
By Brett D. Fromson
Washington Post Staff Writer
Sunday, February 23, 1997; Page H01
It is 2 o'clock on a hypothetical Monday afternoon, and the Dow Jones industrial average has plummeted 664 points, on top of a 847-point slide the previous week.
The chairman of the New York Stock Exchange has called the White House chief of staff and asked permission to close the world's most important stock market. By law, only the president can authorize a shutdown of U.S. financial markets.
In the Oval Office, the president confers with the members of his Working Group on Financial Markets -- the secretary of the treasury and the chairmen of the Federal Reserve Board, the Securities and Exchange Commission and the Commodity Futures Trading Commission.
The officials conclude that a presidential order to close the NYSE would only add to the market's panic, so they decide to ride out the storm. The Working Group struggles to keep financial markets open so that trading can continue. By the closing bell, a modest rally is underway.
This is one of the nightmare scenarios that Washington's top financial policymakers have reviewed since Oct. 19, 1987, when the Dow Jones industrial average dropped 508 points, or 22.6 percent, in the biggest one-day loss in history. Like defense planners in the Cold War period, central bankers and financial regulators have been thinking carefully about how they would respond to the unthinkable.
An outline of the government's plans emerges in interviews with more than a dozen current and former officials who have participated in meetings of the Working Group. The group, established after the 1987 stock drop, is the government's high-level forum for discussion of financial policy.
Just last Tuesday afternoon, for example, Working Group officials gathered in a conference room at the Treasury Building. They discussed, among other topics, the risks of a stock market decline in the wake of the Dow's sudden surge past 7000, according to sources familiar with the meeting. The officials pondered whether prices in the stock market reflect a greater appetite for risk-taking by investors. Some expressed concern that the higher the stock market goes, the closer it could be to a correction, according to the sources.
These quiet meetings of the Working Group are the financial world's equivalent of the war room. The officials gather regularly to discuss options and review crisis scenarios because they know that the government's reaction to a crumbling stock market would have a critical impact on investor confidence around the world.
"The government has a real role to play to make a 1987-style sudden market break less likely. That is an issue we all spent a lot of time thinking about and planning for," said a former government official who attended Working Group meetings. "You go through lots of fire drills and scenarios. You make sure you have thought ahead of time of what kind of information you will need and what you have the legal authority to do."
In the event of a financial crisis, each federal agency with a seat at the table of the Working Group has a confidential plan. At the SEC, for example, the plan is called the "red book" because of the color of its cover. It is officially known as the Executive Directory for Market Contingencies. The major U.S. stock markets have copies of the commission's plan as well as the CFTC's.
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Securities and Exchange Commission Approves New Circuit Breaker Levels
FOR IMMEDIATE RELEASE
April 10, 1998
Washington, D.C., April 10, 1998 -- The Securities and Exchange Commission late yesterday approved new circuit breaker trigger levels for one-day declines in the Dow Jones Industrial Average (Dow) of 10%, 20% and 30%. The new levels, which go into effect April 15, 1998, were proposed by the securities exchanges and the NASD to modify their rules regarding coordinated, cross-market trading halts during periods of extraordinary market volatility.
The new trigger levels will be converted into point values at the beginning of each calendar quarter, using the average closing value of the Dow for the previous month. The new levels also better reflect the original intent of the circuit breakers: that they only be triggered during a severe one day decline of historic proportions. The Commodities Future Trading Commission also approved substantively identical rules for the stock index futures markets.
The rule changes also modify the late-in-the-day trading halt procedures for circuit breakers.
- Ten Percent Decline: The halt for a 10% decline will be one hour if triggered before 2:00 p.m. EST. At or after 2:00 p.m. EST but before 2:30 p.m. EST, the halt will be for one-half hour. At or after 2:30 p.m. EST, the market will not halt at the 10% level and will continue trading.
- Twenty Percent Decline: The halt for a 20% decline will be two hours if triggered before 1:00 p.m. EST. At or after 1:00 p.m. EST but before 2:00 p.m. EST, the halt will be for one hour. If the 20% trigger value is reached at or after 2:00 p.m. EST, trading will halt for the remainder of the day.
- Thirty Percent Decline: If the market declines by 30%, at any time, trading will be halted for the remainder of the day.
Previously, the circuit breakers were triggered when the Dow Jones Industrial Average declined 350 points (thirty minute halt) and 550 points (one hour halt) from the previous day's close.
Something Is Rotten Behind Economic Scene
INSIGHT MAGAZINE
Jamie Dettmer
December 7, 2001During the first week of December, Bush officials started briefing journalists to the effect that the White House was aware that it needed to focus more attention on America's blighted economy.
The underlying thrust of what they were saying was that this president wouldn't get caught out like his daddy did in 1992 and appear aloof from the everyday concerns of Americans struggling with harsh economic times. In short, there will be no embarrassing photo opportunities at supermarkets featuring a president apparently bewildered by checkout scanning technology. But the timing of the economy briefing from Bush aides was interesting, coming as it did on the back of the abrupt collapse of Enron Corp., the energy trader with close ties to Bush and whose executives were singled out to assist in developing the president's energy policy.
Of course, it doesn't take a political genius to see that the White House hardly can ignore the bleak economy. For all the debate about whether this is a Clinton recession or a Bush one, come 2004, if the good times aren't rolling, the buck is going to stop with the guy sitting in the Oval Office.
That isn't the only reason the Bush White House is feeling nervous about possible political fallout from the economy. There are signs ordinary Americans are beginning to get mad. Not so much because of the recession but because of the disturbing things the recession is throwing up about Wall Street, investment banks, the big auditing firms and the politicians they are close to, at least in terms of chucking campaign dollars at them and securing favorable legislation.
The evidence that a head of steam is building is coming in many forms. For one, the National Association of Securities Dealers is on track to receive a record number of formal complaints filed by investors against brokers and analysts: By the end of the year the total likely will exceed by a thousand the record of 6,058 set in 1995.
The current onslaught of complaints has Wall Street worried. And as more details emerge of dubious practices, ranging from conflicts of interests to bad investment advice, from lack of due diligence by brokerages and securities firms to churning by brokers determined to build up fees, Wall Street has cause for anxiety.
In 1998 Americans were taken aback at the revelations of crony capitalism in the Tiger economies of Asia: the kickbacks, nepotism, corruption and lack of transparency in banking and dealing. Now it's "physician cure thyself," as the recession is highlighting serious crony capitalism here.
The Enron bankruptcy is one example of the existence of something rotten. Why didn't auditors and investment banks raise an early alarm about the massive off-the-books debt of Enron? Where was the Securities and Exchange Commission?
The second example is the dot-com mania of the late 1990s and the cronyism and lack of due diligence that now is beginning to emerge in the allocation of shares in initial public offerings (IPOs). When the dot-com bubble burst investors faced huge portfolio losses. And up to a point they had only themselves to blame for taking risks and boosting the notion that the market would go up forever.
But did the securities firms and brokerages and underwriters talk up the market in 1998 and 1999 when they knew problems were looming? Did they in fact do even worse?
On Dec. 4, dozens of high-powered lawyers gathered on the 48th floor of One Penn Plaza in New York City to discuss how to deal with nearly 1,000 class-action lawsuits filed against the underwriters of IPOs. Virtually all the major securities firms are defendants in these suits: Morgan Stanley, Citibank, Merrill Lynch, Goldman Sachs, Credit Suisse First Boston, etc. Chairing the meeting was Mel Weiss, the New York attorney Wall Street fears the most. His New York law firm helped recover $800 million for investors in the investigation of junk-bond king Michael Milken.
Known for his tenacity and bare-knuckled approach, Weiss says the NASDAQ boom wasn't just the result of "irrational exuberance" but a glaring case of market manipulation and fraud by the underwriters, who used kickback schemes, secret profit-sharing agreements with selected clients and price-fixing to inflate the value of IPOs.
Weiss argues that the underwriters required select clients who wanted IPO share-allocations to buy a certain number of shares after launch at predetermined prices, "not for investment purposes but to generate momentum." That process is known as "laddering." The smell of gold was intense. "Greed has always been a growth industry, but it became a supergrowth industry," Weiss says.
He adds: "Investors were blinded by an illusion that was very carefully orchestrated by the investment banks. Our investigations are revealing that the securities firms knew there was a problem. People from the investment banks are telling us that they would sit around the table and ask, 'Why the hell are we bringing this or that company public? This looks like it is a dead-bang nothing.' And then they would walk into the next room to the analysts and they would give a glowing report."
Some Wall Street lawyers estimate that it will take $6 billion to $10 billion to settle the class-action lawsuits. The cost could be even higher in terms of the credibility of the investment banks and brokerages. And pressure is likely to grow for some major reforms to stop the cozy relationships that underpinned the dot-com mania.
Jamie Dettmer is a senior editor at Insight magazine.
Why P/E Matters for the Dow
"The market hasn't corrected at all for the sad truth that the New Economy's underlying assumptions turned out to be mistaken, and we're back in the same Old Economy with uniquely cruel business cycles, booms and busts. Just to give you an idea of how far out of historical whack the stock market is, consider this: Profits rise over the long term by about 4% a year, with immense deviations around the mean. If the earnings depression ends tomorrow and profits rise at 4% a year again, it will take roughly 14 years (not months, years) for the Dow's P/E to reach historical norms -- even if the Dow doesn't rise 1 point in those 14 years. Or, to look at it another way, the Dow would have to fall by about half for it to resume historical P/E behavior."
"One of the best bankers in this country, John Medlin, told me that these are the worst credit standards he had ever seen in 40 years of banking. If we have a downturn in the economy, these debt burdens could present a real crisis for us."
U.S. Senator Lauch Faircloth (R-NC) - Hearing on the Federal Reserve's First Monetary Policy Report to Congress for 1998 - February 25, 1998.