Is The U.S. Government Buying Stocks?

As I pointed out in December 2008, Nouriel Roubini wrote the month before that the government might buy U.S. stocks:

The Fed (or Treasury) could even go as far as directly intervening in the stock market via direct purchases of equities as
a way to boost falling equity prices. Some of such policy actions seem
extreme but they were in the playbook that Governor Bernanke described
in his 2002 speech on how to avoid deflation.

Given that Roubini was previously a senior adviser to Tim Geithner, he probably knows what he's talking about.

Now, Charles Biderman, CEO of TrimTabs, argues that the government may, in fact, have been buying stocks to prop up the stock market.   Given that 25% of the top 50 hedge funds in the world use TrimTabs' research for market timing, it is a credible source.

Specifically, Biderman writes:

As far as we know, it is not illegal for the Federal Reserve or the
U.S. Treasury to buy S&P 500 futures.  Moreover, several officials
have suggested the government should support stock prices. 

For
example, former Fed board member Robert Heller opined in the Wall
Street Journal in 1989, “Instead of flooding the entire economy with
liquidity, and thereby increasing the danger of inflation, the Fed
could support the stock market directly by buying market averages in
the futures market, thereby stabilizing the market as a whole.” 

In a
Financial Times article in 2002, an unidentified Fed official was
quoted as acknowledging that policymakers had considered buying U.S.
equities directly, not just futures.  The official mentioned that the
Fed could “theoretically buy anything to pump money into the system.” 

In an article in the Daily Telegraph in 2006, former Clinton
administration official George Stephanopoulos mentioned the existence
of “an informal agreement among the major banks to come in and start to
buy stock if there appears to be a problem.”

Mike Whitney - in commenting on Biderman's essay - adds another juicy quote:

Consider the comments of former Clinton advisor George Stephanopoulos
who verified the existence of the PPT in an appearance on Good Morning
America on Sept 17, 2000. He said:

"What I wanted to talk about
for a few minutes is the various efforts that are going on in public
and behind the scenes by the Fed and other government officials to
guard against a free-fall in the markets . . . perhaps the most
important the Fed in 1989 created what is called the Plunge Protection
Team, which is the Federal Reserve, big major banks, representatives of
the New York Stock Exchange and the other exchanges and they have been
meeting informally so far, and they have a kind of an informal
agreement among major banks to come in and start to buy stock if there
appears to be a problem. They have in the past acted more formally . .
. I don't know if you remember but in 1998, there was a crisis called
the Long term Capital Crisis. It was a major currency trader and there
was a global currency crisis. And they, with the guidance of the Fed,
all of the banks got together when it started to collapse and propped
up the currency markets. And, they have plans in place to consider that
if the markets start to fall."

Biderman continues:

This type of intervention could explain some of the unusual market
action in recent months, with stock prices grinding higher on low
volume even as companies sold huge amounts of new shares and retail
investors stayed on the sidelines. For example, Tyler Durden of
ZeroHedge has pointed out that virtually all of the market’s upside
since mid-September has come from after-hours S&P 500 futures
activity.

If we were involved in a scheme to manipulate the
stock market, we would want to keep it in place until after the “wealth
effect” put a floor under the economy of, say, three quarters of
positive GDP growth.  Assuming the economy were performing better, then
ending the support for stock prices would be justified because a stock
market decline would not be so painful.

Whitney summarizes another of Biderman's arguments:

"We
cannot identify the source of the new money that pushed stock prices up
so far so fast.  For the most part, the money did not from the
traditional players that provided money in the past."

Huh?  So,
this vast infusion of liquidity--which helped the banks to avoid
painful deleveraging--did not come from the usual suspects?
That's
right. According to Biderman, the money did not come from (a) companies
("which were a huge net seller") (b) retail investor funds,  (c) retail
investors, (d) foreign investors ..., (e) pension funds [or (f) hedge
funds].

Has it happened? Has the government or it's primary dealers really purchased stocks?

I
don't know, but Bernanke's refusal to open up the Fed's books - and the
lack of accountability and transparent accounting standards for the big
banks - isn't helping to dispel suspicions.

And if the stock market tanks again in 2010, it might add
circumstantial evidence to a short-term attempt to prop up the market
by the government.

Comments

[kurt_cagle]

I guess one of the big questions I have with this (which most here believe implicitly to be true) is whether this "willful suspension of disbelief" that the PPT has engendered here will in fact translate to real market sustainability given sufficient belief in the system. After the LTCM collapse in 98, the PPT float of the market did push the tech bubble popping back by two years, though I've often had my suspicion that Greenspan's move after 9/11 to drop interest rates to below the rate of inflation was held in place for so long thereafter because it provided additional liquidity to the banks in order to help them recover from LTCM and the Asian Flu faster, rather than being done to stimulate re-emploment.

Of course, I'm also reasonably sure that the housing bubble and the Ownership Society that Bush pushed in 2004 was a quid-pro-quo between the Fed and the Bush White House to keep those rates low in order for him to more readily finance the Iraq war, but perhaps I"m just being paranoid about that.

Either way, I suspect that the ability of the PPT to use the market to stimulate the economy this time around is a non-starter - this is not an ordinary secular recession, but a structural one, and the tools that were used in 1998 will work only so long as people actually believe in fairies. Unfortunately, there's not a lot of clapping going on, save perhaps at Goldman Sachs.

[Chopshop]

great comment, kurt.

the PPT doesn't sprinkle magic pixie dust over the ES and voila.  why / how ??  because they actually do have both rhyme and reason when and where "they" act.  its called technical analysis and is a very naughty term / concept as per most folk. 

fantastic highlight / post, George Washington !  thank you for it.

[El Hosel]

"Is The U.S. Government Buying Stocks?"

   Do we really have to ask the question at this point?  Maybe it depends on what your definition of "is" is.

Buying stocks and selling gold ( gold they don't have?), still gold is up 300% over stocks this decade.

[Anonymous]

Kurt:

Like your thinking, as I see similar things is say housing, every time they do something that is supposedly in interest of homeowners to stop foreclosures etc...it all seems overwhelming in the interest of the banks, if some few owners were helped a tidbit, so be it, that's how we will sell it...but it usually means US taxpayers spend a fortune to fix a problem in a hugely inefficient way that really could have been addressed with a few, cheap, structural fixes. Like making banks/securities take principal cuts on mortgages that are severely underwater...this of course would leave them with more principle than if they incurred cost of several years no-payments and cost take house and re-sell but the banking system would rather take a pittance interest payment and pretend they still had reserves than admit they are really insolvent.

It sure seems like this whole scenario has benefited GS et al greatly also, give them liquidity when no one else has it, wipe out their competition, give govt contracts to retail money, and then also, goose the market for them right when everyone else is hunkering down.

I do think even the govt is limited in long-term how much they can fight market forces...but it makes since that really, many market indicators peaked around September at similar levels to historic bear market rallies and the very slow topping process since then, as TD pointed out with no volume, all futures manipulation,could certainly be a short term prop up. Markets are behaving close enough to natural patterns in non-manipulated historic markets to not be definitive, but since I thought SnP topped in Sept, I say everything since then is manipulation!

[illyia]

Kurt, nice comment.

Just wondering if fairies are necessary... Now that we all know what the boyz have known all along (maybe accepting as a "given" is a better perspective), will not PPT involvment become a matter of mass understanding?

And, if the "consumer" comes to realize that his own tax dollars are being used to artificially raise stock prices...

Even worse, the boyz no longer can hide behind "the newz" because it wasn't the story, it was The Fed.

'course, that doesn't mean they won't pump to infinity, either.