On the 11th of May, 2010, legislation to authorizes the government to conduct a full scale audit of the Federal Reserve’s emergency-response programs was approved unanimously by the Senate as a piece of the bank reform legislation. Sen. Bernie Sanders said that, “This makes it clear that the Fed can no longer operate under the kind of secrecy it has been operating under.”
The legislation requires the Government Accountability Office (GAO) to audit the financial institutions that borrowed from the Fed during the financial crisis. The legislation also gives the GAO leeway to conduct continuing periodic audits of the Fed’s activities.
This is basically a one time only audit. Why then was the Fed so diametrically opposed to the audit? Maybe it was because one of their “unannounced” activities that will be disclosed is their active participation in the Plunge Protection Team (PPT)?
CEO TrimTabs Investment Research, Charles Biderman claimed in January that the Fed and the Treasury (in alliance with top Wall Street brokerages such as Goldman Sachs) were creating a phony stock market rally on a daily basis. Biderman charged that normal funds flowing into the stock market simply could not account for the $6 trillion increase in U.S. stock-market capitalization. “We cannot identify the source of the new money that pushed stock prices up so far so fast,” Biderman said. Biderman continued to charge that money inflowing couldn’t come from traditional sources such as foreign investors, retail investors, hedge funds, pension funds, or corporations. Biderman said, “We know that the U.S. government has spent hundreds of billions of dollars to support the auto industry, the housing market, and the banks and brokers. Why not support the stock market as well?”
The Fed denies PPT participation or even that a PPT exists. Yet they have long been known to be a major player in the PPT. When the Fed is audited, they suddenly will be mandated to account for how the underlying funds they control were used, where the funds go each day, to whom, how much and how often. If the Fed was truly responsible for artificially propping up the stock market because of their undercover activities in the PPT, this will now be visible with the audit.
The “official” role of the Plunge Protection Team was to prevent another 1987 “Black Monday”. The PPT has the U.S. Treasury at its disposal, and can manipulate the stock markets through derivatives. Wikipedia defines derivatives as “a financial instrument – or more simply, an agreement between two people or two parties – that has a value determined by the price of something else (called the underlying).” Even as early as 2001, the Guardian announced that the Fed through derivatives was prepared to prop up Wall Street. “A secretive committee – the Working Group on Financial Markets, dubbed ‘the plunge protection team’ – includes bankers as well as representatives of the New York Stock Exchange, Nasdaq and the US Treasury. It is ready to co-ordinate intervention by the Federal Reserve on an unprecedented scale.”
Should there be evidence of panic selling, the fed supported by the banks, will buy equities from mutual funds, pension funds, and other institutional sellers.
The PPT used the U.S. Treasury assets to artificially increase the prices of commodities and stocks through derivative trading. Executive Order 12631 signed by Ronald Reagan gave the Fed the authority to establish a “Working Group” on Financial Matters. The “Working Group” consists of 1) the Chairman of the Board of Governors of the Federal Reserve 2) the Secretary of the Treasury ) 4) the Chairman of the Commodity Fuures Trading Commission 3) the Chairman of the Securities and Exchange Commission.This “Working Group” has lately been extended to include large brokerage firms such as Goldman Sachs.
In February, 2010, John Crudele of the New York Post, said “the PWG (President’s Working Group) could have encouraged the misconception that the stock market was a lot less risky than it really was. In that sense, the PWG would have been instrumental in inflating the stock bubble that burst in 2008, costing a lot of Americans their savings. The PWG operates in total secrecy. It’s been suspected that under Hank Paulson, the former chairman of Goldman Sachs who left the Treasury secretary post last year, Wall Street kingpins were brought into the circle. The reasoning: Market participants, as Paulson liked to call them, could best help fix problems. At the same time, they would be free to use these invaluable connections with the PWG for their benefit as well.”
Now for the first time ever, the Fed is going to be audited by the GAO and the Plunge Protection Team exposed. What will this mean to the stock market? Does it mean that for once the stock market will have to stand on its own, make it or not, without the artificial support of the Treasury and without their awareness, the US taxpayer. Former Federal Reserve Board member Robert Heller said that “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 (through derivatives), thereby stabilizing the market as a whole.”
The bank reform bill just passed by the Senate and House curtails usage of derivatives, the main tool used by the Fed and the PPT. “We are sending a clear message to Wall Street, the party is over. Never again will reckless behavior on the part of the few threaten the fiscal stability of our people,” said House Speaker Nancy Pelosi. “The legislation will finally protect Main Street from the worst of Wall Street.”
Could this be why the Fed strongly opposed the bank reform bill section that calls for Fed oversight?
Barbara Cohen has been a professional day trader for over 10 years. She has trained hundreds in trading Futures with Shadowtraders day trading systems. As the CIO, Barbara moderates Shadowtraders daily online trading chatroom. Before you purchase any trading software, make sure you attend Shadowtraders Monday Night Webinar, and hosted by Barbara Cohen
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