Plunge Protection Team - Real or Imaginary?

After trading down as much as 800 points earlier today, the Dow Jones Industrial Average made a dramatic turnaround late in the day, and "only" ended up closing down 350 points.

Whenever the markets violently reverse direction after a crash, many people point to the shadowy "Plunge Protection Team" as the reason for the turnaround. People will tell you that there is a secretive government agency that is charged with stabilizing the American stock markets - that whenever there is a big, sudden drop, the "PPT" will step in to help prop up the markets.

The origins of the "Plunge Protection Team" traces back to 1988, when the Working Group on Financial Markets are created by Executive Order by Ronald Reagan. The Group was established after the stock market crash of 1987, and was given the task of "enhancing the integrity, efficiency, orderliness, and competitiveness of [United States] financial markets and maintaining investor confidence." The Working Group consisted of the Secetary of the Treasury, the Chairman of the Board of Governors of the Federal Reserve, the Chairman of the SEC and the Chairman of the Commodity Futures Trading Commission.

The name "Plunge Protection Team" was actually coined by an article that appeared in the Washington Post in 1997. Since then, the legend of the "Plunge Protection Team" has taken on a life of its own. Some have speculated that the "Plunge Protection Team" will use government funds to buy stocks or stock index futures in order to prop up ailing markets - others have pointed out that this practice would be strictly illegal, and that the "Team" may instead convince banks to buy futures to prop up the markets. This is all strictly speculation, and many would point out that these are unfounded conspiracy theories and that there is no evidence of any of this taking place.

The Working Group on Financial Markets issued a statement earlier today, pledging to help increase liquidity to the markets, preserve market integrity and protect people's bank deposits.

For many though, the trading action today was "proof" that the "Plunge Protection Team" exists, and that they helped to stabilize the markets.


Filed under: The Economic Meltdown | Stock Market Education