The word plunge is very close to us… It brings visions of markets collapsing, deep despair, depression-era soup kitchens and market operators raking it or breaking it. “Plunge” not only has direct ties to the stock market but also to some of the greatest sea-changes that occurred in America, whether they were initiated after the depression in 1930 or after President Reagan signed the Executive Order 12631 on March 18, 1988 creating what has come to be known as the Plunge Protection Team.
A more recent plunge -the one that happened on May 6th, 2010- has surprisingly displayed some of the same characteristics as the other plunge related events. That is, it has gone unexplained. And just like other unexplained events, it has led to a proliferation of conspiracy theories that we can read on the press today.
Given the lack of market regulations that existed in the 1920′s it is not a surprise that individuals may have colluded to create some of the greatest fortunes in the history of Wall Street. However, the word collusion may be somewhat strong if we could extrapolate ourselves to that era. Fact is that no one will ever be able to prove whether Jesse Livermore manipulated markets, engaged in insider trading or planted articles in specific magazines in order to profit from market moves. But even in the case all this really happened, it did under a set of rules that were completely different to the ones that regulate markets today. Little of the behaviour of the old days operators could have been considered illegal. In fact, Warren Buffett himself -according to some paragraphs from The Snowball- also benefitted early in his career from developing close ties to management -receiving privileged information- before opening positions in their companies.
Plunges are mysterious in that they originate at specific nodes and propagate very quickly throughout the system in an ever expanding mode. Because many get hurt during a plunge, a normal response is to look for culprits and rationalize its inner workings. One of these culprits has been the executive order 12631 signed by Ronald Reagan authorizing the creation of a committee to “enhance the integrity, efficiency, orderliness, and competitiveness of [United States] financial markets and maintain investor confidence” after the crash of October 19, 1987. The group came to be known as the PPT or plunge protection team and ever since that day, theories have abound and have been in circulation as to the particular role this group plays in up or down markets. Interestingly, the working group was created only to provide recommendations and solutions to the events surrounding the collapse of markets in 1987, but somehow popular belief managed to turn these goals into more attractive myths and urban legends where dark pools of money operating through trading desks under the scrutiny of the CIA control the fate and flow of money.
The point is that events such as the 1987 crash, or the flash crash of May 6th, 2010 or even the plunging of markets blamed on Livermore in 1930 simply cannot be overlooked by governments given the massive amount of repercussions they generate at all levels, both to individuals as well as society itself. In this light, the EO 12631 was a natural response to those events and none of its wording can be construed as a green light to manipulate markets.
That is not to say that as a result of specific investigations, the obvious conclusion is that intervention is the most appropriate tool under certain scenarios. But interventions by governments have existed throughout history and no other era can teach us more about it than the time we are living. Nevertheless, deeming interventions as a natural -and perhaps welcomed- response in times of crisis cannot stop a large group of determined individuals from creating and disseminating biased stories about what is occurring or what they think it is occurring or what they think we should think about what is occurring. Credit goes to the really clever out there who come up with some of the most amusing stories that brighten our day. Thus, we hear about the “fat finger” wrecking havoc, or some infamous glitches constipating digital pipes or the added digit error of a zero that represents another billion or the black boxes taking over in a high frequency fashion and a terminator-like style…
Popular imagination has no end except when one considers the severity and magnitude of the events: the flash crash was the second largest point swing -1,010.14- and the biggest one-day point decline -998.5- on an intraday basis in Dow Jones Industrial Average history. Just like frogs in a rainy day, on May 6th conspiracists came out of the woods with a plethora of theories while no facts could be singled out. One of the most charismatic personalities among the conspiracists is Bob Chapman. In his own words, the problem “…was the introduction of the Working Group on Financial Markets by Ronald Reagan under an executive order to keep order in plunging markets, called the Plunge Protection Team, euphemistically. What they’ve done is they distorted the whole thing, and they’re using it to rape everybody, financially. And they manipulate markets 24 hours a day, all over the world!”
Widespread is an understatement when referring to the scope of the dissemination of these theories. More likely, they have become ingrained in the average citizen to the point that anyone referring to the PPT is convinced about their existence without the slightest shred of doubt, as this comment from a Yahoo article reflects. “…plunger team wasting trillions of our tax dollars to prop up this rigged rally since march 2009 with illegal goldman/jp morgan high frequency black box algorithm trading. Before massive inflation hits and the trillions in fiat money that the banksters stole from the tax payers become worthless, they will need to pull their stolen money out. Huge stock market crash, s&p 666.” Interesting choice of words: plunger, rigged, fiat, banksters… I would add: nuff said!
A less known fact that I would like to share today to wrap up my thoughts is that Jesse Livermore was not the only Boy Plunger making the rounds in Wall Street. Before him, Emil Mosbacher was also nicknamed the boy plunger in relation to his numerous and sometimes wild operations on the street, as per some of the articles published by the New York Times at the time.
And somehow, I believe neither of them will be the last.