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Wall St. and Business Wednesdays: E-Letter To Rep. Maxine Waters, Rep. Melvin L. Watt, Rep. Julia Carson, Rep. Gregory W. Meeks, Rep. William Lacy Clay, Rep. David Scott, Rep. Al Green, Rep. Emanuel Cleaver II, Rep. Gwen Moore, and Rep. Keith Ellison Re: Holding Hearings On 'The Plunge Protection Team'

I hope that over the past two weeks that you and your staff have had time to at least start to review the material we published two weeks ago at regarding The President’s Working Group On Financial Markets, aka, “The Plunge Protection Team.” I also hope that you took note of the fact that respected New York Post Business reporter, Mr. John Crudele, around a year ago, filed a Freedom Of Information Act (FOIA) request with the United States Department Of Treasury. Thus far, although he has filed and re-filed his request, the Treasury Department has taken no positive action in handling it.

In essence, from my vantage point, this whole matter revolves around two issues: 1) the nature of The Working Group on Financial Markets – what it does, how it does it, and what the record of its meetings and operations reveal and 2) the handling of Freedom Of Information Act (FOIA) requests by the Department of Treasury.

On both matters I believe that only a hearing held by your committee – The House Committee On Financial Services – can properly investigate this in a manner that will shed the most light on what seems to be a very shadowy and elite group.

Should you decide to have such a hearing I believe that the following individuals should be interviewed, called to testify, and even subpoenaed, if necessary:

- Mr. Wesley T. Foster, The U.S. Department of The Treasury’s Acting Assistant Secretary for Management, and the Chief Freedom of Information Act (FOIA) Officer.

- Mr. Hugh Gilmore, Director, U.S. Department of Treasury’s Disclosure Services.

- Treasury Secretary Hank Paulson, who is a member of The President’s Working Group On Financial Markets. He is the former head of Goldman Sachs, one of the 21 Primary Dealers utilized by the Federal Reserve in its open market transactions.

- Federal Reserve Chairman Ben Bernanke. Last year, when questioned by your colleague, Congressman Ron Paul, he acknowledged the existence of the President’s Working Group On Financial Markets and indicated that he believed their records are kept primarily by the staff of the Treasury Department.

- Mr. George Stephanopoulos, former adviser to President Bill Clinton who, while a guest on Good Morning America on September 17, 2001, stated that 'The Plunge Protection Team' had plans in place if the stock market falls.

- Mr. Paul Tudor Jones, the billionaire hedge fund manager, who reportedly is consulted by the President’s Working Group On Financial Markets.

- Mr. Robert Heller, former Member of The Federal Reserve Board Of Governors from 1986 to 1989 and who authored a controversial opinion editorial in The Wall Street Journal advocating that The Federal Reserve pump money directly in the stock market to affect its value.

- Mr. Peter Fisher, former executive vice president of the Federal Reserve Bank of New York; former head of the bank's markets group; former Manager of the System Open Market Account for the Federal Open Market Committee (FOMC); and former Undersecretary Of Domestic Finance For The Treasury Department.

It is my understanding that the privately-owned Federal Reserve does not fall under the Freedom Of Information Act (FOIA), but the Federal Reserve Bank of New York should have some relevant records that it could decide to make available to you.

In addition to these important individuals, you might wish to assemble a special research team that can look into market transactions that took place on certain days. You should consider April 4, 2000 when the Dow was driven up 350 points within half an hour, and February 27th and 28th of 2007 when some peculiar trading patterns lifted the stock market, after the Dow fell 416 points.

I hope that you will consider what I have presented thus far as a primer. I hope it serves as a catalyst for your investigation and action.

I would be disappointed to learn that the same individuals who have been so adamant about getting to the bottom of ‘who knew what and when’ when the subject is war, would be disinterested when the matter is the American economy.

Transparency, checks and balances, and accountability are not partisan issues, nor should concern over them be reserved for certain subjects.

It just may turn out, in days to come, should the stock market fall dramatically, that we all will wish we had paid closer attention to this little-known group that has lived through four U.S. Presidents – two Republican and two Democrat.

If you won’t accept responsibility for oversight of The Plunge Protection Team, who will?

I am available should you have further questions.


Cedric Muhammad

P.S. Here is the article written by former Federal Reserve Governor Robert Heller who served from August 19, 1986 to July 31, 1989. Just three months after resigning, he wrote the following opinion editorial for The Wall Street Journal which outright advocates that the Federal Reserve directly buy futures in the stock market.

Have Fed Support Stock Market, Too
By Robert Heller
27 October 1989
The Wall Street Journal
(Copyright (c) 1989, Dow Jones & Co., Inc.)

The stock market correction of Oct. 13, 1989, was a grim reminder of the Oct. 19, 1987 market collapse. Since, like earthquakes, stock market disturbances will always be with us, it is prudent to take all possible precautions against another such market collapse.

In general, markets function well and adjust smoothly to changing economic and financial circumstances. But there are times when they seize up, and panicky sellers cannot find buyers. That's just what happened in the October 1987 crash. As the market tumbled, disorderly market conditions prevailed: The margins between buying bids and selling bids widened; trading in many stocks was suspended; orders took unduly long to be executed; and many specialists stopped trading altogether.

These failures in turn contributed to the fall in the market averages: Uncertainty extracted an extra risk premium and margin-calls triggered additional selling pressures.

The situation was like that of a skier who is thrown slightly off balance by an unexpected bump on the slope. His skis spread farther and farther apart -- just as buy-sell spreads widen during a financial panic -- and soon he is out of control. Unable to stop his accelerating descent, he crashes.

After the 1987 crash, and as a result of the recommendations of many studies, "circuit breakers" were devised to allow market participants to regroup and restore orderly market conditions. It's doubtful, though, whether circuit breakers do any real good. In the additional time they provide even more order imbalances might pile up, as would-be sellers finally get their broker on the phone.

Instead, an appropriate institution should be charged with the job of preventing chaos in the market: the Federal Reserve. The availability of timely assistance -- of a backstop -- can help markets retain their resilience. The Fed already buys and sells foreign exchange to prevent disorderly conditions in foreign-exchange markets. The Fed has assumed a similar responsibility in the market for government securities. The stock market is the only major market without a market-maker of unchallenged liquidity or a buyer of last resort.

This does not mean that the Federal Reserve does not already play an important indirect role in the stock market. In 1987, it pumped billions into the markets through open market operations and the discount window. It lent money to banks and encouraged them to make funds available to brokerage houses. They, in turn, lent money to their customers -- who were supposed to recognize the opportunity to make a profit in the turmoil and buy shares.

The Fed also has the power to set margin requirements. But wouldn't it be more efficient and effective to supply such support to the stock market directly? 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, thus stabilizing the market as a whole.

The stock market is certainly not too big for the Fed to handle. The foreign-exchange and government securities markets are vastly larger. Daily trading volume in the New York foreign exchange market is $130 billion. The daily volume for Treasury Securities is about $110 billion.

The combined value of daily equity trading on the New York Exchange, the American Stock Exchange and the NASDAQ over-the-counter market ranges between $7 billion and $10 billion. The $13 billion the Fed injected into the money markets after the 1987 crash is more than enough to buy all the stocks traded on a typical day. More carefully targeted intervention might actually reduce the need for government action. And taking more direct action has the advantage of avoiding sharp increases in the money supply, such as happened in October 1987.

The Fed's stock market role ought not to be very ambitious. It should seek only to maintain the functioning of markets -- not to prop up the Dow Jones or New York Stock Exchange averages at a particular level. The Fed should guard against systemic risk, but not against the risks inherent in individual stocks. It would be inappropriate for the government or the central bank to buy or sell IBM or General Motors shares. Instead, the Fed could buy the broad market composites in the futures market. The increased demand would normalize trading and stabilize prices. Stabilizing the derivative markets would tend to stabilize the primary market. The Fed would eliminate the cause of the potential panic rather than attempting to treat the symptom -- the liquidity of the banks.

Disorderly market conditions could be observed quite frequently in foreign exchange markets in the 1960s and 1970s. But since the member countries of the International Monetary Fund agreed to the "Guidelines to Floating" in 1974, such difficulties have been avoided. I cannot recall any disorder in currency markets since the 1974 guidelines were adopted. Thus, the mere existence of a market-stabilizing agency helps to avoid panic in emergencies.

The old saying advises: "If it ain't broke, don't fix it." But this could be a case where we all might go broke if it isn't fixed.

Wednesday, June 6, 2007

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