New York Post-October 12, 1998
MARKET-RIGGING: SHORT-TERM FIX, LONG-TERM DISASTERBy JOHN CRUDELE
THANK goodness someone has finally decided to rig the stock market.
With the impeachment process in motion and Ken Starr confirming my
exclusive of a few weeks ago that there are more impeachable offenses
being looked into, someone had better take action to rig the market
before the political crisis turns into an economic one.
My bet on the rigger is Washington, probably through something that the
Washington Post last year called the Plunge Protection Team. That's a
group of financial big shots from the Treasury, the Fed and Wall Street
whose stated job is to keep the financial markets from collapsing - as
evidenced by Thursday's dramatic turnaround and Friday's 167-point
gain.
But the prop under the stock market could just as easily be coming from
Wall Street firms, with the blessing and assistance of the Federal
Reserve. That's not so preposterous, considering these very firms -
with
the Fed's blessing - had to step in a few weeks ago to protect the
financial system from the mess created by the Long-Term Capital hedge
fund.
But there are right ways to rig the market and there are wrong ways.
There are also legal and illegal ways.
As it turns out, the right ways, or the effective ways, at the present
moment also happen to be the illegal ways.
The wrongheaded and ineffective way would be to continue to try to
correct the current stock market downturn through things like interest
rate cuts.
First, I'll tell you how the stock market is being rigged. Then I'll
tell you what's even more important - what's going to happen in
Washington and why you should get out of stocks before this rigging
adventure leads to disaster.
Here's some history:
Back in 1989 a Fed governor named Robert Heller proposed rigging the
stock market. Heller had just left the Fed when he gave a speech
suggesting that the central bank should step in and take direct action
to keep the stock market from collapsing.
The Fed had taken action before. It made sure there was enough
liquidity
during the crash of '87 to keep the system going. It may have even
strong-armed a few banks into propping up the market. And it has often
lowered interest rates at opportune times.
But Heller's idea was different.
He wanted a more direct approach, especially when the bond and currency
markets were becoming uncontrollable (like they are these days).
Heller believed that in an emergency, the Fed should start buying stock
index futures contracts until it managed to pull stocks out of their
nosedive.
Essentially, whenever there is heavy buying of these futures contracts
it causes the underlying stock market to rise. The futures contracts
can
be bought cheaply; they are highly leveraged so you get more bang for
each buck, and they eliminate the need for a rigger to purchase, say,
all 30 stocks that make up the Dow. Heller explained that the process
was simple. And it is.
The trouble is, the government never has had authority to rig the stock
market.
But there are indications that this sort of rigging works, at least for
awhile. Hong Kong authorities rigged their stock market last month when
selling pressure became too great. That government did it openly and
proudly.
How do I know the market is being rigged?
I really don't. But I am very suspicious.
Take last Thursday, when the Dow was down more than 200 points and the
House was passing a resolution to investigate the President of the
United States. Exactly when the debate was going on in Congress, the
S&P
500 futures contracts shot up in price like someone needed a market
rally awfully bad.
A noble effort. Maybe even a necessary one. But let's keep this to
ourselves. If the rest of the world found out what was going on they
might want to find some other place to invest.
The U.S. is likely to need a lot more market riggings in the months
ahead as more of Starr's findings come to light.
The bottom line?
Washington is going to have to perfect its market rigging technique.
Make it a little more subtle. Perhaps start at 2:35 p.m. in the trading
day rather than always at 3 p.m.
And do it in a hurry - the next big explosion in the Starr
investigation
of the President will probably come soon after the elections.
But if you're an investor who doesn't trust the government to pave your
street much less protect your portfolio, it's time to skedaddle.