Was there illegal manipulation of the markets yesterday? (X-posted from GD)

[Pale Blue Dot]

Yesterday was a tough day on Wall Street. The Dow spent most of the day down over 200 points, thanks to worries about the solvency of Freddie Mac and Fannie Mae. Then, at about 2:45, a rumor started that was reported on by all of the financial press:

Fed's Bernanke tells GSEs discount window open: source
WASHINGTON (Reuters) - Federal Reserve Chairman Ben Bernanke told Freddie Mac chief Richard Syron that his company and Fannie Mae could take advantage of the emergency discount window, according to a source familiar with the conversation.

The source said that Bernanke and Syron spoke by phone Thursday afternoon and the central bank chief said in that call he intended the discount window to be opened if necessary to the two largest U.S. mortgage finance companies.

The Fed declined to comment on whether it was considering opening its discount window to the government-sponsored enterprises (GSEs). A senior senator said at a press conference on Thursday afternoon that such action was among a range of possibilities under discussion to help the struggling mortgage lenders weather a crisis of confidence.
http://www.reuters.com/article/topNews/idUSWBT00938820080711

For those who need a translation, the article is saying that the Fed has promised the two companies that they could borrow any money (U.S taxpayer money) they need from the Federal Government at low interest rates.

The markets reacted with joy to this news. Within 15 minutes, they had regained over 200 points and were in positive territory. Over the course of the next 45 minutes, the Bears prevailed and the Dow closed down 128 points, still well off of the day's trading lows, and much higher than it would have been had that rumor not circulated.

There's one problem, though. As reported after the close of business, the rumor turned out to be false:

Fed Says No Talks With Fannie, Freddie About Loans
July 11 (Bloomberg) -- The Federal Reserve has not had any discussions with Fannie Mae and Freddie Mac about access to direct loans from the central bank, Fed spokeswoman Michelle Smith said.

``Federal Reserve officials are following the situation closely,'' Smith said in a telephone interview today. ``However, there have been no discussions'' with the companies ``about access to the discount window,'' she said.

Shares of the two largest U.S. mortgage-finance companies plummeted this week on concern they don't have enough capital to offset losses from the mortgage meltdown. The discount window offers direct loans to commercial banks at an interest rate that's now 2.25 percent, a quarter point above the Fed's benchmark rate.
http://www.bloomberg.com/apps/news?pid=20601087&sid=a79GKfbIbW10&

Some person or persons deliberately planted false information yesterday in a blatant attempt to manipulate the markets. This person had to have been well connected enough for Rueters, Bloomberg and others to treat him/her as a trustworthy source.

This could have been done for a variety of reasons: Someone connected with Freddie and or Fannie may have wanted to prop up their share prices, which had been off up to 50% during the day; or someone connected to our government may have wanted to pare the losses in the overall market before the weekend, and before the announcement of the failure of Indymac Bank (which also happened after the close of business).

Whatever the reason, a lot of money was lost yesterday by people and institutions that bought into a false rumor that was reported as legitimate by "reputable" news sources. I doubt that we've heard the last of this story, and I believe that investigations are in order.

[Warpy]

1. They're desperate to keep things looking normal until November

which means shifting the same pile of money back and forth and trying to convince the chumps (us) that it's all good money and that everything is going to be saved by the gummint, nothing to see here, move along and go shopping.

The problem is that they're having to do this at least weekly, that the bad news keeps getting worse, and that people are getting nervous enough to sit home instead of shopping. Finally.

Whether or not they'll be able to keep enough of the economy pasted together until November to allow their incumbents in Congress to be reelected is anybody's guess.

[Pale Blue Dot]

2. I think the evidence shows that it's now happening hourly.

I really can't see this circus lasting much longer - but they'll try, bless their hearts.

[Warpy]

3. You mean that in the southern sense, I'm sure.

:evilgrin:

[ozymandius]

4. The numbers during the 3pm hour were swinging wildly.

At one point the Dow fell 30-40 points per minute. Recover to unchanged in five minutes, then plummet. To me, it seemed as though two huge forces were wrestling against each other: the Fed against the will of everyone else. In years of watching the markets - I've never seen anything like it.

[lib2DaBone]

5. The President's Working Group On Markets...

.. known as the Plunge Protection Team (PPT). They gotta keep the wheels on at least until after the Olympics and hopefully until November.

[Pale Blue Dot]

6. UPDATE: It turns out the Fed lied in the 2nd statement.

Well it turned out that the Friday denial by the Fed was a lie, as the announcement this evening is that the Fed board approved discount window lending to Fannie and Freddie. How anyone has an confidence in any statement of the government, especially the Fed, when they are willing to just flatly lie is beyond me. Paulson is also asking for a bigger line of credit with the Treasury for the GSEs, and authority to buy equity in them. As Gretchen Morgenson says in the NYT, “Bill Coming Due“.

http://alamedalearning.com/reality/2008/07/13/they-lie-like-a-rug/


Here's the full statement from Paulson:


July 13, 2008
HP-1079

Paulson Announces GSE Initiatives

Washington, DC-- Treasury Secretary Henry M. Paulson, Jr. issued the following statement:

Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies. Their support for the housing market is particularly important as we work through the current housing correction.

GSE debt is held by financial institutions around the world. Its continued strength is important to maintaining confidence and stability in our financial system and our financial markets. Therefore we must take steps to address the current situation as we move to a stronger regulatory structure.

In recent days, I have consulted with the Federal Reserve, OFHEO, the SEC, Congressional leaders of both parties and with the two companies to develop a three-part plan for immediate action. The President has asked me to work with Congress to act on this plan immediately.

First, as a liquidity backstop, the plan includes a temporary increase in the line of credit the GSEs have with Treasury. Treasury would determine the terms and conditions for accessing the line of credit and the amount to be drawn.

Second, to ensure the GSEs have access to sufficient capital to continue to serve their mission, the plan includes temporary authority for Treasury to purchase equity in either of the two GSEs if needed.

Use of either the line of credit or the equity investment would carry terms and conditions necessary to protect the taxpayer.

Third, to protect the financial system from systemic risk going forward, the plan strengthens the GSE regulatory reform legislation currently moving through Congress by giving the Federal Reserve a consultative role in the new GSE regulator's process for setting capital requirements and other prudential standards.

I look forward to working closely with the Congressional leaders to enact this legislation as soon as possible, as one complete package.

http://www.ustreas.gov/press/releases/hp1079.htm