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Fed to prop up Wall St

Shadowy committee ready to pour billions into stock markets to avert shares meltdown

Special report: Terrorism in the US

Richard Wachman and Jamie Doward Sunday September 16, 2001 The Observer

The US Federal Reserve and Wall Street's powerful investment banks are preparing to spend billions of dollars to support the US stock market, which opens this week for the first time since last Tuesday's terrorist attacks on New York and Washington. A secretive committee - the Working Group on Financial Markets, dubbed 'the plunge protection team' - includes bankers as well as representatives of the New York Stock Exchange, Nasdaq and the US Treasury. It is ready to co-ordinate intervention by the Federal Reserve on an unprecedented scale.

The Fed, supported by the banks, will buy equities from mutual funds and other institutional sellers if there is evidence of panic selling in the wake of last week's carnage.

The authorities are determined to avert a worldwide slump in share prices like the crashes of 1987 or 1929. Investment banks and their broking subsidiaries are to block short-selling by speculators and hedge funds by making it hard for them to obtain prices on favourable terms.

'Everyone is eager to avoid "contagion", where prices fall rapidly as investors react lemming-like to a falling index,' said one banker.

In addition, US regulators are prepared to ease rules that prevent companies from buying their own stock.

The 'plunge protection team' was established by a special executive order issued by former President Ronald Reagan in 1989. It is known to include senior bankers at leading Wall Street institutions such as Merrill Lynch and Goldman Sachs. It has acted before, in the early Nineties and during the 1998 LTCM hedge fund crisis.

Whether coordinated action by the US authorities and banking institutions will be sufficient to avert a large-scale sell-off on Wall Street this week remains to be seen.

Tony Jackson, director of UK equity strategy at investment bank ING Barings, believes there may be an emotional tide of support for Wall Street this week, but that it will be shortlived. He said: 'Some people are talking about a "patriotic rally" that could lift the Dow by 1,000 points on reopening. I don't think it will be that high, but it will certainly go up, perhaps several hundred points.

'But long term, the trend will still be down, perhaps 10 per cent from where it opens. Many companies will cut earnings forecasts now.'

Khuram Chaudhry, equity strategist at Merrill Lynch, believes that Wall Street could fall by as much as 10 per cent. 'You have to remember that things did not look that good before the attack on the World Trade Centre. There were already signs that American consumer confidence was deteriorating. I don't think people are now going to rush out to take foreign holidays or crowd the shopping malls.'

John Llewellyn, economist at Lehman Brothers, is worried that markets may prove disorderly, despite the best efforts of the authorities.

'There is a degree of synchronisation between the three major economies. The US and Europe are weaken ing in tandem, while Japan is in the doldrums. In the early Nineties Japan was in better shape. The global economy may end up in a worse condition than 10 years ago.'

But there are optimists too. Sonja Gibbs, chief equity strategist at Nomura International, believes 'the economic fundamentals will take a turn for the better in 2002'.

Robin Aspinall, equity analyst at broker Teather and Greenwood said: 'The Americans will want to show that the stars and stripes still fly over Wall Street.'

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-- Anonymous, September 17, 2001