President's Working Group on Financial Markets

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The President's Working Group on Financial Markets (PWG) was created in March 1988 by Executive Order of President Ronald Reagan, specifically precipitated by the events surrounding a 508-point drop in the DJIA on Oct. 19, 1987, known as "Black Monday." Within one day, $500 billion "evaporated" from the Dow Jones index (22.6 percent of its value), with other global indexes falling in line over the remainder of the month.

As established by Executive Order 12631[1], Working Group principals in 1988 included:

• Nicholas Brady, Secretary of the Treasury (chairman of the Working Group)
• Alan Greenspan, Chairman of the board of Federal Reserve System
• David Ruder, Chairman of the Securities and Exchange Commission
• Wendy Gramm, Chairwoman of the Commodity Futures Trading Commission

Today, only the faces and issues have changed, but the members of the Group come from the same official government or quasi-governmental groups.

On Feb. 5, 2009, U.S. Treasury Secretary Timothy Geithner convened his first meeting as head of the President's Working Group on Financial Markets. Other participants in the early February of 2009 meeting were Federal Reserve Chairman Ben Bernanke, Securities and Exchange Commission Chairman Mary Schapiro, acting Commodity Futures Trading Commission Chairman Michael Dunn, Federal Deposit Insurance Corp. Chairman Sheila Bair, Comptroller of the Currency John Dugan, and Federal Housing Finance Agency Director James Lockhart.

Initial Mandate

In regard to Black Monday, the major burning issue at that time, the goal was to "recognize the goals of enhancing the integrity, efficiency, orderliness, and competitiveness of U.S. financial markets and maintain investor confidence." The group was charged with identifying and considering:

1. "The major issues raised by the numerous studies on the events in the financial markets surrounding October 19, 1987, and any of those recommendations that have the potential to achieve the goals noted above;" and
2. "The actions, including governmental actions under existing laws and regulations (such as policy coordination and contingency planning), that are appropriate to carry out these recommendations."

The Working Group also was instructed to consult with representatives of the exchanges, clearing houses, self-regulatory bodies, and major market participants to determine private sector solutions wherever possible.

At the time, a great deal of blame initially was placed at the feet of the futures exchanges by the NYSE. The impact of futures markets on the "crash" later was laid to rest as CME conducted studies with outside academic/market experts who analyzed the situation in a rational and studied manner. Shortly thereafter, circuit-breakers were instituted between futures and securities markets to forestall highly erratic market moves. They are still in effect today.

The Working Group was instructed to report to the President initially within 60 days of the Executive Order (and periodically thereafter) on its progress and, if appropriate, to add its views on any recommended legislative changes.

Though an enormous task, there was no additional compensation for the four participants' work on the Working Group. However, it was suggested that "subject to the availability of funds," the Department of the Treasury was to provide the Working Group with administrative and support services to help with the study.

Post-Black Monday Activity

The Working Group did not adjourn after the Black Monday study was completed. Among other issues covered was the near-collapse of Long Term Capital Management. In April 1999, the Working Group submitted the Working Group's report to Speaker of the House Dennis Hastert [2]. Their summary recommendations included:

• More frequent and meaningful information on hedge funds should be made public.
• Public companies, including financial institutions, should publicly disclose additional information about their material financial exposures to significantly leveraged institutions, including hedge funds.
• Financial institutions should enhance their practices for counterparty risk management.
• Regulators should encourage improvements in the risk-management systems of regulated entities.

Over-the-Counter Derivatives Markets and the Commodity Exchange Act (Nov. 1999), and Terrorism Risk Insurance (Sept. 2006) are some of the other issues tackled by the Working Group.

News

In March of 2008, PWG issued its “Policy Statement on Financial Market Developments,” which contained an analysis of underlying factors that were contributing to the continuing market turmoil. The PWG concluded that the primary trigger of events was the escalation in delinquencies associated with U.S. subprime mortgages. On Oct. 6, 2008, PWG issued a statement saying that conditions in U.S. and global financial markets remained extremely strained. PWG said it was working with market participants and regulators globally to address the current challenges and restore confidence and stability to financial markets around the world.

Resources

• National Archives, Federal Register
• Hedge Funds, Leverage, and the Lessons of Long-Term Capital Management: Report of The President’s Working Group on Financial Markets