June 2004


by Robert Bell, Ph.D.

This paper was presented on 24 June 2004, at the conference ”Towards a world with out violence", Fundacio per la pau, Barcelona, for the session ”Realitat I evolucio de la industria military”.

In Spring of 2003 Ken Pedeleose, an analyst at the Pentagon department intended to control program costs at federal contractors, was startled to find that the overhead costs of virtually every airplane that Lockheed Martin sold the U.S. Air Force would soon be skyrocketing in price. Pedeleose had personally researched the massive cost increases on the C-130J transport, which would go up from $1.193 billion in 2003 to $8.352 billion by 2006. Documents widely circulated by others in the Pentagon showed that costs for the F-16 program would jump from $3.49 billion in 2004 to $6.66 billion in 2005 and then on to $14.84 billion the next year. The F/A-22, F-117, and many other programs showed similar vaults in costs.

In a 23 June 2003 letter to the Chairman of the U.S. Senate Finance Committee, Charles Grassley, Pedeleose gave the reason: Lockheed Martin "has to make up hundreds of millions of dollars in their pension funds that were invested in the stock market."

Although Pedeleose wrote the Senator that "prudent investing may have offset some of this loss," he had actually stumbled on something having nothing whatever to do with "prudent" investing. He discovered what may well be the major way the U.S. government selectively and discreetly funnels iceberg sized chunks of cash into U.S. and world stock markets. Those who actually place the money for the government—"invest" is perhaps not the right word—have little reason to complain; unlike all other stock market investors, who are at risk even if only as fund managers, the government contractors’ pension funds operate with a money back guarantee. Literally, gains are kept, losses are socialized.

Most people undoubtedly believe that U.S. stock markets—the Nasdaq and the New York Stock Exchange—are essentially free markets operating under something approaching laissez faire. In fact, the Lockheed Martin evidence proves that there is a material amount of federal tax money selectively invested on a risk free basis. One can make the assumption that the fund managers who place this money, and who work for companies which by and large live or die from federal contracts, act with complete independence of possible federal pressure, and that they do not act for careerist reasons. Given the other widely publicized and spectacular abuses which have come to light with regard to mutual fund and pension fund managers (some of which are discussed below), this assumption seems unreasonably trusting. Otherwise, Pedeleose had found a major slice of the world’s biggest, continuing, stock market manipulation scheme—a legal one, hidden in plain sight.

The Lockheed Martin matter came to light the same way unpleasant truth about business matters nearly always does—something went wrong and various officials felt obliged to put something in writing about it. In this case what went wrong was the long grinding slide in the stock markets beginning in March 2000. Many major companies, such as Lockheed Martin and General Motors, found that their pension funds had dropped below minimum requirements imposed by federal regulation.

Most companies have had to solve the problems themselves, i.e., find the money to top up the funds. General Motors did so by issuing over $13 billion in corporate bonds in early June 2003, just as the interest rate on such bonds was at its lowest. Even though the company borrowed under extremely favorable terms, they did not get the money on terms as favorable as those given Lockheed Martin and other major federal contractors (including GM in its government sales). Lockheed Martin and other federal contractors literally operate under a law unto themselves, known as U.S. Government Cost Accounting Standards.

Lockheed Martin itself described how this law, with its money back guarantee on bad pension fund investments, works. The disclosure is in its December 31, 2002 annual report: "The total funding requirement for our pension plans under U.S. Government Cost Accounting Standards (CAS) in 2002 was $87 million. CAS is a major factor in determining our funding requirements and governs the extent to which our pension costs are allocable to and recoverable under contracts with the U.S. Government. For 2003, we expect our funding requirements under CAS to increase substantially. This amount is recovered over time through the pricing of our products and services on U.S. Government contracts, and therefore is recognized in our net sales."

The last sentence is particularly interesting. It means if Lockheed Martin loses pension fund money on the stock market, the company ultimately increases the size of its revenue by adding the losses onto its prices to the federal government. Impressionable stock buyers could get the idea that the company is doing something right, rather than realizing that the company’s pension fund had simply done something very wrong in the stock market.

Lockheed Martin overwhelmingly receives its revenue from one customer, the federal government. Thus it is a window into the pension fund activities of all the other federal contractors, such as Boeing and General Electric, the pension fund activities of which are obscured because they also have large slices of nongovernmental revenue. Major companies often have a number of different pension funds covering different categories of employees. The detailed data on these and other pension funds is usually impossible to obtain because in 1994, during the inflation of the last bubble, Congress passed a law establishing secrecy on individual pension plans [I]. Thus the pension liabilities of a company will usually be stated in one consolidated number in its annual report. However, some of the pension funds may be for divisions that do business exclusively or almost exclusively with the federal government and thus operate under the special law for federal contractors, CAS. And the other funds may be able to allocate a percentage of their losses to CAS reimbursement.

Lockheed Martin was in 2002 the largest Pentagon contractor. It’s pension plan which received the risk free—to Lockheed Martin--money held $25.5 billion in 2001, of which $12.4 billion was in U.S. stock and $4 billion in foreign stocks.The latter figure is significant. It means that through these federally subsidized pension plans, U.S. taxpayer money is selectively invested in stock markets world wide.

This raises interesting questions. On 29 July 2003, Le Monde published an article on foreign ownership of French companies traded on the Paris exchange. This had grown from 10% in 1985 to 43.7% in 2003. But specifically who were the foreign owners? That was generally impossible to determine. The exchange clearing houses such as Euroclear in Paris, which according to the article were the best sources for who owned what, would only give information on the location of the bank in which the title to the stocks was recorded. The head of investor relations at a major European military contractor, EADS, said, "I can’t know precisely who are our American stockholders, because many of them have entrusted their stock to European depositary banks."

U.S. government insured investments in foreign stock would help explain why foreign stock markets so often change direction and follow the U.S. markets after the opening of the U.S. markets each day. The same pension funds may be doing the buying at the same time on both sides of the Atlantic.

Lockheed Martin is only one of hundreds of Pentagon contractors, nearly all of them operating entirely or in part under CAS. Add to this the contractors for NASA, the Departments of Energy; Homeland Security; Education; Health and Human Services; etc. and we are soon looking at numbers big enough—if used with options and at the right time of day--to act as catalysts, provoking rallies or turning around declines.

There is clear evidence that some of the federal contractors have put their pension money into bubble stocks. For example, in June 2002, Northrop Grumman, which that year was the third largest Pentagon contractor in terms of value of Pentagon contracts awarded (the rankings vary a bit from year to year), put one of its pension fund managers, Pilgrim Baxter & Associates, on notice that their $212 million small-cap growth portfolio was not performing as well as they would have liked. At the time the Nasdaq bubble was hissing air, so a growth portfolio doing badly is hardly surprising. What is surprising, however, is that the pension fund kept pumping new money, or keeping old money, in the sagging fund. The Kansas Public Employees Retirement System had terminated the Pilgrim fund earlier in the year.

As theLockheed Martin evidence shows, pension funds sometimes hold mutual funds. Thus the performance of pension funds can depend on that of mutual funds. At the height of the Nasdaq bubble, $3.8 trillion was held in 8,482 U.S stock mutual funds. But a mere one hundred of these held over 40% of the total, $1.7 trillion [II]. By January 2004, the industry had become so concentrated that the 100 largest stock funds held 47% of the stock fund assets [III]. In March 2003, the Chairman of ICI, the fund industry trade group, testified to Congress that only 497 funds held nearly three quarters of the total assets in all stock mutual funds [IV]. These numbers are sufficiently small now, and were sufficiently small at the height of the bubble, to raise legitimate questions of coordinated buying. A small number of funds could have enough clout to spark up a rally, hoping to lure in outside small investors, or even other fund managers, who thought they were following the momentum.

This blindingly obvious concentration is the essential point of U.S. stock markets. Although ignored by nearly every stock market commentator, it has been implicitly acknowledged by Claude Bebear, the PDG (CEO) of AXA, one of the biggest insurance companies on Earth. He wrote in his 2003 book Ils vont tuer le capitalisme (They are going to kill capitalism):

"… today, shareholders are relegated to the role of quasi-spectators. The small shareholders that are now called ‘individual investors’ know that they have little weight. All together, they only represent a small percent of capital because the investments of households is more and more in the form of mutual funds, pension funds (fonds communs de placement) or life insurance funds. The shareholders today are thus the institutional investors." [V] [1]

Just in case someone misses the point, Bebear, in charge of one of the world’s biggest stock portfolios, says: "We are no more, in effect, in a world that one reads in the economic text books, with innumerable investors of various characterizations, choosing each in his own way the stocks that he’ll put in his portfolio; the results of their millions of decisions generating a sort of changing market equilibrium, but a stable one. The truth is that since several years, the reasoned investment on a stock has almost disappeared in favor of more and more mechanical behavior." [VI] [2]

Bebear discusses at some length the role of indexes such as the Nasdaq 100, concluding: "Today, programmed trading and index trading constitute the heart of the market." [VII] [3]

But index trading also makes market manipulation relatively easy. Market manipulators could buy index options directly, and in huge quantities. Even the indexes themselves are relatively easy to manipulate. To move the index one merely has to move a handful of stocks. In March 2003, just seven stocks made up 35% of the Nasdaq 100 index: Microsoft, Intel, Qualcomm, Amgen, Cisco Systems, Dell, and eBay. Move them and one moves the index.

This is particularly significant considering the financial cartels at the heart of Wall Street. There are 23 firms that deal directly with the Federal Reserve, buying and selling U.S. Treasuries. A number of these firms are also simultaneously: investment banking firms, which launch stock onto the stock market; retail brokerage firms, which sell these same stocks to the investing public; mutual fund firms which invest in the stock market and in which small investors can invest; pension fund management firms which run the pension funds of major companies as well as those of public organizations and unions, (the cartel’s pension fund managers can then stuff the pension funds with their own cartel’s mutual funds as well as the stock of the companies for which they do investment banking); and market maker firms which support stocks by buying when no one else does. The same giant firm which is intimately tied to the Federal Reserve can launch a stock, sell it to the public, stuff it into mutual funds and pension funds and support the stock when it starts to fall.

All of this has created vast conflicts of interest on the part of fund managers which Eliot Spitzer, the New York Attorney General, and others have detailed. On 1 July 2002, at the height of the Enron, WorldCom, Global Crossing, and other scandals, Spitzer, along with the New York State Comptroller, the California State Treasurer and the North Carolina Treasurer issued a joint statement concerning this conflict of interest. They also announced some reforms which they claimed would help to reduce conflicts of interest. These officials said:

"Money management firms that handle investments for public pension funds also handle investments for corporate 401(k) plans. This creates a potential conflict of interest, because the money managers may feel pressured to add stocks of their corporate 401(k) clients into the pension fund portfolios, even if it is not in the best interest of the pension fund. Similarly, money manager research analysts may be reluctant to provide objective research advice, knowing that adverse recommendations may cause their firms to lose corporate clients. Other potential conflicts of interest exist with respect to those money management firms that are subsidiaries of investment banking firms." [VIII]

California’s plan had lost $565 million on WorldCom alone. New York’s plan had lost $300 million [IX]. These were defined benefits plans, so the states were on the hook; they were legally obligated to pay out the specified pensions. State taxpayers had to make up the money.

Bizarrely, most of these conflicts of interest don’t matter to the pension fund managers for federal contractors. They can simultaneously advance their personal careers and devastate the funds they manage; all material damage will be subsequently made-good by the federal government under CAS without anyone really noticing. But couldn’t these fund managers act as sirens for all others? That is precisely the problem.

Wouldn’t these fund managers themselves need to be managed? Wouldn’t they need some system of coordination? Perhaps not, since they could simply keep an eye on each other, operating the same way as do the participants in an emergency telephone tree at a large organization. However, if a stock markets manager were required, and occasionally it might be, it does exist, at the highest level, reporting directly to the President of the United States. To prevent a rerun of the stock market crash of 19 October 1987, President Ronald Reagan signed, on 18 March 1988, Executive Order 12631. This established the President’s Working Group on Financial Markets, occasionally referred to, on the rare occasions it is discussed at all, in the business press as "The Plunge Protection Team." It is composed of the Secretary of the Treasury, the Chairman of the Board of Governors of the Federal Reserve System, the Chairman of the Securities and Exchange Commission (SEC), the Chairman of the Commodities Futures Trading Commission, or the designees of each of the above. The Secretary of the Treasury, or his designee is the chairman. The current designee, Brian C. Roseboro, is a former options trader.

Plunge Protection almost certainly intervened on 4 April 2000, when the Nasdaq 100, the index of the top 100 high tech companies on the Nasdaq, initially dropped to 3525.44. It then suddenly rebounded like someone at the end of a bungee jump line, shooting up 13% from the bottom to close at 4034.17. The net loss for the day was only about 1.4%. Someone paying little attention would have thought nothing happened, but many who watched the day closely may have suffered from cardiac arrest. According to market rumors, two major brokerage houses, Goldman Sachs and Merrill Lynch bought high priced futures options ("calls"). When market participants saw this massive buying of calls at high prices, they themselves turned around and started buying. The idea of acting in this way had first been proposed by Federal Reserve member Robert Heller in a 1989 Wall Street Journal article: "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."

Are there any other suspicious days? One is 15 July 2002, a day when the market fell dramatically, but then both the Dow Jones Industrial Average (Dow) and the Nasdaq composite mysteriously shot up at about 2:30. The time itself is not unusual since the markets are often mysteriously saved at around that time. The saves have become so common that a few commentators have talked about them, for example John Crudele of the New York Post, who appears to think the Plunge Protection team is responsible: "Washington is going to have to perfect its market rigging technique. Make it a little more subtle. Perhaps start at 2:15 p.m. in the trading day rather that always at 3 p.m." [X]

However, on 15 July 2002, President George W. Bush gave a speech intended to reassure the markets. Briefing.Com, whose Live Market coverage is on the Finance page of one of the most widely watched internet sites, YAHOO!, gave an account of what happened: "A wild session for the market averages that saw the Dow plunge roughly 440 points or 5% at its nadir this afternoon and then surge higher into the close. The very impressive turnaround off the low of nearly 4.8% even topped the intraday reversal seen the day that the index bottom[ed] last September…The market also took little positive out of the President’s midday speech. There did not appear to be a specific catalyst for the turnaround but the Dow did retest support at the closing low from last September 21….There was talk of heavy buying in the S&P futures related to re-balancing but clearly once the recovery began to take shape, market participants jumped on the momentum [4] bandwagan.[emphasis added]"

All the elements were there—a crashing market, inexplicable recovery, heavy buying of future options which acted as a catalyst, even a direct Presidential interest in the turnaround.

So, the staggering concentration of mutual funds, the cartel structure of the financial services industry, the concentrated power of index trading or of selective investments in a handful of stocks within the index—all combine to produce the utter impotence of the individual investor. Most important, these elements in combination give tremendous influence to federal contractor pension fund managers who receive risk free tax money to pump into stock markets worldwide. These fund managers can start pumping up bubbles, and can keep pumping them whenever they start to lose air. The actions of these federal contractor pension fund managers, and perhaps other giant fund managers, can then be managed, when necessary, by the Plunge Protection Team.



Robert Bell, Ph.D. is Professor of Management and Chairman of the Economics Department, Brooklyn College, N.Y. He is the author of seven books, including: Beursbedrog (The Stock Market Sting), De Arbeiderspers, Amsterdam, 2003; Les peches capitaux de la haute technologie (The Capital Sins of High Technology), Seuil, Paris, 1998; Impure Science, Wiley, N.Y., 1992


[1] "…aujourd’hui, les actionnaires sont cantonnes das un role de quasi-spectateur. Les petits actionnaires – que l’on appelle aujourd’hui << actionnaires individuals >> savent qu’ils ont peu de poids. Tous ensemble, ils ne representent que quelques pour cent du capital car l’investissement des ménages est de plus en plus sous forme de Sicav, de fonds communs de placement ou d’assurance vie. Les acctionnaires, aujourd’hui, ce swont donc les investisseurs institutionnels." (p. 187)

[2] "Nous ne sommes plus, en effet, dans le monde que l’on decrit dans les manuels d’economie, avec des investisseurs innombrables aux determinismes varies, choisissant chacun a sa maniere les titres qu’il va mettre en portefeuille – la resultante de leurs millions de decisions generant une sorte d’equilibre de marche hangeant, mais stable ! La verite, c’est que, depuis quelques annees, l’investissement raisonne sur une valeur a presque disparue au profit de comportements de plus en plus mecaniques." (p. 122)

[3] "Aujourd’hui, la gestion mathematique et la gestion indicielles constituent le Coeur du marche." (p. 137)

[4] Momentum buying means buying for the sole reason that others appear to be buying , thus the stock price keeps rising.


[I] "Pension reserve: what’s enough?" The New York Times, 22 June 2003, Section 3, p. 1

[II] Jon Waggoner, "Fund fees can be confusing," USA Today, 11 July 2000.

[III] 16 March 2004 email from Brian Reid, Deputy Chief Economist, Investment Company Institute

[IV] Testimony of Paul Haaga, Chairman, Investment Company Institute, to House of Representatives Committee on Financial Services, Subcommittee on Capital Markets, 12 March 2003

[V] Claude Bebear, Ils vont tuer le capitalism, Plon, Paris 2003, p. 186

[VI] Claude Bebear, Ils vont tuer le capitalism, Plon, Paris 2003, p. 122 (translated from the French by R. Bell)

[VII] Claude Bebear, Ils vont tuer le capitalism, Plon, Paris 2003, p. 137

[VIII] www.osc.state.ny.us/press/releases/jul02/070102.htm

[IX] "WorldCom collapse cost state pension funds millions," usatoday.com/money/telecom/2002-06-27-worldcom-pension-funds.htm

[X] The New York Post, 13 October 1997, "Market rigging: short-term fix—long term disaster"