Federal Reserve Chairman Paul A. Volcker said Wednesday that he now agrees with Congress that secondary and "fringe" dealers in government securities should be regulated to help forestall financial panics like those that disrupted thrift institutions in Ohio and Maryland earlier this year.
Volcker warned a House Energy and Commerce subcommittee that excessive regulation would hamper the market and drive up interest costs. But he said the Fed has changed its policy and now believes that all dealers in government securities should be subject to "a more formal process of registration, inspection and regulation."
"We are taking the position: twice burned, once shy," he added. "We thought a couple of years ago that a formal regulatory structure was not needed. We have now shifted our position."
Volcker proposed that all dealers be registered to enable the Securities and Exchange Commission to screen out those who had violated securities laws in earlier dealings.
In addition, he called for "minimum guidelines" for record keeping and auditing, backed up by authority for regular inspection of dealers' books. And he urged some regulation of market practices, especially regarding capital-debt ratios and repurchase agreements.
The Fed now closely oversees the 36 "primary" dealers through which it directly buys and sells about $800 billion in Treasury securities a year. But several hundred secondary dealers, so far unregulated, also deal in the securities, and, in recent years, the collapse of some of them has severely disrupted markets.
In 1982, for instance, the collapse of Drysdale Government Securities sent shock waves through Wall Street and threatened major losses to Chase Manhattan Bank. The failures this spring of ESM Government Securities of Florida and New Jersey-based Bevill, Bresler & Schulman Asset Management Corp. were associated with the S&L; crises in Ohio and Maryland.
The subcommittee on telecommunications, consumer protection and finance, which Volcker addressed Wednesday, has been developing legislation to regulate the shadowy secondary market.
New Treasury Regulations
Last week, panel Chairman Timothy E. Wirth (D-Colo.) received assurances from SEC Chairman John S. R. Shad and Acting Assistant Treasury Secretary John J. Niehenke that the Treasury is prepared to write new regulations and the SEC to enforce them.
Volcker said Wednesday that the proposal was "acceptable" so long as the Federal Reserve is closely involved.
He made it clear, however, that he would prefer to have the rules drawn up by a special "self-regulatory organization" with members drawn from both primary and secondary securities dealers and including public-interest representatives. He said such a procedure would provide more continuity and be less bureaucratic than if the Treasury were chiefly responsible.
Wirth and Rep. John D. Dingell (D-Mich.) expressed sympathy for Volcker's suggestion--if only because they both also expressed strong skepticism that Treasury would impose new regulations on the market.
A draft bill under review by the subcommittee would place rule-making authority in the hands of the special board that currently regulates the market in tax-exempt municipal bonds and similar securities. But Volcker strongly objected to that suggestion, saying the Municipal Securities Rulemaking Board's "traditions and methods of approach are inappropriate to the government securities market" and would almost certainly overregulate it.