Brady Panel Stint an Eye-Opener for Kirby

Robert G. Kirby, who races sports cars on weekends, knew last November when he was named the lone West Coast member of the Presidential Task Force on Market Mechanisms that he would have to race back and forth between coasts to attend its deliberations.

What the longtime Los Angeles money manager didn’t know then was the unprecedented enormity of the crisis that the task force would uncover.

“It really never occurred to me that we were teetering on the brink of some kind of disintegration of the financial system,” Kirby said, echoing the panel’s conclusion that the near-collapse of the U.S. financial markets on Oct. 20, the day after Black Monday, underscores the need for regulatory reform to prevent a recurrence.

The severity of that near-collapse was the biggest revelation that Kirby, chairman of Capital Guardian Trust Co. in Los Angeles, picked up as a member of the task force. The panel, which was headed by Nicholas F. Brady, chairman of Dillon, Read & Co., was the most prestigious of several groups commissioned to study the events surrounding the October market crash.

In findings released last Friday, the Brady Commission said a handful of institutions dominated the massive selloff that precipitated the 508-point meltdown on Oct. 19 and the near-shutdown the following day, when a number of banks reportedly balked at extending credit to cash-strapped brokerage firms.

The commission recommended several steps, including the Federal Reserve Board taking on the role of “supercop” to oversee financial market regulation, and the coordination of “circuit breakers” such as trading halts on stock and price limits on futures.

The commission has been criticized by some congressmen and others for not recommending more drastic steps, such as bans on computerized program trading or shifting regulatory authority over stock index futures to the Securities and Exchange Commission from the Commodity Futures Trading Commission. It also has taken heat for not being more specific in its recommendations and for not naming the institutions whose actions precipitated the crash. Some skeptics predict that most of the panel’s recommendations will never be implemented.

But the silver-haired, 62-year-old Kirby said in an interview Tuesday that the commission was intentionally “moderate” in its recommendations, backing away from specifics “so that people wouldn’t argue over small points and divert attention from our broader concerns” that the U.S. financial markets were really one market that needed better regulatory coordination.

Such a contention was seconded by Howard M. Stein, chairman of the Dreyfus Corp. mutual fund company and another Brady Commission member. In an interview with The Times on Tuesday, he too said the panel backed away from specifics because it would obscure its primary message: that the crash was so severe that measures must be implemented to prevent a recurrence.

“Maybe I’m pretty naive and innocent, but I still have the expectation that something will happen,” Kirby said. “The event was so scary, yet our solutions were so moderate. . . . If there is any common sense in government, most of the recommendations should be acted on.”

The panel’s most controversial recommendation was that the Fed supervise regulation of the financial markets. Fed officials have shown a less-than-warm response to this proposal, fearing it would politicize the agency and reduce its independence.

However, in defending the proposal, Kirby likened Fed Chairman Alan S. Greenspan to “a housemother of a fraternity house who is responsible for cleaning up the mess but has no voice in what they put in the punch bowl.

“The Fed is in the best position to understand the credit relationships and to understand the international institutions” in global markets, Kirby said. “They understand the intermarket mechanisms. The SEC knows stocks and the CFTC knows futures, but no one knows a great deal about the other’s bailiwick.”

Dreyfus’ Stein agreed, noting that “you have to have someone with the sense of the globalization” of the securities markets. “The Fed has the stature to move in those areas.”

Kirby gave the proposal on the Fed a “50-50” chance of being implemented. “If the White House or Congress said, ‘We want you to do this,’ they would do it. They realize they have the best qualifications to do it.”

However, Kirby said, the recommendation most critically in need of implementation is the panel’s call for greater disclosure of the ultimate buyers and sellers in securities trades. Currently, brokerage houses generally are required to report only that they acted as agents for unnamed buyers and sellers.

The Chicago futures exchanges had very good records of who bought and sold contracts, but “it was a monumental task to find out who the buyers were and who the sellers were on the NYSE. It’s like you needed James Bond to get the job done. Luckily, we had a few James Bonds,” Kirby said.

If the big institutions whose massive selling precipitated the crash “had known in advance their actions would be known to the public, the vast majority wouldn’t have done it. Their activities would have looked socially irresponsible.”

Why then, did the commission not name those institutions? “If we named names, we knew we’d get no cooperation, or damn little cooperation, from those people,” Kirby replied, adding that the panel was more interested in investigating market mechanisms and systems than in pointing fingers. In fact, he said, the panel’s staff did not even tell the names of the institutions to task force members, so as to eliminate pressure on the members to release the names.

Kirby, however, confirmed that the institutions involved in the crash included five of the biggest vendors of so-called portfolio insurance, a controversial hedging strategy involving the sale of stock-index futures that contributed to a chain reaction of lower and lower stock prices on Oct. 19. Those five are Wells Fargo Investment Advisers in San Francisco; Leland O’Brien Rubinstein Associates in Los Angeles; Bankers Trust in New York, and units of Aetna Life & Casualty in Hartford, Conn., and of J. P. Morgan & Co. in New York.

Talk of ‘Buyers Strike’

Kirby could not name other players, but sources on the commission have confirmed that they also include prominent New York money managers George Soros of the Quantum Fund and Michael Steinhardt of Steinhardt Partners.

Kirby said his experience on the task force has spurred him to try to organize a “buyers’ strike” against several Wall Street brokerage firms--including Goldman Sachs, Salomon Bros., Morgan Stanley and Merrill Lynch--that engage in computerized program trading and index arbitrage for their own profit rather than on behalf of clients. Such trading strategies, which seek to profit from price discrepancies between stock index futures and their underlying stocks, have been widely blamed for contributing to recent market volatility.

“We’ve already said to such firms (that) ‘We will do as little business with you as we can,’ ” if they persist in such trading, Kirby said. In addition to Capital Guardian Trust, which manages $15 billion in assets, at least two other major institutions are considering such a boycott, he said.

Kirby, a Republican who is not active politically, said he was pleased by the apolitical nature of the commission’s proceedings and how well its members got along. All of the task force members, and its 40-member staff, served on a pro bono basis, their services donated by their employers, which ranged from the Harvard Business School to the McKinsey & Co. management consulting firm. The most unpleasant part of the nine-week assignment, Kirby said, was the eight round-trip coast-to-coast plane rides.

No Radical Changes

“I’ve got more Advantage miles than you can count,” he joked, referring to American Airlines’ frequent-flyer program.

But besides the buyers’ strike and growing requests to speak before institutional investors, Kirby said the task force experience has not changed his life much. He will continue to ski and race sports cars on weekends, a hobby that he pursues seriously enough to have recently won the national championship of the Sports Car Club of America. His racing team also once finished ninth in the 24 Hours of Le Mans.

Being on the Brady Commission “will look great on my resume,” Kirby said. “But at this point in my career, that’s not that important.”