Congress Urged to Develop Plans for Market Crisis : Curb Panic if Stocks Dive, Comptroller General Says

Comptroller General Charles A. Bowsher, issuing an official report on October’s stock market crash, Tuesday called on Congress to order securities exchanges and federal regulators to develop emergency plans within the next 60 days for handling market crises.

“We don’t know when we will have another wave of selling,” said Bowsher, who warned that the financial system must prepare itself to dampen panic and contain potential damage.

“If markets are to function, prices must be free to move, but we should seek to minimize the extent to which a collapse in share prices feeds on itself and on failures in the trading systems,” said the official, who heads the General Accounting Office, the investigative arm of Congress.

Bowsher presented the report to the House Energy and Commerce telecommunications and finance subcommittee, which has been conducting an investigation into the Oct. 19 market slide that saw the Dow Jones industrial index plummet an unprecedented 508 points.

The panel is pondering whether to seek legislation to address problems in the securities industry.

The GAO report, unlike the findings of President Reagan’s appointed commission on the market collapse, did not advocate specific measures to prevent severe price volatility. The Brady Commission, in its report earlier this month, had called for the development of “circuit breakers,” such as exchange limits on price fluctuations or trading halts, to slow a free-fall.

Need Better Regulation

Rather, Bowsher said Congress should insist that federal regulators collaborate with the securities exchanges in fashioning a detailed plan to avert panic in the event of another plunge.

Rep. Edward Markey (D-Mass.), the subcommittee chairman, said the reports by the GAO and the Brady Commission underscore the need for more effective federal regulation. The “financial system is running at supersonic speeds while our regulatory system is still in the horse and buggy era,” Markey said. The situation demands “smart, modern and realistic regulation,” he said.

Bowsher said the October crash was the bursting of a “classic speculative bubble,” coming after prices “lost touch with the prospective earning power of the corporations whose stock was being traded. Then the bubble burst and share prices collapsed.”

The New York Stock Exchange’s operating system buckled under the pressure of the huge volume of orders to buy or sell stock, the GAO report indicated. Transaction processing equipment on the floor of the exchange became overloaded and fell 75 minutes behind. Nervous investors were unable to complete their trades until share prices plunged even more.

The stock and commodities exchanges and the government should assure that systems and computers are available to process the flood of orders accompanying a market plunge, Bowsher said. “There is an urgent need . . . to overcome these problems in automated systems,” he said.

Bowsher praised the Federal Reserve for preventing disaster by supplying the cash needed to lessen the reverberations that spread from the market panic through the financial world.

Wants Curb to Stay

Because the Fed made money available to the banks that provide loans to market trading specialists, the specialists could continue buying stocks and thereby keep prices from falling even further. Also, the funds kept many of these traders from being wiped out, which would have delivered a serious blow to their lenders.

“The first line of defense is the Federal Reserve in its role as the manager of the money supply, lender of last resort and overseer of the nation’s financial system,” Bowsher said. “The Federal Reserve appears to have carried out that role effectively in October. It supplied needed liquidity and announced that it was doing so.”

Bowsher warned, however, against allowing banks to become more involved in the securities business. Legislation now under consideration in Congress would lift many of the restrictions on such activities.

“The role of the Federal Reserve in the event of a future crisis . . . would become significantly more complex and difficult if Congress should allow greater integration of the commercial banking and securities industries,” Bowsher said. The solvency of the banks themselves might be threatened if they were caught directly in a big market decline, he said.