Proxmire Offers Own Proposal to Prevent Crash : Irked by Regulators’ Lack of Plans for Legislation

Senate Banking Committee Chairman William Proxmire, (D-Wis.), chastised federal financial market regulators Thursday for failing to come up with recommendations for legislation to prevent another stock market crash and offered his own plan for creating a powerful new federal oversight committee.

“We’ve waited five months and we’ve done nothing about the worst crash in the history of our country,” Proxmire complained when regulators showed up all but empty-handed at a hearing called to review specific legislative proposals from the Federal Reserve Board, the Securities and Exchange Commission and the Commodity Futures Trading Commission.

The three agencies had promised to make their legislative recommendations by March 4, but Thursday their leaders said any specific proposals will have to await action by a newly formed White House Working Group on Financial Markets. CFTC Chairman Wendy L. Gramm said her agency “does not believe legislative changes are needed” and neither of the other two agency heads went beyond previous recommendations.

Denounced by Regulators

Federal Reserve Board Chairman Alan Greenspan said the reason no legislative recommendations have been made is that there are “no things pressing for action. I don’t think any of us believe there is any specific thing which has to be changed immediately and can be changed immediately.”

Proxmire accused the Reagan Administration of using the new “working group” to stall congressional efforts to do something about the crash, saying: “The White House wants to let the clock run down without legislation.”

Proxmire introduced his own market reform bill at the hearing, only to have it denounced as too far-reaching by the three regulators.

Proxmire’s plan would set up an Intermarket Coordination Committee consisting of the chairmen of the Fed, the SEC and CFTC. Presenting a united front against the Proxmire plan, the agency heads said the committee would not only coordinate, but also dictate to the regulatory agencies, superseding their regulatory authority.

The bill--co-sponsored by seven other senators--calls for the committee to set up “harmonized margin requirements across marketplaces” in response to complaints that low down payment requirements in stock index futures markets encourage excessive speculation and make the markets more volatile.

Proxmire said, “it makes no sense whatsoever that the Federal Reserve Board should have margin authority over securities, but no governmental agency whatsoever should have responsibility for overseeing margin requirements with respect to futures.”

Greenspan objected that under Proxmire’s plan, the heads of the SEC and CFTC could vote--over the opposition of the Fed chairman--to raise margins on stock purchases. Greenspan warned that the Fed chief then could be left in the awkward legal position of being told to do something that he and the majority of the Federal Reserve Board opposed.

“You can’t give authority to a new agency without taking it away from the agency that already has it,” added Gramm, whose husband, Sen. Phil Gramm (D-Tex.), is a member of Proxmire’s committee.

Gramm, Greenspan and SEC Chairman David S. Ruder catalogued a series of steps taken by the federal agencies and the self-regulatory stock and futures exchanges to improve coordination and communication among the stock, futures and options markets.

Ruder said the margins on stock index futures remain the most intense subject of disagreement among federal regulators. He said the CFTC and the futures industry are resisting SEC urgings that margin requirements on stock index futures be raised.

Ruder Stands Firm

Currently, speculators need to put up $500,000 in cash to trade $1 million worth of stocks, but can make a $1-million bet in stock index futures with only $133,000 cash. The presidentially appointed Brady Commission said this disparity encourages speculation in options rather than in investment in underlying stock issues.

Ruder repeated the SEC’s position that it should be given either shared authority over stock index futures or direct responsibility for regulating futures contracts to buy baskets of stocks.

Greenspan, who has previously said his agency does not want power over futures margins, refused to take a stand in the margin debate. In his testimony, he said there are two reasons for setting margins. One is to be sure that investors put up enough money to cover their losses and protect the markets against defaults, and Greenspan said that current margin requirements seem to have minimized market losses during the crash.

In addition, margins might also be used to control speculation, Greenspan said, but he stopped short of endorsing that use.

His comments seem to sum up the stalemate that has developed over reform of the financial regulatory system. “The appropriate objective of margin regulation is an issue that needs to be considered carefully.” he said.