Fed Urged to Curb Salomon’s Dealings : Wall Street: The head of the House Banking Committee wants the firm’s status as a primary dealer of government securities suspended.

The chairman of the House Banking, Finance and Urban Affairs Committee on Monday urged the Federal Reserve Board to suspend Salomon Bros. from acting as a primary dealer in government securities.

In a letter to Federal Reserve Board Chairman Alan Greenspan, Rep. Henry B. Gonzalez (D-Tex.) criticized the Fed for failing to take tough action against Salomon in response to the scandal surrounding the firm’s activities in the government securities auctions.

Salomon’s top officers resigned earlier this month after acknowledging that they had known about trading abuses for months before reporting them to federal regulators.

A Fed spokesman said the central bank had received the letter from Gonzalez but had no further comment. On Aug. 18, the Treasury Department moved to suspend Salomon from government auctions but quickly reversed itself after the firm’s new chief executive, investor Warren E. Buffett, pleaded for leniency from Treasury Secretary Nicholas F. Brady.

The Federal Reserve Bank of New York, which handles government securities auctions, is still dealing with the securities firm. Salomon is under investigation by at least four different federal agencies, including the Federal Reserve.

In the wake of the scandal, however, Salomon’s role has been limited to trading for its own account. It cannot place orders in the government auctions for customers until the federal investigation of its activities is completed.

Gonzalez called for even tougher action. “I strongly suggest that Salomon Bros.’ status as a primary dealer be suspended until a thorough investigation has been completed,” he wrote in his letter to Greenspan.

The sudden scandal over the government auctions--which sell Treasury bonds and other securities that finance the federal government’s huge deficit--has raised new questions about the heavy reliance that federal officials place on securities dealers such as Salomon. Salomon is one of the largest operators among a group of 40 firms that bid to buy government securities at the regular auctions. Those firms then resell the securities in the broader public markets.

Salomon is accused of having violated government rules limiting the amount of government securities that each trading firm can acquire at an auction. Those limits are designed to prevent one dealer from cornering the market on government securities, which would allow the firm then to make a much bigger profit when it resells the securities in the open market.