NEWS ANALYSIS : There Is No ‘Cop on the Block’ in Government Securities Market : Regulation: Tough rules designed to keep Wall Street honest simply don’t apply to dealings in Treasury securities. The lack of guidelines makes Salomon Bros.-type scandals possible.
In this age of computer record-keeping and electronic policing, the government securities business is a cozy club of casual phone calls and hand-written notes. A handful of hard-driving Salomon Bros. employees walked onto this stage and into a massive scandal, making improper bids in several auctions and actually cornering the market in a May sale.
Many of the tough rules designed to keep Wall Street honest, some dating back to the origin of modern securities regulation in 1933 and 1934, simply don’t apply to dealings in Treasury securities. Congress believed that it would be inappropriate for one government agency, the Securities and Exchange Commission, to enforcement powers over another agency, the Treasury.
This hands-off policy may have made it easier for employees at Salomon to engage in improper bids and rigged markets.
The SEC “is a cop with no nightstick and no map of the streets on the beat,” complained Rep. Edward Markey (D-Mass.), chairman of the finance subcommittee of the House Energy and Commerce Committee.
The law exempts government securities dealers from the elaborate network of procedures and safeguards applied by the SEC, the stock exchanges and the National Assn. of Securities Dealers.
For example, the government securities dealers give the Treasury their bids at auctions in hand-written form. There is no rule requiring a copy of the bid to go to a customer on whose behalf a firm may be bidding. Because of this uncertainty, the Salomon investigators still don’t know for certain whether their former top trader ever got permission from Tiger Investments, a Salomon customer, to bid for $2 billion in notes at the May 22 auction.
If the bid was never authorized by Tiger, the transaction was simply a secretive way for Salomon to get more than the limit of 35% of a single auction.
“It sounds like exactly what happened,” said a senior official at Tiger Management, describing as accurate a Salomon report issued on Wednesday dealing with the misbehavior at the May 22 auction. “At all times Tiger Management conducted itself in accordance with the letter and spirit of applicable law in connection with its investment in May, 1991, two-year notes,” said a statement prepared by Tiger’s lawyers. The firm said it is cooperating fully with investigations by the SEC and the Justice Department.
This confusion is much less likely to happen in the ordinary securities market. All customers must get written confirmations on every order to buy or sell shares. If such rules applied to government securities, a confirmation would make it indisputably clear if Tiger had given permission to Salomon to bid for $2 billion in Treasury notes.
When a stock is traded, there is an automatic electronic record made. Each stock exchange has its own computerized system, as does the National Assn. of Securities Dealers for the over-the-counter market. Compliance officers at the firms check the trading records every night, and surveillance officials at exchanges and the SEC can summon up trading records by tapping a few keys on a computer.
In government securities, by contrast, there are only the forms furnished to the Treasury just before the bid deadlines. Dealers aren’t even formally required to keep a copy of the bid information for their own records.
The dealers telephone bids to their employees stationed at Federal Reserve Banks, who scrawl the numbers down and hand in the bid papers just before the deadlines.
There is no record-keeping system that would provide a trail for investigator. As SEC Chairman Richard Breeden told a congressional hearing this week: “Detecting a case of fraudulent bids . . . would require direct access to bid submissions so that they could be spot-checked against customer records or some specific notice of suspicious activity warranting . . . investigation of a firm and its customers.”
The SEC’s broad police powers--it can enter any securities firm at any time and demand to see trading and financial records--also act as a deterrent to wrongdoing at firms dealing in corporate securities. The door is open all the time for the securities cops.
But this power doesn’t extend to the dealers in government securities unless there is specific suggestion of wrongdoing.
When the prices of the notes from the May 22 auction jumped to unusual heights, and there were fears of a possible monopoly “squeeze” on the market, the Treasury and the Federal Reserve asked for an SEC probe.
“The Treasury doesn’t have the investigative capability for this kind of problem,” an SEC official said. The SEC started with Salomon but quickly broadened its probe to include all 39 primary dealers in government securities.
More than 135 subpoenas and formal requests for information flooded Wall Street. The investigation “will fill rooms and rooms of file cabinets,” one official said.
Staff Writer Scot Paltrow in New York contributed to this story.
