WASHINGTON -- House Banking Committee Chairman Henry Gonzalez urged the Federal Reserve yesterday to bar Salomon Brothers Inc. from participating as a primary dealer in Treasury debt auctions until the government completes its inquiry into illegal bidding practices by the firm.
In a letter to Alan Greenspan, chairman of the Federal Reserve Board, the Texas Democrat also called on the Fed to report to the committee within a month on how the Salomon Brothers's scandal has affected the bond market.
The Treasury Department on Aug. 18 suspended Salomon Brothers from submitting auction bids on behalf of customers but decided to allow the firm to continue bidding on its own account. The action came after top Salomon executives admitted the firm had submitted several bids that broke Treasury auction rules.
Treasury has authority to set the rules for the auctions and to determine whether it will accept bids from the 40 individual firms that have the special status of primary dealers. But it is the Federal Reserve -- the government's fiscal agent at auctions -- that has the authority to designate what firms are given primary dealer status.
Rep. Gonzalez's appeal to suspend Salomon Brothers as a primary dealer would not, however, affect the firm's ability to buy and sell Treasury securities in the secondary market, a House Banking committee spokesman said.
In his letter to Mr. Greenspan, Rep. Gonzalez said he was "dismayed" by the "blatant admitted violation of various securities laws" by Salomon Brothers. At a minimum, he added, the firm should not be allowed to participate in Treasury auctions until an investigation is completed by the Fed, the Securities and Exchange Commission, the Treasury, and the Department of Justice.
Rep. Gonzalez asked the Fed to report to the committee on all admitted and allegedly illegal acts performed by Salomon Brothers employees, including a description of how such acts affected short-term and long-term interest rates.
He went on to request a description of the procedures in place to detect illegal bond trading practices and any information that would show other dealers had violated Treasury auction rules. In addition, he asked the Fed to say whether it had any recommendations for changing the auction rules "to detect and deter future violations."
Rep. Gonzalez said he wanted to get the Fed's report by Sept. 23, in time for the committee to consider adding an amendment to the Government Securities Act that would toughen Treasury auction procedures. The committee is reviewing legislation to renew the act along with the House Energy and Commerce Committee. A bill to extend the current law cleared the Senate before Congress took its August recess.
Shares of Salomon Inc. closed up yesterday on a report in the Wall Street Journal that CBS Inc. Chairman Laurence Tisch bought a large share of the firm's stock late last week. Salomon's stock jumped $2.25, to $26 in late afternoon trading.
