on May 22, a syndicate of bidders decided the Treasury's two-year note sale might be "an opportunity to muscle the market."
That description, from Susan Kelly's Treasury market column in May, was only partly accurate. Someone was indeed trying to muscle the market, but the syndicate apparently was fictitious.
On Aug. 11, Salomon Brothers suspended two managing partners and revealed that it had uncovered "irregularities and rule violations" in three recent Treasury note auctions. Two managing partners were suspended. Salomon admitted that it submitted bids in the names of customers who had not authorized it to do so.
The episode now unfolding will doubtless result in increased surveillance of the Treasury securities market, and there is no doubt that this market, the foundation of the world's credit markets, needs stronger oversight.
The Treasury securities market, according to Richard Breeden, chairman of the Securities and Exchange Commission, is "a largely unregulated gap."
The Government Securities Act of 1986 is up for renewal this fall, and Mr. Breeden strongly favors giving the commission more power over the secondary market in Treasury bills, notes, and bonds, a vast $3.5 trillion ocean of debt. The dealers, naturally, believe they are regulated enough.
Jon S. Corzine, a partner at Goldman Sachs & Co., testified before Congress for the Public Securities Association in June, declaring that "the surgical precision with which this market has been regulated in the past has achieved an optimal balance between investor protection and avoidance of market disruption." And he warned, "In a market this size, even modest overregulation will significantly increase cost."
We find it difficult to accept that Solomon Brothers, with its hands-on management and supersophisticated electronic equipment, would not know what was going on. To buy 85% of a $12.26 billion note issue, if that's what it did, would require the commitment of $104.2 million of capital. And even for a firm with $4 billion of capital, $104.2 million is real money.
According to Wall Street Journal, competitors and government officials suggested that Salomon's place in the Treasury market had become "so large, and its trading tactics so sophisticated, that the firm's government securities traders came to believe they could safely function outside the rules."
If that picture is accurate, Congress will give Mr. Breeden and the SEC the powers they want. Salomon has clinched the argument for increased regulation, for as Federal Reserve Chairman Alan Greenspan has said, it is "essential to guard against the perception that the auction process . . . is unfair."