WASHINGTON -- The Treasury should test two alternatives for replacing the increasingly controversial multiple-bid system of auctioning government securities, a panel of prominent economists said Friday.
The five panelists, free market advocates who took part in the second annual "shadow" Securities and Exchange Commission meeting here, voted unanimously to recommend that the Treasury experiment with "uniform price" and "on tap" auctions.
The Treasury now uses the multi-price auction system, under which a pool of bidders makes offers for the securities and the bonds go to the highest bidders.
Under a uniform price auction -- sometimes called a Dutch auction -- the Treasury picks the lowest yield needed to sell the entire issue and every bidder at or below that level receives bonds at that yield. Theorists say such auctions would not result in higher borrowing costs because there is more incentive for the pool of bidders to bid higher.
Under the second alternative recommended by the economists, the Treasury would have securities regularly "on tap" for sale and would continuously adjust the price in reaction to demand rather than using the current system -- which makes massive dollar amounts of bonds available at selected junctures.
Rep. Stephen Neal, D-N.C., chairman of the House Banking subcommittee on domestic monetary policy, is expected to introduce legislation before Congress adjourns recommending the "on tap" system, Ben Crain, the subcommittee's staff director, said at Friday's session.
The panelists on the "shadow SEC" meet each year to debate and make recommendations on economic issues facing the SEC. Treasury, and other federal financial regulators.
This year's panel included Merton Miller, a University of Chicago professor who won the 1990 Nobel Prize for economics; Charles Cox, senior vice president of Lexecon Inc. and SEC commissioner from 1983 to 1989; Ronald Gilson, director of the law and business program at Stanford Law School; and Hans Stoll, a professor of finance at Vanderbilt University; and Gregg Jarrell, former chief economist of the SEC and a professor of economics at the University of Rochester's William E. Simon Graduate School of Business Administration.
The William E. Simon school sponsored the meeting.
The panelists are not the only advocates of trying the "on tap" system. The approach was also recommended by a former Exxon official at a recent congressional hearing on the Salomon Brothers bidding scandal.
Mr. Miller faulted auction system changes the Treasury recommended on Oct. 25, including opening sales to all registered broker-dealers. "Some of us feel very strongly that the system is fundamentally flawed," he said, saying the changes would be merely "cosmetic."
"I have yet to hear from them any good reason why they are continuing with these discriminatory auctions," he said.
"What Treasury is doing is a movement in the right direction," said Dean Furbush, who teaches economics at Virginia Polytechnic Institute and State University, and who spoke at yesterday's meeting. "But I don't expect to see much effect" on the auction process, he said.
The "shadow SEC" also passed a resolution urginging the SEC to recognize the importance of economic analysis in making its decision.
