Echoes From Scandal At Salomon Brothers
REVERBERATIONS from the Salomon Brothers scandal continue to be felt throughout the United States securities industry - raising the possibility of significant alterations in the way Treasury auctions are conducted.Changes, however, are not expected to occur quickly. The $2.3 trillion Treasury market is the largest of its kind in the world; yet, it involves just a small handful of some 39 primary dealers, one of which has been Salomon Brothers Inc. Currently, the system is geared toward bidders willing to take the lowest possible interest rate. And a single purchaser cannot acquire more than 35 percent of an issue - a point ignored by Salomon's bidders, who sought to corner the market. Moreover, bidding is conducte d in person, in the sense that bidders must physically place orders at the Federal Reserve Bank in lower Manhattan on auction day. Congress and securities groups are now studying the possibility of moving towards an automated bidding system. Moreover, calls are mounting for shifting from the "low-bid" auction method to a system in which all securities up for bid are sold at one common price. Also important, record keeping is expected to be increased and regulatory surveillance tightened. According to Edward Kwalwasser, a New York Stock Exchange official, there are currently few official public records for regulators to even examine in the Treasury auction process. Meantime, the Salomon inquiry continues to expand: * The US Securities and Exchange Commission, the National Association of Securities Dealers, the New York Stock Exchange, and at least three congressional committees are investigating the Salomon affair. * Regulatory officials in some 33 states where Salomon is licensed are conducting their own inquiries as to whether the company - which has long been considered one of the most influential and most respected securities firms on Wall Street - should be allowed to continue to operate in their states. * Rumors persist that Salomon's top trader and the man at the center of the scandal - Paul Mozer - may "cut a deal" with government prosecutors. Were that to occur, the scandal might substantially widen to involve other houses or traders - and perhaps even become an issue in next year's presidential election. This Wall Street scandal, unfortunately, is not unique. E.F. Hutton & Co. pleaded guilty to mail and wire fraud in the mid-1980s. Drexel Burnham Lambert collapsed after admitting to various federal fraud charges in the late 1980s. So far the main "loser" in the Salomon scandal remains the investment house itself, which has lost some underwriting business. Salomon concedes it is selling stock and bond holdings to help finance its day-to-day operations; and it is struggling to obtain private lending. Still, Salomon's interim chief executive - Omaha investor Warren Buffett, who agreed to run the company during this difficult period and who is the firm's largest investor - has a reputation for honesty and business acumen. Whether he c an restore the firm will be one of the big questions on Wall Street in the weeks ahead. So far, other houses appear not to have suffered from the fallout. Goldman, Sachs & Co., Salomon's longtime rival, is expected to pick up underwriting business because of the scandal. Goldman Sachs is reportedly earning record pretax profits this year. Moreover, stock prices for other major houses here, including Merrill Lynch & Co., PaineWebber Group, and Morgan Stanley & Co., have risen in recent days. Salomon's stock has dipped. Finally, as if to underscore how the winds of change are roaring through Wall Street, it was announced recently that the famous Dow Jones and Company stock market news ticker will be turned off for good on Jan. 1, 1992. Since its introduction in 1897, the "ticker" has stood as a symbol of high finance. But who needs the ticker in the age of the computer? The great irony is that in the era of the microchip just about everything seems to be computerized - except the $2.3 trillion US Treasury auction.