NEW YORK — THE SALOMON Brothers' misconduct in the Treasuries market -- coming after such scandals as the fall and bailout of hundreds of savings and loans, the drug and money-laundering and bribing activities of the Bank of Credit and Commerce International, the junk bond debacle of Drexel Burnham Lambert and the assorted frauds in the Japanese stock market -- has further stirred anxieties about the integrity of financial markets. Unless they are quelled, such anxieties could hurt saving and investment all around the world.
In cracking down hard on Salomon Brothers for exceeding the 35 percent quota for primary dealers in the auction markets for government securities, the Treasury was sending a message to the other 39 primary dealers in that market that conduct like Salomon's would be dealt with harshly.
With $2.3 trillion in federal debt to be marketed and rolled over ad infinitum -- a debt total that is expected to increase by $279 billion in the fiscal year 1991 and by $362 billion in 1992 -- any loss of faith in the integrity of the government securities market might be extremely costly.
Treasury Secretary Nicholas F. Brady, in an interview on Tuesday, said he did not know how "deep" the problems in the government securities market went.
The Treasury, he said, was not an investigative agency; the SEC and the Federal Reserve, on which the Treasury depends, are now "collecting information." But Brady is clearly warning every house that might be acting as Salomon was to clean up its act fast.
He was asked why the Treasury, having first announced, at 10:30 Sunday morning, that Salomon had been barred from bidding in the primary Treasury auction market, said five hours later, following a telephone conversation between Brady and Warren E. Buffett, the firm's new chairman, that Salomon could bid for its own account but not for its customers.
Brady replied, "In substance, that changed the situation only marginally."
At the time of the first announcement Sunday morning, he said, )) there had been only "a lot of talk about what might happen," but no concrete action. By the time of the second announcement, said a Treasury official, who requested anonymity, the Salomon board had taken four actions: (1) dismissed the top three executives -- John H. Gutfreund, the
chairman; Thomas W. Strauss, president, and John W. Meriwether, vice chairman; (2) discharged the head of the government trading desk, Paul Mozer, and his No. 2, Thomas Murphy; (3) announced other administrative and management changes, and (4) pledged, through Buffett, to cooperate fully with the Treasury, SEC and Fed, to "right the wrongs."
Buffett gave Brady his personal assurance that the situation at Salomon would be cleared up.
Brady denies that confidence in United States securities has been shaken. He said that the federal deficit was "too big" but that the United States was able to sell its obligations to the world.
"The enormous amount of our bonds people buy," he said, "imply confidence not only in United States securities but in the method by which we distribute them, directly and with dispatch."
Instead of damage to the United States resulting from the Salomon scandal, he said, the way it was being handled would "enhance everybody's confidence." The United States financial market, he said, is "deep and liquid -- I'm not sure whose exceeds it."
But with financial markets having gone global on a 24-hour-a-day basis, don't investors need better international regulation? "Good question," Brady said. But he added, "We have to rely on the individual countries."
Every country, he noted, has its own rules and codes. He conceded that it might be desirable to negotiate standard regulations at least for the principal financial markets.
He cautioned against overregulating financial markets, contending that "the cure can be worse than the disease being cured." The United States, he said, now has the opportunity to "do it right" and show that "our market is the safest in the world."
Leonard Silk writes regularly on economics for the New York Times. Jack Germond and Jules Witcover are on vacation.