Securities Dealers, NY Fed Stalled in Capital Adequacy Talks

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WASHINGTON -- Government securities dealers and the New York Federal Reserve Bank appear to be stalemated in their search for a consensus on how to impose capital adequacy standards on the dealers.

The dealers met with top officials of the New York Fed on Monday, but after the meeting, one industry participant underscored the lack of progress, noting that "everybody is going back to the drawing board."

Anthony M. Solomon, the New York Fed's president, told about 60 participants that "the bank was a bit disappointed that the dealers haven't reached agreement yet" on the capital standards. He hinted that the bank's patience may be wearing thin when he informed the firms that the New York Fed "owes some sort of report to Congress" by the end of the summer.

Edward Geng, vice president and special counsel to the New York Fed, will poll the dealers over the next two weeks, Mr. Solomon said, in an attempt to achieve a consensus.

The New York Fed and the dealers are wrangling over a reform of the marketplace that both camps have recognized as necessary, in principle, since 1982, when Drysdale Government Securities Inc. went into bankruptcy after overextending itself in the market by buying and selling Treasury securities with repurchase agreements, known as repos.

Repos are basically short-term loans collateralized with securities. In a typical transaction, an investor buys securities from a dealer for a set period, at the end of which the investor receives a sum that compensates him for the loan and the dealer recovers the securities. For the period of the agreement, the dealer has use of the investor's money, which could be used to purchase more government securities that could form the basis of more repos.

In May 1982, Drysdale came close to starting a crisis in the Treasury market when it defaulted on $160 million in coupon interest it owed on bonds it had acquired in the repo market. Misused Immense Leverage

Drysdale is said to have used the immense leverage available in repos to parlay $20 million of capital in just three months into a $4 billion short position and a $2.5 billion long position in bonds. Because the firm was so thinly capitalized, adverse market moves wiped it out.

Capital requirements are aimed at preventing a company from exposing itself to trading and positioning risks that its equity capital cannot cover. Yet there are no formal capital requirements for dealers who trade only in governments securities. One reason a consensus is so hard to find among primary dealers is that some already adhere to overall capital standards imposed by the Securities and Exchange Commission on firms that deal in corporate and municipal securities, and such firms are loath to submit to more regulation. …