The same rise in interest rates caught Marsh & McLennan, the prominent insurance broker, by surprise, causing $165 million in pretax losses. Marsh & McLennan initially made an $11 million gain speculating in treasuries, mostly in the "when-issued" market, by committing for newly- issued bonds but selling them before the company had to take delivery and pay for them.22 Emboldened by success, the company's commitments in the first quarter of 1984 reached $2 billion, but as rates rose and it incurred losses it had to take delivery of the bonds and borrow against them. Its losses rose further and became a scandal. The company insisted that the trading was unauthorized.
There was a scandal, too, in Memphis at the Public Housing Authority, which borrowed approximately $19 million to buy $24.5 million of treasuries and lost $2 million, as well as $1 million in interest that it should have earned by investing more safely. 23
Even Continental Grain Company, which knew as much about risk as anyone, incurred large losses for a second time at its subsidiary, ContiCommodity Services Inc. Earlier in 1980, Continental Grain was forced to inject $81 million in additional capital into ContiCommodity when it had large losses in the silver market debacle that caught the Hunts. The losses in 1984 were such that Continental Grain virtually gave the subsidiary away to Refco Inc.24
The list of sophisticated losers in the treasury markets could go on in terms of individuals and institutions and over time. For example, it was not until 1991 that we learned that the Pakistan-based Banque du Credit et Commerce Internationale lost nearly $1 billion between 1977 and 1985 speculating in financial futures and options. 25 There was always a substantial speculative element in the U.S. treasury market, attracted by its size, leverage, and lack of regulation. The speculators' problems had little effect on either monetary policy or interest rates, other than temporarily, but these speculative elements were precursors to strong speculative movements in stocks, junk bonds, mortgage securities, and foreign exchange in the second half of the decade.
Interest rates in the treasury market between 1979 and 1984 were dominated by Federal Reserve policies and the budget deficit. The Federal Reserve alone controlled short-term rates in four stages as it raised rates in 1980-1981, eased them in the second half of 1982, raised them twice in 1983 and 1984, and then eased them in late 1984. Its aggressive efforts to reduce inflation determined market expectations for long rates, overwhelming traditional influences on long-term rates such as inflation