Friday, March 01, 2013

"No Headline"

Unarguably, the single most important piece of journalism published in the New York Times about the 1991  bid-rigging scandal where Salomon Bros. took control of a series of Federal Reserve auctions of U.S. Treasury bond issue in order to corner the market, with the final one, "squeezing" an illicit extra $30 million profit out of their deal brokering. In the sole example of team reporting on the subject in the Times, Louis Uchitelle and Stephen Labaton interview a senior Treasury official who for over a year failed to take action as clear signs of manipulation unfolded around him.

Moreover, Uchitelle and Labaton ask the obvious but unspeakable question whether or not the bare facts carefully released to the public of a rogue bond trader on an individual greed-and-power trip wasn't just a cover for a far graver conspiracy involving multiple players, in government, in newsrooms, and on Wall Street, since every indicator seems to point to that place where the rubber of democracy meets the road of capitalism, and tell loudly to anybody listening that Al Capone is in the driver seat now.

It is that voice which must have dictated the title by which this article is maintained in the archive and indexes' of the New York Times---"No Headline," it oxymoronically reads















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September 22, 1991, New York Times, No Headline, by Louis Uchitelle and Stephen Labaton,

John H. Gutfreund sought the unusual audience, and on the hot and humid afternoon of Monday, June 10, the chairman of Salomon Brothers Inc., the most powerful firm on Wall Street, was ushered into the imposing third-floor office of Robert R. Glauber, with its heavy, Victorian-style furnishings and dark oil portraits of unsmiling, bygone financiers.

More than anyone at the Treasury Department's headquarters in Washington, Mr. Glauber, the Under Secretary for Finance, is responsible for regulating the monthly auctions at which the Treasury sells billions of dollars in securities to finance the Government's huge debt. Evidence had been piling up that Salomon might have broken the rules -- particularly the rule aimed at preventing any one firm from hogging too many of the securities at a given auction. Mr. Gutfreund had come to Washington to try to head off an investigation that Mr. Glauber's team had quietly initiated.

The meeting lasted less than 30 minutes, Mr. Glauber recalls. But as summer turns to fall, that brief conversation begins to look like the start of a new direction in the unfolding Salomon Brothers scandal -- one in which the firm's fraudulent auction bids in the names of unknowing customers, much in the news today, take a back seat to a larger and more troubling issue.

The new concern is whether Salomon acted alone; whether the Wall Street firm and a few big customers -- perhaps acting together -- cornered the market in two-year Treasury notes auctioned last May 22, forcing others to pay exorbitant prices to acquire them. If that is the case, then the Salomon scandal goes far beyond the aberrant behavior of Paul W. Mozer, who was chief of Salomon's Government trading department, and a few assistants who helped Mr. Mozer rig bids in the names of customers without their knowledge.

That broader case would spotlight the failure of Mr. Glauber and E. Gerald Corrigan, the 50-year-old president of the Federal Reserve Bank of New York -- the two officials most responsible for regulating and supervising the Treasury market -- to curb Salomon and perhaps other firms earlier this year.

By mid-May, their staffs had detected, in a new study, a striking pattern of aggressive bidding going back to the spring of last year. But until the May 22 auction, this behavior had not distorted Treasury securities prices, so regulators had no compelling reason to act, in the opinion of Mr. Glauber and his staff. Indeed, Mr. Gutfreund sought the June 10 meeting to contest the Treasury's concern that Salomon's behavior and the distorted pricing after the May auction were linked.

"This was a meeting that he set up; we did not ask him to come in," Mr. Glauber said last week. "He told us some things and we listened. We could have asked him more about the May auction. But we listened."

Some Missing Questions

Nor did Mr. Glauber ask Mr. Gutfreund about auctions in February and April in which Salomon had executed what seemed to Treasury to have been excessive bids. And soon after the June 10 meeting, Mr. Glauber made a fateful decision. He decided to postpone until August at the earliest consideration of any proposed changes in Treasury auction rules designed to prevent the concentration of purchases in a few hands.

"You don't want to rush in and make modifications with a sledgehammer until you know the full extent of the problems," Mr. Glauber said. "Rushing to judgment in this kind of market is a mistake. And we do not know yet whether we know the full extent of what happened."

But the reluctance to act raises troubling questions about the close-knit relationships among the Treasury, the Fed and the primary dealers like Salomon who play the major role in financing the huge Federal debt. Did those relationships lull the regulators into a false sense of confidence that the Government securities market was free of corruption?

Even within the ranks of the Treasury and the Fed, which through its New York office conducts the principal Treasury auctions, there is criticism that regulation of the Treasury markets -- where $5 billion to $12 billion in new notes and bonds are auctioned monthly -- had become too lax and too trusting.

"The plain fact is that the Federal Reserve Bank of New York is on the front line," said a high Fed official in Washington, who declined to be identified. "They see all the data and they are in daily contact with the dealers. They are the source of identifying problems and sounding the alarm."

Cast of Characters

Whatever the criticism, the Treasury, the Fed, the Securities and Exchange Commission and the Justice Department are conducting civil and criminal investigations of the Treasury securities marketplace. And Salomon officials, who have tried to characterize the scandal as one limited to Mr. Mozer and a few misbehaving confederates, do not discount the possibility that the misbehavior might go well beyond the firm.

The main evidence leading in this direction so far is twofold: The study showing Salomon to have been a far more aggressive bidder in Treasury auctions than had previously been disclosed and the frequency with which the firm illegally used the names of others to buy securities that it secretly kept for itself. Two firms whose names have been used more than once were Quantum Fund and S. G. Warburg & Company.

Warburg, a London-based investment house, is itself a primary dealer in Treasury auctions. Quantum is a mutual fund that invests the savings of others, often in Treasury securities. Both deny that they had any knowledge of Salomon's activities.

The Treasury and the Fed have turned up a startling trend. In a retrospective study, requested by the Treasury and completed by the Fed in mid-May, they found that in three different auctions, over 13 months, Salomon had acquired more than 75 percent of the notes and bonds sold, either in its own name or as an agent for customers. And in nearly 30 of the approximately 230 weekly or monthly auctions held since early 1986, Salomon had bid for and acquired up to 50 percent of the securities.

"Only Salomon would commit the capital required to take such aggressive positions," said Michael E. Basham, a key Treasury deputy under Mr. Glauber until early September, when he left to join Smith Barney Harris Upham & Company Inc. "Regulating the Treasury market is really regulating Salomon."

The Fed study showed that before the spring of 1990, not even Salomon had accounted for 75 percent of any auction. So the new figures should have aroused the Fed's and the Treasury's suspicions that Salomon might have been trying to exercise undue control over the market, some critics say. Apparently, they didn't.

No rule bars Salomon from acquiring most of the securities at an auction, as long as it bids for 35 percent or less in its own name, with the rest ordered for customer accounts. But some argue that the huge chunks taken by Salomon in March 1990 and then in February and April of this year should have prompted the New York Fed to check whether Salomon might have been violating auction rules, as it turns out it was.

"Enormous power over a particular market segment can lead to arrogance, can lead to conclusions that it's within a firm's power to do things that would be unlawful and that might lead to temptations to do so," Richard C. Breeden, chairman of the S.E.C., told a Congressional committee this month.

Mr. Corrigan's people are now making such checks part of their regular routine. But such policing goes against ingrained habits. Mr. Corrigan, a Fordham-trained economist who has spent most of his career in the Federal Reserve system, told Congress this month that the Treasury auction system "has worked incredibly well until now." He testified that the Fed's relationship with Salomon and the 38 other primary dealers who purchase most of the securities at the auctions has been much more that of a trusting business relationship than a regulatory one.

"The data and information we collect from primary dealers are aimed at providing broad insights into the workings of the market," Mr. Corrigan told the Securities Subcommittee of the Senate Banking Committee in written testimony. "Information gathering activities have never been structured with a view toward enforcement or compliance activities."

The fourth time that Salomon went above the 75 percent mark was on May 22, only a week after the Treasury had received the revealing Fed study. More than $12 billion in two-year notes were sold that day. Immediately after the auction, however, other traders trying to acquire the new notes to meet obligations to sell them to customers, found themselves forced to pay excessively high prices.

Within days, the uproar on Wall Street over the unusual "squeeze" -- resulting in big losses for some traders -- was noted in Congress. Mr. Glauber's staff on May 29 asked the S.E.C. to begin an investigation  the first ever undertaken by that agency into the Treasury market. And Mr. Basham telephoned Salomon on June 4 to express the Treasury's concerns. "My call was a modest attempt to get them to unwind their position," Mr. Basham said. Six days later, Mr. Gutfreund paid a visit to Mr. Glauber in Washington.

At 62, Mr. Gutfreund is a decade older than Mr. Glauber, but the two men are similar in height and build (about 5-foot-7 and stocky) and in intensity. While Mr. Gutfreund is a hard-driving Wall Street trader, Mr. Glauber, a Harvard economics professor temporarily on leave, works endless hours trying to shepherd the Bush Administration's bank reform legislation through Congress.

Because of the banking bill, the investigation of Salomon's trading practices was, in June, a lesser priority for Mr. Glauber -- and it remained that way until August, when Salomon suddenly disclosed that Mr. Mozer, the head of its Government desk, and a few of Mr. Mozer's staff had purchased Treasury securities in customers' names apparently without their knowledge. The practice illegally circumvented the 35 percent maximum purchase for a single buyer.

A Matter of Delays

Mr. Mozer had told Mr. Gutfreund in April of some of these violations, but he made no mention of them at the June 10 meeting in Mr. Glauber's office. Indeed, Mr. Gutfreund's long failure to report the transgressions to the Fed or the Treasury cost him and other top Salomon officials their jobs in mid-August, after the bid-rigging was finally revealed.

In early June, sitting on a couch in Mr. Glauber's office and puffing on a cigar, Mr. Gutfreund spoke only of the squeeze on the two-year notes -- admitting its existence, but arguing that such squeezes are not all that uncommon and can be the result of natural market forces. As he left, he handed Mr. Glauber an envelope of charts, which have yet to be made public, intended to illustrate his case. Mr. Glauber did not tell the S.E.C. about the meeting, although the S.E.C. had been working on the case.

Mr. Gutfreund in June and Salomon today offer various explanations of how a squeeze can occur naturally. With interest rates declining, as they have in recent months, a new Treasury note sold at auction for a yield of, say, 6 percent, gains in value as market interest rates decline below this level. The greater value increases the demand for the notes. A price squeeze can then develop if traders need to acquire some of the notes because they had sold them to others even before they owned them in so-called "when-issued" trading in advance of the auction. Such traders are called short-sellers.

"The development of a squeeze does not imply any deliberate effort by holders to 'corner' the issue," Salomon said in a question-and-answer press release. "Indeed, the possibility of squeezes is inherent in when-issued trading."

But the May two-year notes ended up mostly in the hands of Salomon and three funds -- Tiger Investment Inc., Quantam and Steinhardt Partnership Inc. With short-sellers seeking to borrow or purchase roughly $6 billion of the May notes, or half the issue, the price squeeze continued until July, as Salomon and Steinhardt in particular appeared to hold their positions. Now the S.E.C. is trying to determine whether Salomon and the others somehow worked together to obtain such control.

"Ultimately, the public debate will be whether this was a case of pre-agreement or coincidence," said an executive who trades in Treasury securities at a Wall Street firm.

Like many of Salomon's prior infractions, the May auction prompted some Treasury officials to rethink the rules. They and the New York Fed considered but rejected a proposal that would have limited all traders in the primary market to 35 percent of an issue for both themselves and their customers. Conforming to the current 35 percent ceiling, a primary dealer could theoretically buy 100 percent of an issue on behalf of itself and two customers.

Instead, Mr. Basham said he viewed the problem as one of disclosure. Because the largest Wall Street firms know the positions of their customers and often financed their purchases, they are able to use this information in their own trading in the after-auction secondary markets and could thus cause squeezes.

A Postponed Rule

The proposed solution, circulated in June as a memo from Mr. Basham, was a two-part rule. First, a company that sought to acquire more than 5 percent of an auction would have to make the bid directly to the Fed and not go through a primary dealer. This would reduce the chances of phony bidding. And, secondly, any bidder acquiring more than 20 percent of the securities at an auction would have to publicly disclose its holdings, a rule roughly analogous to S.E.C. regulations for stock market investors.

Such proposals most likely would have drawn opposition from the largest primary dealers, and Mr. Glauber decided to postpone its implementation until he could solicit the industry's views. The plan was to make a presentation in early August, at a meeting in Washington of the Treasury Advisory Borrowing Committee, a group representing primary dealers, including Salomon. Mr. Glauber and some of his staff were tied up in Congressional hearings on bank reform, and the presentation was postponed until early September.

But Salomon's bombshell confession about unauthorized bids came in mid-August. Now Mr. Glauber and Mr. Corrigan are awaiting the outcome of the various investigations under way before making any changes in the rules -- changes that would substitute regulation for the old mutual trust in the marketplace.

"This was a gentlemanly world, where one's word was very, very important," said a lawyer for Salomon. "You see on dollar bills the phrase 'In God We Trust.' At the Treasury Department, there was a view of, 'In the primary dealers we trust.' " Now that trust is gone.

WHY SALOMON'S SUDDEN AGGRESSION?

The Salomon scandal raises a tantalizing question: Why now? Why haven't dealers in Treasury securities broken the rules so flagrantly in the past? No one has a definitive answer, but there are various theories.

The main one is disregard of moral standards coupled with Salomon's pay incentive system -- a sort of 1980's Wall Street mentality reaching the Treasury security market well after the retreat of Ivan Boesky and Michael Milken. Salomon's traders in this market receive annual bonuses tied to the profitability of their operation, and in pursuit of bigger bonuses they cheated, many analysts say.

In doing so, they took advantage of lax auction supervision by the Federal Reserve Bank of New York, which supervises the auctions for the Treasury. "The Fed felt that anyone who would be admitted to the inner-sanctum of doing business with the Fed as a primary dealer was virtually by definition an honorable person," said Francis Schott, an economic consultant and a former research director at the New York Fed.

There are other theories, as well. The recession has produced a steady decline in interest rates since last year. That has made made the prices of Treasury securities rise, emboldening Salomon and other investors to take big positions. Finally, the disappearance of Drexel Burnham Lambert Inc., another major trader in Treasuries, left the field wide open, perhaps encouraging Salomon traders to operate more aggressively.

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I haven't found a hard copy of the September 21, 1991 New York Times yet, but it shouldn't be hard to do the old-fashioned way at the library. I'm curious what this article's original headline was.

But I did find the following notice from the same Sept, 21, 1991 issue. Just something odd to throw into our computer model.

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I did put "Ralph and Peter Mosca" into Google and I got back this:

Mob Star: The Story of John Gotti: The Story of John Gotti, by Gene Mustain, Jerry Capeci,



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Everybody's a star.

The question posed at the end of the Uchitelle-Labaton article is very interesting

WHY SALOMON'S SUDDEN AGGRESSION? 

The Salomon scandal raises a tantalizing question: Why now? Why haven't dealers in Treasury securities broken the rules so flagrantly in the past? No one has a definitive answer, but there are various theories. 
The main one is disregard of moral standards coupled with Salomon's pay incentive system -- a sort of 1980's Wall Street mentality reaching the Treasury security market well after the retreat of Ivan Boesky and Michael Milken. Salomon's traders in this market receive annual bonuses tied to the profitability of their operation, and in pursuit of bigger bonuses they cheated, many analysts say. 
In doing so, they took advantage of lax auction supervision by the Federal Reserve Bank of New York, which supervises the auctions for the Treasury. "The Fed felt that anyone who would be admitted to the inner-sanctum of doing business with the Fed as a primary dealer was virtually by definition an honorable person," said Francis Schott, an economic consultant and a former research director at the New York Fed. 
There are other theories, as well. The recession has produced a steady decline in interest rates since last year. That has made made the prices of Treasury securities rise, emboldening Salomon and other investors to take big positions. Finally, the disappearance of Drexel Burnham Lambert Inc., another major trader in Treasuries, left the field wide open, perhaps encouraging Salomon traders to operate more aggressively.


For me, the most interesting fact found in the article below is that the order placed in the name of "Warburg,"  meaning for S. G. Warburg & Company, in the Feb. 1991 auction was for $3.15 billion. We know from other news sources that at a single auction Mozer placed twin $3 billion orders supposedly on behalf on customers, then bid further amounts for for the house account of Salomon. The other $3 billion could have been for George Soros's Quantum fund, or Julian Robertson's Tiger Investment Inc., both hedge funds large enough to move money around on this scale.


File:Siegmund George Warburg 3.jpg



Two firms whose names have been used more than once were Quantum Fund and S. G. Warburg & Company.





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September 16, 1991, New York Times, Warburg Describes Its Salomon Role, by Kurt Eichenwald,

The S. G. Warburg Group, the British investment house, yesterday disclosed details of its relationship with Salomon Brothers Inc., portraying itself as a victim of Salomon's illegal actions in the Treasury market scandal.

The disclosures were the first details of the scandal provided by Warburg and its affiliate, Mercury Asset Management, which says its name was submitted by Salomon without authorization in a February auction for five-year Treasury notes.

Investigators have focused much of their attention on Warburg and Mercury because of suspicions that the firms had worked with a Salomon trader to cover up the illegal bidding. Mercury was contacted by the Treasury Department in April about the February bid, and did not disclose in its reply that the bid was unauthorized.. 

Two Days of Washington Meetings

The disclosures followed two days of meetings in Washington between Warburg and Mercury executives and officials of the Treasury, the Federal Reserve Board and the Securities and Exchange Commission. In a statement, Warburg implied that it was considering whether to bring a lawsuit against Salomon.

In the statement, Warburg said Mercury was contacted by the Treasury on April 17 about the rules limiting bids to 35 percent of the securities being auctioned. In the letter, the Treasury noted that Mercury's name had been used by Salomon in February for a bid of $3.15 billion, and that S. G. Warburg & Company, the American investment arm of the British firm, had also submitted a bid of $100 million. Salomon has subsequently admitted that Mercury made no bid in February

In its letter, Warburg said, the Treasury advised Mercury that future bids of Mercury and the American arm of Warburg would be counted together in calculating whether the 35 percent limit was reached.

In yesterday's statement, Warburg said that after receiving the Treasury letter Mercury was immediately contacted by Paul W. Mozer, the former head of Salomon's Government securities trading desk who is at the center of the civil and criminal inquiries. Warburg did not disclose yesterday who at Mercury had been contacted by Mr. Mozer. In Salomon's own recent accounts of the scandal, however, the person receiving the phone call has been identified as Charles Jackson, a senior director of Mercury. 

Bid Explained as a Clerical Error

In that telephone conversation, Warburg said, Mr. Mozer explained that the bid was "mistakenly submitted in Mercury's name due to a clerical error at Salomon." Mr. Mozer added that the mistake had been caught and that the correct bidder had been allocated the securities, Warburg said.

But according to recently released information, the bid had originally been submitted in the name of Warburg Asset Management, and Mr. Mozer told the Treasury that he had meant to use Mercury's name, but failed to do so because of a clerical error. Salomon has since disclosed that the securities purchased by Mr. Mozer were purchased for Salomon.

Warburg said that in the conversation with Mercury Mr. Mozer indicated that since the error had been Salomon's, he thought his firm should report it and asked that Mercury allow Salomon to contact the Treasury about the problem.

According to yesterday's statement by Warburg, "Mercury accepted Mozer's explanation and, believing that the matter had been resolved and was being corrected by Salomon with the Treasury, did not, when it acknowledged receipt of the Treasury's letter, point out that it had not in fact submitted any bid in the February auction."

The explanation raises questions about why Mercury would allow someone at another firm to explain away an error of more than $3 billion in its name. But Warburg said it complied with Mr. Mozer's request because it had no knowledge of any improper actions

The firm said in its statement that "no one at Mercury or at Warburg had any reason to believe or suspect that what was described by a managing director of Salomon as a clerical error was in fact part of a pattern of improper or unlawful activities or that Salomon would not, as Mozer had committed to do, itself bring the matter to Treasury's attention.

Warburg added that Mr. Mozer's explanation was "not one that would have aroused suspicion on Mercury's part of any wrongdoing."
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The phrase Big Bang, used in reference to the sudden deregulation of financial markets, was coined to describe measures, including abolition of fixed commission charges and of the distinction between stockjobbers and stockbrokers on the London Stock Exchange and change from open-outcry to electronic, screen-based trading, enacted by the United Kingdom government in 1986. The day the London Stock Exchange's rules changed, 27 October 1986, was dubbed the "Big Bang" because of the increase in market activity expected from an aggregation of measures designed to precipitate a complete alteration in the structure of the market.



















July 15, 2002, New York Times, Citigroup's Chairman Urges More Insulation of Analysts, by Patrick McGeehan,
November 8, 1990, New York Times, Key Man at Banking's Crossroads, by Leslie Wayne, Special to the New York Times,
September 25, 1990, Reuters, Bank Insurance Ceiling Backed,
March 30, 1990, New York Times, Greenspan Favors S.E.C. As Stock Futures Regulator, by Nathaniel C. Nash, Special to the New York Times,
February 9, 1989, New York Times, Backstage at Savings Rescue: Urgent and Secretive Process, by Peter T. Kilborn, Special to the New York Times,
February 14, 1988, New York Times, A Task Force Plays Beat the Clock, by William Glaberson,
February 8, 1988, New York Times, Talking Business; with Glauber of Presidential Task Force; Debate on Letting 2 Markets Interact, by James Sterngold,
October 31, 1987, New York Times, Market Turmoil: Harvard Professor to Aid Stock-Plunge Panel, by Leslie Wayne,

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July 15, 2002, New York Times, Citigroup's Chairman Urges More Insulation of Analysts, by Patrick McGeehan,

Salomon Smith Barney, one of the Wall Street firms under scrutiny by investigators for the New York State attorney general, has urged regulators to curb stock analysts' conflicts of interest, making them more independent from investment bankers.

In a letter sent on Friday to national securities regulators, Sanford I. Weill, the chairman and chief executive of the parent Citigroup, and Michael A. Carpenter, chief executive of its Salomon unit, said the industry should do more to reduce analysts' conflicts of interest.

Most notably, Mr. Weill and Mr. Carpenter proposed prohibiting analysts from appearing at meetings, known as roadshows, in which companies try to sell their stocks and bonds to mutual fund managers and other institutional investors. They also suggested banning analysts from helping investment bankers sell their firms' services to public companies.

''We believe that further steps need to be taken in order to more completely make research independent from investment banking and therefore bolster investor confidence,'' they said in the letter. It was sent to Harvey L. Pitt, the chairman of the Securities and Exchange Commission; Richard A. Grasso, chairman and chief executive of the New York Stock Exchange; and Robert R. Glauber, head of the National Association of Securities Dealers.

The letter did not provide any details on the reasons or timing for the proposals, nor did the executives volunteer to make any changes themselves.

The dual role played by analysts at the biggest securities firms are the subject of several civil and criminal investigations that followed a investigation of Merrill Lynch by Eliot L. Spitzer, the New York attorney general.

Mr. Spitzer said that during negotiations, Merrill refused to agree to prohibitions on involving its analysts in roadshows and sales appeals. After Merrill agreed to pay $100 million in penalties and make several changes in the structure of its research department, Mr. Spitzer turned his attention to two Merrill rivals, Salomon and Morgan Stanley. In April, Mr. Spitzer's office sent a subpoena to Salomon seeking documents about the firm's research and banking activities related to telecommunications companies.

Jack Grubman, Salomon's senior telecommunications analyst, has a reputation for blurring the line between analysis and investment banking. In testimony at a House committee hearing last week on the accounting problems at WorldCom, he said he had appeared with investment bankers at three meetings of WorldCom's board.

Mr. Spitzer, in an interview yesterday, called the Citigroup executives' proposals ''a very constructive and perhaps important step forward.'' He said he saw them as an invitation to Mr. Pitt to impose rules immediately on the securities industry.

But Mr. Spitzer said he would prefer to see Citigroup go further and lead by example.

''I would love to see Sandy Weill step into the breach,'' he said, ''and adopt these proposals unilaterally and say to the public, 'You can trust us more because we are voluntarily doing this.' ''

He also said analysts should be banned from selling banking services to companies that are not yet public. Assignments to underwrite first-time stock sales, known as initial public offerings, are among the most lucrative business for banks and usually lead to future assignments.

''It should be extended to the I.P.O,'' Mr. Spitzer said. ''It clearly should be.''

In their letter, the Citigroup executives proposed two other prohibitions: Banning investment bankers from having any input into how much analysts are paid and banning the bankers from previewing analysts' reports before they are published.

A Salomon spokeswoman said that the firm already had those restrictions in place.

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November 8, 1990, New York Times, Key Man at Banking's Crossroads, by Leslie Wayne, Special to the New York Times,

In this city where relationships mean power, a former Harvard Business School professor who has the ear of Treasury Secretary Nicholas F. Brady, who himself has the ear of President Bush, may well become the Administration's strongest voice in reshaping the nation's banking system.

At a time when Congress will be considering the most sweeping revisions in banking since the New Deal, Robert R. Glauber is the Administration's point man. A relative newcomer who is only beginning to become hardened to Washington's battles, Mr. Glauber has earned Mr. Brady's confidence. Now the question is whether Congress will listen.

"Bob Glauber is the key man in a key spot at a key historic time," said Kenneth A. Guenther, executive vice president of the Independent Bankers Association. The Ultimate Test

Kenneth McLean, a private banking consultant in Washington, added, "Whether Glauber can convince Congress will be the ultimate test as to whether he gets an A or a C minus."

For Mr. Glauber, 51 years old, who left Cambridge, Mass., last year to join the Treasury, it is a chance to put into practice the free-market theories he has preached for nearly two decades at Harvard and as a consultant: that Government should not dictate what banks should do, so long as depositors and taxpayers are protected.

But now, instead of students, he speaks to Congressmen. Instead of university administrators, he faces some of Washington's savviest lobbyists. While academic journals will no longer carry his words, newspapers and C-Span, the Congressional in-house television channel, will.

"You could write things at Harvard and no one would read it," Mr. Glauber said in an interview in his Victorian-era office at the Treasury building. "Here, once you say something, it gets reported and everything is under a microscope." Headed Brady Commission

The banking issue, however, will not be the first opportunity Mr. Glauber has had to bridge financial theory with the power politics of Washington. He was tapped by Mr. Brady to head the Brady Commission investigation of the 1987 stock market crash. Then, after being named Treasury Under Secretary for Finance in 1989, the No. 3 job at the department, he helped draft the savings bailout law and became one of the Administration's essential people on the Hill.

And while he maintains that the infighting in the academic world is as tough as politics, he nonetheless has taken his lumps. Early into the debate over the savings bill, Mr. Glauber's study group proposed taxing savings deposits in spite of Mr. Bush's "no new taxes" pledge. That proposal kicked up a political ruckus that later died out with the suggestion but left Mr. Glauber tagged as a political neophyte.

Then he was in the forefront of a failed attempt to take power from the Commodity Futures Trading Commission and give it to the Securities and Exchange Commission in a jurisdictional dispute. This Brady Commission idea was killed by fierce opposition from the farm lobby and traders in Chicago loyal to the futures commission chairwoman, Wendy Lee Gramm.

"The transition from Harvard to Washington has not been easy," said a former staff member of one of the Congressional banking committees, who insisted on anonymity. "There's a difference in the personal chemistry of the way policy makers and politicians interact." Consultant to Business

Since 1964, Mr. Glauber has been a member of the Harvard faculty and is currently on a leave that ends in January but that is expected to be extended. Like many faculty members, he also consults for businesses.

Among other consulting fees, he has earned $300,000 from Morgan Guaranty Trust for advising on merger transactions; $114,900 from the Toronto Dominion Bank for management seminars; $106,000 from Sunbelt Coca-Cola Bottling in Charleston, S.C., in director and consulting fees, and $75,000 from Avon Products for financial advice. In line with Government policy, he halted these relationships while at the Treasury and will recuse himself from specific decisions affecting the companies.

At Treasury, Mr. Glauber operates out of an office so large that it once housed soldiers during the Civil War. Near a portrait of the Revolutionary War-era financier Robert Morris on the wall along with drawings by his two small children, he kicks around ideas with his staff about restructuring banking -- tearing down the remaining fragments of the Glass-Steagall Act, which restricts the scope of commercial banking.

The challenge is to bring about long-awaited changes that will inevitably lead to a concentration of financial power. The issues to be decided are fundamental:

*How much protection should the Government provide depositors without exposing itself to another savings debacle?
*Should Wall Street and commercial banks merge, and if so how?

*Should banks underwrite securities, sell insurance and operate mutual funds, and how should the Government and depositors be protected against these risky ventures?

*Should large corporations like General Motors or General Electric be allowed to buy banks?

*Should banks operate across state lines, and how should banking powerhouses be regulated?

The first salvo comes later this year when the Treasury issues a report written largely by Mr. Glauber and his staff, outlining the Administration's position. Then it is on to Congress, where the issues and the politics are complex.

The affected constituencies -- Wall Street, insurance, banks and business -- have some of the most powerful lobbies. And unlike his work in the savings debate, Mr. Glauber will be going it alone. 1 of 3 Officials

On the savings issue, he was one of three officials representing the Administration. He was joined by Richard C. Breeden, the S.E.C. chairman and former White House aide, who is well schooled in the ways of Congress, and by David W. Mullins, a Harvard professor recruited by Mr. Glauber to the Treasury and a recent appointee to the Federal Reserve Board, whose dry wit played well.

Of the three, Mr. Glauber was seen as the least politically skilled, sometimes stiff, sometimes nervous and sometimes overly professorial. "So far, he's been moderately effective," Mr. McLean, the consultant said. "He doesn't seem to deceive people or put a false spin on things. He's gotten a thicker skin and is developing an instinct for politics." Rough Outline for Change

While Mr. Glauber and his staff have not sorted out all the details, they have come up with a rough outline. At its core is a desire to shrink the "safety net" of insurance so depositors are protected without the Government being obligated to make good for losses.

He has suggested that banks be allowed to engage in a broad range of financial activities -- so long as they are segregated into separately capitalized subsidiaries not backed by Government protections. He also favors increased capital requirements and more regulatory oversight -- annual examinations, for instance, at large or troubled banks.

"There's a sense that the safety net has been dragged too wide," he said. "It was invented to let small savers sleep well at night. But it's gone way beyond that, and I don't think it was invented to protect large pension funds or big corporations."

He opposes reducing deposit insurance coverage below the current $100,000 level, which he fears could be destabilizing if depositors lose faith in the banking system. Instead, he favors closing loopholes that permit virtually unlimited coverage through multiple accounts.

"The system works best when the limitations are real," he added. "When depositors know their money is at risk, that limits the banks' ability to do silly things."

One of the trickiest issues is the height of the regulatory "firewalls" around risky new ventures. Too high, and banks will lack the freedom to compete and profit enough to protect depositors. Too low, and the safety and soundness of the banking system are endangered -- for instance, if a bank takes on too much underwriting risk.

Another issue is whether to allow corporations to buy banks: in short, if Goldman, Sachs & Company were allowed to buy a bank, why should Kidder, Peabody & Company, which is owned by the General Electric Corporation, be barred from it? Corporate ownership could bring sharp new managers to banking. But the danger is that corporations might tap into low-cost deposits to subsidize corporate ventures. Mr. Glauber said he "hasn't decided" the matter yet. Letting the Market Decide

In general, however, he said he feels that the Government should not dictate the future structure of the banking industry but rather set the rules and let the market decide.

"The Government should set sensible ground rules and let the market dictate who wins and loses," Mr. Glauber said. "There will probably be consolidations of the industry, but we, where possible, should let the companies decide what makes sense. There will probably be a variety of surviving firms that will look very different from what we have today."

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September 25, 1990, Reuters, Bank Insurance Ceiling Backed

A top Treasury Department official urged today that the current ceiling of $100,000 for deposit insurance coverage on individual accounts in banks and savings and loan associations be kept.

Individual accounts of up to $100,000 are now federally insured should a bank or savings institution fail. There have been suggestions in Congress that this amount is too high.

Robert Glauber, Treasury Under Secretary for Finance, told a meeting of the Institute of International Bankers that the $100,000 "has become a fabric of the system, and I think it is going to be very difficult to roll that back."

The Treasury is completing a study on deposit insurance changes.
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March 30, 1990, New York Times, Greenspan Favors S.E.C. As Stock Futures Regulator, by Nathaniel C. Nash, Special to the New York Times,


Alan Greenspan, chairman of the Federal Reserve Board, gave tentative support today to Treasury Department efforts to increase the regulatory power of the Securities and Exchange Commission and reduce that of the Commodity Futures Trading Commission.

His remarks, the latest in a series by high Government officials, are putting pressure on the commidity commission to cede regulation of stock index futures to the S.E.C., which regulates stock trading.

The issue - a highly technical one on the surface - has produced an emotional squabble in the financial industry, at the two agencies and on Capitol Hill.

Some people in Washington say it is purely a turf battle: an attempt by Richard C. Breeden, the S.E.C. chairman, to enlarge his agency while Wendy L. Gramm, the C.F.T.C. chairman, tries to protect her territory.

But others say it goes far beyond turf. Among the issues they cite are the future international competitiveness of the nation's financial markets, the protection of investors from market manipulation and the stability of the financial system.

The Treasury Department, led by Secretary Nicholas F. Brady, argues that split regulation of stock-related products stifles innovation, adds to market volatility and makes enforcement actions involving both markets more difficult. Mr. Brady has made the subject a high priority.

Over the last few weeks, he and the Treasury have begun a major offensive that some people are calling an attempted hostile takeover of the C.F.T.C. While Mr. Breeden has refrained from saying he thinks his agency's authority should be enlarged, he has pointed out problems with a split jurisdiction.

All four members of the White House working group on market regulation - Mr. Breeden, Mrs. Gramm, Mr. Greenspan and Robert Glauber, Under Secretary of the Treasury - appeared before the Senate panel today. Even though she was outnumbered, 3 to 1, on the working group, Mrs. Gramm held her ground, saying she strongly opposed shifting any jurisdiction to the S.E.C.

''The commission does not believe a change in C.F.T.C. jurisdiction will solve any of the real issues our market faces,'' she said.

Mr. Greenspan said he was concerned that the S.E.C., which oversees stock trading, does not regulate futures contracts that are based on the value of stock indexes like the Standard & Poor's 500. Investors use those contracts to speculate on the course of the stock market or to hedge their market positions.

He said he would reluctantly support transferring authority over stock index contracts from the C.F.T.C. to the S.E.C., even though that might result in the futures exchanges being subject to two regulatory agencies.

''I came out on the margin in favor of moving all index futures to the S.E.C.,'' Mr. Greenspan told the Senate panel. ''It was a very close call.''

Innovation as an Issue

He did not endorse combining the S.E.C. and C.F.T.C. into one agency. Mr. Glauber said the Treasury was studying that possibility, but Mr. Greenspan said the Fed was concerned that such concentration of regulatory power might stifle innovation.

Mr. Greenspan also said the S.E.C. should set the margin rules on both stock index futures and stocks, removing that authority from the Fed and the futures exchange. Margin requirements govern the use of credit in buying securities.

In perhaps his strongest comments of the day, Mr. Greenspan said the Fed's board had been deeply disturbed by the futures exchanges' decision to raise margin levels significantly after stock prices plunged last Oct. 13. The decision, he said, required investors to come up with more than $1 billion, posing the risk of a severe liquidity crisis. He said that the move was in the best short-term interest of the exchanges, but that exchange officials had failed to consider the overall ramifications.

''I was shaken by that,'' he said. ''The clearinghouses and the exchanges have got to think about the long term, the basic fundamentals.''


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February 9, 1989, New York Times, Backstage at Savings Rescue: Urgent and Secretive Process, by Peter T. Kilborn, Special to the New York Times,


On the way to President Bush's bailout plan for hundreds of bankrupt savings institutions, senior Administration officials and Alan Greenspan, chairman of the Federal Reserve Board, decided on Sunday night to pump billions of dollars in emergency loans into the institutions if the plan touched off a run on deposits.

The meeting, held in the Roosevelt Room of the White House, was the last, behind-the-scenes step in an urgent and secretive process that began slowly in October and resulted in the far-reaching plan announced on Monday.

During those weeks, a handful of top Administration officials combed through scores of ways of financing the rescue and overhauling the savings regulatory system. The plan presented Monday incorporated many novel approaches. But along the way many other ideas, from the politically incendiary to the absurd, were discarded.

Until Mr. Bush's announcement, however, few people knew for sure what the plan would entail and what the reaction would be. Even the day before the Sunday meeting, not everything had been settled until the President put his own pencil on his advisers' recommendations.

As it turned out, the need for the Fed's emergency cash did not arise, and on Tuesday the Administration and the regulators took the first, dramatic steps in putting the bailout plan in place. They swept into four insolvent institutions and took control, and within a month they expect to have taken over the 220 others that have fallen into similar straits.

Sometimes Clumsy Process

The process from October until the President's announcement occasionally proved clumsy, with some trial balloons producing the first big embarrassments for the new Administration. But participants also note that there could have been many more had it not been for the people Treasury Secretary Nicholas F. Brady relied on to draw up the plan. Two of them, Robert R. Glauber and David W. Mullins Jr., are professors of finance on two-year leaves from the Harvard Business School. They were the ones who directed Mr. Brady's comprehensive study of the stock market rout in October 1987.

The two professors, who are about to be nominated for Treasury posts, ''compartmentalized'' everything, telling officials they turned to for information too little to give them a clue about the overall plan, said M. Danny Wall, chairman of the Federal Home Loan Bank Board.

What resulted is an unusually bold plan for toppling entrenched systems of Government, robbing some institutions of their turf, especially Mr. Wall's bank board, and enhancing the authority of the Treasury and the Federal Deposit Insurance Corporation, which insures deposits at commercial banks.

Mr. Glauber and Mr. Mullins dealt almost entirely with the overhaul of the industry's regulatory apparatus, a bigger and more complex exercise than the other important issue, the financial and budgetary implications of the rescue. In that area, Administration officials say, there was little dispute.

Richard G. Darman, the President's budget director, accepted the Treasury's estimate of the $90 billion size of the problem and the proposal to sell $50 billion in bonds to help solve it. That and the budgetary calculations, leading up to a $39.9 billion taxpayer cost over 10 years, were Mr. Darman's.

''He was very much the author of the financing plan,'' Mr. Seidman said. ''Such things as an interest guarantee to help bring down the interest the Government would have to pay on the bonds were his ideas. It was a very ingenious plan.''


There might have been many more leaks of the novel and politically risky approaches that the Treasury considered had the professors not adopted a strategy that kept everyone but Mr. Brady and Richard C. Breeden, President Bush's assistant and the White House point man on the overhaul, out in the cold.

Rescue Operation Began in October The rescue of the savings system started in October, a month after Mr. Brady, who would stay on in the Bush Administration, became Treasury Secretary. The Treasury's Under Secretary for domestic finance, George D. Gould, who had made it known that he would soon retire, was seething about the soaring estimates being made by consultants about the size of savings institution liabilities.

To work with him, Mr. Brady brought in Mr. Glauber and Mr. Mullins, who have spent much of their careers advising Wall Street firms.

Mr. Mullins was soon made Acting Assistant Secretary for domestic finance, but Mr. Glauber, who is expected to be named Under Secretary eventually, joined as a consultant. He has taken over Mr. Gould's office, room No. 3312, but the large, gold-leaf title over the transom has been whitewashed away, and at the side of the entrance, where names and titles are normally displayed, there is only Mr. Glauber's name. This helped suit the secrecy that Mr. Brady sought to impose on the men's mission.

Mr. Brady told Mr. Glauber and Mr. Mullins to tackle the issue that Mr. Gould had started to struggle with - getting information the Treasury could trust about the seriousness of the problem. As one Treasury official explained it: ''Brady said, 'Look, before we do anything, you've got to get the facts - how big it is, how big it could get, why is it every one of these estimates comes to a different number. Get that before you tell me what kind of solution to get.'"

So the professors brought in their own computers and used them to compile the periodic "call reports" that the savings institutions provide their regulators. They concluded that the insolvencies that taxpayers and the industry would have to pay for amounted to $75 billion to $80 billion. On Monday the Administration put the figure at $90 billion, which in its view provides some added funds if the problem turns out worse. In the view of some industry analysts, even that number is too low.

The official said Mr. Brady then laid down some principles for Mr. Glauber and Mr. Mullins in their quest for solutions. He told them no public funds could be used until industry funds had been exhausted and not even then without a reform of the system; he also said they should list every conceivable option, and that they should sound out Congressional leaders as their work progressed to get their views and start building their support.

Some Options Leaked to the Press As the process moved on, some options were leaked to the press because of the requirement for consultation with Congress. One that was abandoned early was lowering the $100,000 limit on the size of a deposit the Government would insure; but it reappeared in the 1989 Economic Report of the President, the last prepared by President Reagan's chief economist, Beryl W. Sprinkel.

Mr. Sprinkel had brought aboard a consultant to help him with the report, Allan H. Meltzer, a professor of economics at Carnegie-Mellon University in Pittsburgh, and Mr. Meltzer, Administration officials said, inserted the proposal to reduce the deposit ceiling.


In the face of the ensuing outcry from Congress, the Treasury immediately rejected the suggestion, then not among its options. ''That idea was disowned by more people than go to Redskins games,'' said L. William Seidman, chairman of the F.D.I.C., which has taken over much of the regulatory authority of Mr. Wall's bank board.

But there was tougher going over another proposal - a fee of 25 cents, in effect a tax, that savings units and bank customers would have to pay on each $100 of deposits.

The professors at the Treasury considered the fee a reasonable option, and Mr. Brady said on national television that he would present it to the President. But Mr. Breeden, who was the President's principal adviser on the issue, and John H. Sununu, the chief of staff, led the retreat, and the option was abandoned.

Many other options were dropped, too, not all on political grounds. One that was considered was applying a stamp tax, in effect, to securities backed by mortgages every time they changed hands. ''And then,'' a Treasury official said, ''there was a guy who came in and said, 'My solution will get rid of your problem, the drug problem, the deficit problem and a lot of other problems.' He said, 'Get rid of money. Give everyone an Americard, and have them put their thumb print on it.' ''

Mr. Wall was in on the planning, for good reason. He would be losing an enormous amount of turf, and the White House and the Treasury wanted to avoid public disputes later. ''Brady's approach,'' a Treasury official said, "was to tell Glauber and Mullins, 'If you've got such good ideas, get these guys to sign on first so you won't have a big fight.' "

Meetings were now proceeding nonstop at the White House and the Treasury, as Mr. Brady, Mr. Glauber, Mr. Mullins, Mr. Breeden, Mr. Sununu and often Mr. Greenspan put the last touches on a list of recommendations to submit to Mr. Bush at a meeting at Camp David on Saturday.

The President ''raised questions,'' the Treasury official said. ''He wanted to be sure we had gotten the whole problem. He wanted to be sure this wasn't going to happen again.''

Mr. Bush made some changes, which officials declined to disclose, but he discussed some of the recommendations and juggled the amounts by which Federal deposit insurance premiums would be raised for commercial banks and the savings institutions. One official said he lowered the proposed premiums for both.

The participants, including Mr. Brady, Mr. Darman, Mr. Glauber, Mr. Sununu and Mr. Breeden, sat with Mr. and Mrs. Bush for a lunch of seafood and avocado salad. Mr. Greenspan showed up then, too, but little business was discussed, officials said. ''We talked about whether George Bush Jr. would run for governor of Texas,'' an official said.

Assuring a Flow Of Emergency Funds By then the President had made his decisions. But there remained the question of assuring an instant flow of emergency funds to the nation's financial institutions while the relationships among regulators were being redefined. ''If there was a need for cash,'' an official said, ''there had to be a mechanism in place to provide for it.''

Some participants in the rescue plan worried about a run, especially after the report that the President would consider the depositor fee and network television shows conducted interviews with savings unit customers who said they might remove deposits. A slight rise in withdrawals seemed to confirm these people's fears.

Other officials, by contrast, disputed this, but they, too, agreed that the Fed and the financial system had to be ready just in case. Often under such circumstances, the Fed, through its so-called discount window, can extend massive amounts of loans to banks and other institutions that need money for emergencies. But the Fed requires that the borrower put up collateral, and the savings institutions posed a problem.

The insolvent ones still had some assets that could be put up but conceivably not enough to support the loans they would need to stop a run. So, according to one official, arrangements were made for the F.S.L.I.C. to put up collateral of its own if necessary. All this was settled on Sunday in the Roosevelt Room, he said. "Our approach was, 'Why take any risk? Let's have the papers signed. Then everybody knows what funding is available.' "




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February 14, 1988, New York Times, A Task Force Plays Beat the Clock, by William Glaberson,


THE first time Robert R. Glauber saw room 1116 at the Federal Reserve building in New York, it depressed him. That day in early November the big room where he would spend the next two months had one chair in it, one desk and one telephone.

President Reagan had just appointed Nicholas F. Brady to investigate the stock market collapse and Mr. Brady had named Mr. Glauber staff director. Mr. Reagan had given the Presidential Task Force on Market Mechanisms 60 days.

Mr. Glauber, a Harvard Business School professor, peered in at the linoleum-covered room that the Federal Reserve had given the newly formed commission for its headquarters. ''I just looked and said: 'My God, how are you going to fill this with people and get a report out in 60 days?' '' Mr. Glauber remembered.

Somehow, he did it. On Jan. 8, amid handshakes and smiles in the Oval Office, the Brady commission presented its report to the President while the Government Printing Office churned out 10,000 copies. The report instantly drew headlines around the country. In the weeks since its release it has become the most talked about of the many studies spawned by the market collapse. It presented the first official account of the events of October and advanced several provocative proposals.

The document was the product of an unusual team of 50 people Mr. Glauber pulled together. From Mr. Glauber himself to Mr. Brady and other business leaders who were members of the task force to a group of financial whizes who work at the frontiers of the marketplace, the commission and its staff were a microcosm of the financial community.

It was an extraordinary time for the people who signed on to Mr. Glauber's staff. They worked out the most mundane details of setting up an office while they argued about the future of the nation's financial system.

The members of the task force were Mr. Brady, co-chairman of Dillon Read & Company; James C. Cotting, chairman of the Navistar International Corporation; Robert G. Kirby, chairman of the Capital Guardian Trust Company; John R. Opel, retired chairman of the International Business Machines Corporation; and Howard M. Stein, chairman of the Dreyfus Corporation. Together they interviewed scores of people and set targets for the investigation. But it was the staff that got the tough assignments. ''They did the work,'' Mr. Stein said.

THE Brady commission was born two days after the market collapse when the telephone rang in a private dining room at Dillon Read in Manhattan, where Mr. Brady was sharing lunch with a client. Howard H. Baker Jr., Mr. Reagan's chief of staff, was calling. The conversation was brief. Mr. Baker, Mr. Brady remembered, simply said the President wanted Mr. Brady to look into the collapse. ''So I said yes.''

The first question was who would head the staff. Steven R. Fenster, one of Dillon Read's top executives who had briefly taught at Harvard himself, suggested Mr. Glauber. The Harvard professor knew economics and corporate finance. More important, he headed Harvard's Advanced Management Program, a mid-career executive program that gave him widespread contacts.

Within days, Mr. Glauber and David W. Mullins Jr., another Harvard corporate finance professor who Mr. Glauber tapped as his deputy, were set up in a borrowed apartment on Sutton Place and a temporary office at Dillon Reed's Madison Avenue headquarters. They started to sketch out the organization for the study.



Next, they made the move to the Federal Reserve building on Liberty Street in the financial district and started to collect people. The two Harvard men asked another, James F. Gammill, an associate professor who understood the mysterious world of computer processing, to join them. They also borrowed ex-Harvard teachers Bruce C. Greenwald from Bell Communications Research and E. Philip Jones, Shearson Lehman Brothers Inc. But Harvard Business School dean John H. McArthur asked them to keep the Harvard contacts low profile and they tried to comply. ''I think John felt it wouldn't be in the interests of the report that it be perceived as a Harvard Business School report,'' Mr. Glauber said.

Mr. Brady called Joel J. Cohen, a top merger lawyer at Davis, Polk & Wardwell. Mr.Cohen, about to turn 50, had decided to try something different and had retired 19 days before the stock market tumble. Mr. Cohen agreed to become chief counsel.

Charles G. Phillips, a former managing director of Morgan Stanley, called. He was still bound by an agreement that he would not compete in the investment banking business after an unfriendly departure. He knew everyone on Wall Street and, as he put it, ''I know how to run three-week projects.'' Mr. Glauber began calling him the chief of staff.

From the start, Mr. Glauber knew there was no time for everyone to master the intricacies of the securities markets as they were functioning in the 1980's. Such powerful new inventions as stock index futures and portfolio insurance were highly complex. The solution, Mr. Mullins said, was to make the commission's staff itself a microcosm of the market. ''The process,'' said Mr. Phillips, ''was one of bringing people together and trying to beat out consensus.''

Mr. Glauber used his connections with the heads of firms, asking them to send volunteers. Mr. Phillips worked his contacts. Tudor Investment Corporation sent one of its bright young practitioners of the new trading techniques. Salomon Brothers and Goldman, Sachs & Company, each sent one of their rising stars.

Meanwhile, on the 11th floor at the Liberty Street building, the scene was like a movie set. In a four-day period, the Fed's administrative staff divided Room 1116 with temporary walls, supplied gray metal desks, and installed a complete phone system. A team from the Treasury Department's Office of Operations flew in and obtained office machines and personal computers from the Internal Revenue Service and other federal agencies.

Mr. Glauber split the growing staff into 11 working groups. One would look at the ''plumbing'' of the markets, the way they worked and the regulations that governed them. A group of McKinsey consultants agreed to handle a survey the commission sent to big traders. An investment banker from First Boston would put together a description of the bull market that preceded the collapse.

But from the beginning, everyone focused on the work of one group. Mr. Glauber had put several of the bright young Wall Street people together and asked them to answer the questions everybody was asking: Exactly how did the markets self-destruct between Wednesday, Oct. 14, and the following Wednesday, Oct. 21?

The focus sharpened on Nov. 10, at the first task force meeting attended by John R. Opel, the retired chairman of I.B.M. For a while, the group retold anecdotes of the type then preoccupying everybody in the financial world about Black Monday. Then, as Mr. Glauber remembers it, ''Opel said, 'We can't do this on the basis of anecdotes. Get us the data.' '' From then on, the team had its marching orders.


But they were difficult to follow. No one had ever put together a complete financial chronology that matched the records of the futures and stock exchanges and the regulatory agencies with buyers and sellers. The technology had become so complex that trading was a huge puzzle that seemed impossible to fit back together.

The clock was ticking. One of the Harvard men had worked with a Pennsylvania State University computer team on a stock-market computer model. They had software and expertise that would have taken months to duplicate. The staff members quickly pressed the Penn State people into service to make sense of the computer tapes supplied by the stock exchanges.

SLOWLY, the pounds of printouts Penn State produced started to yield answers. But as November wore on, the ''Who Bought and Who Sold'' team realized they needed more. The stock exchange tapes showed the brokers involved in big trades, but not the ultimate buyers and sellers of huge blocks of stock at critical moments.

Someone tracked down a new set of tapes at the Depository Trust Company, a clearinghouse for big trades that contained the missing information. But the Penn State people and their computers were at the point of exhaustion, Thanksgiving was approaching, and no one else, it seemed, could supply the computer expertise in time to get the data base talking to people at Liberty Street.

Well, maybe there was someone. Mr. Glauber called Mr. Opel at his retirement home on Sanibel Island, Fla. ''John,'' he said, ''you said we had to tell you who bought and who sold. We can't do it. Can you help?''

Mr. Opel made a phone call. A few hours later, a small delegation from the retired chairman's old company, I.B.M., arrived. A day and a half later they had one of their big mainframes singing out transactions of the big traders during October.

There was only one hitch. When the I.B.M. technicians showed up to make a telephone connection with their corporate computer, they looked at what they saw as an uninspiring collection of government-issue I.B.M.-clone personal computers. They politely excused themselves and returned shortly with the real thing.

By this time, the staff had outgrown room 1116, and spread across the hall. And with the growth had come problems. There were leaks.

''Any time we found out something exciting, it got into the press,'' said one staff member who asked not to be identified. The ''Who Bought and Who Sold'' group moved downstairs to the more secure 10th floor, where the Fed's executive offices are. And they began referring to some of the big players with code names. One of the big portfolio insurance sellers was ''Cowboy.'' Traders at a big securities house were ''The Flyers.''

By early December, the task force began to make sense of all the information. Mr. Mullins, who had become the staff's chief analyst, led several Boston weekend retreats for the senior staff. In a conference room at the Embassy Suites hotel near the Harvard Business School, they went through the critical events of that week - over and over again.

THROUGH the holiday season, the mammoth task of pulling the information together and fashioning conclusions was becoming urgent. Staff members worked through Christmas and New Year's refining draft after draft and shipping the documents out to the task force members for comment. Frequently, the overtaxed temporary secretaries would press the wrong buttons and a chunk of critical text would disappear. At 2 one morning, an exhausted typist collapsed. He recovered after co-workers called an ambulance.



Four days before the commission's date with the President, a staff member carried the manuscript to Washington. For the Government Printing Office, the assignment was routine. It assigned armies of printers - and 25 proofreaders to scan every page.

On the morning of Jan. 8, Washington was paralyzed by a snowstorm. But the Brady commission had not come that far to be stalled by an act of God. In two four-wheel drive vehicles supplied by the White House, eight of the panel members and staff members made their way down Pennsylvania Avenue from a Capitol Hill hotel where they had spent the night. The Treasury Department's operations people saw to it that the report made it from G.P.O.'s presses into the hands of official Washington and the press corps at the right moment. Mr. Brady began answering what would be weeks of questions about the report.

Back in New York, Room 1116 on Liberty Street was quiet again. ANALYZING THE ANALYZERS Vital statistics on the production of four studies of last October's stock market collapse. Number of Number of pages Estimated days from first (including number of appointment appendixes) contributors to publication Presidential Task Force on Market Mechanisms 379 50 65 Securities and Exchange Commission 877 110 105 General Accounting Office 103 310 95 Commodity Futures Trading Commission 290 20 97



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February 8, 1988, New York Times, Talking Business; with Glauber of Presidential Task Force; Debate on Letting 2 Markets Interact, by James Sterngold,

A provocative finding of the Presidential commission that studied the October stock collapse was that cutting off the ability to perform trades between the stock market and the stock index futures market aggravated the crisis.

Later, however, the Securities and Exchange Commission's report placed much blame on interaction between these two markets and indicated that the phenomenon was not well understood.

Now the New York Stock Exchange proposes a rule to shut down a key means by which the two markets interact whenever there is a large swing in the Dow Jones industrial average. This refuels the debate over whether to strengthen or break links between the two markets at times of stress.

Robert Glauber, a Harvard business professor and executive director of the Presidential task force staff, discussed such issues in an interview.

Q. Your study seemed to conclude that there was too little - not too much - arbitrage-type trading between the stock market and the stock index futures market. Is that your view?
A. Our report clearly indicated that we believed index arbitrage was a force for good during the crash. The interruption of arbitrage was a real problem. This is such a complicated system, and it was never subjected to these pressures before. Nobody knows how it would react again. But our best answer was that the system was worse off when the link between the two markets was severed.

Q. Would you oppose the Big Board's plan for breaking this link in times of stress?

A. What will happen under the stock exchange experiment I don't know. But I think that the idea of experiments is a good thing. We literally don't uderstand that much about how the system works. What I think we would be happier seeing is, in addition, experiments involving cooperation of a couple of different marketplaces. What we learned is that the consequences of an experiment in one market will flow over into the other market.

Q. There are no indications that the exchanges and the regulators are any closer to working together. Is that a problem?

A. The mindset of these exchanges tends to be one of looking at just their own exchange. What we said about there being one market may seem remarkably obvious once it is said. But what is remarkable when you really look at it is how much the regulation is market-by-market and how much the activity of the exchanges is market-by-market. It is a patchwork, and that is a real problem.

Q. Who does index arbitrage?

A. A majority of it is surely done by securities firms for third parties. The typical person doing it would be an index fund, a money manager who indexes his clients' assets to one of the stock market indexes. You would be looking here at the core investments of a pension fund. They are simply trying to add to their return by doing the arbitrage. They are substituting a futures contract for a stock. What many do not understand is that they increase the risk of their portfolio because there is a different credit risk in futures than in stocks.

Q. Your report gives differing pictures of how the specialists on the floor of the stock exchange performed during the crisis. All in all, did they perform well?

A. The general feeling of the task force was that whatever job they did, if they did a better job it wouldn't have made a whole lot of difference. They simply could not have been a vehicle for slowing this thing down very much.

Q. Your report shows that heavy selling by mutual funds was part of the problem. If the funds were required to keep more cash on hand to pay off a flood of redemptions, would that cushion the market against heavy selling?

A. That certainly would be one approach. Another approach would be to say that they have to keep lines of credit open of a certain size. But the fact is that different mutual funds have different marketing strategies. Some funds have adopted as their strategies the presentation of liquidity, that you can switch from fund to fund or to cash readily. Some of those funds understand now better than they did before that that carries with it certain kinds of dangers. Whether you get to the level where you require new regulations is a matter of how much you like regulation.

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October 31, 1987, New York Times, Market Turmoil: Harvard Professor to Aid Stock-Plunge Panel, by Leslie Wayne,

Robert R. Glauber, a Harvard Business School professor, has been selected executive director of the Presidential commission investigating the Oct. 19 stock market plunge, Nicholas F. Brady, a Wall Street investment banker heading the panel, said yesterday.

Mr. Glauber, a specialist on financial markets, is chairman of Harvard's Advanced Management Program, a continuing-education program for business executives. His duties with the commission will be to coordinate the data and set the agenda.

Mr. Brady, chairman of Dillon, Read & Company, also said in a telephone interview that the commission members would be announced on Monday and that it might include five members, the maximum number allowed by the Presidential directive that established it. President Reagan said in his news conference on Oct. 22 that the commission would have three members. Final Decision by Baker

The final decision on the commission's composition will be made by Howard H. Baker Jr., the President's chief of staff, based on recommendations from Mr. Brady. While Mr. Brady declined to disclose who was being considered, he did say that commission members would include a representative of the securities industry, investors, someone familiar with the use of computers in the market place, and a representative of publicly held corporations.

Mr. Brady also said that the commission would begin its work next week. He doubted the panel would report its findings in the 30-day minimum period set by the President but said that it would not take more than the 60-day maximum.

Although Mr. Brady commands considerable respect on Capitol Hill, where he served as the Republican Senator from New Jersey for six months in 1982, some lawmakers are concerned that the Presidential task force he will head cannot do a thorough investigation in 60 days.

As a result, Senator Donald W. Riegle Jr., the Michigan Democrat whose subcommittee on securities will also be investigating the underlying causes of the market collapse, wrote Mr. Brady on Wednesday to ask that the task force consider recommending creation of a special advisory commission on the securities market. Basis of Proposals

That commission would be similar to the one headed by Milton Cohen, a Chicago securities lawyer who examined the markets in 1963. Its findings have formed the basis of Congressional proposals on securities regulation for the last 25 years.

In addition, Mr. Riegle has asked for Mr. Brady's recommendations on the creation of an international regulatory body to oversee the global financial markets. He also asked Mr. Brady to consider the need to increase spending and staff immediately for the S.E.C.'s market regulation and investment management divisions and to exempt them from cuts currently in the works as part of the deficit reduction plan.

The regulatory division's market surveillance section has been the focal point for monitoring market activity since the collapse on Oct. 19, and the investment management division oversees mutual funds.

According to a number of independent assessments from the securities industry and the corporate securities bar, these divisions remain grossly underfinanced, an aide to Mr. Riegle said.

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November 5, 1987, New York Times, Reagan Chooses 4 Executives for Panel on Market Turmoil, by Susan F. Rasky, Special to the New York Times,

President Reagan today appointed four executives, each apparently selected to represent a different sector of the investment community, to the task force he created two weeks ago to study the turmoil in the financial markets.

The panel, led by Nicholas F. Brady, consists of James C. Cotting, chairman and chief executive of the Navistar International Corporation; Robert G. Kirby, chairman of the Capital Guardian Trust Company; Howard M. Stein, chairman and chief executive of the Dreyfus Corporation, and John R. Opel, former chairman of the International Business Machines Corporation.

The White House also formally announced the appointment of Prof. Robert Glauber of Harvard University as the executive director of the panel. Professor Glauber will be responsible for coordinating day-to-day operations.

Mr. Brady, the chairman of the Wall Street firm Dillon, Read & Company, is a former United States Senator from New Jersey and a close friend of Vice President Bush, The President, who met briefly with the panel's members at the White House, asked them to determine what happened to the financial markets last month and to assess the performance and condition of the markets. Mr. Reagan also asked them to study what changes might be made to insure the smooth functioning of the markets and to maintain investor confidence.
The task force was directed to report to the President, the Treasury Secretary and separately to the chairman of the Federal Reserve Board within 60 days, a timetable that many on Wall Street and in Washington think is unrealistic.

The selection process was apparently complicated by efforts to placate rival factions in the financial community and competing jurisdictional interests among regulators.

The Selection of Brady

Mr. Brady's selection to head the task force was apparently serendipitous. An Administration official said Mr. Brady had shared a flight from London to Washington with Treasury Secretary James A. Baker 3d on Oct. 20, the day after the Dow Jones industrial average fell 508 points, and then accompanied Mr. Baker to briefings at the Treasury. Mr. Baker is also a close friend of and adviser to Mr. Bush.

Mr. Brady had previously said that he wanted a panel drawn from different regions of the country and, particularly, at least one expert in the computer technology that has revolutionized financial trading. Those named today partly fulfill that goal, although none of the business leaders, including Mr. Brady himself, is known as a major player in the high-stakes world of junk bonds, leveraged buyouts and derivative financial instruments, and none is truly a technical expert in computers and electronics.

Mr. Opel, for example, represents the nation's leading computer manufacturer, but he has been associated with the sales and administrative side of I.B.M. rather than with research and technical operations.

As head of a large money management firms, Mr. Kirby will apparently be the expert on the institutional investors who manage billions of dollars in pension and corporate assets and whose buy and sell decisions dominate the stock market.

Mr. Stein brings his experience in running one of the country's most successful mutual fund companies. Mutual funds have become the primary vehicle for small investors in the stock market.

Mr. Cotting will apparently represent the nation's large corporations, whose stocks have taken a terrible beating in the volatile trading. A Broad Mandate

The panel, formally known as the Task Force on Market Mechanisms, appears to have been given a fairly broad mandate in examining what led to the stock market's plunge on Oct. 19 and its subsequent volatility, including such issues as the political climate and the fluctuation of the dollar.

Marlin Fitzwater, the White House spokesman, said he expected the task force to involve itself in these larger questions and not just matters such as the technical operation of the markets.

Asked whether matters such as the budget deficit and investor confidence in the country's leaders were within the panel's scope, Mr. Fitzwater replied, "I think certainly that's fair game, and I would assume they would consider that."

But Mr. Brady, in an interview last week, seemed eager to avoid treading too deeply in the political aspects of the trade and budget deficits that have so occupied Washington and Wall Street in recent months.

:Anybody who thinks we are going to come up with some comment on the twin deficits is way wide of the mark," he said.

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