The comptroller of the currency gave the nation's securities dealers a sharp tongue lashing today for dragging their feet in creating a self regulatory body to deal with the growing number of abuses in the selling of government securities.
John G Heimann said if the members of the Public Securities Association, meeting here, did not move to curb abuses such as encouraging unsophisticated financial institutions to speculate in government securities, federal agencies would take steps to regulate the industry.
Hours after Heimann's morning address, the trade group representing those who buy and sell government securities (state, local and federal) announced it had voted to establish such a self regulatory agency that would set up tandards of behavior and, presumably, discipline dealers who violate those canons.
Gedale B. Horowitz of Salomon Bros., who heads the PSA, said membership in a self regulatory body would be voluntary, but that dealers would find it necessary to join.
Most of the abuses Heimann is concerned about do not affect individual investors but rather companies and financial institutions who are relatively unsophisticated in the big government securities markets.
He said regulatory agencies that police the investments of financial institutions have issued a substantial number of "cease and desist" orders to banks, credit unions and savings and loan associations to stop them from making bad deals with some government securities salesmen.
The type of abuses are often complex, but usually deal with some sort of misrepresentation of what can happen to government securities prices or how much certain securities are worth as collateral.
For example, a small bank might commit itself to buy $1 million of government securities at a certain price at some date in the future. In return, the seller may give the bank some sort of a discount that is paid immediately and goes on the bank's income statement when the deal is make. But, when the bank buys the securities in the future, it may find them worth substantially less than the price it committed itself to pay.
The new self regulatory body will have to get clearance from the Justice Department, to insure that there are no anti-trust violations involved in such a collaboration of dealers. Such clearance has been slow in coming for a similar group that wants to set up a self regulatory body to discipline deals in mortgage backed securities such as those issued by the Government National Mortgage Association.
The nation's stock exchanges, for example, are self regulatory bodies.
In another development, Assistant Treasury Secretary Roger Altman told an unfriendly group of public securities underwriters that he expects the administration to formally oppose the issuance of tax exempt securities sold by municipalities to produce funds that are then lent at low rates to home buyers.
Rep. Al Ullman (D-Ore.) has introduced a bill in the House Ways and Means Committee, which he chairs, that would outlaw such municipal securities.
The Public Securities Association, whose members make money by selling these as well as other tax exempt securities for states and municipalities, announced this afternoon that it opposed the Ullman bill.
Horowitz told reporters he fears that the elimination of the interest exemption on mortgage municipal securities is merely the first step toward elimination of all tax exempt issues.
Altman said the government already provides many billions of dollars of direct and indirect subsidies to home mortage lenders. He said the sharp growth in the number of municipal bonds designed to support single-family home loans will crowd out other, worthier tax exempt issues (such as those for sewers and pollution control) and will raise the cost of borrowing for all state and municipal issuers of tax exempt bonds.