Wall Street executives want the Drysdale affair to disappear from public view.
It was like a bad dream for them. To paraphrase one trader, it was as if Wall Street had been betrayed by a family member, in this case the nation's third-largest bank.
As market insiders view it, one member of the small, elite family that controls the nation's financial markets--a bank referred to not simply by its name, but with a title--was on the verge of failing to back its obligations. That institution, known widely as "The Chase," had passed a bad check--Drysdale Government Securities.
The irony is that no one seemed to be suggesting that something was basically wrong with a financial system that permits a single and obscure government securities trader to threaten seriously the stability of that market and at the same time to wipe out the quarterly profits of an $80-billion-asset bank.
"It is more or less an aberration," said Robert Portnoy, general counsel for the Public Securities Association, a trade group whose member government securities trading firms abhor the thought of stepped-up government regulation of their business. "Our industry has worked remarkably well in its present form. It operates and continues to operate very well."
But for more than 24 hours last week, the government securities market did not work all that well because an unregulated, crap-shooting trading firm had gambled heavily--and ultimately unsuccessfully--on repurchase agreements. Had Chase Manhattan Bank not agreed to pay $200 million in interest owed to brokerage houses, the perception and reality of instability in the market might have created panic.
"They were all trying not to imagine the unimaginable," said Michael Savage, the lawyer for Drysdale's strategist, David Heuwetter, of the bank and brokerage executives who negotiated their way out of a near crisis.
That decision by the bank demonstrated that, although Chase, in effect, had given credit worth hundreds millions of dollars to an obscure trader, the system works well, said a leading Wall Street executive.
Some regulators appear less certain. The American Stock Exchange's options watchers are conducting what they say is a routine investigation of heavy trading there in Chase "puts and calls" during the intense days of last week. The Securities and Exchange Commission, which directly regulates most other securities transactions, is only on the Drysdale case because of the possibility of fraud in the firm's operations.
"The whole business is based on trust and living up to your obligations," said the executive, who, like most, asked for anonymity on the Drysdale matter. "There was no way" Chase "could renege on the payments. We knew we'd either get it when they came to their senses or we'd get it in the courts.
"The Chase had the wherewithal to meet their obligations," he said. "It proves that even an institution like the Chase can be fragile in terms of credit controls. But you can't say the whole concept of repos repurchase agreements creates an unnecessarily risky situation."
But by speculating on interest-rate movements the Drysdale dealers attempted to outguess even the best Wall Street minds, most of whom now seem to realize the dangers in commitments based on hunches about short-term interest rate movements.
There is no direct regulation of firms engaged in trading only government securities, a business that involves transactions of at least $30 billion a day for the leading, regulated brokerage firms. And these firms play a vital role in a market that is central to the financing of the federal government itself.
In an era when regulation is politically unfashionable, Congress is making barely audible noises about stepping up its regulatory oversight of the government securities business. But the prospects for legislative action are dim.
Rumors abound here about other potential law enforcement problems stemming from Drysdale's operations. But the fact remains that no one was really watching, and, of course, that it could happen again. The question of whether the ball lands the second time in the hands of a cash-rich banker is one no one here is eager to see answered.