The chairman of the House domestic monetary policy subcommittee yesterday asked the Federal Reserve Bank of New York to put in place as soon as possible its proposed capital adequacy guidelines for unregulated government securities dealers.
The request by Rep. Walter Fauntroy (D-D.C.) was triggered by the closure of Florida-based ESM Government Securities, whose failure Monday could spell a loss of up to $300 million for its customers -- which included savings and loan associations, pension funds and municipalities.
The New York Fed said yesterday that based on its "market contacts we haven't found any evidence of losses of unmanageable proportions in the dealer community" as a result of the ESM failure. A spokesman for the New York Fed said he would have no comment on Fauntroy's proposal.
The capital adequacy guidelines put out for comment last month by the New York Fed are aimed at government securities dealers, like ESM, that are not now subject to some form of federal supervision. The guidelines, which would be voluntary, call on unregulated dealers to maintain a level of liquid capital -- cash and securities that can easily and quickly be converted to cash -- that is at least 20 percent more than any possible losses they might incur.
The guidelines call on customers of the government securities dealers to require the unregulated firms to certify that they meet standards of capital adequacy.
The Securities and Exchange Commission alleged in Miami federal court that ESM lost more than $200 million during the last six years but continued to operate by providing fraudulent financial statements to customers, who bought and sold government securities through ESM and did other deals with the firm.
The Fed's proposed guidelines were triggered by the 1982 failure of Drysdale Government Securities Inc. and several other smaller government securities firms that trade in an essentially unregulated market. The Drysdale failure cost big banks hundreds of millions of dollars in losses.