NEW YORK -- On Wall Street, amid the trading and the underwriting, the junk bonds and the billion-dollar buyouts, there is a little-known back-office business called stock loans.

The stock loan game can be more lucrative than the better known businesses, but as Ivan F. Boesky discovered a little more than two years ago, it also can be perilous.

Boesky was in the midst of a bold deal in February 1985, the acquisition of millions of dollars worth of CBS Inc. stock. To finance those purchases and others, the speculator was using cash generated by lending his stock.

While ordinary investors can borrow no more than 50 percent of the cash needed to buy stock, Boesky was using stock loans to borrow several hundred percent of his cash outlay, a strategy regulators say was legal. In simplified terms, Boesky was able to do this by buying stock, "lending" it to other firms in exchange for cash, using that cash to buy more stock, lending out the new shares for more cash, and so on.

Using debt to maximize his stock purchases -- and his potential profits -- was a key Boesky strategy, perhaps because his illegal access to inside information about deals increased his confidence about buying certain stocks.

But there were risks to Boesky's strategy, risks more immediate than a prison term for illegal insider stock trading. The speculator was at the mercy of the Wall Street firms who lent him generous amounts of cash in exchange for his stock. At any moment, the firms could call in their huge loans.

In the middle of the CBS stock buying, the firms, led by Shearson Lehman Bros. Inc., decided to do just that. Angry with Boesky over an interest rate dispute, they demanded the speculator repay $500 million in borrowed cash immediately.

"Ivan went out of his mind," a Boesky aide who was involved said. "We would have had to sell $500 million in stock immediately."

Shearson and the other firms were upset because one of Boesky's top financial officers, in an effort to cut the speculator's high borrowing costs, had tried to renegotiate the terms of his stock loans. The lending firms decided to retaliate in tandem by calling in their loans.

"Ivan chewed me out," Boesky's aide recalled. "His perspective was that the most important thing was having the cash. If that meant paying one or two points more {in interest} and not offending the stock loan cartel, that was the way it should be."

As it turned out, Boesky managed to obtain $500 million in financing and did not have to sell his shares. But he also acted to appease Shearson and the other firms, paying interest rates on their terms -- a rare concession from Boesky, who was known as one of the most aggressive players on the Street.

The Boesky episode is illustrative of the high stakes and tough tactics prevalent in the stock loan business, a behind-the-scenes operation that has become a major source of profits to prestigious Wall Street firms.

It is also a business facing scrutiny from regulators and prosecutors. Though Boesky's use of stock loans as a financing technique was apparently legal, and though the former speculator has not been accused of any wrongdoing in this area, the stock loan business itself is the subject of continuing federal investigations.

"There are federal grand jury investigations" under way in New York, said Ira Lee Sorkin, former head of the Securities and Exchange Commission's New York office. "They are looking at abuses in stock loan areas having to do with ripping firms off, embezzlement from firms, books and records violations, and the like."

Manhattan U.S. Attorney Rudolph W. Giuliani declined to comment.

Generally, the stock loan business involves the borrowing and lending of stock among brokerage firms or between brokerage firms and institutional investors, such as insurance companies. Over the years, the business has developed a dubious reputation, as employes have been charged with pocketing interest payments and with generating unnecessary transactions to earn fees.

"It's generally a matter of an employe defrauding his firm -- paying {interest rate} rebates to himself," said Carl Hewitt, a New York attorney experienced in the stock loan business.

Some problems have been cleaned up in recent years, according to Sorkin, Hewitt and others. As stock loans have grown rapidly into a business where billions of dollars of securities are borrowed every day, major Wall Street firms have increased their market share and in some cases their internal controls. Problems persist, however.

Used legitimately, stock loans serve two basic functions. Brokerage firms borrow stocks to deliver shares that have been sold by their customers. Because of occasional back-office foul-ups, the firms may not have those shares in inventory.

A second use of stock loans is in the area of "short sales." When a customer sells a stock short, he instructs his brokerage firm to sell certain shares, even though he does not yet own them. The customer is often hoping the price of the shares will decline so he can profit by purchasing the stock at a lower price than he has sold it.

In the interim, however, the brokerage firm must come up with the shares the customer has sold short and deliver these shares to the buyer. The firm is permitted to borrow the shares from another firm.

Boesky used stock loans in a different way. He found that stock loans afforded him a way around Federal Reserve rules governing borrowing by stock buyers. Boesky aggressively -- and apparently legally -- exploited the stock loan loophole.

Because he controlled a massive portfolio of stocks through a registered brokerage firm, Boesky could lend stocks to other brokerage firms in exchange for cash, use the cash to buy more stock, then repeat the process. Using this method, Boesky could leverage up to 600 percent before coming into conflict with other securities rules, according to Roger D. Blanc, a partner in the law firm of Wilkie, Farr & Gallagher.

According to sources familiar with his operations, Boesky, who primarily speculated in stocks of companies involved in takeovers, controlled more than $3 billion of stock at one point last year, even though he had less than $1 billion in capital. Earlier in his Wall Street career, when Boesky had about $400 million in capital, his portfolio reached $2 billion, sources said.

According to the SEC, Boesky reduced his stock loan exposure from the $600 million level to about $45 million by Nov. 14, 1986, when the charges against him were announced.

Not all of Boesky's borrowings were made through stock loans, although they were an important element of his strategy, sources said.

The Federal Reserve's 50 percent limit on borrowing money to buy stocks was enacted to prevent the sort of speculation that led to the 1929 stock market crash. The dangers inherent in Boesky's use of stock loans to avoid the Fed limit do not appear to be widespread on Wall Street, several sources said, because other speculators are not believed to be using stock loans as aggressively as Boesky did.

I'm not saying that other arbs don't use stock loans to raise money on occasion, but I don't think people made as aggressive a play as he {Boesky} did," Blanc said. "Most people regarded that as more aggressive than they had been willing to be."

As stock loans have reached a multibillion-dollar annual volume, the business has been transformed from a relatively small-time operation dominated by independent stock loan finders to one largely controlled by the major brokerage firms. Among those firms, one of the most influential is considered to be Shearson, whose stock loan department is headed by Dennis Palmeri, a dominant stock loan player.

"Dennis {Palmeri} is a very aggressive person, a very, very good business person," said Nicola L. Caporale, partner in charge of operations at Goldman, Sachs & Co. "He gives you a very competitive rate and very good service and you feel as if he is really doing the job for you. When you are trying to find a particular security {to borrow}, invariably Dennis can come up with it because of his desire to be at the forefront of his business."

In June, the Securities and Exchange Commission charged Shearson with lending about $69 million in stock that belonged to customers.

Shearson is permitted to lend a percentage of the stock that belongs to its customers, provided the shares have been purchased with borrowed cash. But brokerage firms are not permitted to lend fully paid customer securities.

Shearson, without admitting or denying the SEC charges, agreed to institute new policies designed to prevent future violations.

"The Shearson case was a significant back-office case," said Mark Fitterman, associate director of the SEC's market regulation division. "This is a matter that had been brought to Shearson's attention by the regulators and they didn't fix it. Other firms, who shall remain nameless, when confronted by the regulators, did fix it."

Shearson and other big Wall Street firms have turned their stock loan operations into major profit centers, earning fees not only for lending excess shares they have on hand but for acting as intermediaries in loan deals. While some brokerage firms, such as Goldman, typically need to borrow stock because of trading strategies that emphasize selling short, Shearson and other firms often have stock to lend because of their large networks of individual investors.

Sources familiar with Boesky's operation said Shearson, through Palmeri, was an important source of stock loan funds for Boesky and earned relatively high rates of interest by providing Boesky with large amounts of cash.

Several years ago, a Boesky employe complained that Palmeri improperly had provided a fully paid vacation to the man who headed Boesky's stock loan operations, sources said.

The complaint did not lead to any action or conclusions that were shared with Boesky employes.

Palmeri declined to be interviewed for this article and Shearson declined to make anyone else available to answer questions about its stock loan business. "He isn't interested in publicizing it {the stock loan operation} and the firm isn't," said Shearson spokesman Jim Podany.

He may shy away from publicity, but to at least one of his clients in the stock loan business, Palmeri is an impressive force.

"When all is failed and you can't find the security you are looking for, he will turn heaven and earth and find it for you," Goldman's Caporale said. "Dennis goes a step further and is very, very eager to increase his business and for the Street to know that when all else fails, call Dennis."