A couple of years ago, an employee suggested to the New York Municipal Assistance Corp. -- the agency that managed New York City's financial recovery -- that it put $1 billion into a slick but safe little financial transaction called "repos," so as to pick up 1/4 point to 1/2 point in extra interest.

"If it's so safe," Big MAC chairman Felix Rohatyn recalls saying, "Why do we get the extra interest?" Rohatyn said the other day: "I never got a good answer."

"Repos" and "reverse repos" are shorthand for repurchase agreements and reverse repurchase agreements in the huge, but unregulated government securities market. Instead of purchases and sales of government securities in the normal way, repos represent an involved sleight-of-hand game in which the "buyer" does not take actual possession of the securities -- and thus has no actual collateral for what is in reality a loan.

But the directors of the Home State Savings Bank of Cincinnati, and the managers of a handful of American cities with loose cash to invest, were not so prudent as Big MAC. Looking for that extra margin of profit, they plunged into the dangerous repos game with E.S.M. Government Securities, Inc., of Fort Lauderdale, Fla., a small, unregistered securities dealer that was closed down by the government on March 4 and charged with fraud.

For example, the city of Toledo, Ohio, got sandbagged because, under the repo deal, it lent E.S.M. $19 million in cash and did not take possession of the securities that were supposed to be the collateral.

With E.S.M. in receivership and showing a $315 million loss, Home State was out $150 million, and the worst run on financial institutions since the Depression was touched off in the state of Ohio. Home State's loss exceeded the total amount of insurance available for 71 privately insured savings associations in Ohio. Predictably, a panic ensued as Ohio citizens tried to get their deposits out. That forced the Ohio governor to shut down 70 of them (one undertook a successful conversion to federal insurance) -- and it appears that a large number of them will never be able to reopen.

This is a disaster for Ohio, and betrays a weak and inexperienced state regulatory system that needs a drastic overhaul. Heads should roll in Toledo and in a dozen other local governments similarly inept. And it warrants another look at private-insurance systems that exist in four other states -- Maryland, Massachusetts, Pennsylvania and North Carolina -- even though they insist that their arrangements are as good as or better than the federal system.

But the real significance of the past week's unhappy events is not so much the bitter medicine for Ohio citizens, and those cities that blew hard-earned cash, but the fact that a case of financial jitters could be touched off by a fringe operator that doesn't even deal directly with the federal government in the marketing of its securities.

"People are getting scared, and they should be," Rohatyn told me. "If a little outfit like E.S.M. can trigger a run on the S&Ls in the whole state of Ohio, what else can happen in the credit markets? Suppose a bank goes bust in Luxembourg? Or a finance company somewhere in the Bahamas? What else can happen?"

For precisely that reason, the dollar plunged in foreign exchange markets and gold -- the traditional store of value in a time of crisis -- rose, signifying the international community's concerns about broader weaknesses in the American economy.

There is no excuse for a sleazy, corner-cutting operation that avoids all regulatory safeguards. The SEC tried to check out E.S.M. in the late 1970s and couldn't even get in the front door. It now becomes clear that Home State's owner, Cincinnati financier Marvin Warner, a man active in state and national Democratic politics for years, had close associations with E.S.M. and was instrumental in arranging for Home State to lend E.S.M. hundreds of millions in securities against cash advances of a lesser amount.

We have been round the corner before on the dangers inherent in the unregulated government securities markets -- and nobody has done anything about it. In 1982 the blow- up of Drysdale Government Securities, Inc., and Lombard- Wall, Inc., exactly paralleled the E.S.M. experience.

Other symptoms of financial-market sickness have been visible for years. There was the Penn Square Bank case in 1982. It revealed the greed of credit union and S&L managers who, without scrutiny, placed certificates of deposit in Penn Square, lured by an extra half point in interest. Last year, the nation's seventh largest bank, Continental Illinois of Chicago, had to be bailed out by the federal government.

On Jan. 16 of this year, New York economist Henry Kaufman soberly warned that the nation's financial structure was wobbly because "debt is growing by leaps and bounds in a helter-skelter fashion." If such warnings have fallen on deaf ears within the securities business, perhaps things will now change. There may be nothing like the Depression's spectacle of poor citizens, camping out in front of a shutdown savings institution, to concentrate the minds of laid-back politicians.