Another dealer in government securities has now filed for bankruptcy, sharpening the demands in Congress that these operations should be regulated. This most recent failure -- a firm called Bevill, Bresler and Schulman Asset Management Corp., in Livingston, N.J. -- is smaller than E.S.M. Government Securities, the Florida dealer that folded last month. But both failures will result in substantial losses to other financial institutions that were their customers. In both, the government has charged the firms with fraud.
Regulation can't prevent fraud. Regulation ought not guarantee complete safety to the dealers' customers, for those customers are professional money managers and the government has no obligation to relieve them of the need to be careful about the cedit and reliability of the people with whom they deal. For the government to guarantee these dealers would come pretty close to insuring financial speculation. But a modest amount of regulation, beginning with registration of dealers, would be useful in a market that has grown with astounding speed over the past decade.
The government securities dealers used to be a tight little circle of experienced competitors who knew each other well. But it has expanded with the rise in the federal debt, for federal debt -- in the form of Treasury securities -- is the dealers' stock in trade. The growth of this market is one consequence of President Reagan's budget deficits.
Gerald Corrigan, the president of the New York Federal Reserve Bank, told a congressional committee the other day that currently it's not uncommon for more than $200 billion in government securities to change hands in one day of trading. By way of comparison, the federal budget is $2.6 billion a day and the American GNP, this country's totl output of goods and services, is $10.5 billion a day. As you would expect in a boisterous and rapidly growing market, some firms are less sound than others.
The victims of fraud and failure are usually incautious money managers simply looking for the highest possible returns. They know that Treasury securities are risk-free, and they often assume -- incorrectly -- that the dealers therefore must be risk-free as well. As Mr. Corrigan told Congress, it's the professional money managers' job to know a lot about the firms with which they do business. Much of these dealers' business is borrowing and lending with government securities as collateral. While a high rate offered may be the sign of a successful competitor, it may also be the sign of a desperate dealer sliding into serious trouble. It's up to investors to distinguish between the two. The government is going to have to set some rules for this game. But it has no duty to protect careless players.