Treasury Auctions Are Anything But Sorry Because They’ve Never Been Sorry About Solly

Twenty years ago, in November 2000, the Treasury Department changed one aspect of the way the government would sell its own debt. Auctions of these and other kinds of securities had been ongoing for decades, back to the twenties, and they had been transformed many times along the way. In the middle of the 1970’s Great Inflation, for example, Treasury gradually phased out all other means for issuing securities, by 1977 relying exclusively on auctions as the sole process for the public to acquire notes and bonds.

That’s not really how it works, though. There’s a lot that goes on in between, stuff that gets misunderstood and misconstrued because for half a century Economics as a discipline hasn’t paid any real attention to what really goes on in the monetary system.

Even by the early nineties, things had already changed rapidly and radically. Salomon Brothers, in one characteristic episode, had caused a significant stir for reasons that thirty years later aren’t well (or at all) understood – at least when using the textbook approach to finance and money. Solly, as the dealer used to be known, was getting dirty. I wrote at length (no surprise) about this five years ago:

What happened in late 1990 and 1991 is still a matter of conjecture, even on the government side. What is not in doubt is that Solly’s chief government securities trader, Paul Mozer, was openly flaunting US Treasury rules about the federal government’s debt auctions. Treasury had never restricted how much any particular dealer could bid for debt at auction, but would from time to time make individual and ad hoc efforts to ensure orderly and “fair” operation.

Not only that, this Mozer guy kept flagrantly flaunting what he was doing, too; what no one could figure out was why he was doing it, and, to the point Warren Buffett had to be brought in to rescue Solly, why Mozer kept doing it even after being repeatedly warned by Treasury officials and regulators.

The LA Times afterward called it an “inept little scam” because from the mainstream it looked like the cheat would have only generated illicit peanuts for Salomon. Risk the whole business for what seemed to be so very little upside?

As it turned out, auction improprieties by that point in history had become widespread and common; not just in UST securities but more so in those being sold off as agency mortgage bonds (MBS). Seriously, it was really bad:

In total, the joint investigation, which included the SEC and Treasury, but also OCC, FRBNY, the NYSE and NASD, found ninety-eight dealers, again, nearly all that were investigated were involved in flagrantly overbidding for agency securities.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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