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Senators question Salomon Treasury market probed after scandal


WASHINGTON -- A Senate panel on securities opened hearings yesterday on the Salomon Brothers treasury bond scandal, hoping to hear about the inner workings of the primary market for the government's $2.3 trillion debt.

But out of the 39 participants in the market, only Warren Buffett, the newly installed chief executive of Salomon, showed up.

The rest, it emerged in response to irate inquiries by senators, had been subpoenaed by the Securities and Exchange Commission or had forsworn attendance on the advice of legal counsel.

And they represent only a small fraction of the number of firms currently being questioned in the investigation. In testimony before the committee, SEC Chairman Richard Breeden added that information on the treasury market had been requested from as many as 200 other firms, "and we don't see that as exhaustive."

To bolster confidence in the pivotal market, the Treasury Department yesterday announced four rule changes to enhance the marketing of government debt, including tightened audits, quicker disclosure of information and additional automation.

But the scandal threatened to widen far beyond the direct market for government debt. Mr. Breeden said there is evidence that "not a small number of firms" falsified information required as part of the underwriting of securities for what is known as "agency debt," or debt guaranteed by the U.S. government.

Agency debt is issued by five, large, non-government institutions: the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Association (Freddie Mac), the Federal Farm Credit Bank, the Federal Home Loan Bank System and the Student Loan Marketing Association (Sallie Mae).

Mr. Breeden characterized the revelations as "distressing and distressingly large," an apparent reference to the number of firms involved.

These agencies package billions of dollars' worth of small loans for homes or education, or the like, into more salable, large packages and then market them through securities firms.

Because of the vast amount of debt involved, the agencies are sensitive to flooding the market. They strictly allocate bonds based on claims by securities firms of pre-existing customer demand. Salomon, as well as other security firms, appear to have been overstating this demand.

Indications that the market for agency debt may have been compromised was first disclosed last week to Congress and the firms themselves by Salomon, which had uncovered improprieties as part of a massive internal investigation.

The Federal National Mortgage Association (Fannie Mae) then reviewed its own operations and determined such conduct was widespread, said David Jeffers, the company's vice president.

"Over the last few weeks, we began to learn the full extent of misrep-resentations being made, not only in the indictions of customer interest, but also in the written reports filed with us afterwards," Mr. Jeffers said.

"We believe based on the data it had no effect on pricing and didn't create losses for either us or the purchasers of the bond. That, though, is a separate issue from the fact that there was little integrity in the system."

Spokesmen for Sallie Mae and Freddie Mac said they were similarly informed of improprieties by firms marketing some of their debt.

"It's a very grave matter for our company," said Mark Latimer, senior vice president, capital markets, for Freddie Mac. "The fact that it is done by more than one institution is no excuse."


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