Treasury Bill Auctions Go Haywire
Every Thursday, the Treasury announces how many 28 day, 91 day, and 182 day Treasury bills it will offer for sale. Buyers must submit bids by the following Monday, and awards are made the next morning. The Treasury accepts the bids offering the highest price. The Treasury auction of securities is supposed to be highly competitive and fair. To ensure proper levels of competition, no one dealer is allowed to purchase more than 35% of any one issue. About 40 primary dealers regularly participate in the auction. In 1991, the disclosure that Salomon Smith Barney had broken the rules to corner the market cast the fairness of the auction in doubt. Salomon Smith Barney purchased 35% of the Treasury securities in its own name by submitting a relatively high bid. It then bought additional securities in the names of its customers, often without their knowledge or consent. Salomon then bought the securities from the customers. As a result of these transactions, Salomon cornered the market and was able to charge a monopoly like premium. The investigation of Salomon Smith Barney revealed that during one auction in May 1991, the brokerage managed to gain control of 94% of an $11 billion issue. During the scandal that followed this disclosure, John Gutfreund, the firm’s chairman, and several other top executives with Salomon retired. The Treasury has instituted new rules since then to ensure that the market remains competitive.