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Drysdale's special twist was to acquire arepo from, in most cases, Chase Manhattan and then resell it on the open market at a premium price that reflected its accrued interest. Immediately thereafter, Drysdale would turn around and buy a replacement Treasury security of identical face value, but one that had less accumulated interest. The second security was then used to settle the repo account when it eventually came due. In this way, Drysdale kept its accounts in apparent balance yet continued to pocket a portion of the interest on each repo deal. High interest rates derailed the whole scheme because the bonds Drysdale had bought against the ones it borrowed failed to rise in value, forcing the firm to float more repos to pay the interest out of new premiums. Eventually, though, even that was not enough, and Drysdale had to default on the interest payments to Chase and other bankers.
Washington last week was filled with cries for closer federal control over the entire Government securities market. Said Stanley Sporkin, former enforcement chief of the Securities and Exchange Commission under President Carter and now chief counsel to the Central Intelligence Agency: "How many incidents do you need before someone says that something has to be done?" Philip Loomis, an SEC commissioner, suggested that "it might be desirable" for Government securities dealers and brokers to register with the SEC just as stockbrokers and bond traders are required to do.
On the other hand, registration and control of the sprawling market, which in terms of trading activity is many times larger than the stock and bond markets combined, could become an administrative monster. Testifying before the Senate Banking Subcommittee, Anthony Solomon, president of the New York Federal Reserve Bank, conceded that it might be helpful to require banks and brokers to report large-ticket trading transactions in Treasury obligations. But he ruled out as unfeasible a proposal to regulate the "thousands and thousands and thousands" of trades. Mark E. Stalnecker, Deputy Assistant Treasury Secretary for domestic finance, said that the Drysdale case was a "very isolated instance" and there was no need for further Government regulation in the field. At least for now, it appears that Congress will not establish any new controls over trading in Government securities.
In a hasty effort to forestall federal policing of the market, the Association of Primary Dealers in U.S. Government Securities, whose 36 members include such blue-ribbon financial firms as Bankers Trust Co., Morgan Stanley & Co. Inc. and Goldman, Sachs & Co., last week started working on some overdue ways to self-regulate their business. One proposed rule, which will probably be quickly adopted, will require that all repurchase transactions involving members must take into account accrued interest on the security. Said Association President Allan Rogers of Bankers Trust of the new rule: "Most people have favored it for a long time." Better late, apparently, than never. —By Christopher Byron. Reported by Frederick Ungeheuer/New York