Bank to cover securities default

Chase Manhattan Bank said it would pay its customers all interest due on securities transactions handled by Drysdale Government Securities, the dealer that defaulted on $160 million in interest payments to the bank.

Chase also said it would buy out Drysdale's position in US notes to cover securities transactions handled by the bank's institutional banking department.

The announcement reversed the stance taken by Chase, the nation's third-largest bank, when it said Tuesday that Wall Street brokerages that supplied the securities it sold to Drysdale would have to seek restitution for losses directly from Drysdale.

It said the new agreement calls for Drysdale to assign unnamed other assets, as well as its securities positions, to Chase and for Chase to assume the related obligations -- excluding those executed by Manufacturers Hanover Trust Company, which agreed to complete the transactions.

Chase said its second-quarter profits will be reduced by about $135 million. Manufacturers Hanover, the fourth-largest US bank, said it will pay its customers about $29 million in interest due on government securities transactions involving Drysdale. The bank said that it expected its total overall loss will be substantially less than $29 million, given current market conditions, and that it would try to recover the payments from Drysdale.

The banks had acted as middlemen in arranging a common financial market transaction called a reverse repurchase agreement. The agreements are in effect loans.

In practice, a dealer contracts to buy securities and to sell them back after a specified time, paying a fixed rate of interest for the period. During that time, the interest earned by the securities accrues to the original owner.

Because of losses in other transactions, Drysdale could not meet the interest payments due Monday on its borrowings.