Brokers' role in financing Uncle Sam's big deficits
Washington counts on Wall Street to help it fund its ballooning deficit. This is so because the vast majority of government securities - which represent the lion's share of all borrowing these days - are sold to the public through a network of 39 dealers in government securities. These dealers are Wall Street brokerage houses and banks. With the government deficit such a significant part of the debt markets, they are vital to the government's ability to float its debt; if customers can't be found to buy the securities, these dealers must bid on them. The following is the story of how one major dealer, Merrill Lynch & Co. , accomplishes the task of helping the government sell its debt to investorsm.Skip to next paragraph
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It was the moment of truth. The US Treasury was auctioning off $3.5 billion in 30-year bonds to the highest bidder last Thursday.
At 1:26 p.m., Merrill Lynch & Co. had four minutes to gets its bid - which it hoped would be accepted as sufficiently high - to the New York Federal Reserve Bank.
A messenger was sitting in a phone booth several blocks away in Chase Manhattan Plaza, ready to jot down how many millions or even billions of dollars of securities Merrill Lynch would buy for itself and its customers. From the phone booth, he would sprint to the Federal Reserve Bank and submit the bid that Merrill Lynch considered to be the proper value for the securities at that moment in time. All of the forces that were pushing and squeezing the economy were focused on this one effort, since the government-bond markets represent a mirror of what sophisticated investors are thinking about the economy.
At Merrill Lynch, in a room packed with blinking computer screens and banks of telephones, all trading stopped as the Merrill Lynch officials prepared to send their bid to the Treasury. The moment was electric as nearly 250 people suddenly focused on this one event. For many of them, it was the culmination of two weeks of effort as they tried to convince pension funds, banks, and other institutional investors this was the right moment to buy long-term government securities.
The moment was particularly tense because buying such securities is a risky proposition. Noted Daniel Napoli, managing director of Merrill Lynch Government Securities Inc. (MLGS), ''When you bid on long-term government bonds, you keep your resume in your pocket.'' The risk, as Mr. Napoli knew, was greater with long-term bonds, because they are more volatile than short-term bonds. And with inflation an unknown component in the future, buying long-term bonds can be a risky business. For example, if the bonds were to move from 11 percent to 11.20 percent, it could make a major impact on whoever owned them. Such a move - which could occur within as short a span as two weeks - would mean a $2 million loss on $100 million worth of bonds.
But the risk did not stop Merrill Lynch from putting its money on the line. Mr. Napoli, with 11 years of experience; Jack Kugler, the chairman of MLGS, with 25 years of experience; and Michael Boyd, the firm's national sales manager, with 10 years of experience, huddled around a phone bank. With Mr. Boyd reading off the orders rounded up from the broker's institutional customers, Mr. Napoli made the decision. He would make a bid to buy nearly 30 percent of the government's offering that day.