Business Notes Scandals

Just as the financial community had feared, the scandal set off by Salomon Brothers' efforts to corner the market for U.S. Treasury securities spread across much of Wall Street last week. On Capitol Hill, Richard Breeden, chairman of the Securities and Exchange Commission, said that "a distressingly large" number of firms had routinely inflated orders for bonds sold by government-sponsored agencies like the Federal National Mortgage Association. The bogus orders apparently enabled firms to purchase extra bonds and resell them at a hefty profit.

In response, Fannie Mae last week launched a program to audit bond sales and expel cheaters from the group of 56 firms that sell the securities to the public. "We realized there was no integrity in the system," an agency spokesman said.

Regulators also decreed that buyers of Treasury securities must verify their purchases to prevent Wall Street dealers from misrepresenting the bids and cornering the market. Although such steps were long overdue, they heightened financial firms' fears of draconian new regulations that could hobble the legitimate trading activities that generate much of Wall Street's profit.