USTreasuryMarket.com: 1. Letter, 2. Government Response, 3. Data: Canada
I wrote this letter describing imperfections in the United States Treasury bond market for a former commissioner of the Securities and Exchange Commission and later sent it to Arthur J. Levitt, who had just resigned as the SEC’s chairman; his replacement, Harvey L. Pitt; the Department of Justice; and the New York State Attorney General’s Office. Here are those contacts, including any responses:
I first wrote him a short letter:
January 29, 1999
Dear [former SEC Commissioner]:
I traded U.S. Treasuries for J.P. Morgan for a dozen years. During that time I daydreamed about how to make financial markets fairer and more efficient, particularly since 1996, when I first used the Internet and realized it would be an important tool in achieving those goals …
While profit-seeking competitors to Wall Street will change the securities business, government regulation will significantly affect the pace and quality of change. I would therefore like your advice on whether I might be useful to the SEC or another agency. I claim no exclusive knowledge—there are thousands of market participants who know as much or more than I—but if the SEC’s statement that “Overall, the bond market is functioning effectively” (press release, September 9, 1998) is representative of its view of how financial markets actually work, the agency could perhaps benefit from a different perspective. I am particularly interested in trading practices in secondary markets and the final form of the proposed rules on the registration of securities offerings.
I am writing you because you understand the issues … have been a vocal and consistent advocate for progress … and know the forces for and against change. I will call you next week with the hope of arranging a meeting …
Sincerely,
[ ]
We talked twice by telephone over the next month. I asked him whether the SEC was aware of how transactions really took place in institutional markets. He said that some officials were but since their contacts were generally pro-industry and there was no credible voice, such as a think tank, critical of Wall Street, they relied on reputation and treated large securities firms such as Merrill Lynch and Goldman Sachs as if they were “true, right, honorable.” He thought the SEC would benefit from hiring more people with market experience.
I told him I would like to meet with him to show him a sample of the data I had collected from the Treasury market. He asked if I could instead mail him a summary. When I replied that it could not be easily summarized, he asked me to write him a letter describing the market’s flaws and presenting the supporting data—he cautioned that without data no one would be interested. I could not determine how to include specific data, so the letter I finally sent him contained only its general description. I mailed it with a cover letter:
July 14, 2000
Dear [former SEC Commissioner]:
More than a year after you made the suggestion, I am sending you a letter about the Treasury market … I hope your generous offer to advise me on who might find the letter interesting still stands.
Without its supporting data (I have not spent the many hours necessary to standardize and summarize my information—time wasted if no one is interested), I suspect that it does not meet your requirement that it be “compelling and self-contained.” After all, Liar’s Poker made the same point—bond dealers’ conflicts of interest make for lots of questionable conduct—far more entertainingly more than a decade ago to no apparent effect.
Is the data compelling? I think that a regulator without experience in the market should find the information, even in its raw form (unfortunately, I would have to present it in person), disturbing enough to warrant further investigation. Although I began recording the data to document, not discover, how the bond market works, I was nonetheless surprised by how frequently and successfully large deals are apparently front-run (despite my caveats in the letter, I am quite confident that for the vast majority of deals what looks like front-running is front-running).
You discussed three possible audiences for my information: the press, prosecutors, and the SEC … My inclination is to start with the SEC, for the simple reason that it both enforces the existing rules of the game and writes the new ones. If that did not work, I would try one or both of the other two …
- The bad-apple school of regulation—look for specific dishonest acts instead of the systemic conflicts of interest that make their occurrence inevitable—does not work. For example, Bankers Trust was not the only derivatives dealer cheating its customers, and the other dealers did not become honest when Bankers was caught …
I would appreciate the chance to take you through the pricing of a few deals so you could judge for yourself what—if any—use the information might have …
Sincerely,
[ ]
A month later I phoned him and left a message. After another month had passed, I wrote to ask if he had received and read my letter, and if he had, whether he could forward it to the appropriate agency or suggest someone I could contact directly. On October 6, I phoned again and reached his assistant who said that he had received my letter and would try to read it in the next two weeks.
I next wrote Arthur Levitt, who had resigned as chairman of the SEC the previous month, but whose permanent replacement had not yet been named:
March 16, 2001
Mr. Arthur J. Levitt
[home address]Dear Mr. Levitt:
I traded U.S. Treasuries for J.P. Morgan for a dozen years and would like to share my experience with regulators. I was a workaday trader and claim no exclusive knowledge—thousands of market participants know as much or more than I—but regulators’ generally positive public statements about this market’s efficiency and honesty suggest that a practitioner’s perspective might be useful to them.
I realize you recently left the SEC after many years of dedicated service but I could not think of a better person to ask whether my view of the Treasury market, which is summarized in the enclosed letter, might be of interest to regulators, and if it were, which individual at which agency to contact …
If you decide that my letter would not be of interest to regulators, I would appreciate you telling me that as well. In either case, thank you for your time.
Sincerely,
[ ]
I left messages on Mr. Levitt’s home answering machine twice the following month.
The month Harvey Pitt took office as Mr. Levitt’s permanent replacement, I mailed him my letter about the Treasury market, along with a cover letter similar to the one I had sent Mr. Levitt, and received the following response from Mr. Alton Harvey, an Office Chief in the Division of Market Regulation:
I wrote back:
November 7, 2001
Mr. Alton Harvey
Office Chief
Division of Market Regulation
Securities and Exchange Commission
450 Fifth Street, NW
Washington, D.C. 20549Dear Mr. Harvey:
Thank you for your quick response to my August 24 letter to Chairman Pitt about the U.S. Treasury market. You wrote on August 31 that you would forward my letter to the “appropriate Commission staff.” I have not heard from the SEC since then, presumably because September 11 gave the agency at least three far more pressing tasks—getting the markets up and running again, reconstructing case files lost with its New York offices, and investigating possible securities trades by terrorists. I suspect it will be many months before the staff has time to consider my letter, but would appreciate any information on when that might be. Please tell me also if someone has already read it and found it uninteresting (in which case I will consider mailing it elsewhere) or if it was sent to your New York office before September 11 and therefore lost (in which case I will send you a copy). Thank you for your help.
Sincerely,
[ ]
On December 5 I phoned and left a message for Mr. Harvey. He called back two days later and told me that he had sent my letter to three departments of the SEC: the Division of Enforcement, the Division of Market Regulation, and the Office of Compliance Inspections and Examinations (OCIE). He had not sent it outside the Commission because of my request for privacy; I told him he was free to forward it to other government agencies, including the Federal Reserve Bank of New York, which was his first choice. I asked who would contact me from the Commission. Mr. Harvey said it would probably be him, although an “aggressive enforcement attorney” might call me directly. He could not say when that might be.
I called Mr. Harvey again on May 7, 2002, and he called back two days later. He told me that he had sent my letter to the New York Fed and the Treasury Department’s Bureau of the Public Debt after our conversation in December, and subsequently had had several meetings and phone calls with them as well as with the Division of Enforcement, which would be the lead division within the Commission. The two outside agencies saw the letter’s subject as “not unimportant” but thought it more a matter for the SEC. Enforcement “appreciated your message” but was “stretched to the limit:” “just look at the newspaper.” Though the Commission had to keep its proceedings quiet, Mr. Harvey was authorized to tell me that they were looking at my letter. I told him I was surprised that no one had contacted me, if only to judge my credibility. He replied that my letter laid out the issues very well. He apologized for not having contacted me sooner and said that he hoped to have reason to contact me in the future.
In between conversations with the office chief of the SEC’s Division of Market Regulation, I called the Justice Department and asked to speak to a fraud investigator. I was connected to John Arterberry, the deputy chief of the Criminal Division’s Fraud Section. I asked him whether the Justice Department was interested in systemic problems in a securities market. After mentioning contacting the FBI, he transferred me to a trial attorney also in the Fraud Section. The trial attorney, however, recommended that I send my letter to Mr. Arterberry, who specialized in securities and bank fraud (he, like the trial attorney, had previously been with the SEC). The trial attorney told me that I could also contact the NASD, but agreed when I said that was unlikely to be productive. I e-mailed Mr. Arterberry the same day:
To: John Arterberry @usdoj.gov
Sent: Friday, March 15, 2002, 3:52 PM
Subject: U.S. Treasury marketDear Mr. Arterberry:
[The trial attorney] you transferred me to after our brief telephone conversation today suggested that you might be the best person to contact about systemic securities fraud. I therefore attach a letter about the U.S. Treasury market that I mailed to the SEC last summer. Although the Division of Market Regulation’s office chief responded within a week that my letter would be forwarded to the appropriate staff, no one has contacted me to pursue the subject (when I called him in December he said that he had forwarded the letter to three divisions of the agency). Whether this is because the staff has more pressing concerns or because they do not find the letter interesting I cannot say.
I … would appreciate your telling me if there is a more appropriate government agency to contact. Thank you for your help.
Sincerely,
[ ]
I e-mailed him again the following month:
To: John Arterberry @usdoj.gov
Sent: Wednesday, April 03, 2002, 12:44 PM
Subject: U.S. Treasury marketDear Mr. Arterberry:
I e-mailed you on March 15 about the U.S. Treasury market. While I realize you probably have not had time yet to respond to the letter, would you please e-mail me if you received it.
Thanks,
[ ]
On April 9 I called Mr. Arterberry and left a message asking if he had received my letter. I left three more messages for him over the next month.
I called the New York State Attorney General’s office on October 14, 2003, and asked for Eliot Spitzer. I was transferred to the Investor Protection and Securities Bureau and left a message. An attorney called back the following day and agreed to take a look at my description of questionable Treasury market practices.
October 15, 2003
[ ]
Assistant Attorney General
Investor Protection & Securities Bureau
New York State Attorney General’s Office
23d Floor
120 Broadway
New York, NY 10271Dear [Assistant Attorney General]:
Thank you for calling back today. I enclose the letter I mentioned about the U.S. Treasury market, which is based on a dozen years spent trading for J.P. Morgan. I will call you next week to see if you would like to discuss it or examine my supporting data. Thank you for your time.
Sincerely,
[ ]
Two weeks later he told me that the Attorney General’s office was not going to look into the Treasury market because it was a national issue. I pointed out that research analysts’ conflicts of interest and mutual fund trading abuses were also national issues, yet had been aggressively pursued by their office. He agreed, saying they had taken the first case because “nothing had been done” and the second because it was “important,” but with only 18 attorneys in his bureau, compared with hundreds at the SEC, they could not pursue every lead.
I left a message for Mr. Harvey on May 21, 2004. He called me back after he returned from vacation and said that he would ask senior staff in Enforcement if they were interested in my letter. He asked me to e-mail it to him so that he would have an electronic copy to distribute. I remarked that the various departments had had it for more than two years and presumably would have contacted me by now if they found it interesting. He replied that they were "stretched to the limit" in 2002 and 2003 when he talked to them about it, but with recent staff increases they might now have time for it. I asked who in the Enforcement Division had received my letter before. He said he did not want to give me names as there had been staff changes. I asked that he try to set up a meeting in the next two weeks and sent an e-mail the same day to reiterate this point:
To: Alton Harvey @sec.gov
Sent: Friday, June 04, 2004, 12:39 PM
Subject: U.S. Treasury MarketMr. Alton Harvey
Office Chief
Division of Market Regulation
Securities and Exchange CommissionDear Mr. Harvey:
Thank you for calling this morning to reply to the voice mail I left you on May 21 … Although it has been almost three years since I first sent the attached letter describing these concerns to the SEC and more than two years since you told me that you had given it to the Divisions of Enforcement and Market Regulation and the Office of Compliance, Inspections, and Examinations (as well as to the Federal Reserve Bank of New York and the Treasury Department’s Bureau of Public Debt), I continue to believe that the SEC—with its dual role of enforcing the existing rules of the game and writing new ones—is the best place to address these matters and would therefore like to meet with an official who has some knowledge of the bond market, has read my letter, can spare an hour or two to examine a few sample deals from my data, and has the authority to initiate an investigation. I appreciate your offer to try to set up such a meeting in the next two weeks and look forward to hearing from you next week. If I have not heard from you by then I will assume the SEC is not interested in the issues raised in my letter and pursue an alternative course for the data.
Sincerely,
[ ]
Alex J. Sadowski, a branch chief (an SEC branch chief supervises staff attorneys and reports to an assistant director, who in turn reports to an associate director) in OCIE’s Office of Market Oversight, called the following week to set up a conference call. On June 15, 2004, I spoke for an hour with him and four of his colleagues: Eric J. Swanson, an assistant director in Market Oversight; Tom Stickley, a staff attorney in Market Oversight; Joseph Cella, chief of Enforcement’s Office of Market Surveillance; and Eric Ribelin, a branch chief in Market Surveillance (others may have been listening without speaking), answering general questions about the Treasury market (their experience was in stocks, not bonds) and describing how a dealer might front-run a typical deal pricing. At the end of the call they said they would like to look at some actual transactions; Mr. Sadowski called the next week to set up a meeting.
On June 24, 2004, I met at the Commission’s Washington headquarters with six staff members: Messrs. Swanson, Sadowski, and Stickley of Market Oversight plus John A. McCarthy, the head of that group (an associate director, he reported directly to OCIE’s director, Lori A. Richards); Thomas P. Conroy, a subordinate of Messrs. Cella and Ribelin from Market Surveillance; and Mr. Harvey. After providing a general description of deal pricing and front-running, I took them through one of four deals for which I had brought my records, the October 27, 1998, pricing of a $2.5 billion 10-year bond issued by Canada. Mr. McCarthy then asked why, given that the SEC’s primary duty was to protect small investors, it should concern itself with this conduct. Why couldn’t corporate treasurers defend themselves? I replied that they had neither the experience (their deals are sporadic) nor the incentive (there was no way to accurately reward them for minimizing issuance costs) to avoid being taken for five basis points. And because that five basis points was ultimately paid by the corporation’s shareholders, it was a proper concern for the Commission.
John McCarthy and Eric Swanson supervised some of the SEC’s investigations of Bernard Madoff.
After Messrs. McCarthy, Swanson, and Harvey left for another meeting the remaining staffers turned to the question of how to prove front-running. I said that it was surprising—leaving aside the question of proving intent—that while large stock trades prior to the release of information or large price movements were routinely investigated regardless of whether there was an apparent connection between the stock’s buyer or seller and the underlying corporation, large bond trades were seemingly free of oversight. They pointed out that stock exchanges and other self-regulatory organizations (SROs), not the SEC, performed that supervision. I said that the bond market’s SROs did not seem to conduct comparable monitoring. They did not want to go through any of the other three deals so the meeting ended soon thereafter.
I called Mr. Sadowski the next day to ask some questions not addressed at the meeting. He called me back on June 29 and gave the following answers:
I offered to help the SEC set up such a unit. Mr. Sadowski was not encouraging.
While waiting to hear back from Mr. Harvey, I contacted the Commission’s chief economist:
To: Lawrence Harris @sec.gov
Sent: Tuesday, June 01, 2004, 10:58 AM
Subject: US Treasury MarketSecurities and Exchange Commission
Office of Economic Analysis
Lawrence E. Harris, Chief EconomistDear Mr. Harris:
Thank you for taking my call this morning. I attach a letter about the Treasury market, based on a dozen years trading for J.P. Morgan. I also attach the cover letter that I included when I sent it to the SEC almost three years ago. In two subsequent conversations Alton Harvey of the Division of Market Regulation told me that the Divisions of Enforcement and Market Regulation and the Office of Compliance, Inspections, and Examinations had all seen it. Since no one has contacted me to examine the data, I must conclude they are not interested in this issue. Nonetheless, I still believe the SEC is the proper audience for my letter and its accompanying data and therefore hope you might find time to spend an hour or two this week or next (how about this Thursday?) looking at a few illustrative deal pricings with me …
Sincerely,
[ ]
I called Mr. Harris on June 4 and he told me that he hoped to read my letter over the weekend. I called his office from the SEC’s lobby after the June 24 meeting and learned that he had resigned from the Commission and returned to the University of Southern California’s Marshall School of Business. I was connected to a staff member who suggested I contact the new chief economist when he started work in July.
On July 16, 2009, I called SEC Chairwoman Mary L. Schapiro’s office and described this site to her assistant. I said that though the SEC previously had not shown much concern about front-running in the Treasury market it might be more interested now because some of the derivatives central to the financial crisis were traded on the same trading floors, by the same people, and in the same way, as Treasuries. I e-mailed her office the next day:
This section is incomplete; please check back.To: chairmanoffice @sec.gov
Sent: Friday, July 17, 2009, 12:38 PM
Subject: Fraud in U.S. Treasury MarketI called yesterday to suggest that Chairwoman Schapiro might find interesting my Web site about dealer misconduct in the Treasury market since Wall Street misconduct in other areas of fixed-income (mortgages and swaps) was a major cause of the current financial crisis. I traded Treasuries for a dozen years for J.P. Morgan, after graduating from the University of Chicago (BA in economics, MBA in finance) … I think that my information about the Treasury market would be useful for the Division of Enforcement, the Division of Trading and Markets, and perhaps also the Office of Compliance Inspections and Examinations. I also think that Chairwoman Schapiro might find it interesting herself not only for its description of how dealers profit at their customers’ expense, but also for its account of my attempts to interest government regulators, including the SEC and Department of Justice, in this matter almost a decade ago.
I will call this afternoon to confirm you have received this e-mail …
Sincerely,
[ ]
[J.P. Morgan was (and is) a primary dealer, a bank or securities firm selected by the Federal Reserve Bank of New York as a counterparty for its purchase and sale of U.S. Government securities in implementing monetary policy. There were 31 primary dealers in 1998: ABN AMRO, Aubrey Lanston, Bear Stearns, BT Alex. Brown, Barclays, Chase, CIBC Oppenheimer, Credit Suisse First Boston, Daiwa, Deutsche Bank, DLJ, Dresdner Kleinwort Benson, First Chicago, Fuji, Goldman Sachs, Greenwich Capital, HSBC, J.P. Morgan, Lehman Brothers, Merrill Lynch, Morgan Stanley, NationsBanc Montgomery, Nesbitt Burns, Nikko, Nomura, Paine Webber, Paribas, Prudential, Salomon Smith Barney, Warburg Dillon Read, and Zions Bank. There are 18 primary dealers currently: BNP Paribas, Banc of America, Barclays, Cantor Fitzgerald, Citigroup, Credit Suisse, Daiwa, Deutsche Bank, Goldman Sachs, HSBC, Jefferies, J.P. Morgan, Mizuho, Morgan Stanley, Nomura, RBC, RBS, and UBS.]
USTreasuryMarket.com: 1. Letter, 2. Government Response, 3. Data: Canada
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