New Treasury Auction System Is Criticized : Securities: Agency plans to begin computerized operations today despite GAO objections.

By ROBERT A. ROSENBLATT

April 29, 1993 12 AM PT

TIMES STAFF WRITER

WASHINGTON — The Treasury Department’s new automated system for handling auctions of government securities is deeply flawed and unlikely to prevent fraud, the General Accounting Office said Wednesday.

Despite the objection, the Treasury defended the system and said it will begin operating it today in an effort to avert a repetition of the securities scandal in 1991 that shook Wall Street and one of its leading brokerages, Salomon Bros.

The investment firm admitted that some of its traders had tried to rig the auction market in Treasury bills and bonds by cornering supplies of certain issues. The auctions are held periodically to service the federal government’s huge debt.

Rules forbid a single bidder from winning more than 35% of a securities issue, but the Salomon traders evaded the limit by submitting false bids using the names of some customers without permission. The market is dominated by 40 large bidders in New York, San Francisco and Chicago.

The bid-rigging scandal forced the resignation of Salomon’s top executive, John H. Gutfreund, who was replaced by shareholder Warren E. Buffett. Salomon paid $290 million to settle the government’s case against the firm.

The Treasury system that will accept certain bids by computer lacks the “capability to detect and identify collusion--where dealers and customers agree to collaborate in violating Treasury rules--or fraud--where bidders provide false information,” the GAO said in the report, sent to Treasury Secretary Lloyd Bentsen. (The GAO is the investigative arm of Congress.)

The Treasury will combine two systems today: the old one of accepting manual bids, pieces of paper submitted at the Federal Reserve, and the new one of automated bids. The department hopes that most dealers will be using the computer network within a few months, but it did not indicate when the dual system will be phased out.

Dealers may use the computer or stay with the traditional method of dropping bid papers in boxes at the Federal Reserve Bank. The auctions are run by the Treasury and the Federal Reserve Bank of New York.

The automated network proved highly unreliable during tests of simulated auctions between January and March, the GAO said. In one test, five dealers “were disconnected from the mainframe computer system,” the report said. If this happened during an actual auction, the bids would have been lost.

Another threat comes from the computer clock in the automated network, which “drifts and has to be manually readjusted every Saturday,” the GAO said.

“This poses a potential problem for those dealers who submit bids seconds before an auction closes,” the report noted. “For instance, should the bank’s computer clock gain time, dealers could transmit timely bids that are rejected by the bank as being late.”

Because of these uncertainties, the Treasury is allowing dealers to maintain the old method of bidding despite the GAO warning that this defeats the purpose of the new network, known as the Treasury Automated Auction Processing System.

The GAO recommended that the computer effort be delayed while a better system is devised to detect fraud and collusion. “It should be determined what effect a completely automated auction . . . would have on time savings and rule monitoring,” the agency said.

The Treasury defended its decision to proceed with the new system.

“Our positions is that TAAPS has been thoroughly tested and is ready to be put into production,” a Treasury spokeswoman said.

“Treasury considers this TAAPS program an important first step,” she added.

“We deliberately chose to introduce automation to the auction process incrementally and believe this to be a prudent approach.”