U.S. Launches Reform of Its Auctions for Notes, Bonds : Securities: The Treasury will require dealers’ customers to provide it with written confirmation of large, winning bids before it parcels out the issues.

WASHINGTON —  In a move to restore confidence in the huge government securities market, the Treasury on Wednesday took its first steps since the Salomon Bros. Inc. bidding scandal to reform the way it auctions notes and bonds.

It said it will require customers of securities dealers to provide it with written confirmation of large, winning bids before parceling out the government securities.

Salomon admitted placing bids in the name of customers without getting their permission. That way, it was able to acquire huge blocks of Treasury issues, often in violation of a rule limiting a single buyer to 35% of an issue. In one May auction, Salomon cornered the market by controlling 94% of the notes sold.

The Treasury and Federal Reserve also said they will speed up efforts to automate auctions. The current system, widely described as archaic, requires dealers to scrawl bids on pieces of paper, then drop them in a box in the Fed lobby seconds before the deadline.

The new rule requiring confirmation of bids “is aimed at ensuring the authenticity of large, winning bids placed on behalf of a customer by a primary dealer,” the Treasury said.

The regulation, which will be developed by the Treasury and the Federal Reserve Bank of New York, is the first specific step to reform the auction system since the disclosures last month of Salomon’s misdeeds. The auction system is vital because it enables the Treasury to refinance the huge, $2.3-trillion public debt.

Treasury officials are anxious to reassure investors that the auction works in a fair manner without special advantages to Salomon and the 38 other primary dealers in Treasury issues. Investor doubts about the fairness of the system could drive up the interest rates the Treasury must pay, raising the cost to the taxpayers.

Treasury Secretary Nicholas F. Brady emphasized the fairness issue as he announced the major changes: requiring confirmation of bids and providing earlier public notice of the Treasury’s borrowing needs.

“The U.S. government securities market is the largest, most efficient and liquid market in the world,” Brady said. “We are taking these steps to ensure its continued integrity. In addition to these actions, the Treasury Department will continue to review the auction process to determine what other changes may be appropriate.”

Under the new rules, a customer of a securities dealer would provide a written statement that “indeed, the bid on its behalf was authentic,” a Treasury official said. This rule is designed to prevent incidents such as the false bid in a February auction that Salomon submitted in the name of Mercury Asset Management, an affiliate of S. G. Warburg.

The Treasury and the Fed will meet with Warburg today to learn why Mercury never told authorities that its name was used in Salomon’s phony bid, according to E. Gerald Corrigan, president of the Federal Reserve Bank of New York, which manages the auctions.

Paul W. Mozer, who was fired as Salomon’s head government securities trader, “apparently went to considerable lengths in requesting an official of Warburg not to respond” to a Treasury inquiry about the February auction, Corrigan told the securities subcommittee of the Senate Banking Committee.

“This raises another question about possible wrongdoing,” Corrigan said. “The SEC and Justice Department are aware of these developments, and the Treasury and Fed have arranged a meeting with Warburg for this week in order to learn its side of the story.”

In the other key change aimed at reassuring the public, the Treasury said it will announce its borrowing needs two days before issuing the quarterly schedule for auctions.

Currently, an advisory committee of securities dealers learns how much the Treasury will borrow a day before the public. The advisory committee gives the Treasury suggestions on the best mixture of securities--with maturities ranging from three months to 30 years--to raise the maximum amount of money at the least cost to taxpayers.