Wall Street's Panic That Wasn't

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Chase Manhattan Chairman Willard Butcher then called together the heads of seven of the brokerage firms from which it had obtained the securities. Butcher told the moneymen that his bank would not be making the interest payments that were supposed to be due to them that day because Drysdale Government Securities had not paid Chase. The banker said that Chase could not be considered legally responsible for the money owed by Drysdale, but was willing to go ahead anyway and and put put $90 million into a $250 million pool until the situation was cleared up. Included among the astonished listeners were the heads of some of the bluest chips of American finance: Merrill Lynch; Goldman, Sachs; and Salomon Bros.

The executives were furious when they heard Butcher argue that Chase had no obligation because the bank had been merely a transfer agent between the brokerage houses and Drysdale. Their arrangement had been with Chase, the brokerage houses argued, not with Drys dale. Chase seemed to be breaking the most fundamental rule of Wall Street: a dealer stands behind his deal. Said one an gry brokerage house executive: "We had taken a negative view of Drysdale's opera tions from the start, and we never had any direct dealings with them at all. We did not know for whom Chase was acting." Added a colleague: "This is going to hurt Chase a lot. I think Butcher panicked."

On Tuesday afternoon the New York branch of the Federal Reserve called to gether the chairmen of New York City's ten largest banks to discuss the possible repercussions of Chase's refusal to make the interest payment. Officials were very fearful that if Chase persisted, some securities firms might find themselves in a cash squeeze. After the session, the Feder al Reserve issued a statement saying that it "stood ready as a lender of last resort" to help any commercial banks temporarily short of cash. It was the first time since the mini-financial panic following the 1970 bankruptcy of the Penn Central Railroad that the Federal Reserve had put out such a market-soothing statement.

Chase was even more isolated from the financial community the next day, when Manufacturers Hanover Trust, which had also been involved in Drysdale repo deals, announced that it would make good to brokerage houses on some $29 million in weekend interest payment defaults by Drysdale. Only three hours later, a thoroughly chastened Chase reversed it self and said that it would also honor its commitments after all.

Though Wall Street executives insist ed that the market's stability had not been really shaken last week, in private some moneymen were much less sanguine. Said one investment banker: "The episode showed that the system can work if the proper people apply pressure at the right time, but the reaction could have been terrible. Adverse news is one thing, but un certainty at the core of adverse news can create widespread panic." Even if the banks manage to collect something from Drysdale, the anticipated after-tax loss of $135 million that Chase expects to suffer from the affair will probably wipe out the bank's earnings for the second quarter.

By Christopher Byron.

Reported by Frederick Ungeheuer/New York