Stocks to Trade Monday With Special Rule Big Firms Can Buy Shares Back to Halt Plunge

By Kathleen Day and John M. Berry Washington Post Staff Writers Friday, September 14, 2001; Page E01

In advance of the planned reopening of U.S. stock markets on Monday, major securities firms and corporations have reached an extraordinary agreement to prop up prices by buying shares if a flood of sell orders threatens to send the markets into a free fall, industry and government sources said yesterday.

Federal securities regulators have made it clear they will permit these and other market practices that might raise legal questions in ordinary circumstances, the sources said. Securities and Exchange Commission Chairman Harvey Pitt alluded to the informal accord yesterday when he said the agency would make it as easy as possible for companies to buy back their own shares and would open a hot line for brokers and companies with questions about proper trading practices.

The government's green light was signaled late yesterday after a major firm approached the SEC requesting that the rules concerning share buybacks be relaxed temporarily because of widespread fears of an investor panic in reaction to Tuesday's terrorist attacks, Wall Street sources said.

"We intend to make it easy for public corporations to repurchase their shares," Pitt said at a news conference with New York Stock Exchange Chairman Richard A. Grasso and Nasdaq Chairman Harwick Simmons. But Pitt also made it clear the agency will be making sure investors don't get gouged, which securities lawyers interpreted to mean that the SEC will allow corporate buybacks only to the extent that they don't hurt investors by unfairly propping up or depressing individual company prices.

The SEC chief said he will announce today a number of steps "to facilitate an orderly market." He hinted strongly that short selling -- a practice in which investors bet that stock prices will fall -- will be restricted. "With respect to short selling, the goal of all of us is to have a market that most closely approximates the normal trading environment," he said. "As a result of that, you can tell in which direction we will probably be leaning."

The plan to resume stock trading on Monday after a four-day halt -- the longest since the Great Depression -- depends on a test of market systems scheduled for Saturday, the three men said.

Securities industry executives interviewed yesterday said the Monday target is attainable but privately voiced concern about whether it will be met, warning that power outages, disrupted phone service and structural damage to buildings are proving to be more daunting than expected.

While industry and government officials have struggled for days with the technical obstacles to reopening the U.S. markets -- the largest in the world -- the agreement yesterday reflected their concerns about the potential psychological hurdles ahead.

"As the market opens on Monday, no one knows what will happen," said an executive of a major securities firm. "But people have been made aware that they're looking at facilitating the ability of companies to purchase shares if the market gets wacky."

Pitt would not disclose details about how stock buyback rules will be eased, but SEC steps could include relaxing rules about the volume of stock that can be purchased and allowing such trades at the beginning and end of trading sessions, securities industry experts said.

Sources said the SEC's decision is similar to steps the agency took to restore stability and confidence in the aftermath of the 1987 market crash.

Before the SEC was created in the early 1930s, powerful Wall Street figures tried on occasion to prop up the market in times of distress. J.P. Morgan stopped a panic in 1907 that way. In October 1929, Richard Whitney, an exchange official, became a national hero by walking onto the jittery trading floor and placing a bold order to buy U.S. Steel above its price at the time. The move, backed by a group of bankers, buoyed hopes and prices -- but only for two days. Then the market crashed.

Yesterday, the Federal Reserve, which pumped a record $38 billion into the U.S. banking system on Wednesday, put in another $70 billion in the afternoon to ensure that brokerage firms, investment banks and other companies providing financial services have no trouble financing loans or other types of investment activity.

In another effort to shore up market confidence, Treasury Secretary Paul H. O'Neill issued a statement before television cameras taking sharp issue with the concerns, voiced by many private economists, that the terrorist assault will tip the slowing U.S. economy into a recession by destroying consumer confidence.

"The destruction in New York City is horrible and detestable. At the same time, America's dynamic economy is not located in any one place," O'Neill said. "Innovation and productivity are found in every factory and farm, every laboratory, every financial institution, every small business and every home office across America. That spirit cannot be destroyed."

Although the tragedy will cause some supply disruptions and transportation stoppages, "these effects will be transitory," O'Neill said. "The prospects for a rebound in the U.S. economy [later this year] remain unchanged."

Helping to bolster optimism was the performance of markets in Europe, which continued to claw their way back from the steep drops Tuesday that followed the attacks on the World Trade Center and Pentagon. Germany's DAX index rose 1.32 percent, and London share prices were up 1.26 percent, though France's CAC 40 index dipped slightly. Japan's Nikkei index eked out a gain of 0.03 percent, and Hong Kong's Hang Seng index rose 0.8 percent.

But two pieces of news yesterday underscored how shaky the U.S. economy was even before this week's events.

A monthly survey of consumer sentiment dropped to an 8 1/2-year low in the first part of this month. The survey, compiled by the University of Michigan, provided a reading of 83.6, down from 91.5 the month before, and by far the lowest since sentiment began falling late last year. Significantly, both consumers' assessment of the state of the economy and their expectations about it six months from now deteriorated noticeably.

Analysts at the university said the "early September loss was due to heightened concerns about future prospects for the national economy as well as more pessimistic assessments by consumers of their own financial situation." Given the shock of the terrorist attacks, "the likelihood that the economic downturn could turn into a full-fledged recession has grown substantially."

Meanwhile, the Labor Department said the number of initial claims for state unemployment benefits jumped to 431,000 last week, well above the 400,000 level that had been reported for several weeks. A number of analysts said the increase was a sign that the labor market is continuing to deteriorate and that joblessness is certain to continue rising.

In the U.S. government bond market, where trading resumed yesterday after a two-day hiatus, yields on some Treasury bills plummeted more than four-tenths of a percentage point. Yields on six-month bills tumbled to 2.72 percent, the lowest level in decades.

Analysts said the sharp drop was the result of several factors, including the "flight to quality" impulse that often materializes during crises as investors move money into U.S. government securities, which are viewed as the safest in the world. Strong demand for bonds causes yields to drop as investor become more willing to hold them regardless of their yields.

Yields were also depressed by expectations of many investors and analysts that the Fed will cut interest rates no later than its next policymaking session on Oct. 2. That would be the eighth rate cut since the beginning of the year.

SEC officials did an about-face from Wednesday, when a spokesman said the agency didn't know where investors having trouble contacting brokers should go to learn about their accounts and money. Pitt said that in addition to the hot line for financial institutions, the agency would today open another one for investors who have questions about their accounts. The numbers will be posted on the SEC's Web site (www.sec.gov).

The National Association of Securities Dealers, the parent company of Nasdaq and the American Stock Exchange, said it will post on its Web site today (www.nasdr.com) information about where investors with questions can go.

A Nasdaq spokesman also had to backtrack yesterday from a statement Simmons made Wednesday, apparently in error, that 19 of the 32 securities firms with offices in the World Trade Center had not been heard from. The spokesman said in fact Nasdaq had heard from 25 of the 32. It hadn't tried to contact the other seven. All 25 have said they can be up and running, at least in some capacity, the spokesman said.

http://www.washingtonpost.com/ac2/wp-dyn/A28035-2001Sep13?language=printer

-- Jackson Brown (Jackson_Brown@deja.com), September 14, 2001