Last Act in the Cliff-Hanger?

All this year, Wall Street has been enacting a financial version of The Perils of Pauline, with the customers playing Pauline. Time and again, investors have been threatened with loss of the money and stock held for them by brokerage houses that have gone to the brink of insolvency--or fell over it. Repeatedly, the financial community has prevented disaster by rounding up new capital for the failing firm, arranging a shotgun merger or, as a last resort, ransoming customers' stock by making payments out of a $55 million New York Stock Exchange trust fund. Last week Wall Street managed the most dramatic rescue yet, but in doing so apparently exhausted its resources for continuing the cliff-hanger act.

Shaky Capital. This time the prospective failure was large enough to threaten not only investors but much of the securities business. The firm about to go under was Goodbody & Co., whose 250,000 customer accounts make it the fifth biggest brokerage in the nation. The collapse of a company so huge seemed likely to frighten investors into withdrawing stock and cash from many other firms, triggering a panic.

Like many other brokerages, Goodbody was shakily capitalized. About half of its capital, now down to about $10 million, consisted of loans advanced by partners and other investors for 90 days at a time. Its record keeping got into a horrendous snarl. By mid-October an exchange-ordered audit disclosed that Goodbody held some $10 million in stock that was not even entered on its books--while another $10 million of stock that was recorded on the books could not be found. Operating losses this year totaled $8 million by the end of September, and partners and other lenders began withdrawing capital in amounts large enough to put Goodbody in violation of a stock exchange rule that a member firm must have capital equal to at least 5% of its liabilities.

Finally, the Big Board gave Goodbody an ultimatum: come up with additional funds by Nov. 5 or face suspension--a move that would have forced liquidation. Early last week, no one had worked up the nerve to mount a rescue, and the $55 million in the exchange trust fund was no longer available; it is fully committed to help customers of ten brokerages that earlier tumbled into insolvency. On Tuesday, the exchange's governors and representatives of 20 of the richest investment houses were summoned, on an hour's notice, to an emergency meeting in the exchange's dark-paneled board room. President Robert Haack told them they had to come up with some salvage plan or face a major crisis. By process of elimination, Merrill Lynch, Pierce, Fenner & Smith, by far the biggest U.S. brokerage, was selected as savior. Clifford Michel, managing partner of Loeb, Rhoades, explains: "One strong, viable firm had to take over, and Merrill Lynch was the only one that had the capital, the muscle and the talent."

Hard Bargain. Merrill Lynch President Donald T. Regan reluctantly agreed to have the firm put up an immediate $15 million to save Goodbody. He said that Merrill Lynch had gone along because a Goodbody collapse "might hamper the orderly functioning of the nation's capital markets." Regan drove a hard bargain. Exchange officials had to agree to assess the 578 member firms a total of $30 million to guarantee Merrill Lynch against losses that it might suffer in taking over Good-body. At week's end, it was still uncertain whether Merrill Lynch will absorb Goodbody by itself, or sell some Goodbody offices to other firms. Such sales would please both federal trustbusters and some competitors who grumble about how much bigger the Goodbody bail-out will make Merrill Lynch. Some exchange members may balk at voting for the assessment but,if necessary, officers of 35 wealthy firms are ready to round up the money themselves.

Goodbody's customers, and Wall Street's continued ability to do business as usual, seem safe--for the moment. But the rescue raises some extremely disquieting questions. If Goodbody was not secure, what other firm, apart from Merrill Lynch, is? Considering that Goodbody as long as two years ago was reliably rumored to be in grave difficulty, why did the New York Stock Exchange fail to take action until the last minute?

Up to Congress. Most distressing of all is the thought of what would happen if another major firm staggers to the brink. The Goodbody bail-out was the sort of thing that can be done only once; not even Merrill Lynch has the resources to rescue a succession of failing houses. If Congress passes the bill to set up a Securities Investor Protection Corp., with authority to tap the Treasury for as much as $1 billion to restore stock to customers of failing brokers, all may be well for investors, though not necessarily for their brokers. The Goodbody furore has improved the bill's chances, but it still could be put aside in an adjournment rush at the end of Congress's lame-duck session. If the S.I.P.C. bill fails and the trouble continues, Wall Street will face a terrifying unknown: What would be the consequences of the failure of a major house whose customers are not protected by anyone in either downtown Manhattan or Washington?

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