TREASURY AUCTION BIDS AND THE SALOMON SQUEEZE

Recent press accounts claim that collusion is common practice in Treas ury auctions and that as a result the auction profits are excessive. B ut, this paper finds that the auction prices are on average marginally higher than the secondary market bid prices. The auction profits, how ever, are systematically related to the total fraction of winning bids tendered by banks and dealers. The postauction prices of the two-year notes in which Salomon Brothers had a 94 percent holding are also exa mined. The secondary market prices of these notes were significantly h igher than the estimated competitive prices in the four-week postissue period.