Washington Insiders;

Whether or not the plunge in stock prices drives the nation into a depression, it has already driven American business to rework many of its assumptions about finance, compensation, real estate, and company acquisitions. At year's end, we sought some new ideas from some old hands about surviving in the post-Wall Street economy.

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Washington has found itself at the center of the storm following the market crashes. Wall Street was quick to point an accusing finger at a Congress and a President who have been unable to get a handle on the twin deficits, budget and trade. Many others, however, blame Washington for turning a blind eye to the spiral of speculation on the financial markets that finally over-reached itself on Black Monday.

We asked two Washington veterans to comment on the new political climate for government deregulation -- or reregulation -- of the financial markets. They are Henry Reuss, the former Democratic congressman from Wisconsin who was chairman of the House Banking Committee from 1975 to 1981; and Frederick Schultz, who was vice-chairman of the Federal Reserve Board from 1979 to 1982.

INC.: In the weeks after Black Monday, the chairman of American Express Co. was quoted as saying that deregulation is now a "dead duck." Was he right?

SCHULTZ: Obviously, any time you have a dramatic shock like this to the financial markets, the climate for regulation tends to get stronger. People will say, "Well, why couldn't somebody have done something to avoid this?" So I think the political climate clearly is such that the whole thrust of deregulation will go slower.

INC.: Before the crash, there was considerable momentum toward allowing banks to get into heretofore forbidden areas by repealing all or part of the Glass-Steagall Act. Has that campaign now been derailed?

SCHULTZ: It has been slowed, but in that case, it also seems that such a good argument can be made for allowing banks to do things like underwrite all types of municipal bonds and offer mutual funds, that there is still a possibility you could get that kind of deregulation this year.

INC.: That would be letting the banks into the investment-banking business just when the investment banks are reeling from huge losses.

REUSS: More competition would be good for investment banking. I mean, the fees are outrageous -- so outrageous that when municipalities began turning to banks to handle their general-purpose bonds a few years ago, the Wall Street investment firms began a sullen retreat. Now, the next area is corporate underwriting, and I expect that, sometime during the next three years, banks will be allowed into that competition too.

INC.: But why would you want to let banks get into any of these risky areas and possibly jeopardize the integrity of the banking system?

REUSS: I'm sure that when repeal comes, it will include provisions imposing very severe, iron-wall requirements that would make it impossible for a bank, for example, to dump its underwriting lemons onto its trust customers, or use its leverage as a lender to force its banking customers to become underwriting customers as well.

SCHULTZ: I think you will also want to make sure that the investment subsidiary has its own capital and that the bank is not able to supply any capital to the investment subsidiary -- if you do that, you can probably do a fairly good job of preventing any major problems.

INC.: And do we trust the free-market ideologues of the Reagan Administration to craft and oversee this new set of regulations to accompany this expansion of bank powers?

REUSS: I wouldn't trust them from here to the next corner -- which is one reason why I say that it may take three years rather than just one to have these changes in Glass-Steagall enacted. Congress may want to see a new Administration in place first.

INC.: Has the Fed, almost by default, been forced to be more aggressive in its oversight?

REUSS: Yes, the Fed, poor souls, seeing the rest of the government hacking the situation very badly, is often drawn into an attitude of "Let's save the world." And as often as not, its intervention does more harm than good. After the October crash, the Fed was out there printing money in a manner that would please the ghost of William Jennings Bryan. That has had an immediate salutary effect of stemming more Black Mondays, one hopes. But, in the name of shoring up a few large financial institutions, it runs the risk of higher inflation for everybody else.

INC.: Certainly you wouldn't fault the Fed for grabbing the bull by the horns.

REUSS: Yes, I would. I would say Paul Volcker, during his tenure, should have threatened to resign, and Greenspan should threaten to resign, if necessary -- anything to hold the feckless Administration and Congress ransom until they come to their senses and do was needs to be done. As it is, the Fed pursues a mousy little role.

INC.: But at least the Fed has begun talking about higher margin requirements for stock options and index futures.

REUSS: Yes, after sitting idly by while the market was bid up to a level where sensible people could see that it was headed for trouble. And after years of allowing real-interest rates to remain so high that the dollar was bid up, and we began to lose even more of our industrial base and began to accumulate some of the terrible trade imbalances from which we are now suffering.

INC.: I suppose, Mr. Schultz, this question might be put to you: why is it that the Fed ever allowed Wall Street to become as speculative as it became? Take the case of options and index -- what do they have to do with anything other than pure gambling?

SCHULTZ: Well, that is very much the same argument I made back when John Shad [then chairman of the Securities and Exchange Commission] came over to the Fed seeking our approval for index futures. That was back in 1981. Shad talked to Volcker and each of the governors, and everyone else agreed. I was the final holdout. And I said I found it very difficult to believe that there were going to be a lot of portfolio managers who, in fact, would use these index futures as a hedge. It seemed to me that it would primarily be used for speculation. But Shad spent an hour and a half going through it with me, telling me about all the managers who had indicated the need for a hedge. So I went along reluctantly. As it turned out, I think both of us were right.

INC.: It was used extensively as a hedge and extensively for speculation, too.

SCHULTZ: Correct.

INC.: And how do you see the government responding to that now?

SCHULTZ: I think there will be increased margin requirements for options and futures. And I think we can probably expect some limits on how people carry out portfolio insurance -- program trading, index futures, that sort of thing.

INC.: All of those items concern the markets. What about the investment banks themselves -- is there any public interest in regulating them?

SCHULTZ: I don't think there's much.

REUSS: Well, perhaps to this extent: I think investors are entitled to know sooner, and in more comprehensive form, some of the shenanigans that are now commonplace.

INC.: The area of shenanigans most often cited, of course, is mergers and acquisitions. How do you assess the prospect for greater regulation in that area?

SCHULTZ: I think it is very hard to try to make a connection between the merger and takeover activity and what happened in the markets. That tends to be a little on the farfetched side. But what is of concern to a lot of people is that the M&A activity has led to an increase in debt and in debt-equity ratios.

REUSS: I agree that the market gyrations probably won't have must of an effect on whether some curbs are placed on mergers and acquisitions. But I think the real sadness of it in terms of the readers of INC. is in the vast amounts of the nation's credit that these takeover loans absorb. If the real, provable danger of unbridled acquisitions is the distortion of credit in this country, as I believe it is, then it would be simplicity itself for a Fed with some gumption to require that any bank lending for an acquisition be required to plunk down a hefty reserve against it. That would surely dim the enthusiasm and move the point of calculation several notches in the direction of more productive loans to those small and midsize companies that are producing something of value.