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Stock values seen adding to imbalances - Greenspan

WASHINGTON: Federal Reserve Chairman Alan Greenspan told Congress in a letter, released on Thursday, that the central bank was concerned about supply-demand imbalances in the economy, and that stock valuations seem to have been a big factor in the developing imbalance.

"The Federal Reserve is concerned about imbalances between aggregate demand and supply and the implications for inflation and thus sustainability of the expansion," Greenspan said in a letter answering questions which arose during his Feb. 17 Humphrey-Hawkins testimony.

"The sharp increase in equity valuation appears to have been an important factor behind an apparently developing imbalance," he added.

Referring to the rising use of margin borrowing to buy stocks, Greenspan said that "lenders and borrowers need to assess carefully the risks they are assuming through the use of margin."

Greenspan also said he does not believe the Fed's short-term monetary policy has "a significant effect on stock prices."

"Even if our operating procedures were associated with somewhat larger movements in short-term rates, I doubt that investors' perceptions of equity risks would be much affected and thus that equity prices would be significantly influenced," he said, adding that changes in margin rules would also have little effect on stock prices.

Market speculation has persisted recently that the Fed might intervene to make margin requirements more stringent to dampen stock market speculation.

Current margin requirements, unchanged by the Fed since 1974, allow investors to finance 50 percent of a stock purchase through margin debt. That effectively allows investors to buy $200 worth of stock for every $100 of cash on hand.

Margin requirements were mandated by Congress after the stock-market crash of 1929.

The practice of buying stocks on margin has increased markedly recently as the stock market has boomed. But Fed officials have often noted that other types of leverage -- in particular stock options and other derivatives -- have also become much more popular, so a change in margin requirements would not put much of a dent into stock market speculation.

Some U.S. lawmakers have called for tougher margin rules to make it harder for day traders to speculate.

The practice of day trading drew the attention of Congress and regulators last summer after one day trader killed nine people at two brokerages in Atlanta and his family after totalling up more than $150,000 in losses.

Asked to end speculation that the New York Fed had intervened in the gold market, Greenspan responded: "I can say unequivocally that the Federal Reserve Bank of New York has not intervened in the gold market in an attempt to manipulate the price of gold o affiliated with Eclipsys and VHA.

Including warrants, VHA and UHC will receive 58.6 million and 10.7 million shares, respectively, of Neoforma.com common stock.

Neoforma.com said it would issue about 120 million new shares to finance the deals and that helped send the shares into a tailspin.

Neoforma.com shares fell 10, or about 33 percent, to 20-3/8 in afternoon trading while Eclipsys shares fell 2-11/16, or more than 10 percent, to 23-1/8.

It was the second straight day that investors failed to support a proposed merger in the health-care services sector.

On Wednesday, IMS Health Inc. RX.N agreed to take control of TriZetto Group Inc. TZIX.O IMS Health shares closed down 24 percent, while TriZetto closed down about 42 percent.

In an interview with Reuters, Neoforma.com Chairman and Chief Executive Bob Zollars said the agreement did not include a collar on the price of Neoforma.com's stock. But, he said, it did include a breakup fee of about $43 million.

The companies said they expected to complete the deal mid-year and it would be accounted for as a purchase transaction. The deal is subject to regulatory and shareholder approvals.

The combined company will be referred to as Neoforma.com until a new name is selected.

Eclipsys Chairman and Chief Executive Harvey Wilson will become chairman of the combined company. Neoforma.com Chairman, President and Chief Executive Bob Zollars will become CEO and president of the combined company.

Eclipsys, which earlier this month made an unsolicited $2 billion bid for Malvern, Pa.-based Shared Medical Systems Corp. SMS.N, said it would drop its efforts to pressure the company to accept its offer.

Eclipsys said it would withdraw its nomination of four directors to replace a majority of the current Shared Medical directors and its litigation against Shared Medical in Delaware Chancery Court.

"Our No. 1 priority is the completion of our very exciting merger with Neoforma.com and HEALTHvision, announced today," Wilson said. "However, we remain open to having further discussions with SMS," he said.

Shared Medical said it would continue to evaluate its strategic alternatives.

"The SMS board is continuing to evaluate its strategic alternatives to ensure that shareholders receive an appropriate value for their investment," a Shared Medical spokesman said.

"The board continues to believe the SMS stock is extremely undervalued," he said.

Shares of Shared Medical fell 2-1/8, or about 4 percent, to 51-7/8 in afternoon trading amid concern about the prospect of any other bidders-Reuters