Salomon Brothers

Salomon Brothers, Inc., was an American multinational investment bank and financial services company headquartered in New York. A bulge bracket, it was one of the five largest investment banking enterprises in the United States[2] and the most profitable firm on Wall Street in the 1980's, under its chairman John Gutfreund, nicknamed "the King of Wall Street".[3][4][5][6]

Salomon Brothers, Inc.
Acquired
Traded as
IndustryFinancial services
FateAcquired by Travelers Group in 1998
SuccessorSalomon Smith Barney (1998–2004), Smith Barney (2003–2009), Morgan Stanley Smith Barney (2009–2012), Morgan Stanley Wealth Management (since 2012)
Founded1910
FounderArthur Salomon,
Herbert Salomon,
Percy Salomon
Defunct2003 (name dropped by Citigroup)
Headquarters250 Greenwich Street
New York, NY 10006
U.S.
Key people
John Gutfreund
(Chairman 1978–1991)
Warren Buffett
(Chairman 1991–1997)
Deryck Maughan
(CEO)
ProductsSales and trading, Investment banking
Revenue $4.018 billion (June 1997)[1]
$443 million (June 1997)[1]
Number of employees
7,100 (June 1997)[1]

Founded in 1910 by Arthur, Herbert and Percy Salomon and a clerk named Ben Levy, it remained a partnership until the early 1980s. In 1981, it was acquired by the commodity trading firm Phibro Corporation and became Salomon Inc.[7][8] Eventually, Salomon (NYSE:SB) was acquired by Travelers Group in 1998; and, following the latter's merger with Citicorp that same year, Salomon became part of Citigroup.[9] Although the Salomon name carried on as Salomon Smith Barney, which were the investment banking operations of Citigroup, the name was abandoned in October 2003 after a series of financial scandals that tarnished the bank's reputation.[10]

The bank was famed for their "alpha male" encouragement and "a cutthroat corporate culture that rewarded risk-taking with massive bonuses, punishing poor results with a swift boot."[11] In Michael Lewis' 1989 book Liar's Poker, the insider descriptions of life at Salomon gave way to the popular view of banking in the 80's and 90's as a money-focused and work-intense environment. The expression "Big Swinging Dick" was born at the bank, and was used to refer to the Salomon bankers who dominated the game of extraordinary profit-making.[12]

Recent history

William Salomon, Arthur's nephew, became managing partner and the head of the company in 1963.[13] Fifteen years later, John Gutfreund became the managing partner, taking the company public, staying on as CEO.[14] During the 1980s, Salomon was noted for its innovation in the bond market, selling the first mortgage-backed security, a hitherto obscure species of financial instrument created by Ginnie Mae. Shortly thereafter, Salomon purchased home mortgages from thrifts throughout the United States and packaged them into mortgage-backed securities, which it sold to local and international investors. Later, it moved away from traditional investment banking (helping companies raise funds in the capital market and negotiating mergers and acquisitions) to almost exclusively proprietary trading (the buying and selling of stocks, bonds, options, etc. for the profit of the company). Salomon had expertise in fixed income securities and trading based on daily swings in the bond market.[15]

During this period, the upper management became dissatisfied with the firm's performance. Profits were small and the company's traders were paid in a way that was disconnected from true profitability. There were debates as to which direction the firm should head, whether it should prune down its activities to focus on certain areas. For example, the commercial paper business (providing short term day-to-day financing for large companies) was apparently unprofitable, although some in the firm argued that it was a good activity because it kept the company in constant contact with other businesses' key financial personnel.[16]

Finally, the firm decided to imitate Drexel Burnham Lambert, using its investment bankers and its own money to urge companies to restructure or engage in leveraged buyouts. As a result, the firm competed for the leveraged buyout of RJR Nabisco and the leveraged buyout of Revco stores (which ended in failure).[17][18]

At the time of the September 11, 2001, attacks, Salomon Smith Barney was by far the largest tenant in 7 World Trade Center, occupying 1,202,900 sq ft (111,750 m2) (64 percent of the building) which included floors 28–45.[19][20]

1990s treasury bond scandal

In 1991, US Treasury Deputy Assistant Secretary Mike Basham learned that Salomon trader Paul Mozer had been submitting false bids in an attempt to purchase more treasury bonds than permitted by one buyer during the period between December 1990 and May 1991. Warren Buffett served as interim Chairman of the Board in 1991 and 1992—rooting out the prior corporate culture and preventing the SEC and the Treasury Department from starting criminal proceedings against Salomon. Salomon was fined $190 million for this infraction, and required to set aside $100 million in a restitution fund for any injured parties. The firm was weakened by the scandal, which led to its acquisition by Travelers Group. CEO Gutfreund left the company in August 1991 and a U.S. Securities and Exchange Commission (SEC) settlement resulted in a fine of $100,000 and his being barred from serving as a chief executive of a brokerage firm.[21] The scandal was then documented in the 1993 book Nightmare on Wall Street.

After the acquisition, the parent company (Travelers Group, and later Citigroup) proved culturally averse to the volatile profits and losses caused by proprietary trading, instead preferring slower and more steady growth. Salomon suffered a $100 million loss when it incorrectly positioned itself for the merger of MCI Communications with British Telecom which never occurred. Subsequently, most of its proprietary trading business was disbanded.

The combined investment banking operations became known as "Salomon Smith Barney" and was renamed 7 April 2003 "Citigroup Global Markets Inc." [22] after the reorganization, because the Salomon Brothers and Smith Barney names were a division and service mark of Citigroup Global Markets.

Many members of the Salomon Brothers' bond arbitrage, such as John Meriwether, Myron Scholes and Eric Rosenfeld later became a founder and a consultant for Long-Term Capital Management, a hedge fund that collapsed in 1998.[23]

The firm's top bond traders called themselves "Big Swinging Dicks," and were the inspiration for the book The Bonfire of the Vanities, by Tom Wolfe.[24] Salomon Brothers' success and decline in the 1980s is documented in Michael Lewis' 1989 book, Liar's Poker. Lewis went through Salomon's training program and then became a bond salesman at Salomon Brothers in London. The last years of Salomon Brothers, culminating in its involvement in the Long-Term Capital Management crisis, is chronicled in the 2007 book A Demon of Our Own Design.

Lewis on the concept of a "Big Swinging Dick":

A new employee, once he reached the trading floor, was handed a pair of telephones. He went on-line almost immediately. If he could make millions of dollars come out of those phones, he became that most revered of all species: a Big Swinging Dick. After the sale of a big block of bonds and the deposit of a few hundred thousand dollars into the Salomon till, a managing director called whoever was responsible to confirm his identity: "Hey, you Big Swinging Dick, way to be."[25]

Lewis described the trading floor at Salomon:

Because the forty-first floor was the chosen home of the firm's most ambitious people, and because there were no rules governing the pursuit of profit and glory, the men who worked there, including the more bloodthirsty, had a hunted look about them. The place was governed by the simple understanding that the unbridled pursuit of perceived selfinterest was healthy. Eat or be eaten. The men of 41 worked with one eye cast over their shoulders to see whether someone was trying to do them in, for there was no telling what manner of man had levered himself to the rung below you and was now hungry for your job. The of acceptable conduct within Salomon Brothers was wide indeed. It said something about the ability of the free marketplace to mold people's behavior into a socially acceptable pattern. For this was capitalism at its most raw, and it was self-destructive...[26]

Notable staff

Notes
  1. Travelers Group SEC Form 8-K Filing September 2007
  2. Carol J. Loomis: "Warren Buffet's Wild Ride at Salomon" in Fortune, October 27, 1997
  3. Denis Collins, "An Ethical Analysis of Organizational Power at Salomon Brothers" in Business Ethics Quarterly, Cambridge University Press, Vol. 2, No. 3 (Jul., 1992), p. 1
  4. Kristin Tablang, "'King of Wall Street' John Gutfreund's $120 Million Fifth Avenue Duplex Crowned New York's Priciest Home Listing" in Forbes, 28 April 2016
  5. Emily Jane Fox, "'King of Wall Street' John Gutfreund dies at 86" in Vanity Fair, 9 March 2016
  6. Jonathan Kandell, "John Gutfreund, 86, Dies; Ran Wall Street Investment Firm at Its Apex" in The New York Times, 9 March 2016
  7. http://www.fundinguniverse.com/company-histories/Salomon-Inc-Company-History.html
  8. Lewis, Michael (1989). Liar's Poker: Rising Through the Wreckage on Wall Street. New York: W. W. Norton. p. 228.
  9. "A timeline of Salomon brothers". Business Insider. Retrieved 16 July 2018.
  10. Deep Within Citi, the Death of Salomon. Wall Street Journal, September 29, 2009
  11. James Chen, "What was Salomon Brothers?" in Investopedia, 16 March 2020
  12. Daniel Gross, "The end of the BSD" in Slate, 25 September 2008
  13. Company Profiles – FundingUniverse 1992">"History of Salomon Inc. – FundingUniverse". Search Thousands of Company Profiles – FundingUniverse. November 23, 1992. Retrieved January 11, 2018.
  14. Michael Lewis, The End, Portfolio.com, 11 November 2008
  15. Sterngold, James (January 10, 1988). "TOO FAR, TOO FAST; Salomon Brothers' John Gutfreund". The New York Times.
  16. Hojnicki, Carrie (July 3, 2012). "The Spectacular Rise And Fall of Salomon Brothers". Business Insider.
  17. "History of the RJR Nabisco Takeover". The New York Times. December 2, 1988.
  18. Eichenwald, Kurt (October 31, 1991). "Rite Aid Seeks to Buy Revco As Salomon Settles Lawsuit". The New York Times.
  19. Gilsanz, Ramon; Edward M. DePaola; Christopher Marrion; Harold "Bud" Nelson (May 2002). "WTC7 (Chapter 5)". World Trade Center Building Performance Study (PDF). FEMA. Archived (PDF) from the original on March 5, 2008. Retrieved February 17, 2008.
  20. "Building: 7 World Trade Center". CNN. 2001. Archived from the original on October 13, 2007. Retrieved September 12, 2007.
  21. Ex-Salomon Chief's Costly Battle, The New York Times, August 19, 1994
  22. changing its name from Salomon Smith Barney Holdings Inc. to Citigroup Global Markets Holdings Inc.
  23. When Genius Failed: The Rise and Fall of Long-Term Capital Management
  24. Conversations with Tom Wolfe. Scura, Dorothy McInnis. Jackson: University Press of Mississippi. 1990. pp. 262. ISBN 087805426X. OCLC 20630163.CS1 maint: others (link)
  25. Lewis, p. 46
  26. Lewis, pp. 69-70
  27. Du, Lisa. "Salomon Brothers Alums: Where Are They Now?". Business Insider. Retrieved 2020-07-17.
  28. Nasar, Sylvia (1994-05-13). "A Top Executive's Puzzling Death". The New York Times. ISSN 0362-4331. Retrieved 2020-07-17.

Further reading
  • Liar’s Poker: Rising Through the Wreckage on Wall Street by Michael Lewis. Penguin Books


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