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Salomon Brothers

Salomon Brothers
Acquired
Industry Financial services
Fate Acquired by Travelers Group in 1998
Successor Salomon Smith Barney (1998-2003), Smith Barney (2003 - 2009), Morgan Stanley Wealth Management (since 2012)
Founded 1910
Founder Arthur Salomon,
Herbert Salomon,
Percy Salomon
Defunct 2003 (name dropped by Citigroup)
Headquarters New York, US
Products Investment banking
Revenue $4.018 billion (June 1997)[1]
$443 million (June 1997)[1]
Number of employees
7,100 (June 1997)[1]

Salomon Brothers was a Wall Street investment bank, known as a bulge bracket company. Founded in 1910 by three brothers (Arthur, Herbert and Percy) along with a clerk named Ben Levy, it remained a partnership until the early 1980s, when it was acquired by the commodity trading firm Phibro Corporation and then became Salomon Inc. [2][3] 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. Although the Salomon name carried on as Salomon Smith Barney, which were the investment banking operations of Citigroup, the name was ultimately abandoned in October 2003 after a series of financial scandals that tarnished the bank's reputation.[4]

Contents

  • Recent History 1
  • 1990s treasury bond scandal 2
  • Notable former staff 3
  • Notes 4
  • Further reading 5

Recent History

John Gutfreund became the managing partner in 1978, taking the company public, staying on as CEO.[5] 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.[6]

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.[7]

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).[8][9]

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. Salomon was fined $290 million for this infraction, the largest fine ever levied on an investment bank at the time. 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.[10] 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." [11] after the reorganization, because the Salomon Brothers and Smith Barney names were a division and service mark of Citigroup Global Markets.

Two members of the Salomon Brothers' bond arbitrage, John Meriwether and Myron Scholes, later became a founder and a consultant for Long-Term Capital Management, a hedge fund that collapsed in 1998.[12]

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. 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.

Notable former staff

Notes

  1. ^ a b c Travelers Group SEC Form 8-K Filing September 2007
  2. ^ http://www.fundinguniverse.com/company-histories/Salomon-Inc-Company-History.html
  3. ^ Michael Lewis. Liar's Poker. New York, pg 228 http://books.google.com/books?id=Ujl3ngrhduUC&pg=PA228&dq=partnership+salomon+inc+liar%27s+poker&client=safari
  4. ^ Deep Within Citi, the Death of Salomon. Wall Street Journal, September 29, 2009
  5. ^ Michael Lewis, The End, Portfolio.com, 11 November 2008
  6. ^ James Sterngold (January 10, 1988). "TOO FAR, TOO FAST; Salomon Brothers' John Gutfreund".  
  7. ^ Carrie Hojnicki (July 3, 2012). "The Spectacular Rise And Fall of Salomon Brothers".  
  8. ^ "History of the RJR Nabisco Takeover".  
  9. ^ Kurt Eichenwald (October 31, 1991). "Rite Aid Seeks to Buy Revco As Salomon Settles Lawsuit".  
  10. ^ Ex-Salomon Chief's Costly Battle, The New York Times, August 19, 1994
  11. ^ [2] changing its name from Salomon Smith Barney Holdings Inc. to Citigroup Global Markets Holdings Inc.
  12. ^ When Genius Failed: The Rise and Fall of Long-Term Capital Management

Further reading

  •  
  • Lowenstein, Roger (2000).  
  • Martin Mayer (1993). Nightmare on Wall Street: Salomon Brothers and the Corruption of the Marketplace. Simon & Schuster. 
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