______________________________________________________________
February 23, 1991, The Economist (US) Red ink flows. (at Wall Street securities firms)
May 31, 1991, The Washington Post, Fed Studies Possible Squeeze On Sale of Treasury Securities; 'Short-Sellers' Rumored to Face High Costs, by John M. Berry,
August 9, 1991, The Washington Post, Fed Lets Buffett Increase Stake in Wells Fargo, by Albert B. Crenshaw,
August 10, 1991, The Boston Globe, Corbett attacks Nucci's Salomon 'legacy' on school board,
August 10, 1991, Albany Times Union / Knight-Ridder, Furloughs Follow Brokerage Probe, by Sheila Mullen,
August 10, 1991, New York Times, Salomon Brothers Admits Violations at Treasury Sales, by Jonathan Fuerbringer,
August 10, 1991, The Washington Post, Dow Falls 17.66, Closes Below 3000,
August 10, 1991, The Washington Post, by Kathleen Day, Salomon Suspends 2 Traders in Bond Market Probe,
August 12, 1991, The Bond Buyer, Salomon says it broke Treasury bidding rules, suspends two managers, by Steven Dickson,
August 12, 1991, American Banker, As interest rates drop, banks return to the market, by Kelly Holland,
August 13, 1991, Associated Press / Albany Times Union, Investors File A Class-Action Suit Alleging Fraud,
August 13, 1991, Wall Street Journal / Albany Times Union, U.S. Alleges Salomon Violated Rules at Treasury Auctions,
August 13, 1991, The Washington Post, Class-Action Lawsuit Filed Against Salomon; Company Accused of Artificially Inflating Prices of Securities, by Laurie Goodstein,
August 13, 1991, Chicago Sun-Times, Banks boost Dow to slim 5-pt. gain,
August 14, 1991, Chicago Sun-Times, Only real news is on sports pages, by Otis Pike,
August 14, 1991, The Boston Globe, Salomon probe won't be expanded, by Frank Perrotta, Globe Staff
August 14, 1991, The Washington Post, Suspended Salomon Traders Held Key Positions in Industry Group, by Kathleen Day,
August 15, 1991, Associated Press / Albany Times Union, Salomon Trader's Joke Led to Rule-Breaking,
August 15, 1991, The Boston Globe, Salomon will suffer in scandal, by Robert Lenzner,
August 15, 1991, The Washington Post, Violations Detailed By Salomon; Securities Firm Says Top Officers Delayed Informing Regulators, by Kathleen Day,
August 15, 1991, Chicago Sun-Times, Salomon details violations,
August 16, 1991, Associated Press / The Boston Globe, Salomon's stock falls, legal woes mount, by Dirk Beveridge,
August 16, 1991, The Washington Post, A Wall Street Giant Shaken; Bond Probe Reaches Top Salomon Executives, by Kathleen Day,
August 16, 1991, The Washington Post, Newell Infusion Seen Easing Black & Decker's Debt Woes, by Angela Walker,
August 16, 1991, The Washington Post, Dow Falls 7 in Trendless Trading,
August 16, 1991, The Bond Buyer, Moody's to scrutinize Salomon debt; Treasury rates ignite issuance boom, by Sean, Monsarrat,
August 16, 1991, The Bond Buyer, Sen. Dodd asks for investigation in wake of Salomon disclosures, by Steven Dickson,
August 16, 1991, New York Times / Albany Times Union, Salomon Bidding Embarrassment Threatens Its Future,
August 16, 1991, Chicago Sun-Times, Stocks dive 30,
August 16, 1991, Chicago Sun-Times, Salomon execs 'prepared' to resign, by Christina Toh-Pantin,
August 16, 1991, Chicago Sun-Times, Profit-takers cost Wall Street 6 pts.
August 16, 1991, The Bergen County Record, Moody's Reviewing Salomon Bros. Debt
August 16, 1991, The Boston Globe / Associated Press, Salomon's stock falls, legal woes mount, by Dirk Beveridge,
August 17, 1991, New York Times, Salomon's 2 Top Officers to Resign Amid Scandal , by Kurt Eichenwald,
August 17, 1991, New York Times, Salomon's 2 Top Officers to Resign Amid Scandal,
August 17, 1991, The Washington Post, Dow Falls 30 Amid Concern About Scandal,
August 17, 1991, Chicago Sun-Times, Scandal sparks Salomon shakeup, by Rick Gladstone,
August 17, 1991, The Boston Globe / Associated Press, Stocks hammered by Salomon scandal, byDirk Beveridge,
August 17, 1991, The Washington Post, Top Salomon Executives to Resign; Major Investor Warren Buffett Is to Take Charge Temporarily, by Kathleen Day,
August 17, 1991, The Economist (US) Rotten at the core. (Salomon Brothers Inc. is being sued)
August 17, 1991, Albany Times Union, Salomon Bosses Quit Scandal,
August 17, 1991, The Economist (US), Rotten at the core. (Salomon Brothers is being sued for unfair bidding in the government bond market)
August 17, 1991, Los Angeles Times, Scandal Spurs Calls for Reform; Treasuries: Wrongdoing by Salomon Inc. strengthens argument for making the transactions in the $2.2-trillion market more public, by Tom Petruno,
August 17, 1991, The Washington Post, Buffett Brings an Air of Quiet Success to Salomon, by Albert B. Crenshaw,
August 17, 1991, The Washington Post, Top Salomon Executives to Resign; Major Investor Warren Buffett Is to Take Charge Temporarily, by Kathleen Day,
August 17, 1991, The Washington Post, Dow Falls 30 Amid Concern About Scandal,
August 17, 1991, The Economist (US), Japan in the dirt. (scandals in the banking industry)
August 17, 1991, Chicago Sun-Times, Despite shakeup, Dow dives 30,
August 17, 1991, Chicago Sun-Times, Scandal sparks Salomon shakeup, by Rick Gladstone,
August 17, 1991, Associated Press / The Boston Globe Stocks hammered by Salomon scandal, by Dirk Beveridge,
August 17, 1991, New York Times / Albany Times Union, Salomon Tried to Stem Damage, by Jonathan Fuerbringer,
August 17, 1991, Albany Times Union, Combined wire services, Salomon Bosses Quit in Scandal,
August 18, 1991, Chicago Sun-Times, The Salomon affair shakes Wall Street, by James M. Kennedy,
August 18, 1991, The Washington Post, Shaking The Bonds Of Trust; Salomon Case Raises Concern Over Market, by Monroe W. Karmin,
August 18, 1991, The Boston Globe, Scandal update I,
August 18, 1991, Chicago Sun-Times, Buffett to rescue - again
August 18, 1991, Chicago Sun-Times, How U.S. securities mart works,
August 18, 1991, Albany Times Union, Salomon Scandal Renews Call For Treasury Bond Regulation
August 18, 1991, The Washington Post, Shaking The Bonds Of Trust; Salomon Case Raises Concern Over Market, by Monroe W. Karmin,
August 18, 1991, Chicago Sun-Times, The Salomon affair shakes Wall Street, by James M. Kennedy,
August 18, 1991, Albany Times Union, Salomon Scandal Renews Call For Treasury Bond Regulation,
August 19, 1991, The Washington Post, Bond Trading By Salomon Is Limited, by Kathleen Day, David S. Hilzenrath,
August 19, 1991, Chicago Sun-Times, Salomon suspended, top officers ousted, by Dirk Beveridge,
August 19, 1991, Chicago Sun-Times, Kup's Column
August 19, 1991, Albany Times Union, Salomon Brothers Scouring It's Image,
August 19, 1991, The Oil Daily, Recommendations reflect Wall Street dissension over industry's future, by Eugene R. Smith,
August 19, 1991, Los Angeles Times, Salomon Receives Penalty, Reprieve : Scandal: U.S. at first bans Wall Street giant from bidding on Treasury bonds. But punishment is eased after plea by firm's chairman, ouster of more executives, by Scot J. Paltrow,
August 19, 1991, Albany Times Union, Combined wire services, U.S. Backpedals on Trader Penalty,
August 19, 1991, New York Times / Albany Times Union, Salomon Brothers Scouring Its Image, by Richard D. Hylton,
August 19, 1991, Post-Tribune (IN) Government Relaxes Salomon Inc. Sanctions
August 19, 1991, The Bond Buyer, Salomon and the case for more rules, (Editorial) by John H. Allan,
August 19, 1991, The Bond Buyer, Salomon officials ready to resign amid treasury bidding scandal, by Steven Dickson,
August 19, 1991, The Washington Post, Rigging the Bond Market,
August 19, 1991, The Washington Post, The Rise And Fall Of John Gutfreund; For the Salomon Bros. Ex-Head, A High profile at Work & Play, by Cathy Horyn,
August 19, 1991, New York Times / Albany Times Union, Salomon Brothers Casualty of Greed, by Floyd Norris,
August 19, 1991, The Washington Post, Bond Trading By Salomon Is Limited, by Kathleen Day and David S. Hilzenrath,
August 20, 1991, Los Angeles Times, Many Large Clients Say They'll Stand By Embattled Salomon, by Scot J. Paltrow,
August 20, 1991, New York Times / Albany Times Union, Other Firms Probed as Part Of Salomon Brothers Scandal, by Kurt Eichenwald,
August 20, 1991, The Boston Globe, Salomon tries to mop up the damage,
August 20, 1991, The Boston Globe, Capitalist pageant, communist plague, by David Warsh,
August 20, 1991, Albany Times Union, Other Firms Probed as Part of Salomon Brother's Scandal,
August 20, 1991, The Washington Post, Government Bond Market Probe Expanded; Investigation Goes Beyond Salomon Brothers Scandal, Sources Say, by Kathleen Day,
August 20, 1991, The Bergen County Record, A Coup for Some Investors,
August 20, 1991, The Bergen County Record, Salomon tries to mop up the damage,
August 20, 1991, Chicago Sun-Times, Salomon loses California pension fund,
August 20, 1991, Chicago Sun-Times, A Russian bear market // Dow opens with triple-digit skid; calmer by close, by Greg Burns,
August 20, 1991, Chicago Sun-Times, New heads for Salomon operations,
August 21, 1991, The Washington Post, Salomon Scandal an Object Lesson, Perhaps, for Moscow, by David Warsh,
August 21, 1991, The Washington Post, Buffett Begins Wall Street Duty in Washington, by Kathleen Day,
August 21, 1991, The Washington Post, Salomon Loses Major Bond Customer; California Pension Fund Drops Securities Business With N.Y. Firm, by Stan Hinden,
August 21, 1991, The Washington Post, Buffett Begins Wall Street Duty in Washington, by Kathleen Day,
August 21, 1991, The Washington Post, Salomon Scandal an Object Lesson, Perhaps, for Moscow, by David Warsh,
August 21, 1991, The Bond Buyer, Corporates 'exciting as watching paint dry' as Soviet coup captures market's attention, by Kathie, O'Donnell,
August 21, 1991, The Bond Buyer, Prices drift in narrow ranges as traders watch Soviet news, by Susan Kelly,
August 21, 1991, Chicago Sun-Times, 'Outraged' Calif. pension fund blocks Salomon as bond trader, by Gene Ramos,
August 22, 1991, New York Times / Albany Times Union, In Wake of Treasury Scandal More Clients Drop Salomon, by Kurt Eichenwald,
August 22, 1991, The Boston Globe, The wisdom of Salomon,
August 22, 1991, The Bond Buyer, Salomon scandal could sidetrack bank measure, disclosure push, by Geoffrey A. Campbell, Vicky Stamas,
August 22, 1991, The Bond Buyer, Prices reverse Monday's moves as Soviet coup comes undone, by Susan Kelly,
August 22, 1991, The Bond Buyer; Goldman takes Calif. taxables, with Salomon as co-manager, by Sean Monsarrat,
August 22, 1991, The Bond Buyer, Gorbachev's return means Soviet Union's public finance plan now back on track. (Mikhail Gorbachev) by Steven Dickson,
August 22, 1991, The Washington Post, Salomon: The Subject Is Survival; Few Doubt the Firm Will Last, but Many Question Its Future, by Stan Hinden,
August 22, 1991, The Washington Post, Confessions of a Robber Baron, by Art Buchwald,
August 22, 1991, The Bergen County Record, More Investors Flee Salomon Bros.,
August 23, 1991, The Washington Post, Letter, The Salomon Disaster: Nothing to Joke About, by Albert Yu,
August 23, 1991, The Washington Post, Dow Creeps Up 6 Points As Investors Calm Down,
August 23, 1991, Albany Times Union, Salomon Brothers Has Strategy to Steady Finances,
August 23, 1991, Albany Times Union, Post-Coup Giddiness Short-Lived,
August 23, 1991, Chicago Sun-Times, Calumet Federal plans to go public,
August 24, 1991,The Economist (US) Life after Gutfreund; Salomon Brothers,
August 24, 1991, New York Times, Chief Legal Counsel Quits Salomon Under Pressure,
August 24, 1991, The Washington Post, Salomon's Chief Legal Officer Resigns; Buffett Pledges to Clean House at Troubled Investment Firm, by David S. Hilzenrath,
August 24, 1991, The Economist (US) American bonds beleaguered. (US hopes to sell &1.5 trillion of debt a year)
August 24, 1991, The Washington Post, Dow Average Gains 33 Points On Strong Durables Report; New Closing Record Is Set at 3040.25,
August 24, 1991, The Boston Globe, Corbett donates Salomon money, by Michael Rezendes,
August 25, 1991, Chicago Sun-Times, Book dresses down Salomon's salad days, by Edwin Darby,
August 25, 1991, Associated Press / The Boston Globe, Market held up in crisis,
August 25, 1991, The Washington Post, Temptation Still Beckons On Wall St.; Despite '80s, Opportunities Abound to Cheat System, by David S. Hilzenrath,
August 25, 1991, The Washington Post, Salomon Scheme Provides Lesson On Regulation, by Hobart Rowen,
August 26, 1991, Los Angeles Times, Buffett Chooses L.A. Attorney as Salomon Counsel, by Michael Parrish,
August 26, 1991, Chicago Sun-Times, Stocks dip 0.89
August 27, 1991, The Washington Post, Buffett Lays Down Law At Salomon; New Chief Cautions Staff on Behavior, by Stan Hinden,
August 27, 1991, The Washington Post, Behind Closed Doors, Bond Experts Get Treasury's Ear, by Kathleen Day,
August 27, 1991, Chicago Sun-Times, Mart takes breather after roller-coaster,
August 27, 1991, Albany Times Union, Temptation Opportunity Make Market Fraud Easy,
August 27, 1991, The Bond Buyer, Bank panel chairman seeks suspension of Salomon's status as primary dealer. (Henry Gonzalez, Salomon Brothers Inc.) Stephen A. Davies,
August 28, 1991, Chicago Sun-Times, Salomon may lose S&L asset sale right,
August 28, 1991, The Bond Buyer, by Joe Mysak, Ten state treasurers to join delegation of finance experts in visit to U.S.S.R.,
August 29, 1991, The Washington Post, Salomon Says Ex-Trader Sold Stock Before Scandal, by Robert J. McCartney,
August 29, 1991, The Bond Buyer; Salomon's Treasury Auction violations could jeopardize its RTC advisory role. (Resolution Trust Corp.)
August 29, 1991, Chicago Sun-Times, After-tax profits reach 2-year low,
August 29, 1991, Albany Times Union, Moody's Lowers Salomon Credit Rating Slightly,
August 30, 1991, The Washington Post, Four Hill Committees Plan Bond Market Investigations; Inquiries Prompted by Salomon Scandal, by Stan Hinden,
August 31, 1991, Los Angeles Times, Salomon Bros. Is Looking for a New Law Firm; Securities: A prominent Wall Street law firm that conducted an internal investigation of possible wrongdoing is off the case, by Scot J. Paltrow,
August 31, 1991, The Washington Post, Salomon Eyes Benefits For Ousted Executives; Four May Get Millions Under Severance Plan, by Robert J. McCartney,
September 1, 1991, The Boston Globe, Rogues on Wall Street Defining crime on the street has been slippery business, by Jolie Solomon,
September 4, 1991, The Washington Post, Today in Congress,
September 5, 1991, The Boston Globe, Buffett endorses tougher regulation Salomon chief apologizes for firm's manipulations, by Peter G. Gosselin,
September 5, 1991, Associated Press / Albany Times Union, Salomon Inc. Makes Move to Shift Blame, by Stefan Fatsis,
September 5, 1991, Associated Press/ Albany Times Union, Practical Joke with $1B in Bonds Backfires,
September 5, 1991, The Washington Post, Salomon Says Trader Challenged Treasury;Firm Alleges Bond Dealer Evaded Rules, by Robert J. McCartney,
September 5, 1991, The Bond Buyer, Rep. Markey wants new rules this year for Treasury market; agencies urge delay. (Republican Edward J. Markey) by Vicky Stamas and Stephen A. Davies,
September 6, 1991, The Washington Post, Trader Allegedly Sought Client's Cooperation on Bid;Salomon Dealer Said to Cite Embarrassment, by David S. Hilzenrath,
September 8, 1991, The Washington Post, Is This Any Way to Make a Market?; Critics Calling for Change Say Treasury Bond Auctions Have Long Been Open to Abuses, by Robert J. McCartney and Kathleen Day,
September 9, 1991, The Washington Post, The Inside Trader Comes Out; Chronicling the Greed Of 1980s Wall Street, by Steven Pearlstein,
September 9, 1991, The Bond Buyer, Salomon's lesson. (auction-rigging scandal at Salomon) (Editorial)
September 10, 1991, Associated Press / The Boston Globe, Firm involved in $1b 'joke' suspends Salomon business, by Stefan Fatsis,
September 10, 1991, The Boston Globe, Kicking the dickens out of US bonds, by David Warsh, Globe Staff,
September 10, 1991, The Washington Post, Salomon's John Gutfreund Most Definitely Knew Better, by Allan Sloan,
September 10, 1991, The Washington Post, Firm Halts Treasury Bond Deals With Salomon, by David S. Hilzenrath,
September 11, 1991, Chicago Sun-Times, Plus Business,
September 11, 1991, The Bond Buyer, Dodd offers bill to make auction deceptions subject to securities laws' antifraud provisions. (Christopher Dodd) by Vicky Stamas,
September 11, 1991, Associated Press / The Boston Globe, Salomon paid trader extra $6.6m Senate acts to close Treasury bidding gaps, by John M. Doyle,
September 11, 1991, Associated Press / Albany Times Union, Former Salomon Trader Received $11M in Bonuses,
September 11, 1991, The Washington Post, Fannie Mae Adopts Bond Safeguards; Dodd, Riegle Sponsor Bill to Stop Phony Bids in Treasury Auctions, by David S. Hilzenrath and Stan Hinden,
September 12, 1991, American Banker, Corrigan warns against stalling bank reform. (E. Gerald Corrigan),
September 12, 1991, The Washington Post, Salomon Saga, by Hobart Rowen,
September 14, 1991, The Economist (US), In bondage: the Salomon scandal,
September 15, 1991, The Boston Globe, Wowing those clients,
September 16, 1991, The Washington Post, Salomon Blamed Illegal Bid on Error; British Client Was Told Not to Respond to Letter Sent by Treasury, by David S. Hilzenrath,
September 16, 1991, New York Times / AP / Albany Times Union, Bond Dealer Claims Salomon Misled Firm,
September 17, 1991, The Washington Post; Salomon Client Denies Role In Scheme to Control Auctions,
September 17, 1991, The Washington Post, $12 Billion Question: Is Cornering A Treasury Market an Illegal Act?; Intent Is Key Factor in a Tricky Wall Street Issue, by Kathleen Day,
September 18, 1991, Albany Times Union, Salomon Scandal Probes Spread,
September 20, 1991, The Boston Globe, Salomon Brothers reveals two more bid violations, by Michael K. Frisby, Globe Staff,
September 20, 1991, Chicago Sun-Times, Salomon tells more cheating, by Rick Gladstone,
September 21, 1991, The Washington Post; Salomon Finds More Auction Improprieties, by Kathleen Day,
September 21, 1991, Chicago Sun-Times, Salomon confesses to more violations, by Alice Cathcart,
September 21, 1991, The Washington Post, Salomon Finds More Auction Improprieties, by Kathleen Day,
September 22, 1991, The Washington Post, When Wall Street Bond Traders Make Millions: How Much Is Too Much?, by Robert J. McCartney,
September 24, 1991, The Boston Globe, Salomon working out the 'dents' Firm tells customers it will survive trading scandal, by Jolie Solomon,
September 27, 1991, The Washington Post, Panel Told Of Treasury, Trader Clash, by David S. Hilzenrath,
September 27, 1991, Associated Press / Albany Times Union, Salomon Foreign Desk Probed,
September 28, 1991, The Economist (US) Wall Street cleans up its act,
September 30, 1991, Albany Times Union / Washington Post, Top Pay Issue in Salomon Bond Scandal,
September 30, 1991, The Washington Post, For Wall Street Pros, Lying Comes Easily; Practice of Deception Hinders Probes, by Robert J. McCartney,
October 1, 1991, The Record, Salomon Takes a Rating Tumble,
October 3, 1991, The Washington Post, Salomon Says Illegal Bidding Began Earlier, by Robert J. McCartney,
October 5, 1991, The Economist (US), Investing for fun and profit: American hedge funds,
October 12, 1991, Associated Press / Albany Times Union, Executive Life the Eye of a Takeover Storm, by E. Scott Reckard,
October 12, 1991, The Economist (US) Hanging in there: Salomon Brothers,
October 19, 1991, The Washington Post, Red Lights and Traffic Jams as Bankers Meet in Bangkok,
October 22, 1991, Associated Press / Albany Times Union, Buffett Keeping Salomon Reins For Now,
October 25, 1991, The Washington Post, Salomon Says Illicit Trading Netted $5 Million, by Robert J. McCartney,
October 27, 1991, Chicago Sun-Times, Dealers unite to fight marketplace abuses, by Ed Rochette
October 30, 1991, Associated Press / Albany Times Union, Salomon's Profits Increase Despite Legal Troubles, by Stefan Fatsis,
November 20, 1991, Chicago Sun-Times, Salomon reportedly fires 140 employees,
November 26, 1991, The Boston Globe, It's a grand, rich game, by David Nyhan,
December 1, 1991, The Washington Post, Wired Into Wall Street; Tough Trader Steinhardt Brings Wealth to Clients, Attention to Himself, by Brett D. Fromson,
December 3, 1991, The Washington Post, World Bank Ends Ban On Salomon,
December 3, 1991, Associated Press / The Boston Globe, Salomon, World Bank resume ties, by John M. Doyle
December 4, 1991, The Washington Post, Johnny, We Hardly Sununu; The Ritual Preparation For a Political Wake by Marjorie Williams,
December 20, 1991, The Bergen County Record, Salomon Vice President to Resign,
December 25, 1991, Real Estate Weekly, Availability up in Midtown South,(Salomon)
January 21, 1992, Chicago Tribune / Dow Jones News Service, Fed Acts To Limit Primary Dealers In Treasury Auctions,
January 5, 1992, The Washington Post, On Wall Street, Paychecks Pack a Punch; After a Lean '90, Executive Rewards Up Sharply in '91, by Robert J. McCartney,
January 23, 1992, The Washington Post, U.S. to Propose Tough Penalties for Salomon; Federal Probe Nearing Finish, Sources Say, by Robert J. McCartney and Brett D. Fromson,
February 4, 1992, Chicago Sun-Times, U.S. trims estimate of borrowing,
February 23, 1992, The Buffalo News, Democrats Profit as Wall St. begins to Hedge Bets on November Election, by Jolie Solomon,
March 26, 1992, The Washington Post, Salomon's Ex-Chief Asking $14 Million; Other Ousted Officials File Severance Claims, by Robert J. McCartney,
April 21, 1992, The Bond Buyer, Salomon bond clerk said to have been offered immunity in federal probe. (Salomon Brothers Inc., Henry Epstein, Treasury market trading fraud investigation) by Charles Gasparino,
May 7, 1992, The Washington Post, Salomon Ups Its Estimate of Settlement Charges, by Robert J. McCartney,
May 21, 1992, The Washington Post, Salomon, .S. Settle Bond Case; Wall Street Brokerage To Pay $290 Million, by Robert J. McCartney and David S. Hilzenrath,
May 21, 1992, Albany Times Union, Salomon Inc. to Pay $290M To Settle Case,
May 21, 1992, Chicago Sun-Times, Salomon settles, will pay $290 million, by Stefan Fatsis,
May 28, 1992, The Washington Post, With Scandal Over, Buffett Steps Down; Investor Leaves Salomon Brokerage, by Robert J. McCartney,
July 23, 1992, Chicago Sun-Times, Salomon Posts Healthy Earnings,
July 24, 1992, Defense Daily, Berkshire Hathaway buys huge stake in GD. (General Dynamics Corp.)
August 16, 1992, BusinessWeek, Pinning The Blame On Wall Street's Lawyers,
September 5, 1992, The Economist (US) Paying for performance. (Solomon, the Wall Street Brokers' employee pay system)
September 15, 1992, The Boston Globe, $27.8m fine will settle suit against Salomon,
September 15, 1992, The Buffalo News, Salomon Pays $28 Million Fine,
December 3, 1992, Albany Times Union, SEC Accuses 2 of Making Fake Treasury Bids,
December 3, 1992, The Washington Post, Two Former Salomon Officials Sued by SEC; Agency Seeks Bond Trading Scandal Penalties, by David S. Hilzenrath,
December 3, 1992, Chicago Sun-Times, The Ticker,
December 4, 1992, New York Times, Low-Price Settlement in Big Salomon Scandal,
December 4, 1992, Albany Times Union, Ex-Salomon Boss Agrees to Penalty,
December 4, 1992, The Bond Buyer, Gutfreund agrees to pay $100,000 SEC. (John H. Gutfreund, Securities and Exchange Commission) by Stephen A. Davies,
December 4, 1992, The Washington Post, Ex-Officers At Salomon To Pay Fines; Gutfreund, 2 Others Settle With SEC, by David S. Hilzenrath and Brett D. Fromson,
December 19, 1992, The Buffalo News, Ex-Salomon Trader to Plead Guilty,
January 6, 1993, The Bond Buyer, Salomon reinstates Treasury trader suspended after short-squeeze scandal. (Christopher Fitzmaurice) by Charles Gasparino,
January 6, 1993, The Buffalo News, Salomon to Pay $4 Million For Trading Claims,
January 7, 1993, The Buffalo News, Key Salomon Exec to Plead Guilty,
January 8, 1993, The Washington Post, Former Salomon Trader Will Plead Guilty in Bond Scandal; Mozer to Pay $500,000 on 2 Felony Counts, by Jay Mathews,
January 12, 1993, Albany Times Union, Bond Trader's Plea Deal Collapses,
January 12, 1993, The Buffalo News, Plea Agreement Collapses for Salomon Bond Trader,
January 12, 1993, The Bond Buyer, Federal judge rejects Mozer plea agreement. (Paul Mozer) by Charles Gasparino, Charles,
January 12, 1993, The Washington Post, Mozer's Plea Agreement Collapses; Judge in Bond-Trading Case Says Too Many Issues Left Unresolved, by Jay Mathews,
January 13, 1993, Chicago Sun-Times, Ex-Salomon Bros. Exec Charged With Fraud,
January 13, 1993, The Washington Post, Mozer Is Indicted on Four Felony Counts, by Jay Mathews,
January 13, 1993, The Buffalo News, Mozer Indicted in Bond Scandal,
January 13, 1993, Albany Times Union, Trader Indicted on New Charges,
February 2, 1993, The Washington Post, Digest,
May 5, 1993, Real Estate Weekly; Wall Street (smart) brokers in Studley/Saloman pact. (Julien J. Studley Inc. and Salomon Brothers Inc. create affiliation to enhance value to...
May 18, 1993, The Boston Globe, Those May '93 notes reach real maturity, by David Warsh, Globe Staff,
June 22, 1993, The Bond Buyer, PSA confirms a Federal probe on rule limiting Treasuries pricing. (Public Securities Association) by Stephen A. Davies, Susan Kelly,
July 18, 1993, The Washington Post, Cleaning Up the Junk, by Stan Hinden,
July 29, 1993, The Bond Buyer, Three from Wall Street join CEOs in praising Clinton's budget plan. (Felix G. Rohatyn of Lazard Freres, Robert E. Denham of Salomon Inc., Donald B. Marron of PaineWebber Group Inc.) by Hill, Patrice,
July 29, 1993, Albany Times Union, Judge Reinstates Trader's Plea Deal,
July 29, 1993, The Bond Buyer, Deficit reduction talk prompts welcome Treasury market lift, by William Pesek,
September 4, 1993, The Washington Post, Warren Buffett, Taking Stock; Berkshire Hathaway's Chairman Rides a Bull Market to the Top of the Billionaires' Club, by Brett D. Fromson,
October 28, 1993, The Washington Post, Wall Street's Risky Bets; `Derivatives' Are Popular, Profitable And to Many a Big Danger to Markets, by Brett D. Fromson,
December 6, 1993, The Bond Buyer, SEC zeroing in on firms failing to catch lawbreakers, by Vicky Stamas,
December 15, 1993, The Buffalo News, Salomon Trader Given Four Months,
December 30, 1993, Chicago Sun-Times, Ex-Salomon Trader Fined, Banned,
December 31, 1993, Chicago Sun-Times, Nation / Business In Brief,
January 3, 1994, The Bond Buyer, SEC fines, bars trader formerly with Salomon for alleged bid rigging. (Thomas Murphy) by Stephen A. Davies,
April 1, 1994, Futures (Cedar Falls, IA). Meriwether Hedges Bets, by Miriam Bensman,
April 24, 1994, The Independent, Phantom Profits on Wall Street, by Larry Black,
July 7, 1994, The Washington Post, Salomon Inc. Expects Loss of $200 Million; Other Wall Street Houses May See Quarterly Deficits, by Brett D. Fromson,
July 15, 1994, The Independent, Business and City in Brief,
July 15, 1994, The Buffalo News, Ex-Salomon Trader Fined, Barred,
July 15, 1994, Post-Tribune (IN), Salomon Scandal Figure Barred From Securities,
July 15, 1994, Albany Times Union, Salomon trader agrees to fine, by Betsy Feldstein,
November 23, 1994, The Bond Buyer, Basham replaces recently retired Williams at First Fidelity. (Michael E. Basham, Alexander S. Williams, First Fidelity Securities Group) by Joyce Hanson,
December 17, 1994, The Washington Post, Two Investment Funds Settle Treasury Note `Squeeze' Case; Firms to Pay $76 Million Over 1991 Scandal,
June 12, 1995, New York; Wall Street weak.(Deryck C. Maughan and Salomon Brothers Inc.)(Cover Story)
September 28, 1995, The Boston Globe, Scandals beg question: Who is minding the store?, by Steven Syre, Globe Staff,
October 4, 1997, The Economist (US) Loose lips on Wall Street. (insider trading of Salomon Brothers' shares)
October 6, 1997, Newsweek, His Happy Light Is On: Sandy Weill Creates a New Wall Street Titanby Michael Leverson Meyer,
September 26, 1997, The Washington Post, Bigness Becomes an Imperative for Brokerages; Travelers-Salomon Deal a Likely Catalyst for More Wall Street Mergers, Analysts Say, by Jill Dutt,
June 2, 1998, American Banker, Wall Street Watch: Salomon Weighs Effect of Media on Refis, by Joshua Brockman,
September 11, 1998, International Herald Tribune, Asian Silver Lining on Wall Street Malaysia Hires Salomon to Raise Funds as Crisis Creates Odd Couple, by Thomas Fuller,
October 5, 1998, AP Online, Does John Meriwether still have the Midas touch?, by Dennise Lavoie,
April 1, 2000, Personnel Psychology, The leadership Moment: Nine True Stories of Triumph and Disaster and Their Lessons for Us All, by Richard Blackburn,
November 16, 2011, Reuters Hedgeworld, U.S. SEC Targets Low-Level Bankers, Spares Top Execs __________________________________________________________________
May 31, 1991, The Washington Post, Fed Studies Possible Squeeze On Sale of Treasury Securities; 'Short-Sellers' Rumored to Face High Costs, by John M. Berry,
The Federal Reserve yesterday was trying to determine whether a large portion of two recent $12 billion issues of Treasury notes has ended up in the hands of a few owners who may now be demanding a premium for selling or lending the securities.
According to widespread rumors in financial markets, such a maneuver is occurring, squeezing dealers and investors who need to acquire the two-year Treasury notes to cover "short" market positions.
The Fed has a big stake in assuring an open, orderly market in government securities, which it buys and sells constantly to influence the course of the economy.
If the Fed detected a squeeze was in process, it could bring strong pressure on the participants to stop. However, in the lightly regulated government securities market, carrying out such a squeeze would not normally be illegal, officials at several securities dealers said.
A short sale occurs when an investor who believes the value of a security that he or she does not yet own sells it, expecting its value to fall. Initially, the short seller may borrow the security from someone else so he or she can deliver it to the buyer. If all goes well, the investor will replace the borrowed security by buying it at a lower price in the market.
As a result of the apparent squeeze on the Treasury notes, there were few sellers but plenty of buyers, a condition that has pushed yields on the notes about 0.15 percentage points below what they otherwise would be, analysts said.
Similarly, holders of the notes, who were using them as collateral on loans, were able to borrow at favorable rates from investors who needed to obtain the securities to cover a short position. The holders were paying as little as 1 percent to 4 percent interest rates on such loans. In contrast, transactions of that type, called repurchase agreements, that involved other government securities were paying about 5.8 percent yesterday.
Speculation on the identity of the note holders centered on George Soros, manager of an aggressive hedge fund, the Quantum Fund.
The rumors also indicated that Salomon Brothers Inc., one of the largest of the major dealers in government securities, was involved, presumably acting on Soros's behalf.
According to Dow Jones Capital Markets Report, Soros and Salomon Brothers declined to comment on the rumors.
A spokesman at the Federal Reserve Bank of New York said that officials there were "asking questions" about the circumstances surrounding the two-year notes but that they did not consider it to be an investigation.
The yield on the two-year notes "is definitely out of line" with what it normally would be given the yields on other Treasury securities, said a senior official at one government securities dealer.
On the other hand, he added, the 0.15 percentage point involved is "not way, way out of line. This is a good issue to own on its merits," he said.
While it was unclear exactly how the apparent squeeze developed, an official at another major dealer said that it was quite possible for one or more investors to gain leverage over an issue by putting up only $100 million to $200 million.
With such a stake, the investor, working though a dealer, could spread offers to buy several billion dollars worth of the notes among several other dealers. Those dealers, unaware of what was in store, would agree to sell the desired securities. Likely, they would have only a portion of what was sold already in their own inventory and would plan to buy or borrow the rest.
But if the investor setting up the squeeze acquired enough of the available supply, the only source from which the dealers who were short could obtain the notes would be the investor to whom they had sold them in the first place.
Such a transaction is not without risk to the original investor, however. If interest rates rose suddenly, the investor would face a capital loss since the value of the notes would fall as rates rose. In addition, the investor would also have to pay higher rates on the money he borrowed to purchase the notes in the first place.
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August 9, 1991, The Washington Post, Fed Lets Buffett Increase Stake in Wells Fargo, by Albert B. Crenshaw,
Omaha investor Warren Buffett, who has made billions of dollars spotting successful investments ahead of the crowd, obtained permission yesterday to more than double his stake in San Francisco-based Wells Fargo & Co., a move that could push Buffett's holdings in the nation's 10th-largest bank to more than $800 million, at current market prices.
Through his Berkshire Hathaway Inc. investment company, Buffett owns 5 million Wells Fargo shares, or about 9.7 percent of the 51.7 million shares of the bank outstanding. Yesterday the Federal Reserve said that stake could be raised to 22 percent. Buffett would have to buy the shares on the open market and he signed a "passivity" agreement with the bank promising "not to exercise any control over Wells Fargo's management or policies."
Buffett had announced his intention to increase his stake several months ago. At that time, Wells Fargo Chairman Carl Reichardt said, "We are honored and flattered by Mr. Buffett's confidence in our company and its management."
Shortly after yesterday's announcement Wells Fargo stock surged $3.25 a share before closing at $72.25, up $2.62 1/2.
The investment would be Buffett's second in as many weeks in a big financial services company. Last week, Buffett injected some $300 million into American Express Co. in exchange for preferred stock that would give him an 8 percent annual dividend plus a chance to reap a large profit if the company's common stock rises.
Both American Express and Wells Fargo are well established in their fields, but both face possible problems in the market that give other investors pause.
"We have a neutral rating on Wells Fargo," said Sandra J. Flannigan of Alex. Brown & Co. in Baltimore. "We remain concerned about their high exposure in commercial real estate and HLTs {highly leveraged transactions, such as takeovers}, and California is not as far along in the {economic} down cycle as some other parts of the country."
However, she added that "Mr. Buffett is a very long-term, patient investor," who likes to "zero in on good management," and "despite the uncertainties today we would have to regard the Wells Fargo management as a very good one."
American Express has been suffering from losses in its Shearson Lehman Brothers Inc. brokerage subsidiary, and its core credit card business is under intense competitive pressure.
Buffett, who also owns a stake in the Wall Street firm Salomon Brothers Inc., was not available for comment yesterday.
Several analysts said they thought Buffett's interest in American Express and Wells Fargo reflected his analysis that they were good individual investment opportunities, rather than a broad new endorsement of financial services firms.
Nicholas Pirsos of Firemark Research in Parsippany, N.J., noted that a few years ago Buffett was lamenting the lack of quality companies into which to put his money.
Pirsos said the two deals reflect two different types of investments that Buffett has made recently, one emphasizing cash dividends and the other focusing on potential stock growth.
The American Express deal is of the first type, designed "to secure a higher dividend yield," while the Wells Fargo move "is an opportunity-type play, at least as I read it," Pirsos said.
How much of an opportunity is the subject of differing opinions. While Wells Fargo is widely regarded as one of the nation's best-managed and most successful banks, it has a large portfolio of real estate loans.
The bank, which has $54 billion in assets, took a $350 million pretax loan loss provision in the second quarter, which sharply reduced earnings. Since most other banks have had to take proportionately larger hits from their real estate lending, some analysts wonder if there is more to come.
J. Richard Fredericks, an analyst at Montgomery Securities in San Francisco, said he thinks if another blow is to fall it will fall in the next six months. But he added that Wells Fargo pulled back from aggressive real estate lending earlier than other California banks and may be able to escape more significant damage.
In the meantime, the differing views have touched off what Pirsos called "a classic bull and bear struggle," as professional short sellers - speculators who bet the price of a stock will fall - have taken large positions in Wells Fargo. The result has been sharp changes in the stock price, but so far those betting on Wells Fargo's success generally have prevailed, analysts said.
Also working to keep the stock up are continuing rumors of major bank mergers. Said Fredericks, "Any combination or permutation you can think of on the West Coast is a possibility."
Staff writer John M. Berry contributed to this report.
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[Original public announcement, Friday, August 10]
August 10, 1991, The Washington Post, Salomon Suspends 2 Traders in Bond Market Probe, by Kathleen Day,
Salomon Brothers Inc., the Wall Street investment firm, yesterday announced the suspension of two top traders amid an expanding government investigation into possible price- fixing and securities law violations in the huge Treasury securities market.
The Securities and Exchange Commission, the Federal Reserve Board and the Justice Department are conducting the investigation into bids by Salomon Brothers at U.S Treasury auctions, where the government raises billions of dollars at a time to finance its operations and cover the federal budget deficit, officials said.
A Treasury Department spokesman said that agency is "examining" possible "irregularities and rule violations" and the need for changes in auction procedures.
Government regulators had already concluded that an attempt was made to manipulate or "squeeze" the May 22 auction of $12.25 billion in two-year Treasury notes. A handful of bidders, underbidding the rest of the market, were able to sweep up a large portion of the offering of $1,000 notes, officials have said. The successful bidders then demanded that others who wanted to purchase the issue pay a higher, premium price. Fed officials have said such a squeeze play is not necessarily illegal and "not that unusual."
The trading of government instruments is a $113 billion-a-day market, the biggest securities market in the world. Individuals may bid for newly issued Treasury securities directly from the government, but many investors make their purchases through one of the small group of government-selected "primary" dealers such as Salomon. Once auctioned, Treasury securities continue to trade until they mature.
Compared with the market in corporate stocks and bonds, the Treasury market is relatively unregulated territory, a circumstance that has raised calls in recent years in Congress and at the SEC for stricter government oversight.
"Today's announcement by Salomon ... underscores the need for improvements in the regulation of the government securities market," said Rep. Edward J. Markey (D-Mass.), who heads the House subcommittee that oversees securities issues. "These revelations raise questions regarding the adequacy of the current rules."
It is not known if other investment banking firms or other government securities dealers besides Salomon are targets of the government investigation.
In a statement yesterday, Salomon said it has suspended the two managing directors who ran its Treasury securities trading desk, and two other lower-ranking officials, pending completion of its internal investigation and the government inquiries. Salomon would not name the employees. Sources said Salomon managing directors Paul Mozer and Thomas Murphy head its trading desk. Neither could be reached for comment.
Salomon said that its inquiry revealed that on at least three occasions it bid for and bought a higher percentage of Treasury notes at auction than Treasury rules allow. At the May 22 auction, the violation resulted from a company oversight, Salomon said. But violations at auctions in December 1990 and February 1991 were far more serious, it said.
At those times, Salomon officials bid for government securities on behalf of customers who had not authorized such a bid, Salomon said. Salomon then purchased the securities from the customers' accounts. The transactions were a ruse that allowed Salomon to purchase for the firm's account more than the 35 percent of the Treasury auction government rules permit any one firm to buy, it acknowledged.
"These irregularities resulted from individuals acting on their own without the knowledge of management," said Salomon spokesman Robert Baker.
Some government officials familiar with the situation said they thought Salomon's announcement was, in the words of one, a "preemptive strike" in light of more serious and extensive charges that could result from the government investigation.
Among the questions government investigators are looking into are whether Salomon or other firms violated trading and securities rules on more than the three occasions Salomon has noted, and if so, whether officials at government agencies that regulate Treasury auctions knew about the violations. The Treasury and the Fed, and to a lesser extent the SEC, are the primary regulators of the government securities markets.
The "squeeze" on May 22 was initially a plus for the government, lowering the government's cost of borrowing in the short run.
But government officials worry that the Treasury's cost of borrowing could rise in the long run if enough investors back away from the auctions, out of fear that the market for U.S. bonds is rigged or that they will be vulnerable to price squeezing.
In recent testimony before the Senate Banking Committee, spokesmen for the Treasury and the Fed said "squeezing" in itself was not necessarily illegal and that some amount of it was to be expected.
But SEC Chairman Richard Breeden, at the same hearing, was more skeptical. "I would not want to state that it is unequivocally clear that there were no violations in the law. That would remain the subject of a detailed investigation," he said.
The revelations about Salomon come at a bad time for the government securities industry, which has opposed tighter regulation. Congress is considering legislation that would tighten rules over sales practices and generally put government securities under the same restrictions that apply to private sector securities.
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August 10, 1991, Albany Times Union / Knight-Ridder, Furloughs Follow Brokerage Probe, by Sheila Mullen,
Salomon Brothers, a trading unit of Salomon Inc., said Friday that it has suspended two managing directors in charge of its Treasury securities trading desk, and two other employees, amid a probe of its bidding at U.S. Treasury auctions. "Salomon Brothers has reported to the Treasury Department and other government agencies that it has uncovered irregularities and rule violations in connection with submission of bids in certain auctions of Treasury securities," the company said in a news release.
The employees involved were not named.
The company said John Meriwether, a vice chairman of Salomon, will assume responsibility for managing the government bond unit.
Salomon said that after doing an internal review of Treasury auction bids, it discovered:
*That in the May 1991 auction of 2-year Treasury notes, "due to an apparent oversight,"Salomon did not disclose the size of its when-issued position (as required by regulations) that it was holding when it submitted a bid for 35 percent of the issue.
*That in the December 1990 auction of 4-year notes and the February 1991 auction of 5-year Treasury notes, "bids were submitted by Salomon in the name of persons who had not authorized such bids ... And Salomon then purchased the notes allocated to such bids.
"As a consequence, there was a violation of limitations on one person bidding for or purchasing more than 35 percent of an issue of Treasury securities," the firm said.
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August 10, 1991, The Washington Post, Dow Falls 17.66, Closes Below 3000,
Blue-chip stocks retreated below the key 3000 level Friday, falling on late profit-taking and getting little benefit from the latest news on inflation.
The Dow Jones industrial average closed 17.66 points lower at 2996.20 and finished the week with a net loss of 10.06 points. New York Stock Exchange volume was a moderate 143.6 million shares. Declining issues outnumbered advances by about 5 to 4 on the Big Board.
A surprising 0.2 percent drop in the July producer price index got the stock market off to a rousing start, since Wall Street thought the inflation report would give the Federal Reserve room to cut interest rates further.
But program selling quickly wiped out an 11-point advance and the market then settled in to waffle near Thursday's close before slipping on late profit-taking.
"We don't view today's decline as anything negative, but rather a delayed reaction following the run-up earlier this week," said Brad Turner of McDonald & Co.
Analysts said the market is looking for more good news on interest rates. "The PPI was good news, but the thing the market's waiting on is a prime-rate cut," said Don Hays, chief investment strategist at Wheat First Securities.
Bond prices closed narrowly mixed, with the market boosted by the inflation report but worried by Salomon Inc.'s announcement that it violated Treasury auction bidding rules. The price of the Treasury's benchmark 30-year bond fell 1/16 point, or about 63 cents per $1,000 in face amount. Its yield rose to 8.24 percent from 8.23 percent late Thursday.
Among individual issues, Kimberly-Clark shed 1 to 91 5/8. Bear Stearns trimmed its 1991 earnings estimates on the company.
Salomon Inc. fell 1 7/8 to 34 3/4 on its announcement that it broke rules in its bids for Treasury securities.
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August 12, 1991, The Bond Buyer, Salomon says it broke Treasury bidding rules, suspends two managers, by Steven Dickson,
Salomon Brothers Inc. said Friday it violated bidding rules on three recent auctions and has suspended two managing directors in charge of the firm's Treasury securities trading desk as a result.
"Bids were submitted by Salomon in the names of persons who had not authorized such bids, and Salomon then purchased the notes allocated to such bids," a statement said.
As a result, the firm violated the prohibition against one person buying more than 35% of a given offering during both the December 1990 auction of four-year notes and the February 1991 two-year note auction.
In what Salomon called "an apparent oversight," the firm also admitted it did not disclose a long when-issued position that exceeded permissible limits when it submitted a 35% bid at the Ma6 1991 two-year note auction.
Salomon characterized the incidents as "irregularities and rule violations."
The Securities and Exchange Commission and the antitrust division of the Justice Department have been investigating the May auction, following reports of a price "squeeze" in which virtually all of the bonds were purchased by only a few investors, driving up prices.
A spokeswoman for the Justice Department confirmed that investigations into possible antitrust violations are under way there, but she declined to name which firms might be involved. Representatives of the SEC did not return calls regarding the extent of their probe.
Company officials said the firm "believes that the irregularities it has discovered did not result in any financial loss to the government."
The firm declined to name the managing directors involved, but said John Meriwether, a vice chairman of the firm, would assume responsibility for managing the government bond department. Two other unnamed employees were also suspended, Salomon said Friday.
Market Activity
Although the Federal Reserve decided just last week to cut short-term interest rates 1/4 point, speculation has arisen that another ease might be in the cards as early as next month.
Friday's inflation indicator, the producer price index, came in lower than expected and that could mean there is still room for further interest rate cuts without fueling inflation.
The Labor Department reported that the index fell 0.2%, when the market was expecting the number to remain unchanged. The core rate, which excludes food and energy costs, rose 0.2%, in line with expectations.
"That's good news on the inflation front, but in order to be comfortable with inflation levels we have to see inflation in the service sector coming down," said Maria Ramirez, chief executive officer of Ramirez Capital Consultants Inc.
On Friday, The Wall Street Journal's "Washington Wire" said the Fed is coming under increasing pressure from the Bush administration to continue lowering rates, especially in light of good news on the inflation front. Such a move could come at the next meeting of the Federal Open Market Committee on Aug. 20, the Journal said. But many say that any easing on the way will probably have to wait until after Sept. 6, when the August employment report is slated for release.
Treasury Market Yields Prev. Prev. Friday Week Month 3-Month Bill 5.46 5.62 5.72 6-Month Bill 5.60 5.79 5.92 1-Year Bill 5.76 6.02 6.23 2-Year Note 6.44 6.67 6.84 3-Year Note 6.84 6.96 7.29 4-Year Note 6.97 7.11 7.45 5-Year Note 7.48 7.61 7.89 7-Year Note 7.80 7.88 8.12 10-Year Note 7.96 8.04 8.24 20-Year Bond 8.20 8.23 8.43 30-Year Bond 8.22 8.24 8.43 Source: Cantor, Fitzgerald/Telerate
Fred Leiner, a market strategist at Continental Bank in Chicago, said that rather than focusing on the producer price index to gauge inflation, he is more concerned with the shape of the yield curve, which steepened throughout last week after Tuesday's interest rate cut.
Yields on the long bond started the week about 14 basis points higher than where they finished on Friday. Disappointing interest in the 30-year auction last week -- following good showings at both the three-year and 10-year auctions earlier in the week -- also put pressure on yields.
"There's probably some reason to be positive on the inflation outlook, but the yield curve is sending me to opposite message," Mr. Leiner said.
Speculation over another ease bolstered prices at the short-end at the close of last week. But Mr. Leiner said a cut in rates could be bad news for bonds. "The bond market is not convinced the Fed's concerns about the economy are completely justified," he said. Although money supply growth has been sluggish and other indicators are showing slight growth at best, "the market wants to see more evidence," Mr. Leiner said.
This week will bring a plateful of economic data that may provide such data.
Tomorrow, for example, the market will see retail sales figures for July and another important inflation indicator, the consumer price index. Business inventories and jobless claims are on tap for Wednesday, and housing starts will be released Thursday. Capacity utilization for July is due for release on Friday.
The September bond future contract closed 1/8 lower on Friday, at 96 2/32.
In the cash market, the when-issued 30-year 8 1/8% bond was 3/32 lower, at 98 26/32-98 30/32, to yield 8.22%.
In other when-issued trading, the 7 7/8% 10-year note rose 3/32, to 99 8/32-99 12/32, to yield 7.96%, and the three-year 6 7/8% note was up 5/32 at 100 1/32-100 3/32, to yield 6.84%.
Rates on Treasury bills were lower, with the three-month bill down five basis points at 5.32%, the six-month bill off four basis points at 5.38%, and the year bill three basis points lower at 5.46%.
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August 12, 1991, American Banker, As interest rates drop, banks return to the market, by Kelly Holland,
In the equity market, Puget Sound Bancorp of Tacoma, Wash., said it plans to issue 1.5 million new shares. Merrill Lynch & Co. and Salomon Brothers will manage the offering.
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August 13, 1991, Associated Press / Albany Times Union, Investors File A Class-Action Suit Alleging Fraud,
Investors filed a class-action lawsuit Monday accusing officers of Salomon Brothers Inc. of fraud.
The lawsuit, which seeks unspecified damages for people who bought Salomon shares since December, followed the announcement last week that two of the investment firm's top executives and two other employees had been suspended.
The class-action lawsuit, filed in U.S. District Court in Manhattan, said Salomon officers knew, but failed to tell investors, that employees had violated federal and state laws and regulations.
"Salomon was exposed to loss of its good reputation among its individual customers, corporations, banks and the government, which could result in substantial business and revenue loss," the lawsuit said.
Also Monday, the Public Securities Association said it would replace Thomas Murphy, a managing director at Salomon, as chairman of one of its watchdog committees.
The trade group plans to name a new chairman of its government trading practices committee within a few days, said Caroline Benn, a spokeswoman for the private organization.
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August 13, 1991, Chicago Sun-Times, Banks boost Dow to slim 5-pt. gain,
Salomon Inc. fell 3 to 31 3/4 on top of a 1 7/8-point loss Friday, when the firm, a prominent force in the bond market, said it had uncovered irregularities in connection with its bids at auctions of Treasury securities.
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August 13, 1991, Wall Street Journal / Albany Times Union, U.S. Alleges Salomon Violated Rules at Treasury Auctions,
Government regulators launched a sweeping investigation of Salomon Brothers Inc., alleging that Wall Street's most powerful trading firm may have controlled a stunning 85 percent of the notes sold in a recent Treasury auction, and exceeded the government's bidding limits.
On Friday, in what appears to have been a preemptive move, Salomon suspended the two managing directors in charge of its Treasury securities trading desk, saying it had uncovered "irregularities and rule violations" in three recent Treasury auctions.
Salomon, the dominant player in the U.S. Treasury bond market, revealed details about its own practices that suggest that the huge marketplace periodically has been rigged. The firm admitted that it had submitted bids in the names of customers who hadn't authorized it to do so at two, and maybe three, recent multibillion- dollar government note auctions.
These fabricated orders appear to have enabled Salomon to corner a good portion of the market, violating Treasury rules that bar individual bidders from purchasing more than 35 percent of the Treasury securities at any single sale. It was in the May 22 Treasury auction of $12.26 billion of two-year notes that investigators believe the firm may have controlled as much as 85 percent of the single issue.
The revelations have sent a shudder through the world's biggest and most important securities marketplace, where trading often exceeds $100 billion a day. The health of the U.S. and global economy hinges on its smooth functioning. The Treasury uses the $2.2 trillion market to finance government spending and the national debt. And the rates the U.S. government pays to borrow in this market heavily influence other interest rates, sending ripples through stock and bond markets around the globe.
Salomon has acknowledged that both the Justice Department's antitrust division and the Securities and Exchange Commission are investigating its actions for possible criminal and civil violations.
Salomon declined to name the two suspended managing directors, but people familiar with the firm identified them as Salomon's powerful government bond trading chief, Paul Mozer, and a top aide, Thomas Murphy. The firm also suspended a bond trader and a clerk.
Salomon asserted Friday that the four employees it suspended acted individually and "without the knowledge of management" when they violated Treasury auction rules. But several present and former Salomon employees find it hard to believe that a firm with such hands-on management and close monitoring systems could have easily made such a mistake such as exceeding the bidding limits.
Says one person familiar with the firm: "It's hard for me to believe - it's inconceivable - that (Salomon's management) wouldn't know how much was bid for."
Salomon Chairman and Chief Executive Officer John Gutfreund and President Thomas Strauss, for instance, have desks on the vast trading floor that overlooks the Hudson River here. They oversee all trading activity. Both have backgrounds in bonds; Strauss himself ran the government-bond sales operations years back.
On the days of Treasury auctions, both men often mill about the trading arena, peppering salesmen with questions about how the "book" looks. There's little time for committee meetings; instead Gutfreund and Strauss have frequent 10-minute chats with traders and others to size up how the auction is likely to go.
Says a former senior Salomon trader, "They're very actively involved."
And Salomon's new trading floor is equipped with the latest technology, including shiny new Sun Microsystems computer workstations that can monitor the latest trading positions. Indeed, in a huge market where they make money on fractional price movements, Salomon traders say the firm takes pride in the discipline of knowing the positions minute to minute.
Besides Mozer and Murphy, the two other Salomon employees suspended Friday were trader Christopher Fitzmorris and clerk Henry Epstein. None could be reached to comment over the weekend.
Mozer, 36, has run Salomon's government trading desk since 1988, when he replaced E. Craig Coats Jr. A small wiry man, Mozer is known for his intensity on and off the trading floor; colleagues recall his fierce tennis game. A former colleague recalls that Mozer frequently told him he wanted to put in a few more years at the firm, "take his chips off the table and live on a boat or move to Florida with his wife."
But present and former colleagues say they're dumbfounded that he would be implicated in such a bid- rigging scheme. "This guy is above reproach, he's not a chiseler," says a former colleague who worked with Mozer for several years.
Salomon said Mozer's duties will be assumed by Vice Chairman John Meriwether, who runs the firm's prominent bond arbitrage group, a select cadre of high- tech traders.
Meriwether and Mozer are among the highest-paid employees at Salomon; both made about $10 million last year, according to people familiar with the firm.
Competitors and government officials say that Salomon's bond positions are so large, and its trading tactics so sophisticated, that the firm's government securities traders came to believe that they could safely function outside the rules. They note that only last year, the government gave warning of its concern when the Treasury tightened its 35 percent rule to limit not only the percentage of bids made by one source at auctions, but also the percentage of securities actually purchased. The rule change was specifically aimed at reining in Salomon's activities.
Other Wall Street dealers have complained for years that Salomon was manipulating auctions where the Treasury regularly sells billions of dollars of securities (Treasury bonds, notes and bills) to fund government spending and the ballooning federal deficit.
"The fact that shenanigans were going on at the Treasury bond auctions was not a surprise," said F. Ward McCarthy of Stone & McCarthy Research Associates.
Indeed, at Salomon, traders boasted of "couping" government auctions - buying such a huge chunk of the securities for the firm and its customers that Salomon effectively controlled subsequent sales to rivals and others.
The government sells billions of dollars of securities each week, the bulk of which are purchased by big Wall Street investment and commercial banks. The activity builds to a crescendo on the day of the auction at Salomon's football-field sized bond-trading floor at New York World's Trade Center. That's when traders and salesmen are pressured to "build a book"; that is, line up orders for securities from the firm's customers.
"If you build a book of $3 billion, $5 billion, $8 billion, then you really control the situation," says a former Salomon trader, who asked not to be named. "Then you use your muscle, your big war chest of dollars, to force the thing and make a bid" slightly higher than Salomon's rivals. The aim: to force dealers who have been shut out of the auction, and short-sellers (who have sold Treasury securities in the hope they would go down in price) to buy from Salomon at higher prices.
One Salomon bond trader compares the firm's Treasury bond strategy with the game of bridge. "The aim is to get a grand slam, to use your cards to generate the best possible break."
That's easier for Salomon than other firms, with its $4 billion in capital backed by billions of dollars in borrowing power. In the government securities market, a firm needs to put down just $30 million in cash to buy $3 billion of Treasury securities, borrowing the rest of the funds.
U.S. officials said Salomon had little choice but to admit its improper activities. That's because a 6-week- old government investigation of a "squeeze" in the May auction of two-year Treasury notes eventually would have uncovered the earlier transgressions. "Salomon figured out some time ago they were in one hell of a box on this stuff," said a U.S. official familiar with the investigation.
The probe came after some of Salomon's Wall Street rivals groused loudly that Salomon had grabbed too big a chunk of the $12.26 billion of notes sold in May, and then squeezed competitors by driving up their prices. Federal regulators have been peppered with questions from Congress about the May auction for several weeks.
The Treasury told Congress in early July that "discussions with market participants and our observation of market prices lead us to the conclusion that a squeeze ... did in fact occur in the May two-year note," but it didn't identify the suspected culprits.
For its part, Salomon said that "due to an apparent oversight," it didn't disclose its holdings accumulated in the "when issued" market for the notes, in which Salomon bought notes before they were officially issued. That position, on top of a disclosed bid Salomon submitted for 35 percent of the notes at the auction, exceeded the Treasury bidding limits. "In addition, Salomon is attempting to determine if the bid limitation for the May auction may otherwise have been exceeded," the firm said. People familiar with the firm say this presumably occurred by buying bonds in the names of customers who hadn't authorized such bids.
In its public statement, Salomon revealed that it submitted bids at two other Treasury auctions in the name of customers who hadn't authorized them. This occurred at the four-year note auction in December and five-year note auction in February. In both cases, the customer bids enabled Salomon to breach the 35 percent bidding limit.
The Treasury wasn't aware until Salomon's admissions that there had been any irregularities in the February or December auctions, said Robert Glauber, undersecretary of the Treasury for finance.
The damaging disclosure comes just when Salomon's earnings have skyrocketed. Boosted primarily by bond trading, parent Salomon Inc. earned a record $451 million in this year's first half. Analysts estimate that one-third of Salomon's revenue came from government bond operations.
"It's going to take some time for Salomon to rebuild its credibility, particularly in the government bond market," says Perrin Long, a veteran securities industry analyst at First of Michigan Corp.
Competing securities firms scrambled over the weekend to devise ways to steal some of Salomon's customers. At some firms, national sales and product managers were told to go on the road and woo clients to snare market share from Salomon, Wall Street executives said over the weekend.
"How often does the number 1 guy put himself in this position?" asked one rival Wall Street executive. "If Ford did it, you can bet on what (General Motors) would do."
In a prepared statement, Salomon Brothers said it didn't believe that its irregular activities had forced the government to pay any more to borrow. In fact, one U.S. official said the Treasury may have benefited - by borrowing at lower than otherwise obtainable interest rates - from Salomon's aggressive bidding.
Nonetheless, a senior regulator said: "The longer-run concern is that people will be less willing to hold Treasury debt, because they believe the market is being manipulated or rigged by one player. The integrity of the market demands that it be perceived as a fair, open marketplace."
The Salomon disclosure likely will influence how Congress proceeds with the renewal this fall of the 1986 Government Securities Act. The House version of the bill, which SEC Chairman Richard Breeden strongly favors, would give regulators more muscle over the secondary, or resale, market in government securities, by requiring the SEC to oversee the dissemination of price and volume information. "The government market has been a largely unregulated gap in the securities markets," Breeden said. The Treasury presently regulates only the Treasury auction market.
Salomon has clashed with government regulators before over its aggressive auction tactics. In July 1990, Salomon submitted huge bids at a Resolution Funding Corp. $5 billion bond auction; the Treasury rejected the bid for the government agency's bonds. Shortly afterward, the Treasury tightened the 35 percent bidding limit.
At the time, Salomon's Mozer was highly critical of the move complaining that "the Treasury made a rash decision without consulting the dealer community."
"Potentially, this ties the hands of the larger dealers, who, time in and time out, buy the bulk of the debt," Mozer added.
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August 13, 1991, The Washington Post, Class-Action Lawsuit Filed Against Salomon; Company Accused of Artificially Inflating Prices of Securities, by Laurie Goodstein,
Two shareholders of Salomon Brothers Inc. filed a class-action lawsuit today in federal court in Manhattan accusing the company of artificially inflating securities prices and concealing the illegal scheme from its stockholders and the public.
The legal action follows Salomon's announcement Friday of the suspension of two of its top traders in the midst of widening government investigations into whether the firm manipulated prices in a May auction of Treasury notes.
The Securities and Exchange Commission is investigating whether a handful of traders acquired an unusually large block of the notes in violation of Treasury rules, and then forced other investors to pay premium prices for the securities.
The lawsuit alleges that Salomon employees consciously violated federal securities laws and then deceived the company's shareholders by issuing false information in its annual reports and financial statements.
The suit names Salomon chief executive John Gutfreund, vice chairman Thomas Strauss, former managing director Paul Mozer and his former chief assistant Thomas Murphy.
The suit was filed by the New York law firm of Abbey & Ellis on behalf of Seymour Mann and Malia Gloria Jacobsen, who are seeking a class action on behalf of all Salomon shareholders who bought stock between Dec. 27, 1990, and Aug. 9, 1991, when Salomon suspended its two traders.
The lawsuit alleges that "The wrongful failure of defendants to truthfully disclose the illegal scheme and its consequences to the investing public during the class period has resulted in financial damages to plaintiffs and other class members.
"... Had such alleged acts been disclosed to the investing public, plaintiffs and other class members would not have purchased Salomon's shares at the artificially inflated prices they did," the suit alleges.
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August 14, 1991, The Washington Post, Suspended Salomon Traders Held Key Positions in Industry Group
by Kathleen Day,
Two executives suspended last week from Salomon Brothers Inc. after the Wall Street firm admitted violations in its trading of Treasury securities represented the firm within the key lobby and watchdog group for government securities traders.
The Public Securities Association, though technically a lobby group only, is described by several Wall Street securities lawyers as more powerful, acting in many respects as a self-regulatory body for the relatively unregulated government securities industry.
Paul Mozer and Thomas Murphy, the Salomon executives who headed up the firm's government securities trading desk, were suspended last week amid revelations by Salomon that it had bid for and bought a higher percentage of Treasury notes at auction than Treasury rules allow. Salomon said that in certain instances, the firm improperly used customers' accounts to buy securities for itself.
Mozer represented Salomon on the PSA's primary dealers committee, an active and extremely influential group within the trade group. The committee serves as a forum to discuss and, in many cases, to set policy on issues confronting the industry, according to securities lawyers. PSA has led the industry's fight against tighter federal regulation, for example.
Murphy was chairman of the PSA's trading practices committee, a group within the primary dealers committee that deals with technical issues on how primary dealers trade with each other, according to a PSA spokesman.
The spokesman said that because Mozer and Murphy are no longer active traders, they no longer serve on the PSA committees.
In effect, the two were suspended from PSA with their suspension from Salomon, the spokesman said. Murphy and Mozer could not be reached for comment.
Salomon's disclosure of rule-breaking came as the Securities and Exchange Commission, the Justice Department and other government agencies widened investigations into possible securities law and antitrust violations in the government securities market.
That market, the largest in the world, serves as a benchmark that determines interest rates in other securities markets all over the world.
Salomon is the dominant player among the 40 or so primary dealers in government securities - the firms authorized by the government to bid at Treasury auctions, where billions of dollars are raised to fund federal spending and the budget deficit. Before Salomon disclosed its violations last week, government regulators had concluded that an attempt was made to manipulate the May 22 auction of $12.25 billion in two-year Treasury notes.
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August 14, 1991, The Boston Globe, Salomon probe won't be expanded, by Frank Perrotta, Globe Staff
THE TREASURY DEPARTMENT will not widen its investigation of violations of rules covering the sale of government securities, a department spokeswoman said. Salomon Brothers Inc., one of the biggest players in the huge Treasury securities market, admitted Friday that it broke government rules at several auctions and said it had suspended four employees. "We feel this is an isolated incident and are not examining any other primary dealers in connection with the May squeeze," the Treasury spokeswoman said. Salomon said it placed bids in the names of people who had not authorized them and bid for more securities than permitted. By using fabricated orders, Salomon was able to corner a large part of the market in the so-called squeeze.
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August 14, 1991, Chicago Sun-Times, Only real news is on sports pages, by Otis Pike,
On the news pages, what did we get last week? There was a story about how, as the Bank of Credit and Commerce International went its squalid way around the international community, buying big politicians and bilking a million little depositors, the rich got richer and the poor got poorer. That's news?
There was a story about how the Bush administration, in a devious move, changed the definition of "wetlands" and removed federal protection from as much as 10 million acres of what, by a simple regulatory gambit, are no longer to be deemed "wetlands." The White House paid lip service to the environment, talking about the importance of wetlands in protecting the habitat and breeding grounds for fish, birds and animals. The developers licked their lips as they got the right to fill bogs, marshes and swamps. That's news?
There was a story about how the Resolution Trust Corporation had managed to sell off a big package of the assets of failed savings and loan associations for $450 million. To the wealthy buyers who got the hotels and office buildings at 60 cents on the dollar, it was a great accomplishment. The RTC is giving them 85 percent financing. To the average taxpayer, it is a disaster. That's news?
A great New York investment company, Salomon Brothers, confessed cheating on the purchase of U.S. Treasury notes, using fake names to buy more than the 35 percent of any issue that the law allows. They had "suspended" but not fired the two managing directors. That's news?
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August 15, 1991, The Boston Globe, Salomon will suffer in scandal, by Robert Lenzner,
NEW YORK -- Salomon Brothers, one of the bully boys of Wall Street, pushed too hard this time. It has broken the rules that block a single trader from controlling the monthly auctions of Treasury bonds, by which the United States raises money. Although investors were not hurt, the integrity of the huge Treasury market has been damaged.
Salomon, which since 1917 has raised more money for Uncle Sam than any other registered Treasury dealer, has admitted violating the 35 percent position limit in five Treasury-note auctions since last December.
Even worse, sources say Salomon misrepresented the size of its positions and falsified its books and records. These problems are certain to bring costly fines, private lawsuits and action by the Securities and Exchange Commission. Additionally, Salomon says the irregularities may result in "censure, suspension or debarment from acting as a broker-dealer and as a primary dealer in government securities."
Salomon also says legislation currently under consideration, if enacted, "would have an adverse impact on Salomon's business."
Potentially more troubling would be a Justice Department indictment charging Salomon with trying to "rig," or monopolize the Treasury market. It may well bring the $120 billion-a-day government securities market under increased regulation and change the rules of the game for Salomon and its competitors.
In a confession highly unusual on Wall Street, chairman John Gutfreund, President Thomas Strauss and Treasury bond manager John Meriwether admitted last night they knew of the irregularities in late April and did not take any action until July. A special committee of outside directors will be formed to review these irregularities.
The scandal is a jarring setback for Gutfreund's game plan to return Salomon to its mid-1980's prominence as Wall Street's leading trading firm. The firm earned a record $451 million for the first six months this year. It recently scored a major coup by managing the $3 billion Time Warner Inc. rights offering and was chosen as British Telecom's banker.
Nevertheless, rot at the heart of Salomon's core business could be costly. The firm's in-house investigation has only reviewed Treasury auctions back to December 1990. If there is a more extensive pattern of fraudulent trading, the firm's standing in the global financial community could be damaged. Salomon's franchise was built on trading Treasuries and its reputation has been unsullied until now.
Astutely, Salomon wants to clean up its act before the government does. Salomon has discovered that before the May 22 auction of 2-year Treasury notes it purchased $497 million in the when-issued market -- that is, a promise to buy securities after they are issued. Then the firm for its own account bid for 35 percent of the $12.26 billion issue. Another $500 million transaction, which may be Salomon's doing, brings the firm's position to the 44 percent level, an "inadvertent" violation, the firm says.
At the same time Salomon bid as agent for two well-heeled clients for another $6 billion in notes, bringing the group's total position to 85 percent.
This substantial position by Salomon and others in a Treasury-note issue raised havoc with other Treasury dealers who sold bonds short before the auction and lost a bundle of money scrambling to buy them back. Salomon and its two clients did not make it easy for other dealers by holding onto their note positions, rather than distributing them into the market. This behavior led traders to charge Salomon with trying to "squeeze" or "corner" the market in this issue. The only saving grace was Salomon's 6.82 percent bid, which saved the US government $25 million.
If the May auction was a crude power play that got out of hand, at least two earlier fundings involved Salomon's falsifying purchase orders, sources say. In December 1990 Salomon bid in its own name for 35 percent of the $8.57 billion auction of four-year notes. It also bid for another large order in the name of clients who hadn't authorized the transactions. Salomon traders falsified these purchase orders, and the subsequent sale orders, whereby Salomon repurchased the notes from the clients at the original issue price, sources say.
Then, in February 1991, Salomon made a similar play, buying substantially more than 35 percent of the $9.04 billion sale of five-year notes by forging customer orders. In both instances Salomon's written bids to the Federal Reserve Bank in New York, transmitted electronically, were misrepresented as well, the sources say. Tom Murphy, the two managing directors in charge of Treasury trading. Their attempt to control the auction process, and make a killing, may have been motivated by Salomon's generous year-end bonus plans.
Unfortunately, this pressure forces traders to take gigantic risks with shareholders' money. Huge leverage and declining interest rates make the Treasury market one of Wall Street's most competitive but profitable arenas. Salomon was able to buy $1 billion of Treasury notes for $10 million down, a 1 percent margin that is unavailable to the ordinary investor. Then it borrowed $990 million at an interest rate 150 basis points less than the interest earned by holding the notes.
This "positive carry" -- borrowing at 5.75 percent and earning from 6.90 percent to 7.30 percent -- made buying Treasuries an odds-on play. When the return is figured on a small down payment and annualized, it's considerable. Even better, Treasuries in short supply might rally and be sold at a profit.
Salomon's fiddling will renew congressional fervor about regulating the huge government securities market, where price data and position size are not available publicly. The Treasury, which hasn't the manpower to supervise the market, has let dealers carry their derivative positions books in offshore subsidiaries. The SEC would apply much tougher capital charges on positions.
Before this pressure to maximize profits, Salomon used to ask the Fed's permission before subscribing to 30 percent of a new issue. But those polite times are a relic.
Salomon's domination of the Treasury market was tested by brutal competition in the 1980s, when daily average trading rose from $28 billion in 1981 to $118 billion in 1990. Severe overhead reductions in fixed-income trading helped five firms to gain half the $800 million pretax profits from 1990 Treasury trading.
Now, the tarnishing of its reputation alone will cost Salomon dearly.
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August 15, 1991, The Washington Post, Violations Detailed By Salomon; Securities Firm Says Top Officers Delayed Informing Regulators, by Kathleen Day,
Salomon Brothers Inc., the nation's leading trader of government bonds, disclosed yesterday that its chairman, John H. Gutfreund, and other top executives learned of "clear wrongdoing" by the firm involving the purchase of Treasury securities early this year but failed to inform government regulators until months later.
The giant Wall Street firm, whose trading practices are under investigation by four government agencies, said it could be subject to criminal fines, civil penalties and other sanctions including possible debarment as a trader in government securities, a core of the firm's business.
After reporting the details to regulators, the company yesterday released a four-page statement that outlined four instances during the past eight months in which it violated government rules in bidding for Treasury notes and bonds at government auctions.
U.S. officials have said this would be a serious violation, given the Treasury's reliance on the auctions to raise billions of dollars at a time to finance and refinance the $2 trillion federal debt. The interest rates that the Treasury must pay on each offering of securities is determined by the bids it receives - the bidders specify the interest rates they are willing to pay to purchase the securities.
On each of the four occasions it cited, Salomon acknowledged acquiring more than the maximum amount of these securities that any one bidder is permitted to purchase. A focus of the federal investigations is whether Salomon used its unusually large holdings of the Treasury bonds and notes to run up prices when it later sold the securities to other investors.
Gutfreund, one of Wall Street's most powerful financiers, and other top officers were informed in April that Salomon had violated auction rules in its bid for Treasury notes in February. "Management immediately determined that this matter must be communicated to the government; however, due to a lack of sufficient attention to the matter, this determination was not implemented promptly," Salomon said in its statement.
A few weeks later, following the government's sale of $12.5 billion in Treasury notes in May, other traders publicly raised questions about whether Salomon had tried to "corner the market" by acquiring a dominant share of the securities. Salomon said it stepped up its review of its own operations, "but despite its knowledge of clear wrongdoing in the February auction {it} took no further action. ... "
"In retrospect, the firm and senior management consider that the delayed supervisory action in the face of clear wrongdoing was inappropriate," Salomon said in its statement. Salomon informed regulators about the delay on Aug. 9. The same day, it announced the suspension of the two managing directors who supervised its Treasury securities trading and two other employees.
At the time, a Salomon spokesman said that the violations were committed without the knowledge of top management. Salomon stuck by that statement yesterday, but acknowledged that Gutfreund, Salomon President Thomas W. Strauss and Vice Chairman John W. Meriwether had failed to report the problem, as they are required by law to do.
This acknowledgment has few if any precedents, focusing the investigation at the very top of Salomon, one of the nation's three largest and most prestigious securities firms. As one of 40 or so "primary" dealers in Treasury securities, Salomon is obligated to bid at each offering of Treasury securities.
Failure by top management to report the rule violations immediately to federal authorities opens the firm to charges it failed to supervise its employees and operations, according to authorities familiar with the investigation. Such charges would go far beyond Salomon's suggestion last week that any violations were the work of several lower level employees acting alone.
So far, the government probe centers on two violations by Salomon: exceeding rules that restrict primary dealers from acquiring more than 35 percent of a new issue of securities and making trades in the names of customers accounts without their authorization.
Both are significant violations. "We've read the release and we've had conversations with representatives of the firm," said SEC chief of enforcement William McLucas. "The matters discussed are serious." He would not comment further.
In addition to the delay, the Salomon statement disclosed more details about the violations it first revealed last week. It said one violation occurred because of a practical joke that "went awry." And it disclosed that on the three known occasions when it exceeded the 35 percent limit, its bids represented from 44 percent to 57 percent of the issue.
"As the oldest primary dealer in U.S. government securities, Salomon Brothers has always prided itself on meeting its business obligations," the firm said in its statement. "We will correct these matters. We know that the government will hold us strictly to this commitment."
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August 15, 1991, Chicago Sun-Times, Salomon details violations,
NEW YORK Salomon Bros. disclosed new details Wednesday [Aug. 14] of how it broke rules at government bond auctions and said it could be debarred as a primary dealer in government securities.
Last Friday Salomon admitted breaking government rules at several auctions and said it had suspended four employees.
Salomon said that it had placed bids in the names of people who had not authorized them and bid for more securities than permitted. By using fabricated orders, Salomon was able to corner a large part of the market in a so-called squeeze.
In Washington, Richard Breeden, chairman of the Securities and Exchange Commission, said the repeated rule-breaking by Salomon at the government debt auctions showed the "honor system" governing Treasury trading is inadequate.
Salomon said it plans to create a committee of outside directors to review irregularities at several auctions of government bonds and its practices in trading securities from other agencies affiliated with the federal government.
Salomon is one of the three biggest firms in the Treasury market.
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August 15, 1991, Associated Press / Albany Times Union, Salomon Trader's Joke Led to Rule-Breaking,
Salomon Brothers Inc., the Wall Street giant under federal investigation for breaking Treasury bond-bidding rules, disclosed more details of the wrongdoing Wednesday, including a $1 billion error that stemmed from a "practical joke."
Salomon, the biggest trader in Treasury securities, announced last Friday it had suspended two managing directors and two other employees in connection with the irregularities.
Salomon admitted Wednesday that in several instances, it bought more than the legal limit at Treasury bond auctions, which could give a player the power to dictate the securities' prices. The firm said it had at times done so by using names of its customers without authorization.
Although individual participants are permitted to buy up to 35 percent of a bond issue, Salomon acknowledged it had bought up to 57 percent of the bonds in a single sale.
One of the incidents disclosed Wednesday involved a practical joke that turned into a $1 billion bond purchase.
Salomon said in the February auction of 30-year bonds, one of the suspended managing directors persuaded a customer to try to play "what he characterized as a practical joke" on a Salomon employee.
But the firm said the plan "went awry" and the bid was submitted in a customer's name. Salomon said it accepted ownership of the bonds but didn't disclose the purchase or the erroneous bid.
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August 16, 1991, Associated Press / The Boston Globe, Salomon's stock falls, legal woes mount, by Dirk Beveridge,
NEW YORK -- The admitted wrongdoing by Salomon Brothers Inc. in the Treasury bond market depressed its stock price yesterday and left traders wondering how aggressively the government will respond to the scandal.
The cheating by the biggest broker of government bonds raised new concerns in Congress about regulation of the Treasury sales. The disclosures also drew lawsuits from shareholders who say they lost money because Salomon management knew about the problems for months before admitting them.
Salomon says it bought more than its fair share of Treasury securities in several auctions this past winter and spring, used customer names without authorization and in one instance made a $1 billion purchase as a result of a botched practical joke. Once Salomon's top executives learned about the violations, they delayed telling the government.
Salomon stock plunged 4 3/4, closing at 26 7/8. It was the most active stock on the New York Stock Exchange, with nearly 8 million shares traded. Since Salomon made an initial announcement about the wrongdoing last Friday, its stock has lost almost 10, cutting the value of the company from $4.10 billion to $3.01 billion.
Moody's Investors Service said it was thinking of downgrading Salomon's debt ratings because of "concerns regarding the possible legal, financial and business consequences" of Salomon's improper bond dealings.
The Justice Department, Securities and Exchange Commission and Treasury are investigating. They declined to elaborate, despite calls for a speedy explanation of what went wrong.
Sen. Christopher J. Dodd (D-Conn.), chairman of the Senate banking subcommittee on securities, wrote to Treasury Secretary Nicholas Brady asking for a report "on the respective roles of the Treasury, the Federal Reserve and the SEC in surveilling transactions and participants in the Treasury auctions generally, and specifically with respect to the incidents involving Salomon Brothers Inc."
Dodd asked Brady to submit the report by Sept. 5. It is "absolutely essential that the integrity of the Treasury auction process is maintained," he wrote Brady.
"We've received it, we're reviewing it and we will respond to it as quickly as possible," Treasury spokeswoman Cheryl Crispen said.
On Wall Street, executives and bond traders at rival firms would not speak on the record about Salomon's problems.
But privately, industry figures said the disclosures had raised questions about whether Salomon's top management would be removed and how far the government would go in punishing the firm.
"I don't think anybody is quite sure what is going on right now," said a bond trader at a major Wall Street brokerage. "It's very confusing."
Salomon said that in late April, three executives learned of an unauthorized bid that had been submitted in the February auction of five-year bonds. The three, chairman and chief executive John H. Gutfreund, president Thomas W. Strauss and vice chairman John W. Meriwether, decided the government should be told, but did not do so for months "due to a lack of sufficient attention to the matter," Salomon said.
Salomon spokesman Robert F. Baker Jr. said yesterday he knew of no plans to oust the management. Salomon has already suspended two managing directors, Paul Mozer and Thomas Murphy, as well as a trader and a clerk, in connection with the scandal.
Salomon raised the possibility that it could lose its status as a primary dealer of bonds, an elite status shared by 40 firms that entitle them to buy Treasury securities directly from the Federal Reserve and resell them to the public. A spokesman for the Federal Reserve in New York declined to comment.
Several bond traders said the removal of Salomon from the bond sales could cause temporary problems in the market, but would be smoothed out over a period of a few months.
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August 16, 1991, The Washington Post, A Wall Street Giant Shaken; Bond Probe Reaches Top Salomon Executives, by Kathleen Day,
What reportedly started out in part as a practical joke has turned into a nightmare for John Gutfreund, the legendary chairman of Salomon Brothers Inc.
The man Business Week magazine once dubbed "The King of Wall Street" now finds himself at the center of an investigation by four federal agencies that could lead to criminal and civil charges - even to Salomon's being barred from trading in the huge market for Treasury bonds, notes and bills - an arena it now dominates.
Gutfreund has admitted that he and other top Salomon executives waited months before alerting federal regulators to "clear wrongdoing" by the firm's government securities trading desk earlier this year.
At the least, the revelations have sullied the name of the oldest, largest and most powerful trading firm in the vast market for Treasury securities.
Rep. Edward J. Markey (D-Mass.), whose House subcommittee has jurisdiction over Wall Street regulations, fired a shot across Salomon's bow yesterday, saying, "Clearly, we cannot tolerate games of Jeopardy being played with what is in effect the public's money."
Perhaps anticipating more trouble to come, investors have turned sour on Salomon's stock. Since the disclosure of violations last Friday, the firm's stock has lost $1 billion in market value.
The admission that senior officers at a leading Wall Street firm delayed informing federal authorities is unprecedented, market veterans said.
During the entire Wall Street insider trading scandal of the 1980s, no head of a company had to offer the confession that Gutfreund offered Wednesday.
As a "primary" dealer in government securities, Salomon is among about 40 firms allowed to bid at Treasury auctions, where billions of dollars in newly issued securities are auctioned to raise the money that finances the federal debt.
Reaction in Washington and in the financial community yesterday ranged from astonishment to worry to outright glee that a firm known both for its trading prowess and its belligerence toward regulators and competitors could be so humbled.
"There are many people in Washington who think this couldn't have happened to a nicer group of guys," said one securities lawyer familiar with Salomon's reputation among regulators.
And Wall Streeters found it ironic that Salomon's travails involved a securities trade that began as a "joke" - given the firm's rough-and-tumble, "Animal House" culture described in Michael Lewis's best-selling book "Liar's Poker."
The prank, as Salomon described it, involved the firm making a bid for $1 billion in securities last February on behalf of a customer who hadn't placed such an order.
At first the federal investigation, which started in late May, focused on whether Salomon traders had attempted to corner the market in a $12.5 billion issue of Treasury securities on May 22 and raised prices when it resold the securities, "squeezing" the buyers.
The probe also was directed at possible involvement by some of Salomon's major customers in any possible securities violations or price-fixing, sources said.
Last Friday, Salomon admitted it violated rules in at least three auctions since last December, including the one on May 22. The violations included buying a larger share of a securities offering than any one firm is permitted to do and doing so by buying securities in the name of its customers without their authorization.
Finally, on Wednesday, Salomon disclosed other violations at two additional auctions and admitted that Gutfreund and others had failed to report one of the earlier violations, from February.
That has shifted the focus of the probe to include determining what senior executives knew and when they knew it, according to those familiar with the investigation.
"The import of Gutfreund's admission is that Salomon is taking this very seriously," said Samuel L. Hayes III, professor of investment banking at Harvard Business School.
Many in the investment community applauded Gutfreund's action of "coming clean," as one securities industry lawyer put it.
But others familiar with the investigation were more cynical in their assessment yesterday.
They said Gutfreund and Salomon confessed to regulators only after the government subpoenaed documents from the firm in June that would have raised questions about why management did not speak up sooner.
And those questions are the ones that could lead to the most serious reprisals by the Securities and Exchange Commission, the Justice Department, the Federal Reserve Board and the Treasury Department, those familiar with the investigation say.
The details that Salomon disclosed Wednesday were these: Gutfreund, Salomon President Thomas W. Strauss and Vice Chairman John W. Meriwether learned in April about a serious trading violation in February.
Although the company says the men knew they should have immediately reported the violation to federal authorities, they waited three months - until last Friday - to do so. Compounding the seriousness of that delay in the eyes of regulators, sources said, is that the May 22 violation occurred in the meantime.
The idea of a $1 billion "joke" involving something as sacrosanct as a Treasury auction struck some in the financial community and in Congress yesterday as ludicrous, but also in keeping with the firm's anything-goes culture.
In "Liar's Poker," where he chronicles his years as a Salomon bond trader, Lewis describes pranks at the firm that have ranged from burying a trader's desk in garbage to making a new trader believe the SEC was investigating him for stealing candy and hot dogs from the firm's cafeteria.
The book also describes how Gutfreund on one occasion challenged Meriwether to risk $1 million on a gamble - a guessing game called liar's poker - only to have Meriwether refuse unless the stakes were raised to $10 million.
Inside Salomon, Gutfreund was considered a trader's trader. Even today he keeps a desk on Salomon's football field-sized bond-trading floor, personally overseeing many of the firm's more important transactions. That has led many to wonder how he and other senior brass could not have known that the firm's top government securities traders, Paul Mozer and Thomas Murphy, were committing violations.
Salomon has suspended Mozer and Murphy, as well as two others, pending the outcome of the government's probe and Salomon's internal investigation.
Lawyers for Mozer had no comment. Murphy's lawyers could not be reached late yesterday.
According to those familiar with the government probe, Treasury officials, in their role as overseers of government auctions, sent a letter in April to a large Salomon customer questioning the size of a trade made two months earlier in February.
No mention of wrongdoing was made, according to those familiar with the investigation. But copies of the letter went to Salomon's management. That prompted Mozer to confess to Gutfreund and others that in the transaction in question, he purchased securities for a customer without authorization.
What concerns some regulators most is that, during many discussions with regulators in May and June about the May 22 auction, senior management at Salomon never mentioned the violation they knew Mozer had committed earlier in the year.
In June, the SEC subpoenaed Salomon documents. It was not until Aug. 9, several weeks after that subpoena, that Salomon disclosed to regulators that Gutfreund and others knew about earlier rule-breaking by Mozer but allowed him to continue to run Salomon's government securities desk until recently.
Government securities trading is one of Salomon's most important businesses, and the firm dominates the $119 billion-a-day market.
"It does seem like they have managed to do exactly the worst thing," Lewis said yesterday. "They have maximized the amount of outrage this is going to provoke. One of the three or four violations was a joke? That is shocking to people who don't know what goes on on Wall Street. It isn't that surprising. It's just stupid."
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August 16, 1991, Associated Press / The Boston Globe, Salomon's stock falls, legal woes mount, by Dirk Beveridge,
NEW YORK -- The admitted wrongdoing by Salomon Brothers Inc. in the Treasury bond market depressed its stock price yesterday and left traders wondering how aggressively the government will respond to the scandal.
The cheating by the biggest broker of government bonds raised new concerns in Congress about regulation of the Treasury sales. The disclosures also drew lawsuits from shareholders who say they lost money because Salomon management knew about the problems for months before admitting them.
Salomon says it bought more than its fair share of Treasury securities in several auctions this past winter and spring, used customer names without authorization and in one instance made a $1 billion purchase as a result of a botched practical joke. Once Salomon's top executives learned about the violations, they delayed telling the government.
Salomon stock plunged 4 3/4, closing at 26 7/8. It was the most active stock on the New York Stock Exchange, with nearly 8 million shares traded. Since Salomon made an initial announcement about the wrongdoing last Friday, its stock has lost almost 10, cutting the value of the company from $4.10 billion to $3.01 billion.
Moody's Investors Service said it was thinking of downgrading Salomon's debt ratings because of "concerns regarding the possible legal, financial and business consequences" of Salomon's improper bond dealings.
The Justice Department, Securities and Exchange Commission and Treasury are investigating. They declined to elaborate, despite calls for a speedy explanation of what went wrong.
Sen. Christopher J. Dodd (D-Conn.), chairman of the Senate banking subcommittee on securities, wrote to Treasury Secretary Nicholas Brady asking for a report "on the respective roles of the Treasury, the Federal Reserve and the SEC in surveilling transactions and participants in the Treasury auctions generally, and specifically with respect to the incidents involving Salomon Brothers Inc."
Dodd asked Brady to submit the report by Sept. 5. It is "absolutely essential that the integrity of the Treasury auction process is maintained," he wrote Brady.
"We've received it, we're reviewing it and we will respond to it as quickly as possible," Treasury spokeswoman Cheryl Crispen said.
On Wall Street, executives and bond traders at rival firms would not speak on the record about Salomon's problems.
But privately, industry figures said the disclosures had raised questions about whether Salomon's top management would be removed and how far the government would go in punishing the firm.
"I don't think anybody is quite sure what is going on right now," said a bond trader at a major Wall Street brokerage. "It's very confusing."
Salomon said that in late April, three executives learned of an unauthorized bid that had been submitted in the February auction of five-year bonds. The three, chairman and chief executive John H. Gutfreund, president Thomas W. Strauss and vice chairman John W. Meriwether, decided the government should be told, but did not do so for months "due to a lack of sufficient attention to the matter," Salomon said.
Salomon spokesman Robert F. Baker Jr. said yesterday he knew of no plans to oust the management. Salomon has already suspended two managing directors, Paul Mozer and Thomas Murphy, as well as a trader and a clerk, in connection with the scandal.
Salomon raised the possibility that it could lose its status as a primary dealer of bonds, an elite status shared by 40 firms that entitle them to buy Treasury securities directly from the Federal Reserve and resell them to the public. A spokesman for the Federal Reserve in New York declined to comment.
Several bond traders said the removal of Salomon from the bond sales could cause temporary problems in the market, but would be smoothed out over a period of a few months.
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August 16, 1991, The Washington Post, Dow Falls 7 in Trendless Trading,
Blue-chip stock prices edged lower today and the broader market was almost evenly matched between gaining stocks and losers.
"The market is really looking for something to lead it out of the desert," said Gene Seagle, director of technical research at Gruntal & Co.
The Dow Jones industrial average slid 6.94 points to 2998.43 on active New York Stock Exchange volume of 174.3 million shares.
Alfred Goldman, market analyst at A.G. Edwards & Sons, said, "This trendless market points out that investors have a high level of confusion."
Profit-taking hit smaller stocks, which had hit record closing highs for two sessions running. The Nasdaq index pulled back after setting records Tuesday and Wednesday.
In addition, the bond market fell after a recent rally, putting added pressure on stocks. Short-term government bond prices rose but longer-term bonds slipped, hurt by disappointment that the government did not cut interest rates.
The price of the Treasury's key 30-year bond fell 9/32 point, or about $2.81 per $1,000 in face amount. Its yield rose to 8.08 percent from 8.06 percent late Wednesday.
But some analysts took heart from the market's resilience despite mixed signals on the economy and a government inquiry of Salomon Inc. Salomon slid 4 3/4 to 26 7/8, a one-day fall of 15 percent, on volume of 7.8 million shares.
Among widely held blue chips, AT&T rose 3/8 to 39 1/2, General Electric fell 3/8 to 72 5/8 and Wal-Mart Stores dropped 1 3/4 to 49 3/4.
The NYSE index slid 0.25 points to 213.38, the Standard & Poor's 500 index fell 0.57 to 389.33, the American Stock Exchange index added 0.21 to 367.99 and the Nasdaq index slid 2.03 to 515.65.
The dollar finished higher against most major currencies as a strong report on U.S. housing starts outweighed the effects of a long-awaited hike in German interest rates. In New York, the dollar was quoted at 1.7490 German marks, up from 1.7375, and at 137.05 yen, up from 136.79.
Energy futures headed higher in moderate trading, as home heating oil took the spotlight with gains of nearly a penny a gallon. On the New York Mercantile Exchange, heating oil for September delivery jumped 0.96 cent to settle at 60.41 cents a gallon. Light sweet crude oil for September delivery settled at $21.44 per barrel, up 17 cents.
Share prices on the Tokyo Stock Exchange rose sharply in early trading Friday. The closely watched Nikkei average of 225 stocks stood at 23,065.14 at the end of morning trading, up 46.46 points from Thursday.
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August 16, 1991, The Bond Buyer, Moody's to scrutinize Salomon debt; Treasury rates ignite issuance boom, by Sean, Monsarrat,
Salomon Brothers Inc.'s Treasury market bidding woes spread to the debt market yesterday, where Moody's Investors Service placed the firm's $7 billion in rated securities on negative review.
The firm's A2 senior debt rating and its Prime-1 commercial paper rating may be affected.
The review, Moody's said, was prompted by "concerns regarding the possible legal, financial, and business consequences arising from recent revelations related to Salomon's U.S. Treasury Securities Business."
The government has started criminal and civil investigations of the investment firm based on evidence that it violated bidding rules in several U.S. Treasury auctions.
Bond traders said there was little Salomon paper out for the bid in the secondary market, and bond prices had not fluctuated, although the firm's stock plunged 15%, or 4 3/4 point, on the day.
In secondary trading, junk bonds rose 1/8 to 3/8 point, while investment grade bonds climbed 1/4 to 3/8 point. The price gains, traders said, are prompted by good technicals and yield-hungry investors.
"Treasury rates are very low, and we're seeing a lot of new issuance, which means more bonds in the secondary," a trader said. "A lot of people are jumping on the bandwagon for undervalued bonds."
Around $1 billion in new securities flooded the primary sector yesterday as issuers continue to take advantage of low interest rates.
Treasury yields have plummeted during the last several sessions, and the debt markets have taken on considerable new supply, some from issuers long absent from the market.
Salomon Brothers as senior manager priced $250 million of noncallable debentures for Capital Cities/ABC, its first new issue in months.
The offering is priced as 8.750s to yield 8.83% in 2015, 75 basis points over comparable Treasuries.
The issue is rated A1 by Moody's and A-plus by Standard & Poor's Corp.
Ingersoll-Rand also ventured into the market after a long hiatus, with a $125 million issue of noncallable debentures, priced by Salomon as 9s at par in 2021, 92 basis points over comparable Treasuries.
The debentures were rated A2 by Moody's and A by Standard & Poor's.
First Boston Corp. priced $250 million of noncallable notes for Tenneco Credit as 9 5/8s to yield 9.693% in 2001, 190 basis points over comparable Treasuries.
The issue is rated Baa2 by Moody's and triple-B by Standard & Poor's.
First Boston also priced $210 million of noncallable senior subordinated notes for American Medical International.
The offering included a 2001 maturity priceds as 13.50s at par, 569 basis points above comparable Treasuries, one of the highesty yielding junk bonds to ever hit the market, traders said.
The notes are rated B2 by Moody's and B-minus by Standard & Poor's.
Goldman, sachs & Co. as senior manager priced $200 million of noncallable notes for Proctor & Gamble Co. as 7.10s at par in 1994, 37.5 basis points over the comparable Treasury coupon.
The issue is rated Aal by Moody's and AA by Standard & Poor's.
In ratings news, Moody's Investors Service said it placed the long-term ratings of Leeds Permanent Building Society under review for possible downgrade.
About $2.5 billion of debt may be affected.
Moody's said the action reflects some degree of concern regarding the possible effect of higher loan loss provisions on the earnings stream of Leeds Permanent.
Leeds Permanent's senior debt is currently rated Aa3 and its subordinated debt is rated A2.
Moody's added that the Prime-1 rating for Leeds Permanent's commercial paper is not under review.
Moody's said it also lowered First Union Corp.'s debt and commercial paper ratings as well as the long-term certificate of deposit ratings for its subsidiary banks. The ratings were placed under review July 15, 1991.
About $1.2 billion of securities is affected.
First Union's rating changes reflect the likely continuing impact of depressed commercial real estate market conditions, especially in the important Florida market and in other markets outside of North Carolina where the corporate banking group has been active.
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August 16, 1991, New York Times / Albany Times Union, Salomon Bidding Embarrassment Threatens Its Future,
The disclosure that Salomon Brothers' three top officials had known for several months about illegal bidding by the firm in the government securities market has moved an unfolding scandal from an embarrassment to a serious threat to the future direction of the investment house.
The view of traders and analysts on Wall Street seemed to turn markedly against Salomon, after the firm's disclosure Wednesday that John H. Gutfreund, chairman and chief executive, as well as Thomas W. Strauss, the firm's president, and John W. Meriwether, a vice chairman, knew in April about an illegal bid made by the firm.
The firm faces not only possible fines and sanctions, but also possible debarment as a primary dealer in Treasury securities.
The embarrassment strikes at the very heart of Salomon Brothers, in the $2.2 trillion government securities business where it forged its reputation and where it is one of the three largest firms.
William R. McLucas, head of the enforcement division for the Securities and Exchange Commission, said, "There were clearly some matters that will have to bear scrutiny."
Some of the growing disenchantment was reflected in the precipitous drop in the firm's stock Thursday. Trading was delayed almost half an hour on the New York Stock Exchange, and the stock closed down $4.75, at $26.875. According to the Washington Post, since the disclosure of violations last Friday, the firm's stock has lost $1 billion in market value.
The mood was also evident in a growing sense on Wall Street and in Washington that regulators would have to punish Salomon severely to maintain their credibility as a strict enforcer of the rules in its own market.
Talk throughout Salomon and on Wall Street centered on which senior executives might have to resign for the firm to recover.
A number of institutions that deal with Salomon also expressed concerns Thursday about their dealing with the firm, raising the specter that Salomon could start to lose some big business if the investigations being conducted by the Securities and Exchange Commission and the Justice Department uncover further wrongdoing.
"Our business dealings with Salomon Brothers are under review because of this," said Steven Kornrumpf, assistant director for New Jersey's division of investment.
Other officials made decisions to stay with the firm - at least for now. Edward V. Regan, New York state's comptroller, said the state would continue to do business with Salomon while the investigations of the firm continued. After those inquiries are completed, the state will review its investment relationship with the firm, he said.
The scandal has also prompted calls for legislative review. Sen. Christopher J. Dodd, D-Conn., chairman of the Senate banking subcommittee on securities, in a letter Thursday to Treasury Secretary Nicholas F. Brady, asked for a report on the roles of the Treasury, the Federal Reserve and the SEC in supervising Treasury auctions, "specifically with respect to the incidents involving Salomon Brothers Inc."
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August 16, 1991, Chicago Sun-Times, Stocks dive 30,
NEW YORK Stock prices swung sharply this afternoon as traders closely watched developments in the Salomon Brothers Inc. scandal at the same time options were expiring.
The Dow Jones average of 30 industrials fell 30.41 points to close at 2,968.02.
Declining issues outnumbered advancers by more than 2-to-1, on volume of 189.9 million shares.
The market had turned sharply lower early in the afternoon, with trading in Salomon Inc. shares suspended and Wall Street waiting for news in the Salomon case. But the Dow immediately recovered almost 15 points after Salomon announced two of its top three executives, Chairman John Gutfruend and President Thomas Strauss, were prepared to resign.
The U.S. dollar closed sharply higher today against other major currencies in European trading following the release of an unexpectedly small U.S. trade deficit. Gold prices were lower.
In Tokyo, the dollar rose to 136.90 Japanese yen from 136.59 yen at Thursday's close. Later, in London, it rose to 137.25 yen.
In London, the British pound rose to $1.6870 from $1.6610 late Thursday.
Gold fell in London to a late bid of $358.25 a troy ounce, down from $358.35 late Thursday. In Zurich, the metal fell to a closing bid of $357.75 an ounce from $357.80 late Thursday.
Silver bullion rose 3 cents in London to a late bid of $4.01 a troy ounce.
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August 16, 1991, Chicago Sun-Times, Salomon execs 'prepared' to resign, by Christina Toh-Pantin,
NEW YORK Salomon Bros. Chairman and Chief Executive Officer John Gutfreund is "prepared" to resign over a Treasury securities scandal that has rocked Wall Street, and be replaced by Nebraska investor Warren Buffett, the brokerage said today.
Thomas Strauss, president of the firm, also appears likely to resign at a special meeting Sunday at which directors will also "consider the status" of Vice Chairman John Meriwether, the company said in a brief statement.
The scandal at Salomon, which revealed Aug. 9 that it broke federal rules during at least three auctions of Treasury notes and bills, has exploded this week with the revelation that Gutfreund knew of irregularities as early as April but did not report them.
In the statement, Gutfreund and Strauss said:
"We cannot allow our unfortunate mistake of not taking prompt action, when in April we learned of one unauthorized bid at a February Trasury auction, to harm the firm. We are taking this action to protect the firm, its 9,000 people and its clients."
Trading in Salomon's stock and high-grade bonds was suspended today pending the announcement; after it resumed, the stock rose $1 cents to close at $27.87 1/2..
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August 16, 1991, The Washington Post, Newell Infusion Seen Easing Black & Decker's Debt Woes, by Angela Walker,
Newell Co.'s $150 million investment in Black & Decker Corp. will ease the toolmaker's cash flow problems while protecting it from a hostile takeover, analysts said today.
Newell, a Freeport, Ill., manufacturer of do-it-yourself products, will acquire 150,000 shares of preferred Black & Decker stock for $150 million, the companies announced Wednesday.
"This really provides a very meaningful cushion for Black & Decker," said Jonathan Goldfarb, a Merrill Lynch & Co. analyst in New York. "The main investor concern has been that cash flow is so tight."
Black & Decker spokeswoman Barbara Lucas said the agreement will help reduce the $3.2 billion debt that the Towson-based company accrued after taking over Emhart Co. for $2.8 billion in April 1989.
Black & Decker, which makes power tools, appliances and other household goods, experienced serious cash flow problems after acquiring Emhart, analysts said. Connecticut-based Emhart is best known as a maker of plumbing fixtures and locks.
"They were highly confident that they'd sell off debt incurred by the {Emhart} acquisition, but the company got caught in a never-ending cash squeeze," Goldfarb said.
Black & Decker will pay a 7.75 percent dividend on the preferred stock. The company has been paying 9 percent to its lenders, Lucas said.
The preferred stock is convertible into common stock for $24 per share. In trading today, Black & Decker stock rose 75 cents to $16.87 1/2 on the New York Stock Exchange. Newell slid $1.12 1/2 to $38.
"It'll reduce their financing expense costs since preferred stock interest is less than debt-paying interest," said Russell Leavitt, an analyst with Salomon Brothers Inc. in New York.
The deal also includes a 10-year "standstill" agreement that restricts Newell from increasing its stake in the company beyond the 15 percent it will hold. Newell already owns about 2.8 million shares of Black & Decker common stock, amounting to a 4.5 percent stake in the company.
The deal comes after the Stanley Works, another hardware maker, filed an antitrust suit last month against Newell's attempt to acquire as much as a 15 percent stake in Stanley.
But Lucas said Newell has no interest in acquiring Black & Decker. "Both sides wanted to make it very clear this was strictly an investment - that this is not the front for a takeover attempt," Lucas said.
Analysts said the standstill agreement makes it almost impossible for Newell to attempt a takeover. The agreement also restricts the ways in which Newell can dispose of its Black & Decker shares. And Black & Decker will have the option to repurchase the preferred shares and any common stock issued upon conversion at the end of the 10-year period.
Mike Mead, an analyst at Legg Mason Inc., a Baltimore securities firm, said he thinks the deal will have a relatively minor impact because of the standstill and buyback provisions.
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August 16, 1991, Chicago Sun-Times, Profit-takers cost Wall Street 6 pts.
The stock market stumbled Thursday when a late round of selling overcame traders' visions of lower interest rates.
The Dow Jones industrial average lost 6.94 to close at 2,998.43. Declining issues narrowly eclipsed advancing ones on the New York Stock Exchange.
Volume on the floor of the Big Board came to 174.12 million shares, down from 196.03 million in the previous session.
Stocks advanced on the opening bell and held at modestly higher levels until a late round of selling - some of it generated by computer programs - sent prices lower.
Analysts said dealers were adjusting their positions ahead of today's "double-witching hour," the simultaneous expiration of stock-index futures and options contracts.
Financial stocks, which had been underpinning much of the market's strength in recent days, were deflated by profit-taking as well as by a scandal at Salomon Inc.
Salomon, which is in danger of losing its primary dealer status after admissions that the firm violated rules in several Treasury auctions, plunged 4 3/4 to 26 7/8. Salomon was the most active issue on the Big Board, with nearly 8 million shares changing hands.
Elsewhere in the financial sector, Security Pacific fell 1/2 to 35 1/8; BankAmerica lost 3/4 to 42 1/4; Chemical Bank fell 1 to 28; Manufacturers Hanover lost 1 to 31 3/8, and PaineWebber slipped 1/4 to 23 1/8.
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August 16, 1991, The Bergen County Record, Moody's Reviewing Salomon Bros. Debt
NEW YORK -- Moody's Investors Service said Thursday that it has placed under review for downgrade the Single A2 senior debt ratings of Salomon Bros. Inc. as well as the company's prime-1 rating for commercial paper. About $7 billion in long-term securities is under review, the rating agency said. The review was sparked by worries of possible financial fallout from recent fraud allegations concerning Salomon's U.S. Treasury securities business, Moody's said. Salomon admitted that it violated rules governing bids for Treasury bonds at four government auctions.
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August 16, 1991, The Bond Buyer, Sen. Dodd asks for investigation in wake of Salomon disclosures, by Steven Dickson,
Citing recent disclosures by Salomon Brothers Inc. that it violated bidding rules at several recent Treasury auctions, Sen. Christopher Dodd, D-Conn., yesterday asked the Treasury Department to investigate the adequacy of auction oversight regulations.
In a letter to Treasury Secretary Nicholas Brady, Sen. Dodd notes Salomon admitted it broke auction rules forbidding a single bidder from acquiring more than 35% of a given offering by submitting bids in the name of clients who had not authorized the purchase, as well as through other "irregularities."
At the February 1991 auction of five-year notes and 30-year bonds, for example, officials at the firm knew of the violations in April, but "it appears that they were reported to the Treasury and other regulators only last week," the letter says.
"In view of the recent disclosures, I would appreciate a report on your views of the adequacy of Treasury's auction rules and existing authority under other statutes to address these and other irregularities in Treasury auctions," Mr. Dodd said.
He added it is "absolutely essential" to maintain the integrity of the auction process, to keep borrowing costs as low as possible for the federal government.
Analysts have so far found it difficult to gauge what impact the Salomon disclosures are having or might have on the market. But several have said it might result in much heavier federal regulation of the sort suggested by Sen. Dodd's letter.
Lacy H. Hunt, chief economist at Carroll, McEntee & McGinley Inc., said the situation has created an unknown element in the market's psychology, adding that whenever that sort of dynamic is at work, "uncertainty is how it reflects itself in the market. It could chase some people to the sidelines."
Yesterday's market activity was chaacterized by quiet consolidation, following Wednesday's raucous buying session.
The long bond ended the day in New York down 5/16, to yield 8.08%.
Rumors that the Federal Reserve called an emergency session to discuss lowering interest rates gave the market an early boost into positive territory. But the Fed denied the rumor and later executed four-day system repurchase agreements, signaling no change in policy.
Disappointment over the Fed action led to the lows for the day at around 9/16 off on the long bond. But prices soon moved back up to their opening levels, where they sat for the rest of the day.
"After three or four days of run-ups, it's not surprising you're going to get a little stall action," one trader said. "People are tired."
And yesterday's economic indicators did little to waken them. July housing starts were reported up 3.7%, the fourth monthly increase in a row and somewhat stronger than expected.
Initial jobless claims rose 8,000, to 408,000, in the week ended Aug. 3, about as expected.
Lacy Hunt, chief economist at Carroll, McEntee & McGinley Inc., said the claims numbers are not particularly important either in calculating where the economy is headed or in trying to second guess the Fed.
"And there's reason to believe that claims are not a true reflection of the labor market, because of the number of people exhausting their 26 weeks of benefits," Mr. Hunt said.
In the futures market, the September contract closed down 5/16, at 97 14/32.
In the cash market, the bellwether 30=year bond was down 5/16 late in the day, to yield 8.08%.
The 7 7/8% 10-year note fell 5/32, to 100 6/32-100 10/32, to yield 7.82%, and the three-year 6 7/8% note was 3/32 higher at 100 14/32-100 16/32, to yield 6.68%.
Rates on Treasury bills were lower, with the three-month bill down one basis point at 5.29%, the six-month bill also one basis point lower at 5.34%, and the year bill three basis points lower at 5.33%.
In other news, a spokesman for the Federal Reserve Bank of New York reported at the weekly press briefing that the nation's M1 money supply was up $3.3 billion to $867.6 billion in the week ended Aug. 5, the broader M2 aggregate gained $1.2 billion, to $3.387.2. trillion; and M3 fell $5.6 billion, to $4.142.4 trillion, in the same period.
Also, for the week ended Wednesday, the federal funds rate averaged 5.62%, compared with 5.83% the previous week, according to the New York Fed.
Staff reporter Vicky Stamas in Washington contributed to this column.
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August 17, 1991, The Economist (US), Rotten at the core. (Salomon Brothers Inc. is being sued for unfair bidding in the government bond market)
IN A mea culpa that left Wall Street gasping, Salomon Brothers admitted publicly on August 14th that its chairman, John Gutfreund, its president, Thomas Strauss, and a vice chairman, John Meriwether, knew since late April of irregularities in its Treasury-securities department yet undertook no coherent action to stop them until July. Rumours of wrongdoing at Salomons were spreading even before the firm confirmed some of them on August 9th, but nobody knew how high knowledge of them went. This week's answer: right to the top.
Salomon broke rules designed to stop a single bidder dominating the market in American government securities and faked records to cover it up. it is a damning admission for America's oldest primary dealer, a firm that has raised more money for Uncle Sam since 1917 than any other. The repercussions will be all the greater because the market in question is not in any sense marginal, like the junk-bond market, nor can the investors affected be seen as a clutch of get-rich-quick speculators. Treasury bonds are at the heart of America's capital markets, and those who buy and sell them include its most powerful institutions.
Civil suits are being brought against Salomon and individual executives. The firm warns that its actions may also attract criminal fines and other sanctions including censure, suspension and even exclusion from the government-bond market. It has been reviewing" matters with the regulators since August 9th and intends to appoint a committee of outside directors to review them further. Appalled investors knocked $157m-or 3.8%-off the value of its shares.
The main offences that Salomon has admitted to involve breaking a rule imposed a year ago that prohibits a single entity from bidding for or purchasing more than 35% of a Treasury issue. in the December-auction of four-year Treasury bonds (notes, to Americans) Salomon bid in its own name for 35% of the $8.6 billion issue. It also placed an order for another $1 billion as purported agent for a customer who had not, in fact, authorised it to do so. The firm walked away with 48% of the issue. in February's five-year bond auction, Salomon submitted three bids for 35% of the $9-billion issue: one in its own name and two, unauthorised, for clients. it ended up with 57% of the bonds.
A bizarre fiddle, also in February, is interesting not because Salomon broke the 35% limit but because it shows how far out of control its securities operation was spinning. A managing director (now suspended) seems to have persuaded a client to carry out a "practical joke" which went awry, leaving Salomon with an unintended $1-billion worth of that month's 30-year bond issue.
April and May were more complicated. Salomon not only bid for 35% of the April five-year bond issue on its own account but also placed an order for 2.5 billion for a customer, buying back $600m of it at the auction price. The manoeuvre may have been a way of guaranteeing clients a specific quantity despite auction uncertainties.
In May, the firm bid as usual for 35% of the $12.3-billion two-year note issue in its own name, repurchased 500M from a customer in circumstances that remain mysterious, and failed to disclose another commitment to buy $497m of the securities when they were issued. At the end of the day it owned 44% of the notes.
Salomon also bid at that auction as authorised agent for two well-heeled clients, including George Soros's Quantum Fund, for a further packet worth up to $6 billion. That brought the firm's total position, as principal and agent, to some 85%. This substantial holding by Salomon and others squeezed dealers who had sold the notes short before the auction and had to scramble to buy them back, other dealers say. The shortage of stock in the market raised the price of the securities sharply, increasing the overall value of the issue by 254M. Liar's poker redux Salomon Brothers has blown the whistle on itself, astutely, before the government did it. The firm has suspended Paul Mozer and Tom Murphy, the managing directors in charge of Treasury trading, and two others. Yet the scandal cannot be other than a jarring set-back for the firm's chairman, John Gutfreund. He had been striving to restore Salomon to the prominence it enjoyed in the mid-1980s as Wall Street's leading trading firm, before internal feuding, uncoordinated international expansion and commercial reverses lowered its profile.
His efforts seemed to be succeeding. Salomon had record profits of $451m in the first half of this year. Recently, it managed a $3-billion rights offering for Time Warner. But Salomon's worldwide franchise rests on its reputation in Treasury securities. The revelation that he concealed wrongdoing in this core business may mean that Mr Gutfreund will never now realise his desire to become, once again, the "King of Wall Street".
Whatever happens to Salomon Brodiers, America's loose-flying secondary market in government securities (the world's largest, with average daily trading of $118 billion in 1990) is likely to be more tightly regulated. So, too, is the primary market, a privileged group of 40 firms which have not seen such a squeeze since Japanese banks tried to comer the market in 1986.
Huge leverage and declining interest rates make the Treasury market one of Wall Street's most profitable-and competitive-arenas. Last year it generated $800m in pretax profit for firms, half of which went to just five houses. A particularly steep yield curve in recent months has made the market even more lucrative than usual.
Salomon (like other dealers) was able to buy Treasury securities by putting down only 1% of their face value ($10m to buy $1 billion-worth, for example). Then the firm borrowed $990m with the notes as collateral. As the interest rate on Federal funds (the rate at which banks borrow short-term from the Federal Reserve) fell faster than rates on longer Treasury securities, preferred non-bank customers like Salomon were able to borrow on terms only slightly worse than the banks' own. They paid interest at rates up to 150 basis points less than the interest earned by holding the notes.
This "positive carry"-borrowing at a rate of 5.75% and earning between 6.9% and 7.25%-gave government securities an annualised return on investment of nearly 50%. Further profits could be gleaned by curtailing the supply of securities to the market so that their prices would rise.
Yet the biggest everyday problem with the government-securities market is neither leverage nor fiddling but simple murkiness. The Salomon affair will renew calls in Congress to let in more sunshine. The Treasury says that it is sufficiently concerned by evidence of unusual "concentration of ownership" in recent auctions to consider changing its rules. Some lawmakers would prefer to switch regulatory authority to the SEC from the understaffed Treasury. Neither prices nor positions are now made public; dealers have also been allowed to keep information about their positions in bond-based options and futures off-shore.
The SEC would probably tolerate none of that, and would also require firms to hold more capital to back their holdings of government securities. For all their glee that Salomon is being brought low, its rivals will not thank it for that.
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August 17, 1991, Los Angeles Times, Scandal Spurs Calls for Reform : Treasuries: Wrongdoing by Salomon Inc. strengthens argument for making the transactions in the $2.2-trillion market more public, by Tom Petruno,
There's nothing bigger than the $2.2-trillion market for U.S. Treasury securities, and that's a problem.
Critics have argued for years that the Treasury market is too lightly regulated and that the 40 "primary dealer" brokerages and banks that dominate it operate too much as a private club.
The Salomon Inc. scandal is certain to spur new oversight of the Treasury market by Congress, which last visited this issue in 1986--after the failures of two government securities trading firms caused a run on 70 savings and loan institutions in Ohio.
Unlike the stock market, where prices largely are determined in open view either on exchange floors or via nationwide electronic systems, the daily buying and selling of Treasury securities have mostly been private telephone affairs among dealers, with little public "sunshine" on prices.
That has been the case despite the mammoth trading volume in Treasury securities--$115 billion a day in 1990 versus just $21 billion a day in corporate stock and bonds and $3 billion a day in municipal bonds, according to the Public Securities Assn.
"It's very difficult for people who are not primary dealers to have good information about spreads and prices (on Treasuries)," Richard Breeden, chairman of the Securities and Exchange Commission, told the New York Times earlier this year.
The huge size of the Treasury market today stems from the government's borrowing binge in the 1980s. There were $683 billion in tradable Treasury securities outstanding in 1981. Today, there are $2.2 trillion outstanding, from three-month bills to 30-year bonds. The money raised by Uncle Sam has been used to fund defense, social services and the myriad other government programs.
Because that debt is so large and because so many investors around the globe own a piece of it, it's imperative that the Treasury market be extremely liquid--that is, buyers and sellers must be able to enter and exit the market quickly and easily. Otherwise, investors' confidence in the security of their Treasury holdings could be shaken.
The primary dealer group of 40 brokerages and banks is supposed to ensure Treasury liquidity. The 40 firms, of which Salomon is a leader, must always stand ready to buy or sell Treasuries.
They also act as the major distributors of new Treasury securities to other brokerage houses, banks and other investors worldwide. Whenever the government sells new debt, the 40 primary dealers buy the bulk of it for resale to other investors.
However, the primary dealers don't completely control the market. For example, individual investors can buy Treasury securities direct from the government when it sells new debt, bypassing the primary dealers altogether.
Also, the market itself ultimately determines the yields the government must pay on its debt. When the government decides to sell a new bond issue, for example, the primary dealers poll their large-investor customers to get a feel for the yields they're willing to accept on the issue.
In some situations, investor sentiment can turn on a dime--and if the primary dealers have purchased Treasury bonds at one yield and their customers suddenly demand a higher yield, the dealers can lose money when they finally unload the bonds.
Still, the risk of losses to the dealers is offset by their potential to profit from warehousing and trading Treasuries. And there is no question that the dealers exercise enormous power in pricing the securities, in that they can influence their investors' sentiment about bond yields either directly through investment advice or indirectly through trading tactics.
That pricing power means the dealers determine, in part, the cost of operating the federal government. In addition, because interest rates on Treasury securities affect other rates--such as on home mortgages--the dealers' power over the economy is multiplied, and honesty in pricing and trading of Treasuries becomes that much more important.
Even before the Salomon scandal came to light, Congress had begun debate this summer on reauthorization of the Treasury Department's ability to regulate its own securities market. That authority was given in 1986, under the Government Securities Act.
The GSA was enacted after the failure of two firms that were big traders (though not primary dealers) in government securities: ESM Government Securities of Ft. Lauderdale, Fla., and Bevill, Bresler & Schulman. ESM's failure brought down some state-chartered Ohio savings institutions that had done business with the firm.
The GSA established, for the first time, a system for regulating government securities dealers and how they hold Treasuries for customers. However, some critics have long believed that the GSA didn't go far enough because it didn't establish rules for Treasury dealers' sales and trading practices. The fear at the time was that too rigid a system of regulation would slow trading and thus threaten the crucial liquidity in the Treasury market.
But Congress is certain to focus on those trading practices now, in light of Salomon's admitted attempt to virtually corner the market in some Treasury securities by hoarding them. Lawmakers will ask how the Treasury's oversight failed to spot Salomon's abuses.
One healthy development is that an electronic system for real-time Treasury security quotes among dealers was just launched this summer--an answer to the calls of SEC Chairman Breeden and others for more transparency in how Treasuries trade day to day. The system, GOVPX, is only in its infancy, but its ability to let any trader view on a screen the minute-by-minute price action in Treasuries is seen as a major step toward letting the sun shine on the Treasury dealer network.
RESIGNATIONS AHEAD: A1
Why Salomon Is So Important
The shock of the Salomon Inc. Treasury market scandal has shaken Wall Street to its foundations because Salomon is such an important part of so many markets:
* It is the oldest dealer in Treasury bonds, and its capital base of $4.42 billion--fourth-biggest of any brokerage--allows it to provide important liquidity to the market as an active buyer and seller.
* Salomon's broker network does relatively little business with individuals. Instead, the firm is a major supplier of trading services, research and investment banking services to many of the world's biggest companies and to national and local governments.
* Salomon's Phibro Energy subsidiary is a leading global trader of crude oil, and its Phibro Refining unit is the fourth-largest independent oil refiner in the United States.
Transition Time at Salomon Bros.
Warren Edward Buffett, 60
* Entered Salomon Bros. as a member of its board, 1987
* Has well respected judgement on Wall Street
* Will try to appease upset customers and shareholders of Salomon
* Built his fortune largely through passive investments in undervalued companies.
* Made a major shift with his $700-million investment in convertible preferred stock in Salomon.
Career Highlights
1991: named temporary chairman, Salomon Bros.
1969-present: folded Buffett Partnership Ltd., became chairman of Berkshire Hathaway Inc.
1965: purchased Berkshire Hathaway, small Mass. textile manufacturer
1956-69: general partner Buffett Partnership Ltd.
1951-54: investment salesman Buffett-Falk & Co.
John H. Gutfreund, 61
* In April knew of security scandal but said nothing, according to Salomon Bros.
* Believed Salomon Bros. could not remain dominated by its old strength of trading but must also be comfortable with merchant banking, lending and investing in leveraged buyouts.
* Oversaw most trading activity at Salomon Bros.
* Is well known in New York social circles and on Wall Street
Career Highlights
1981-1991: chairman and chief executive, Salomon Bros.
1978-81: managing partner, Salomon Bros.
1966-78: member of executive committee, Salomon Bros.
1963-66: partner, Salomon Bros.
1962-63: syndicate manager, Salomon Bros.
1953-62: on municipal desk, Salomon Bros.
Where the Brokers Rank
Salomon Bros. is a small brokerage in terms of offices and employees, but it is a giant presence on Wall Street, as shown by its huge capital (net worth).
Capital Global
Brokerage (billions) Offices Employees
1 Merrill Lynch & Co. $9.67 510 39,000
2 Shearson Lehman Bros.5.41 427 33,326
3 Goldman Sachs Group 4.70 21 6,822
4 Salomon Bros. 4.42 17 4,520
5 Morgan Stanley Group 3.38 12 7,079
6 Paine Webber Group 1.55 267 12,746
7 First Boston Corp. 1.47 10 4,218
8 Dean Witter Reynolds 1.41 499 16,609
9 Bear Stearns Cos. 1.39 13 5,558
10 Prudential Securities 1.22 336 17,000
Data as of Jan. 1, 1991. Source: Securities Industry Assn.
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August 17, 1991, The Washington Post, Buffett Brings an Air of Quiet Success to Salomon, by Albert B. Crenshaw,
Warren Buffett, who yesterday agreed to take over as interim chairman and chief executive of troubled Salomon Brothers Inc., brings with him an air of reassurance that few others in American finance - or any aspect of American life - can claim today.
A plain-speaking, low-key Midwesterner, Buffett during the '80s achieved riches beyond the dreams of the Carl Icahns and Ivan Boeskys and other symbols of that "greedy" decade - and he did so without the benefit of the insider trading, hostile takeovers and junk bonds that made so much of the wealth of that time seem ill-gotten.
Instead, Buffett has built his Omaha-based Berkshire Hathaway Inc. from a $28 million company in 1965 to a $10 billion firm today the old-fashioned way: by making long-term investments in sound companies that are either undervalued by the stock market or are depressed by temporary troubles.
Along the way he earned a reputation as one of the nation's most astute investors and all-purpose business advisers to top executives of corporations in which he has a stake.
For example, when Geico Corp., the big Chevy Chase-based insurance company, got into trouble and nearly folded during the 1970s, Buffett concluded that the firm had a solid franchise and made a major investment in it. Today Berkshire Hathaway owns 48 percent of Geico, and its stake, which cost it $45.7 million, is worth more than $1.1 billion.
Others of what Buffett calls his "permanent four" investments are The Washington Post Co., Capital Cities/ABC Inc. and Coca-Cola Co. In each case Buffett has at least doubled his money, and in the case of The Washington Post, he more than tripled it.
As a result of this success, Buffett's own stake in Berkshire Hathaway is worth more than $4 billion, with another $300 million stake held by his wife Susan.
More recently, Buffett purchased 10 percent of Wells Fargo & Co., parent of Wells Fargo Bank, last year, and earlier this month obtained permission to double his stake. While that has yet to pay the kinds of dividends of earlier investments, Buffett told Berkshire stockholders this spring that he views the stake as a bargain and that strong management at the bank will eventually yield a handsome return.
In recent years, Buffett also has become an investor to whom companies have turned in search of "patient capital," money to stave off unwanted takeovers (as in the case of Salomon Brothers) or to bolster the balance sheet in troubled times.
He has thus acquired large blocks of special issues of convertible preferred stock in Salomon Brothers, USAir Group Inc., Champion International and American Express Co.
The terms of his investments have been attractive and not available to other investors: He receives high-yield dividend payments on the preferred stock plus the chance to participate in any increase in price in the common stock.
Buffett, 60, began his lifelong fascination with money buying Coca-Colas and selling them for a profit as a child on the streets of Omaha during the Depression.
In the 1960s, he managed to acquire Berkshire Hathaway - which has major insurance operations today - and eventually converted it into a vehicle for his investments.
He continues to emphasize his role as a passive investor, spending hours studying company financial statements, picking well-managed companies to invest in, and then letting the managers manage.
In his annual report to shareholders this year, Buffett likened himself to his granddaughter Emily, who celebrated her fourth birthday last fall. Her party featured a magician who "helped" Emily pull a variety of things out of a "box of wonders." After she successfully pulled many wonders from the box, "Emily was unable to contain herself," Buffett wrote. "Her face aglow, she exulted: `Gee, I'm really good at this.'
"And that sums up my contribution to the performance of Berkshire's business magicians. ..." Buffett said.
Buffett has said repeatedly that he has no plans to build a dynasty and his estate plan is "aimed at preserving the character of Berkshire and returning the fortune to society."
He has, however, succumbed to some of the perquisites of wealth, notably the acquisition of a corporate jet dubbed "The Indefensible."
One of the effects of his death, he wrote, would be an immediate $1 million annual increase in Berkshire's earnings because his associate Charles T. Munger "would immediately sell" the plane, "ignoring my wish that it be buried with me."
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August 17, 1991, The Washington Post, Top Salomon Executives to Resign; Major Investor Warren Buffett Is to Take Charge Temporarily, by Kathleen Day,
John Gutfreund, one of Wall Street's most powerful executives, will resign Sunday as chairman of Salomon Brothers Inc., toppled by a sudden scandal involving the firm's multibillion-dollar trading in Treasury securities.
Salomon said yesterday that Gutfreund, its chairman, and president Thomas W. Strauss will offer their resignations Sunday at a special meeting of the Salomon board, in an effort to stem the sharp damage to the firm's reputation following its admissions of wrongdoing over the past week.
Warren Buffett, an Omaha billionaire whose shrewd investments have made him a cult figure on Wall Street, has agreed to take over as chairman and chief executive from Gutfreund "on an interim basis," according to a one-page Salomon statement. Buffett is a major investor in Salomon Brothers. {Details, Page A11.}
The resignations, which follow a week of disclosures of rule violations by Salomon in at least five Treasury auctions, are expected to be accepted, according to Salomon sources. The status of Salomon vice chairman John W. Meriwether also will be considered at the meeting.
"We are not aware of any problems other than those already disclosed," Gutfreund and Strauss said in a prepared joint statement.
Those "problems," which include buying securities using the names of customers without their permission, are the target of a government investigation that could result in criminal and civil charges and the possible banishment of Salomon from the government securities market, an arena it dominates.
Gutfreund, Strauss and Meriwether have come under fire since Wednesday, when they disclosed they had learned of one of the rules violations earlier this year but did not inform federal authorities until Aug. 9.
"We cannot allow our unfortunate mistake of not taking prompt action, when in April we learned of one unauthorized bid at a February Treasury auction, to harm the firm," the two men said in the statement. "We are taking this action to protect the firm, its 9,000 people and its clients."
In related announcements, the Federal Reserve Board and the Treasury indicated Salomon's status as a primary dealer may be in jeopardy. The government has authorized a small, elite group of 40 firms, including Salomon, to buy and sell government securities at Treasury auctions, where new issues of government securities are sold to finance the nation's $2.2 trillion debt. These primary dealers are required to bid on each auction.
The resignations, though rumored for several days, at once astonished and calmed the Wall Street community. The investing public is known for disliking uncertainty, especially surrounding a firm such as Salomon, one of the nation's three largest investment banking firms.
"The whole top senior management at Salomon ... had lost credibility in the eyes of Wall Street," said Perrin Long of First of Michigan Capital Corp.
"It's incredible that they would jeopardize their whole firm ... to do this," said Gilbert Clark, a 20-year Wall Street veteran and head government trader at Daiwa Securities America Inc.
The resignations are perceived not only as an attempt by Gutfreund to prevent Salomon from losing customers, but also to shore up the public credibility of the $119 billion-a-day government securities market. That market, the largest in the world, is relatively unregulated and operates mostly on the honor and good faith of those who trade in it, securities lawyers and other experts said.
"I think that although it's a sad turn of events, participants in the market are relieved that Warren Buffett is coming in and that the management situation at Salomon appears to have stabilized," said James G. Rickards of Greenwich Capital Markets Inc., a primary dealer based in Connecticut.
Market concern about Salomon has been evident for days. Its stock has lost $1 billion in market value since the disclosures began a week ago.
Salomon is the subject of investigations by the Treasury, the Fed, the Securities and Exchange Commission and the Justice Department, which are looking into whether Salomon violated securities law or engaged in price-fixing or other antitrust behavior. Several shareholder lawsuits have been filed in connection with the firm's admissions, and yesterday Standard & Poor's Corp., a credit rating agency, placed some of Salomon's debt on a credit watch list. That's a step above being downgraded.
Gutfreund and Strauss are legendary on Wall Street for their skill at trading bonds as well as for surviving management upheavals at Salomon.
Gutfreund's resignation will end his 38-year tenure at the firm, which began when he was hired as a 24-year-old at the urging of William Salomon, son of a firm founder. Salomon and Gutfreund's father were friends. He took over from Salomon as managing partner in 1978 and three years later, in a controversial move, turned Salomon into a publicly owned firm.
Although Salomon remained the leader in government securities trading in the 1980s, it also suffered reverses, particularly in 1987. That prompted financier Ronald Perelman to threaten a hostile takeover of Salomon, but Gutfreund told the board he would resign and take senior management with him if Perelman succeeded. Buffett came to Gutfreund's rescue, investing $700 million in a new issue of Salomon stock and making it clear that he would block any unwanted takeover bid.
Staff writer David Hilzenrath contributed to this report.
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August 17, 1991, The Washington Post, Dow Falls 30 Amid Concern About Scandal,
Stocks fell sharply today in volatile trading triggered by the mounting scandal surrounding Salomon Brothers and its dealings in the government bond market.
The Dow Jones industrial average dropped 30.41 points to end at 2968.02 on the New York Stock Exchange.
Losing issues outnumbered gaining ones by a 2 to 1 ratio. Volume was 188.4 million shares.
Uncertainty over Salomon, enveloped in a scandal sparked last week by disclosures that it violated bidding rules at government bond auctions, weighed on stock prices, analysts said.
As the market awaited an announcement from the firm today, the blue-chip index briefly dropped as many as 46 points before trimming its losses.
The Dow recovered some ground after the investment house announced that its chairman and president were ready to resign at a special board meeting Sunday.
"It's difficult to isolate how much of the day's action was influenced by options expirations and how much by waiting for what Salomon was going to do," said William LeFevre, market strategist at Tucker Anthony & Co.
"Over the longer term, the action the Federal Reserve takes with Salomon means more than options expirations."
The Justice Department and the Securities and Exchange Commission are pursuing criminal and civil investigations into Salomon's tactics.
Shares of the brokerage's parent, Salomon Inc., did not trade for most of the day and opened only after the firm announced the likely resignations of its top executives.
Nevertheless, Salomon topped the NYSE active list for the second-straight day, rising 1 to 27 7/8. Its shares had fallen 4 3/4 points Thursday.
Dealers said the stock rose after Salomon's statement and another by the New York Federal Reserve, which said top management changes would be taken into account when the Fed reviews Salomon's status as a primary dealer of government securities.
"The world's financial structure dodged a bullet last week," said LeFevre.
"The Fed needed to preserve the integrity of the market for U.S. obligations, the biggest securities market in the world, and that is what they did."
Wal-Mart Stores was the second-most active NYSE issue, losing more than a point for the second-straight day after rising early in the week. Wal-Mart ended at 48 3/8, down 1 3/8.
Another retail industry growth stock, the Limited, fell 1/2 to 28 1/4 in active trading.
The Limited has been slipping since it reported flat second-quarter profits earlier this week.
Hewlett-Packard fell 3 1/2 to 51 in brisk trading. Its third-quarter earnings results disappointed Wall Street.
The NYSE Composite index fell 1.76 to 211.62, the Standard & Poor's 500 dropped 3.75 to 385.58, the American Stock Exchange index slipped 1.40 to 366.59 and the Nasdaq over-the-counter index was down 3.19 to 512.48.
The government securities market remained quiet today. The price of the Treasury's bellwether 30-year bond and its yield of 8.08 percent remained unchanged from late Thursday.
The dollar staged another broad advance today. In New York trading, the U.S. currency rose to 137.30 yen from 137.05 yen late Thursday, and to 1.7645 German marks, up from 1.7490.
Oil prices slipped in quiet trading. Light sweet crude oil for delivery in September settled at $21.30 per barrel, down 14 cents, at the New York Mercantile Exchange.
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August 17, 1991, The Economist (US), Japan in the dirt. (scandals in the banking industry)
A WEEK without a fresh Japanese scandal would be like a meeting without swapping business cards: disconcerting, because it would be so unusual. The latest, revealed on August 13th, involved an Osaka credit union small enough to be obscure but large enough to have issued $342 billion ($2.5 billion) worth of fake deposit certificates to a single client. The numbers involved in this and any of the dozen other big scandals that have been revealed in recent months make the eyes spin like a fruit machine. Add more noughts to the figures, find scams in every financial firm in the land, and no Japanese would any longer be surprised. It is dawning on many in the West, too: Japan is up to its neck in dirt.
Soon, probably a day or two after the country's parliament has reconvened on August 19th, Ryutaro Hashimoto, the ambitious and popular pin-up boy who is Japan's finance minister, may well resign. The sight of a minister bowing tearfully as he departs will grab headlines and reassure many people in the world outside Japan that penalties are being inflicted, remedies being sought. in Japan, it will fool nobody. The Japanese know that in their country a resignation is but a ritual, an effort to prevent reform, not to encourage it. Quitting will do nothing to hurt Mr Hashimoto's political career, and may well enhance it. The president of Nomura Securities, the world's biggest stockbroker, has already resigned twice over his firm's scandals. He is still employed by Nomura. Such fake goings are not a cause for worry. The real Japanese worry is that the supply of scandals will cease. That will be a sure sign that change has been replaced by cover-up.
To be sure, the world is not short of financial scandals. Salomon Brothers, America's biggest bond trader, admitted this week to massive misdeeds in cornering new Treasury-bond issues (see page 69). Fraud-riddled Bank of Credit and Commerce international; Britain's National Westminster and its Blue Arrow affair; an insider-trading row in Frankfurt; Michael Milken in jail as ex-king of America's junk-bond market-no country can afford to be smug about Japan's scandals. But there are strong reasons for thinking that Japan's dirt is deeper and more worrying than that elsewhere.
For a start, the scandals so far revealed in Japan are huge. The size of the BCCI fraud remains unknown but, at somewhere between $4 billion and $10 billion, it has been hyped as "the largest in world financial history". This week's Japanese scandal, at Toyo Shinkin bank, is alone more than half that lower estimate. Add $2 billion of similar forgery at Fuji Bank, perhaps $1 billion at two other banks, more than $1 billion in illegal compensation paid by stockbrokers to clients for investment losses, and billions of dollars in art frauds and in known share-manipulation cases, and the Japanese total leaves BCCI far behind. And there remains an iceberg under this tip.
The biggest reason for paying special heed to Japanese scandals is that the dirty dozen uncovered so far are not just a bunch of isolated frauds. The scandals are sewn into the fabric of Japan's financial system, its corrupt politics and even of its business ways. They are systemic not only in nature but also in the risk that they pose: the world's largest single source of capital and one of its three top financial centres is riddled with crookery, has been supervised by the blind or the complacent, and could be-not is, but could be-facing collapse. Japan's dirt is dangerous stuff. Collusion, cock-up and conflict As always with Japan, it is tempting to build a conspiracy theory around the. scandals, especially when they look systemic. Take the main one: that stockbrokers paid illegal compensation to favoured clients. The finance ministry knew for years that this was going on. So why did it not stamp on it? Because, with Japanese industry struggling against a rising yen in 198589, it was convenient to have share prices ramped higher to make capital cheaper and provide dealing profits for hard-pressed companies. Why, then, stamp on it now? Because, with the Tokyo stockmarket down 40% in 1990, the bill for that compensation was due. Revealing the scandal helped save the securities industry from paying the whole, huge bill.
So they are all in it together? Not quite. Japan's scandals often do reflect collusion, but that is not the same as conspiracy. In Japan, laws are the guidance of last resort, not first: bureaucrats are given wide discretion over how-and whether-to enforce the law. in the compensation affair this gave officials the chance to exploit what was already going on: to collude with manipulation by Japan's broking oligopoly, rather than to plan it in advance.
The distinction is important because it implies complicity rather than fiendish control. indeed, the scandals reveal much unfiendish incompetence. Having grown up in a financial system that was tightly regulated, officials failed to adjust to the fact that in the 1980s Japanese finance was largely at the mercy of market forces. Prices of financial assets soared thanks to an easy monetary policy, oligopolistic manipulation and non-existent supervision, but what went up had also to come down. When it did, it left a gigantic bill to be paid. It also uncovered the classic outcome of a speculative boom: greedy and overconfident excess.
Moreover, as the market spirit spread, the ministry and the Bank of Japan still twiddled their old-style quantitative controls, for instance on banks' lending for property investment. in an obedient world, they would have worked. In a disobedient, market-driven one they merely pushed banks to seek ways around the controls-some of them illegal. The overall result: cock-up, sumo-size.
There is also conflict alongside the collusion. in Japan, groups compete furiously for power or survival: banks versus brokers, one set of bureaucrats against another, upstarts against the establishment. Some break rules to prevail, others expose rule-breaking by their opponents. This spate of scandals reflects both of those tendencies; in that way it is evidence not of an unswerving Japan inc but rather of a struggle to exploit changes that are sweeping through one of the world's most dynamic economies. As the struggle proceeds, however, so a truth about business ethics in Japan emerges: they do not exist. Even more than their foreign rivals, Japanese businesses will do whatever they can get away with. That is not a reason for western businessmen to reject Japan as a market or a partner, but it is a powerful reason to enter with eyes wide open.
This combination of collusion, cock-up and conflict has, however, brought Japan to a sad state: one in which its undoubted industrial prowess could be threatened by financial collapse. Officials, bankers, brokers and the politicians they bribe: all have left Japan in the dirt. As at a hot spring, that dirt can have cleansing properties. Or it can pile even higher, above the neck.
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August 17, 1991, Chicago Sun-Times, Despite shakeup, Dow dives 30,
NEW YORK Stock prices finished lower Friday, despite a partial rebound as news of a management shakeup at Salomon Inc. eased fears that an unfolding bond scandal could harm the market.
The Dow Jones industrial average fell 30.41 points to 2,968.02. Declining issues outnumbered advancers by about 2 to 1 on the New York Stock Exchange.
Volume was 188.36 million shares, up from 174.12 million in the previous session.
Trading began the day on a quiet note, driven by technical concerns as certain option contracts on stocks expired. But the market turned sharply lower early in the afternoon, with trading in Salomon shares suspended by NYSE officials who were anticipating developments in the scandal that intensified this week.
After Salomon announced that two of its top three executives, Chairman John Gutfreund and President Thomas Strauss, were prepared to resign, the Dow immediately surged almost 15 points. The market limped to a weak finish after failing to hold those gains.
After Salomon stock went back on the board late Friday, it quickly became the most actively traded issue on the NYSE, closing at 27 7/8, up 1.
The government securities market ended the day quietly. The price of the Treasury's bellwether 30-year bond and its yield of 8.08 percent remained unchanged from late Thursday.
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August 17, 1991, Chicago Sun-Times, Scandal sparks Salomon shakeup, by Rick Gladstone,
NEW YORK Salomon Inc.'s two top executives will quit and billionaire board member Warren Buffett will take temporary command in an emergency shuffle the broker proposed Friday to confront a scandal over its illegal bidding at Treasury auctions.
The move could banish John H. Gutfreund, chairman and chief executive officer, from a company he helped build into a Wall Street powerhouse. But the announcement appeared to steady the financial markets, which had been shaken by the disclosure of wrongdoing by one of the biggest names in the business.
"We are taking this action to protect the firm, its 9,000 people and its clients," Gutfreund and Thomas W. Strauss, president, said in a statement released at mid-afternoon.
The decision came a week after the company disclosed it had flouted the rules in auctions for Treasury securities and two days after it admitted top executives, including Gutfreund and Strauss, knew about violations but failed to act promptly.
The company said Friday that Gutfreund and Strauss would submit their resignations at an emergency board meeting tomorrow morning.
In addition, Salomon said, "Warren Buffett has advised Salomon that he is prepared to become chairman and chief executive officer on an interim basis."
Two managing directors in charge of Treasury dealings and two other employees were suspended earlier.
Chicago brokerage executives expressed surprise and regret at the news from Salomon, particularly the apparent departure of Gutfreund. "You're talking about one of the most powerful guys on Wall Street," said Bruce Young of Young Capital Group in Chicago. "It's astounding.
Revelations from Salomon could erode confidence in the securities industry, added Jack Wing of the Chicago Corp. "I'm dismayed that a firm of that seeming stature . . . was that cavalier."
Some rival bond dealers have expressed satisfaction that swaggering Salomon is being cut down to size, and one Chicago-based primary dealer said there's "fairly aggressive" scrambling to take away the firm's clients.
Salomon's stock price rose $1.12 1/2 a share to $28 in heavy trading following the announcement of the impending change in leadership. The broader stock market, down sharply earlier in the day, partly rebounded on the news, though the Dow industrial average still ended the day 30 points.
Salomon stock had tumbled 25 percent in value since the firm's first disclosure a week ago Friday.
The company's action coincided with word that the Treasury and Federal Reserve were reviewing their relationship with Salomon, raising the possibility that Salomon's franchise as a primary dealer of Treasury securities might be in jeopardy. Salomon is one of 40 such dealers and the dominant trader in the $2.2 trillion market for government securities.
Pressure also was building from Salomon customers, including pension funds in California and Wisconsin, which indicated they might take their business elsewhere because of the firm's transgressions. In addition, a large debt-rating agency, Standard & Poor's Corp., said it was reviewing the Wall Street giant's overall financial health.
"Let's put it this way. Somebody had to bite the bullet," said Perrin Long, an analyst of the securities industry at First of Michigan Corp. in Detroit.
"As Harry Truman used to say, the buck stops here. The person with ultimate responsibility was Mr. Gutfreund," Long said.
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August 17, 1991, Associated Press / The Boston Globe Stocks hammered by Salomon scandal, by Dirk Beveridge,
NEW YORK -- Stock prices finished lower yesterday, despite a partial rebound as news of a management shakeup at Salomon Inc. eased fears that an unfolding bond scandal could harm the market.
The Dow Jones average of 30 industrials fell 30.41 points to 2,968.02. Declining issues outnumbered advancers by about 2 to 1 on the New York Stock Exchange. Volume came to 188.36 million shares, up from 174.12 million Thursday.
Trading began the day on a quiet note, driven by technical concerns as certain option contracts on stocks expired.
But the market turned sharply lower early in the afternoon, with trading in Salomon shares suspended by NYSE officials who were anticipating developments in the scandal that intensified this week. The firm's disclosure on Wednesday night that its top executives had knowledge of Salomon bond trading violations caused the company's stock to plummet Thursday.
Wall Street was waiting anxiously, and some traders began dumping stocks out of fear that the scandal could depress prices.
"If you're at all nervous, you'd probably be selling," said Nora McAuley, a vice president at Dean Witter Reynolds Inc.
After Salomon announced that two of its top three executives, Chairman John Gutfreund and President Thomas Strauss, were prepared to resign, the Dow immediately surged almost 15 points. The market limped to a weak finish after failing to hold those gains, however.
Other analysts said traders may have overreacted by selling stocks early on, although other scandals, such as recent Japanese securities problems, have hit stock prices hard.
After Salomon stock went back on the board late yesterday it quickly became the most actively traded issue on the NYSE, closing at 27 7/8, up 1. Still, Salomon's stock has lost about a quarter of its value since the first details of the wrongdoing were revealed last week.
Other active issues included Hewlett-Packard, down 3 1/2 at 51 on a disappointing earnings report.
Shawmut National rose 3/4 to 10 3/8, while Security Pacific Corp. fell 1 to 34 1/8. BankAmerica Corp., which recently agreed to merge with Security Pacific, was reportedly interested in buying Shawmut and at least four other banks. BankAmerica fell 3/8 to 41 7/8.
Pennzoil fell 5 7/8 to 67 7/8, but said it did not know what caused the plunge.
Also on the most-active list were Wal-Mart, down 1 3/8 at 48 3/8; AT&T, down 3/8 at 39 1/8; and Westinghouse Electric, down 1 1/4 at 22 5/8.
Wal-Mart Stores was the second-most active NYSE issue, losing more than a point for the second straight day after rising early in the week. Wal-Mart ended at 48 3/8, down 1 3/8.
Another retail industry growth stock, The Limited, fell 1/2 to 28 1/4 in active trading. It has been slipping since it reported flat second-quarter profits earlier this week.
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August 17, 1991, New York Times / Albany Times Union, Salomon Tried to Stem Damage, by Jonathan Fuerbringer,
The leadership of Salomon Brothers, by resigning Friday, made a dramatic effort to restore investor confidence in the powerful but troubled investment banking firm.
But Salomon still faces many legal and regulatory problems in connection with its admitted irregularities in the giant government securities market.
It is too early to say how they will eventually affect the firm. But unlike Drexel Burnham Lambert and E.F. Hutton, both of which faced major financial scandals, Salomon Brothers - once its scandal became public a week ago - moved quickly to try to mitigate its problems. And this could help.
The Federal Reserve Bank of New York, which has announced that it is reviewing Salomon's important status as a primary dealer in the Treasury securities market, said Friday that the moves would be an important factor in the Fed's decision on whether to punish Salomon. And the firm's stock, which had dropped 15 percent on Thursday, rose $1 Friday, to $27.875, after the announcement.
"That is basically a cleansing action, and that is favorable," said James P. Hanbury, an analyst who specializes in Salomon at Wertheim Schroder and who downgraded Salomon's stock twice this week from "attractive" to "sell." "There is less reason to fear that this momentum will build," he added.
But the investment bank still faces major challenges, with investigations under way by the Treasury Department, the Securities and Exchange Commission, the Federal Reserve and the Justice Department.
All four agencies met on the investigations on Wednesday, according to a Treasury spokesman.
Warren E. Buffett, who owns a major stake in Salomon and has agreed to take over as chairman on a temporary basis, said in a meeting, according to employees at Salomon on Friday, that managing the expected federal fines and the cost of the many civil lawsuits would be a major issue for the new management.
Any criminal indictment or civil charge that might result could further damage the firm's credibility. In addition, such charges could strike at the investment bank's core business, the trading of securities, which Hanbury estimated accounted for half of Salomon's earnings in 1990.
Indictments could also make some customers consider taking their business elsewhere.
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August 17, 1991, New York Times, Salomon's 2 Top Officers to Resign Amid Scandal, by Kurt Eichenwald,
John H. Gutfreund, the powerful chairman and chief executive of Salomon Brothers Inc. who molded the firm into the premier bond-trading house on Wall Street, announced yesterday that he would resign amid the widening scandal involving illegal bidding by the firm in the Treasury securities market.
The firm's president, Thomas W. Strauss, also announced that he would step down as a result of the scandal. Mr. Gutfreund, Mr. Strauss and a third executive had been told four months ago that the firm had made illegal bids, but failed to report it to the Government until last week.
That failure caused the Salomon scandal to mushroom, as many other traders and analysts on Wall Street feared that the affair could tarnish the reputation of American securities markets worldwide and raise the Government's cost of financing its debt.
Warren E. Buffett, the investor from Omaha whose company, Berkshire Hathaway Inc., put $700 million into Salomon in 1987, agreed yesterday to become chairman and chief executive of the firm on an interim basis, pending acceptance tomorrow by the board of directors, as the firm moved quickly to halt the crisis of confidence. Mr. Buffett is known for his brilliant investing and a caustic attitude regarding the foibles of Wall Street. [ Page 33. ]
Salomon Inc. called for a meeting of its 13-member board for tomorrow. The executives said yesterday that they would submit their resignations at the meeting, and Wall Street executives with ties to Salomon said the resignations would surely be accepted.
By asking for the dramatic Sunday meeting and by turning to Mr. Buffett, whose years of investing have won him a reputation as a "Mr. Clean" on Wall Street, Salomon signaled the gravity for the firm of the unfolding scandal and the threat to its reputation.
After the announcement of the resignations, Salomon's stock which had not been allowed to open for trading most of the day, rose $1, to $27.875, on the New York Stock Exchange. The shares had fallen sharply after the scandal was disclosed, losing $7.875 in the first four days of trading this week.
If the resignations of Mr. Gutfreund and Mr. Strauss help the firm's share price continue to recover, their decisions could also help them financially. With the stock being beaten down by the scandal, the two men's multimillion-dollar holdings in the firm were being hurt. 'To Protect the Firm'
In a joint statement Mr. Gutfreund (pronounced GOOD-friend) and Mr. Strauss said they had made their decision because of the scandal's effect on the firm. "We cannot let our unfortunate mistake of not taking prompt action, when in April we learned of one unauthorized bid at a February Treasury auction, to harm the firm," they said. "We are taking this action to protect the firm, its 9,000 people and its clients."
The firm disclosed last week that in several recent Treasury auctions, it had improperly purchased substantially more than the 35 percent of an issue than any one firm is allowed to buy. The firm also admitted submitting bids in the names of customers who had not authorized it to do so, enabling it to buy more of the securities than allowed.
The resignations of the two top executives -- in a bold attempt to save the firm a week after the scandal came to light -- is in sharp contrast to the actions of the heads of big firms that were subject to criminal investigations during the 1980's, notably Drexel Burnham Lambert and E. F. Hutton & Company. In the inquiries into those two firms, the managements fought the investigations before finally pleading guilty to felonies. But the managers stayed on and ultimately saw their firms collapse.
The decisions to resign, which came after hours of tense meetings among senior executives, leaves Salomon's management in a hobbled position. John W. Meriwether, a vice chairman who had been thought on Wall Street as a possible successor to Mr. Gutfreund, was the third executive informed of the illegal bidding in April. While Mr. Meriwether did not resign, his status at the firm is going to be reviewed by the directors at the special meeting tomorrow.
A senior Wall Street executive with ties to the firm said more high-level resignations were expected.
Late yesterday, Mr. Gutfreund, Mr. Buffett and other senior executives met for 35 minutes with the firm's managing directors at the firm's headquarters at Seven World Trade Center. At the meeting, Mr. Buffett told the directors that he would be very open as he worked to straighten out the firm's status, according to Salomon executives. Mr. Buffett said the firm's reputation for staying just within the bounds of the rules would not be acceptable.
Mr. Buffett also alluded to the potential troubles in the management structure, saying that he would need to name a chief operating officer to handle the daily operations of the firm. Significance to the Market
The scandal also has sweeping significance for the operation of the entire $2.2 trillion Treasuries market, Wall Street executives and others said. The perception that a leading force in that market is not honest can damage the credibility of the American markets worldwide.
"The way our business operates is because everybody is completely honest," a senior Wall Street executive with a background in the Treasury securities markets said. "You transfer billions of dollars on a phone call, my word to your word. And these people lied."
The decision of Salomon's top management to step down was an attempt to heal the wounds to the firm that have deepened in recent days. But lawyers with knowledge of the investigation said the resignations would do little to temper any penalties the Government might bring against the firm. Salomon has said that it faces not only possible fines and sanctions, but also possible debarment as a primary dealer in Treasury securities as a result of its illegal bidding. Inquiry Is Continuing
Regulators said yesterday that they were continuing their inquiry into the situation. In a statement, the Federal Reserve Bank of New York said that the resignations would be "an important factor" in its evaluation of its relationship with the firm. The Fed said its review of Salomon's violations would be finished "in a matter of weeks."
The firm is also still under criminal and civil investigation by the Justice Department and the Securities and Exchange Commission.
The decision to quit is also a significant embarrassment for Mr. Gutfreud, an executive so influential that he was once proclaimed by Business Week magazine as the "King of Wall Street." Mr. Gutfreund, the firm's chairman since 1978, has been the main architect in building Salomon into an powerful factor on Wall Street, especially in mergers and other lucrative areas of investment banking where the firm had lagged.
But he also set the tone for the firm, making it one of the most aggressive and creative of Wall Street's houses. It was a firm where securities traders were king, and it rewarded employees who could land big profitable trades with some of the highest pay on Wall Street. And Mr. Gutfreund was not shy about pushing out the door high-level employees who no longer fit into his strategy.
The decisions yesterday came after several hours of meetings between Mr. Gutfreund and other top executives of Salomon, several Wall Street executives said. Mr. Gutfreund arrived at the meeting apparently having decided to resign before he arrived at work yesterday.
Mr. Buffett was reached by telephone during the meeting, these executives said. He was said to have flown to New York City yesterday to prepare for tomorrow's board meeting and hold further discussions with Salomon officials.
After the meeting, Mr. Gutfreund visited the offices of his colleagues, as well as Salomon's trading floor. During that personal trip, the Salomon executive informed his co-workers about his decision and the other developments.
The mood was somber at Salomon, but it brightened late yesterday, when Mr. Buffett and Mr. Gutfreund met with the firm's managing directors. After Mr. Buffett's discussion, in which he told the managing directors that the firm would have to follow the laws closely, the firm's executives burst into applause for the man who would soon be their chairman, executives said.
Mr. Buffett was said to have told the executives that after the board meeting tomorrow, he would hold a news conference to answer questions and name the chief operating officer.
Also during the conversation, Mr. Buffett cautioned the executives about the liabilities the firm faced because of the scandals, including fines and litigation costs, that the company would have to shoulder going forward.
The developments yesterday led to speculation about who the most likely candidates for other top slots at the firm might be. Analysts and other Wall Street executives speculated that the top candidates were Deryck C. Maughan, a vice chairman of the firm's parent who was recently named to revitalize the firm's investment banking effort, and James L. Massey and Leo I. Higdon Jr., who are both vice chairmen of the firm. A Failure to Report
The heart of the scandal that touched Mr. Gutfreund and Mr. Strauss occurred when they were told in April that a bid was made in a customer's name without authorization during the February Treasury auction. While the firm's senior management concluded that the violation should be reported to the Government, no one did until last week, when Salomon reported a series of other violations during several auctions.
That failure to report the violation has left Salomon officials and supporters of the firm stunned.
In the statement yesterday, Salomon said the board would address "the management control failure that have occurred" at its meeting tomorrow. Substantial Holdings
According to Salomon's filings with the Securities and Exchange Commission, Mr. Gutfreund owns the equivalent of about 989,000 common shares in Salomon, mostly through options and convertible notes, while Mr. Strauss owns about 649,000. That means that since in the first four days of this week, Mr. Gutfreund's holdings had lost about $7.8 million in value, while Mr. Strauss stake's had lost about $5.1 million.
After the announcement Mr. Gutfreund's and Mr. Strauss's holdings increased by $1 a share, or about $989,000 and $649,000, respectively.
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August 17, 1991, Albany Times Union, Salomon Bosses Quit in Scandal,
Byline: Combined wire services
John Gutfreund, one of Wall Street's most powerful executives, will resign Sunday as chairman of Salomon Brothers Inc., toppled by a sudden scandal involving the firm's multibillion-dollar trading in Treasury securities.
Salomon said Friday that Gutfreund, its chairman, and President Thomas W. Strauss will offer their resignations Sunday at a special meeting of the Salomon board, in an effort to stem the sharp damage to the firm's reputation following its admissions of wrongdoing over the past week.
Warren Buffett, 60, an Omaha billionaire whose shrewd investments have made him a cult figure on Wall Street, has agreed to take over as chairman and chief executive from Gutfreund on an interim basis, according to a Salomon statement. Buffett, a major investor in Salomon Brothers, said the firm's reputation for staying just within the bounds of the rules would not be acceptable.
The resignations, which follow a week of disclosures of rule violations by Salomon in at least five Treasury auctions, are expected to be accepted, according to Salomon sources. The status of Salomon Vice Chairman John W. Meriwether also will be considered at the meeting.
"We are not aware of any problems other than those already disclosed," Gutfreund, 62, and Strauss, 49, said in a prepared joint statement.
Those problems are the target of a government investigation that could result in criminal and civil charges and the possible banishment of Salomon from the government securities market, an arena it dominates.
The securities are sold by the government to finance the federal debt and keep the economy running smoothly. No bidder is allowed to monopolize the market by buying more than 35 percent of any one issue.
The firm admitted violating that rule, using customer names without permission to make some bids.
Gutfreund, Strauss and Meriwether have come under fire since Wednesday, when they disclosed they had learned of one of the rules violations earlier this year but did not inform federal authorities until Aug. 9.
"We cannot allow our unfortunate mistake of not taking prompt action, when in April we learned of one unauthorized bid at a February Treasury auction, to harm the firm," Gutfreund and Strauss said in the statement. "We are taking this action to protect the firm, its 9,000 people and its clients."
In related announcements, the Federal Reserve Board and the Treasury indicated that Salomon's status as a primary dealer may be in jeopardy. The government has authorized a small, elite group of 40 firms, including Salomon, to buy and sell government securities at Treasury auctions, where new issues of government securities are sold to finance the nation's $2.2 trillion debt.
On Wall Street, the resignations are perceived not only as an attempt by Gutfreund (pronounced GOOD- friend) to prevent Salomon from losing customers, but also as an effort to mollify angry federal regulators and to shore up the public credibility of the $119-billion-a-day government securities market.
Also, salvaging Salomon stock has a personal stake for the two executives. According to Salomon's filings with the Securities and Exchange Commission, Gutfreund owns the equivalent of about 989,000 common shares in Salomon, mostly through options and convertible notes, while Strauss owns about 649,000.
That means that since in the first four days of this week, Gutfreund's holdings had lost about $7.8 million in value, while Strauss' stake had lost about $5.1 million.
After the announcement they would quit, Gutfreund's and Strauss' holdings increased by $1 a share, or about $989,000 and $649,000 respectively.
The U.S. securities market, the largest in the world, is relatively unregulated and operates mostly on the honor and good faith of those who trade in it, securities lawyers and other experts said.
Market concern about Salomon has been evident for days. Its stock has lost $1 billion in market value since the disclosures began a week ago.
After the announcement of the resignations, Salomon's stock, which had not been allowed to open for trading most of the day, rose $1 to $27.875 on the New York Stock Exchange. The shares had lost $7.875 in the first four days of trading this week.
Salomon is now the subject of investigations by the Treasury, the Fed, the Securities and Exchange Commission and the Justice Department, which are looking into whether Salomon violated securities law or engaged in price-fixing or other antitrust behavior. Several shareholder lawsuits have been filed in recent days in connection with those violations, and Friday Standard & Poor's, a major credit rating agency, placed some of Salomon's debt on a credit watch list. That's usually the first step before being downgraded.
Gutfreund and Strauss both are legendary on Wall Street, famed for their skill at trading bonds, as well as for surviving several management upheavals at Salomon over the years. Gutfreund's resignation will end his 38-year tenure at the firm, which began when he was hired as a 24-year-old at the urging of William Salomon, the son of one of the firm's founders.
Compiled from reports by the Washington Post, New York Times and the Associated Press
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August 18, 1991, The Washington Post, Shaking The Bonds Of Trust; Salomon Case Raises Concern Over Market, by Monroe W. Karmin,
The damage from the Salomon Brothers Inc. scandal in the government securities market threatens to extend far beyond tarnishing the reputation of one of Wall Street's oldest and most prominent firms.
If large investors - particularly foreigners who supply nearly one-fifth of the capital required to finance ballooning federal deficits - lose confidence in the integrity of the U.S. market in which they are investing, the Treasury will be forced to pay higher interest rates to attract their funds.
That would hit the average American in two ways. It's the taxpayer who, in the final analysis, pays the higher costs of government borrowing, and higher rates paid by the Treasury tend to exert upward pressure on interest rates throughout the economy.
Individuals who own government securities are in no danger of loss because Treasury bonds, backed by the full faith and credit of the U.S. government, remain the safest investments in the world. For that reason also, there is no threat of a crisis in the government's ability to finance its escalating debt.
Still, Wall Street analysts are concerned about the possibility that the government's borrowing costs could rise if the Treasury and the Federal Reserve Board fail to take meaningful action promptly to shore up investor confidence.
The Salomon shenanigans, warned Leonard Santow, managing director of Griggs & Santow Inc., a financial consulting firm in New York City, could cause, "damage to the depth, breadth and resiliency" of the government securities market if large investors hold back some of their funds out of concern that they are paying unfair prices for what they buy.
Investor psychology is a capricious commodity, and certainly events of the past decade have done little to inspire confidence. Not only did the United States pile up enormous deficits during the Reagan years, but also the corporate junk bond market collapsed, helping bring down the investment house of Drexel Burnham Lambert Inc. Then the savings and loan debacle saddled the government and taxpayers with hundreds of billions of dollars of "junk" assets, including empty office buildings and other marked-down real estate.
The latest addition to the string of fiascos can only hurt Wall Street's smudged image, insiders say. "What it does," declared Lacy Hunt, chief U.S. economist for the Hong Kong Bank, "is serve to confirm the Hollywood view that what drives Wall Street is greed, and that greed is good."
In Salomon's case, greed does appear to be the motivation that brought shame. The investment house holds a prominent position - along with Merrill Lynch & Co., CS First Boston Inc. and Goldman Sachs & Co. - among the 40 securities firms chosen by the Treasury to serve as primary buyers and sellers of Treasury issues.
In that role, they buy the issues at the auctions and resell them to other dealers and the public in the secondary market. Salomon earned sizable profits from that business. Why officials allowed this lucrative money-maker to be jeopardized by those who tried to squeeze out a few extra dollars "can only be attributed to greed," said one Wall Streeter.
Salomon has admitted to, in effect, trying to corner the market in selected government offerings on three occasions, dating back to last September, by violating Treasury rules. Those rules prohibit a primary dealer from acquiring more than 35 percent of a new issue in an auction. Salomon concedes that it exceeded the limit by buying for customers' accounts without their consent. By accumulating excessive amounts of new government issues, Salomon could charge premium prices to other dealers.
Growing Market The scandal has highlighted a fact that was often forgotten in the media furor over junk bonds: The government securities market no longer is the sleepy backwater it once was. As the United States went from being the world's largest creditor nation to the largest debtor over the past decade, the market expanded enormously. Today, some $2.7 trillion of public debt is in private hands, more than double the amount at the start of the 1980s.
Trading in Treasury issues, which averages about $120 billion a day, has grown so huge that it dwarfs daily trading on all the U.S. stock exchanges. Fifteen years ago, trading in government securities totaled roughly $25 billion a day.
"What was a small domestic market in the late 1970s," said financial consultant Santow, "has grown into a monstrous international market with foreigners holding a sizable amount of the U.S. debt." By latest count, foreign investors own almost 20 percent of the Treasury debt.
The Japanese, in particular, have become important dealers in Treasury issues. The Japanese own six of the 40 primary dealerships, a penetration that is causing concern in Congress. Rep. Charles Schumer (D-N.Y.), for one, questions whether Tokyo is as generous in opening its financial markets to U.S. firms.
Though securities floated by the Treasury are the world's safest investment, the anomaly is that the business of dealing in that paper is a high-risk venture. Indeed, profits were so poor during the later years of the 1980s that some firms were forced to quit the business.
A major cause has been the market's increasing volatility as the swings in interest rates have become exaggerated and less predictable. For large traders, such as pension funds or insurance companies, big profits or losses can hinge on a variation of a tiny fraction of a percentage point.
To restore investor confidence, Wall Street insiders agree, the Treasury and the Federal Reserve Board must move quickly to punish Salomon and require the firm to return ill-gotten gains when investigations are completed.
The market has not waited to administer its punishment. Salomon stock fell sharply last week and a growing list of pension funds have announced they will not do business with the firm. On Friday, Salomon Chairman John H. Gutfreund and President Thomas W. Strauss said they would offer their resignations today, and investor Warren Buffett agreed to take over as chairman and chief executive officer on an interim basis.
Fed Under Fire The Federal Reserve, which oversees the national banking system, is under fire for failing to spot the machinations being revealed at the Bank of Credit and Commerce International. Congress, in hearings this fall, will want to know why Salomon got away with its subterfuge for so long. "Enough red flags were raised to catch the feds' attention," said one Wall Street analyst.
Meaningful action by the regulators seems required for a larger reason, too. Even in the "anything goes" climate of Wall Street in the 1980s, the government securities market maintained its integrity - a beacon of safety for domestic and foreign capital flows in a turbulent financial world. Though the junk bond market fell apart and the savings and loan industry sank, said one Wall Streeter, the government bond market "always had the reputation of being clean."
Because of that reputation, the market attracted the funds of investors who were willing to accept lower returns than in riskier debt markets, such as those in which junk bonds and Third World government bonds are traded. Because the market was so clean, the government let it operate with only minimal oversight. That could change, however, as Congress takes a closer look at the way the market really functions.
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August 18, 1991, The Boston Globe, Scandal update I,
It was interesting to watch who was complaining the loudest after the Boston Fed came in with its study on the second mortgage scandal. The report was hardly the indictment of the Boston banks Bruce Marks and other community activists wanted, and they were quick to write off the study as a shoddy piece of work by the cozy pals of the banks. But two years ago when the same Fed came out with a tough report on redlining, there were no complaints from the complainers. You can't have it all ways, as much as some people try.
CD report
Our favorite item of the week comes from columnist Joan Vennochi, who reported that Leonard Lapidus, president of the Mutual Savings Central Fund, has a certificate of deposit in the Bank Five for Savings in Arlington that will be worth $150,000 when it matures in 1992. The fund that Lapidus heads has agreed to help bail out Bank Five by providing money outright and purchasing preferred stock. "That decision was a board decision," he says. You might remember that Lapidus, who makes $170,000 a year, last year negotiated a $540,000 pension payout, which he said he obtained in advance of his scheduled retirement at age 65 to minimize his federal tax liability.
Scandal update II
Would the real Mark Goldweitz please stand up? Friends say he was a man who generously spread his wealth around to arts groups and nonprofits ranging from the Wang Center to the Museum of Science. His lenders now say he was a man who diverted money for his 70-foot yacht, his children's private schools and landscaping for his home. Are we talking about two different people here -- or does this pass for two sides negotiating a settlement to an ugly dispute in the "90s? Odd lot
Bank of America is buying Shawmut. Bank of Boston is buying Shawmut. Shawmut is buying -- you name it. The rumor mill is working overtime, and for a pretty good reason: Bankers are talking to other bankers these days, and you'll know who's going home with whom only when the dance is over . . . It reportedly began as a practical job, but Salomon Brothers chairman John Gutfreund certainly can't be laughing much today . . . At last: American Express says The Card will now be accepted in Mongolia.
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August 18, 1991, Chicago Sun-Times, Buffett to rescue - again
NEW YORK This isn't the first time Salomon Inc. has leaned on billionaire Warren E. Buffett in a time of need.
Buffett agreed Friday to step in temporarily as chairman and chief executive officer at Salomon as part of a management shakeup aimed at stemming the damage from an embarrassing bond-trading scandal.
John H. Gutfreund, the reigning chief, and Thomas W. Strauss, president, were expected to resign today after the firm's admission that it cheated in several bond auctions.
Buffett came to Salomon's rescue in the fall of 1987 when Salomon was attempting to fend off a hostile takeover bid by Revlon's Ronald O. Perelman. Buffett gained a large stake in Salomon and a seat on the board of directors.
Buffett, 60, is known as "the oracle of Omaha" for his astute investment decisions made through his investment company, Berkshire Hathaway Inc. His personal net worth is estimated at more than $3 billion.
Born in Omaha, Neb., Buffett attended the University of Pennsylvania, University of Nebraska and received a master's degree from Columbia University at age 21.
He founded a partnership in the 1950s with $100,000 borrowed from friends and relatives. By the time the partnership was dissolved in 1969, it was worth millions.
When Buffett acquired Berkshire Hathaway in 1964, the firm had one textile mill and assets of about $10 million. Through conservative "value investing," a strategy to stick with investments through the long haul, Buffett nurtured Berkshire Hathaway into a diversified firm with assets exceeding $6 billion.
Its interests range from encyclopedias to furniture to insurance, as well as investments in Coca Cola Co., Capital Cities-ABC Inc. and the Washington Post Co.
Most recently, Buffett made substantial investments in Wells Fargo & Co. and American Express Co.
Buffett, one of the world's wealthiest men, still buys suits off the rack and has kept his home in a modest Omaha neighborhood.
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August 18, 1991, Chicago Sun-Times, How U.S. securities mart works,
NEW YORK Salomon Bros. is one of the top three, and perhaps the largest, of the 40 primary dealers in government securities, a prestigious group of banks and securities companies that are allowed to buy Treasury bills, notes and bonds directly from the government and resell them.
It is a market in which prices are measured in hundredths of a percentage point and total volume in trillions of dollars.
The primary dealers' bids determine how much interest the Treasury, and ultimately the taxpayers, pay on the national debt, which the Federal Reserve Bank of New York said grew from $930 billion in 1980 to $3.36 trillion in 1990. Two-thirds of that debt is financed by the securities the primary dealers buy.
The auction process works like this: Each of the participating primary dealers submits a secret bid setting out how much it is willing to pay for the new securities and the amount it is willing to buy. The company bases its bid on factors such as prevailing interest rates and customer demand. Generally, the lower the price the dealer pays, the higher the yield on the securities.
The Fed selects the highest bids in descending order until the entire issue has been sold. If a dealer bids too low, it could be shut out of the auction and forced to buy from one of the successful dealers at a higher price to satisfy customers' demand for the securities.
But there is another factor. A dealer would not be allowed to buy the entire amount of securities it bid for if that equaled more than 35 percent of the total issue. It could, however, buy an additional 10 percent for a customer as long as it did not purchase more than 35 percent for its own account.
Once the auction is over, the dealers resell the Treasury securities to their customers: banks, foreign governments, state and local governments, mutual funds, large corporations and pension funds. The dealers profit by marking up their inventory, often billions of dollars' worth, by tiny increments.
Of course, if they guess wrong by bidding at too high a price, and interest rates go up, that could push prices down and force them to take a loss when they resell the securities.
The bidding process and the resulting yields help securities companies price other kinds of debt - like mortgage-backed bonds and corporate securities - whose prices are based on Treasury securities, said a senior vice president and bond trader at one primary dealer.
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August 18, 1991, New York Times / Albany Times Union, Salomon Scandal Renews Call For Treasury Bond Regulation, by Floyd Norris,
The admission by a leading Wall Street firm that it had violated Treasury market rules, and the resignation Friday of its top two executives, has focused new attention on this huge but little understood and lightly regulated market, and generated renewed calls for its tighter regulation.
The resignations of the top two executives of Salomon Brothers Inc., which its board is expected to accept today,
resulted from the furor over the disclosure that they had not promptly disclosed the firm's irregular activities in buying Treasury securities.
The abuses took place in the little-known but important corner of the market, the when-issued market in which new Treasury securities - the bonds that are sold to finance the government's ever- growing national debt - are traded even before they are sold by the government. That pre-sale trading helps ensure that the bonds slide easily into the marketplace when they do arrive.
Over all, the Treasury market dwarfs most others in size, with more than $2 trillion in bonds outstanding and more than $100 billion of them traded each day. By contrast, the value of the more than 1,800 companies on the New York Stock Exchange exceeds $3 trillion, but daily trading volume is less than $10 billion.
Many of those buying and selling bonds are large institutions, including pension funds, insurance companies and mutual funds, in which most Americans have a stake.
Because there is no risk of default by the bond issuer - the federal government is presumed to be able to print dollars, if necessary - this market has largely escaped the extensive regulation of others. The main dealers in the market are large investment houses and banks.
To finance the government debt, the Treasury Department conducts a series of auctions of its bills, of up to a year, notes, of up to 10 years, and bonds, generally up to 30 years.
Dealers interested in buying Treasury securities for themselves or their customers submit bids, specifying how much they want, and at what prices or yields.
Although individuals may put in direct orders to the Federal Reserve Bank of New York, they put in requests for a certain amount, but not at any particular price. The dealers, on the other hand, place bids for specific amounts at specific prices. Once the Federal Reserve collects the bids from the firms, it takes the ones that are most advantageous.
With the prestige and the direct bidding rights, comes the obligation to make markets in all Treasury securities and to participate in all auctions. These firms must report daily to the Fed on their volume, their market positions, and how they are financed.
How much a firm bids for in any auction depends in part on how much its clients want, whether it thinks rates are headed up or down, and whether it thinks it can make a profit by bidding a certain amount and reselling the bonds.
To do business on Wall Street, a firm must have securities to sell, especially Treasury issues, which make up such an important part of so many investors' portfolios.
Even before the auctions, however, there is a good deal of action in the when-issued segment of the market. While it may seem odd for big firms to be trading securities that have not yet been issued, it is considered necessary to allow investors and dealers who buy the multibillion-dollar bond issues to estimate demand for the bonds and avoid big losses. But the market is also subject to abuse.
Although there are no public statistics on this market, it is clear that billions are traded during the intense activity that accompanies Treasury auctions.
The when-issued trading begins as soon as the Treasury announces just how large a bond sale will be. For example, on Wednesday it will announce the size of a two-year note auction, to be held Aug. 27, and a five-year note auction to be held the following day.
Institutions wanting to own the bonds will be able to buy them immediately, on terms that provide they will not actually be delivered until they are issued on Aug. 30. The bonds will be sold, on a when-issued basis, by dealers who expect to buy them at the auctions, or by speculators betting that interest rates will rise, and bond prices decline, by the time the actual auction is held.
When the auction is held, Treasury rules bar any bidder from buying more than 35 percent of the issue, including whatever bonds have been previously purchased in the when-issued market. The 35 percent rule is one of the rules that Salomon has admitted breaking. It has also said it bought bonds for itself using customer names, without their authorization.
The reason for the 35 percent rule is to prevent a "squeeze" from developing. In such a case, those who had sold bonds in the when-issued market would be forced to buy them from the few dealers who had possession of the actual bonds, and thereby be forced to pay higher prices than overall market levels would indicate. A trader might have sold bonds short - the sale of borrowed securities - anticipating that rates would rise in the next few days and that the bonds would be cheaper to buy back later.
The Treasury Department believes such a squeeze occurred last May, in an auction of two-year notes. Salomon has admitted purchasing at least 44 percent of the issue, saying that the violation was inadvertent. The government has not said how much, if at all, it thinks the squeeze did move rates.
But even as Salomon's board moves to name Warren E. Buffett, the respected chairman of Berkshire Hathaway Inc. and a Salomon director, as an interim successor to John H. Gutfreund, the current chairman and chief executive, there will be intense scrutiny of the workings of the Treasury markets - and of Salomon's actions and their consequences.
It is expected that any government action against Salomon will include fines but could stop short of putting the firm out of the Treasury bond business. The government needs to sell bonds, and Salomon's withdrawal from the market could make that more difficult. At the same time, a perception that an important part of the market is being abused could cost the government money if some buyers shied away.
The Treasury says that as a result of the squeeze, some dealers lost money, and it has expressed concern over the impact that could have on future auctions.
"If dealers are not reasonably comfortable that they can deliver securities that they have sold prior to the auction, they will be less likely to participate in pre-auction distribution of new issues," Assistant Treasury Secretary Mary C. Sophos wrote in a letter to Rep. Edward J. Markey, D-Mass.
Markey, the chairman of the subcommittee on telecommunications and finance, said the Salomon scandal "underscores the need for improvements in regulation."
Those changes could include requirements to make more information about pricing available to the public and to open trading practices to closer scrutiny.
The Securities and Exchange Commission would like to get jurisdiction over such trading, a desire that bond dealers have resisted.
August 18, 1991, Chicago Sun-Times, The Salomon affair shakes Wall Street, by James M. Kennedy,
NEW YORK It was a week reminiscent of the Ivan Boesky era.
Salomon Brothers Inc., one of the pillars of the American securities business, admitted its top officials knew the company violated trading rules in the government securities market but waited months to report the information to regulators.
The firm's legendary chairman, John Gutfreund, was among those who failed to act, and by week's end he had offered to resign to spare the firm any more damage.
Another living legend, multimillionaire investor Warren Buffett, was expected to take command of the shaken company after a Salomon board meeting today.
Buffett, one of the richest men in America, already holds a big stake in Salomon and sits on its board. As a replacement for its fallen hero, Salomon could not have found broader shoulders.
The management change announced Friday ended a tense 48 hours for Salomon. It released its bombshell about what management knew on Wednesday night after the close of market trading and five days after first disclosing "irregularities and rule violations" in its government bond dealings.
The Wednesday night surprise, though designed to help the company come clean, pitched Salomon's stock into a freefall on Thursday and threatened to undermine the confidence of the financial markets in general.
Salomon stock didn't open for trading Friday until the resignation offer was announced at mid-afternoon. It rose slightly on the news.
New leadership alone was not expected to restore the faith of investors, whose memories of the '80s insider-trading scandals were still fresh. Indeed, the latest scandal revived the uneasy feeling that for all the punishment meted out to Boesky and Michael Milken, the principal figures of the insider-trading era, Wall Street was no safer - or cleaner.
The Salomon episode demonstrated once again how vulnerable the financial markets are to abuse.
"It means that recovering the public's confidence is going to be all the tougher in the 1990s," said Samuel B. Hayes III, a Harvard investment banking professor.
The government, too, must still be heard on the Salomon case. Investigations launched on several fronts could lead to charges or other sanctions against the firm and its executives.
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August 19, 1991, Los Angeles Times, Salomon Receives Penalty, Reprieve : Scandal: U.S. at first bans Wall Street giant from bidding on Treasury bonds. But punishment is eased after plea by firm's chairman, ouster of more executives, by Scot J. Paltrow,
The Treasury Department on Sunday announced unprecedented punishment for Salomon Bros., suspending the giant Wall Street firm from auctions of Treasury bonds and notes. Just hours later, though, the government partly backed down. The punishment, which analysts said could have had dire consequences for Salomon, was eased after billionaire investor Warren E. Buffett, named Sunday as interim chairman and chief executive of the scandal-plagued firm, made urgent phone calls to Treasury Secretary Nicholas F. Brady. Buffett said he assured Brady that stringent new control procedures would be put in place at the firm.
After the phone calls, Treasury said it will let Salomon continue bidding to buy securities for the firm's own account. But it suspended the firm's right to make bids on behalf of customers.
The government's move against Salomon was prompted by the firm's admission over the past 10 days of serious wrongdoing in Treasury auctions, and disclosure that top Salomon executives knew about the violations for months before alerting regulators. Renowned for its trading prowess, Salomon was one of the biggest buyers at Treasury auctions and probably the most powerful player in the $2.2-trillion market for government securities.
As expected, Salomon Chairman and Chief Executive John H. Gutfreund and President Thomas W. Strauss resigned Sunday and gave up their seats on Salomon's board. A vice chairman, legendary Wall Street trader John W. Meriwether, also quit. And Buffett said he fired managing directors Paul Mozer and Tom Murphy, who had been suspended. The two were in direct charge of Salomon's government securities department.
In one of several revelations in a long press conference Sunday afternoon, Buffett said there had been a "cover-up" at Salomon in which it appeared some executives had altered documents to hide the firm's wrongdoing. He said there was no evidence that Gutfreund, Strauss or Meriwether had participated in the cover-up.
But Buffett described the three men's failure to alert regulators promptly after they had learned of the wrongdoing as "inexplicable and inexcusable."
The Salomon scandal marks the first allegations of major wrongdoing in the Treasury market, which the government depends on to finance the national debt at the lowest possible cost to taxpayers. But the Salomon affair follows years of major financial scandals, including the manipulation of the junk bond market by Drexel Burnham Lambert, the savings and loan debacle and more recently scandals involving the largest financial institutions in Japan and the sprawling Bank of Credit & Commerce International. Senior regulators and banking officials say that collectively, the spreading scandals may undermine confidence in the global financial markets, with unpredictable consequences.
Despite the partial and possibly temporary reprieve granted by the Treasury on Sunday, Buffett faces a daunting job in persuading regulators not to punish the firm severely. The firm has said it also may face criminal and civil prosecution by the Justice Department and the Securities and Exchange Commission.
Buffett said he has heard from government "authorities that they are quite upset about what has taken place in the past." Buffett said the firm could still lose its valued designation as one of 40 primary dealers of government securities, firms authorized to trade securities directly with the Federal Reserve.
Buffett said the firm must move quickly to reestablish its reputation for integrity, and cooperate completely with regulators if it wants to remain a primary dealer.
Buffett also must seek to rebuild Salomon's formidable reputation--and stem defections by big clients--without the aid of expert traders like Gutfreund and Meriwether, who built the firm. He said he had no doubt, however, that it can be done.
Buffett, chairman of Omaha-based Berkshire Hathaway Inc., controls about $700 million of Salomon's stock and was on the firm's board. He has no experience running a Wall Street firm. On Sunday he named Deryck C. Maughan, 43, as chief operating officer, with responsibility for running the firm on a day-to-day basis. Maughan, a British citizen and former official of the British treasury department, is a vice chairman of Salomon. He just returned from Tokyo where he was head of Salomon's Asian operations.
Maughan is an investment banker in a firm where bond traders have long been king. He acknowledged he faces a tough job in taking over. "I'm not an American and I'm not a trader," he said.
Buffett said the decision to take over as interim chairman came about on Friday, after he "volunteered" in telephone conversations with Gutfreund and Strauss. He said the two executives had already made up their minds to resign. "I had no interest in doing it," Buffett said, and denied exerting any pressure. But he added, "It needed to be done. Probably I was the logical person to do it."
Suspension of the right to participate in Treasury auctions would have severely curtailed one of Salomon's main businesses. The firm regularly buys billions of dollars worth of securities in individual auctions and then resells them to a range of customers. Losing the right to bid altogether might have caused the firm to shrivel or founder as customers moved elsewhere.
The suspension of the right to bid on behalf of customers, although less severe, is still expected to hurt. "If (clients) want to go to the Treasury auction, they're going to have to submit bids through another firm," Buffett said.
But only a relatively small proportion of Salomon's buying in the auctions consists of bids handled for customers. The firm will lose some revenue, but makes most of its money in reselling--often only minutes or hours later--the securities it bought for its own account. Salomon will still be permitted to do this.
In a statement, the Treasury said it decided to rescind the harsher penalty because of the changes in management at Salomon and the firm's "plans to address management and administrative problems that surfaced last week." The Treasury said "it welcomes these important steps," and said Secretary Brady "expressed high regard for Mr. Buffett."
Salomon's violations included covertly buying more securities than allowed for individual firms in the auctions. Salomon several times bought more than the 35% maximum allowed by law.
The move was characterized by government securities experts as an attempt to corner the market and "squeeze" other firms that had already made commitments to sell the securities to clients. These other firms were forced to buy some of the securities from Salomon at markups instead of directly from the Treasury.
Salomon also admitted making bids in the name of customers even though the customers had not authorized the bids.
In another possibly significant disclosure, Buffett said the respected Wall Street law firm Wachtell Lipton Rosen & Katz had been called in on "July 6 or 8" to conduct an internal investigation for Salomon. Salomon has admitted that its executives knew of at least one incident of wrongdoing as early as April 27, and presumably Wachtell lawyers learned of possible serious wrongdoing shortly after beginning the investigation. But Buffett and Maughan said they did not know if Wachtell had made any efforts to get the firm to notify regulators before top executives finally did so on Aug. 9.
The only Wachtell partner who could be reached Sunday, Leonard M. Rosen, said he was not involved in the investigation and declined to comment.
Buffett said top management first learned of misdeeds on April 27 when Mozer showed Meriwether a copy of a letter the Treasury department had sent to a Salomon client. The letter raised questions about a possible unauthorized bid in a February auction of five-year notes. "John Meriwether on seeing (the letter) immediately knew he had a problem," Buffett said.
Over the next 48 hours Strauss and Gutfreund met with Meriwether to discuss the letter, but no one informed the government, Buffett said. "I said to John Meriwether: 'Did anyone tell you it was your job to report it?' John says no and I believe him," Buffett said.
Meriwether, 44, was a ferociously competitive trader who personified Salomon's aggressive corporate culture. Buffett acknowledged that one of his main jobs will be to change that culture, which he said contributed to the wrongdoing, at times encouraging traders to work perilously close to the bounds of legal behavior.
Buffett and Maughan said they would emphasize "moral" as well as legal behavior. Buffett vowed to fire anyone who did not get the message.
In addition to investigations by at least four government agencies, the firm said it has been named as a defendant in three lawsuits. Buffett said he did not know how much money, if any, the firm made because of its wrongdoing, or whether the government and taxpayers actually lost money because of the manipulations.
Oswald Johnston in Washington contributed to this story.
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August 19, 1991, Chicago Sun-Times, Salomon suspended, top officers ousted, by Dirk Beveridge,
NEW YORK The government suspended Salomon Inc. from Treasury securities auctions Sunday, but lifted key parts of the action after the firm removed top executives who withheld information on its trading scandal for months.
The Treasury's quick reversal eliminated what had been the most severe consequence of Salomon's improper purchases of government securities.
Salomon's newly appointed chairman, billionaire investor Warren Buffett, appealed to Treasury Secretary Nicholas F. Brady to lift most of the suspension after Salomon removed top managers.
At an emergency meeting, Salomon directors accepted the resignations of Chairman John H. Gutfreund, 62; President Thomas W. Strauss, 49, and Vice Chairman John W. Meriwether, 44.
The firm fired its government-bond trading chief, Paul Mozer, and a top aide, Thomas Murphy. Salomon changed bidding and internal control procedures.
Buffett, who holds a big stake in Salomon, was appointed interim chairman of the firm, the biggest bond dealer on Wall Street. Deryck C. Maughn, the Tokyo-based chairman of Salomon Bros. Asia Ltd., was named chief operating officer.
Salomon's brokerage, Salomon Bros. Inc., is still barred from making bids for customers, but can participate in auctions for its own account. It is from its own account that Salomon routinely sells securities to investors.
Salomon Bros. admitted last week that it improperly bought more than its fair share of government securities at several Treasury auctions in the winter and spring. At times, the firm bid in the names of customers without authorization.
"It looks to me, like in the case of the two people we fired, there were things done that you and I would characterize as a cover-up," Buffett said, referring to Mozer and Murphy. Buffett said it appeared records had been altered.
The Treasury Department had said Salomon could not participate in government bond, note and bill auctions while four federal investigations continue and "until appropriate steps are taken to address irregularities."
The Treasury said it welcomed Salomon's management changes and plans to address administrative problems.
Though Gutfreund, Strauss and Meriwether learned of some of the problems in April, they did not tell the government until this month, Salomon said. Meriwether said Sunday he acted properly and that he resigned so Salomon could install a new management team.
The wrongdoing, believed to have allowed Salomon to "squeeze" customers after cornering parts of the market, has created concerns in Washington that the integrity of the market could be compromised.
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August 19, 1991, The Washington Post, Bond Trading By Salomon Is Limited, by Kathleen Day and David S. Hilzenrath,
The Treasury Department yesterday punished Salomon Brothers Inc. for government bond trading violations, but relaxed some of the harshest terms of its sanctions after newly elected Chairman Warren Buffett appealed to Treasury Secretary Nicholas F. Brady.
While the Treasury suspended Salomon from buying new issues of government bonds on behalf of customers, Salomon will be allowed to buy bonds for its own accounts.
Treasury officials said the unprecedented action was taken to restore confidence in the government bond market after disclosure of numerous trading violations by Salomon, which has been Wall Street's leading bond trader.
The move came as Salomon's chairman, John Gutfreund, and two other top Salomon executives resigned and two others involved in the illegal trading were fired during a dramatic board meeting at the firm's World Trade Center headquarters in Manhattan.
Buffett said at a press conference after the board meeting that documents may heave been altered by Salomon employees to cover up the firm's trading violations, which have led to the worst scandal in Salomon's history and renewed calls for increased regulation of the government bond market.
"I heard just a little bit about records being altered," Buffett said. "... There were things done that you and I would characterize as a coverup."
Buffett said Gutfreund, Salomon President Tom Strauss and vice chairman John Meriwether were not involved in altering documents. They resigned because their failure to promptly notify the government once they learned of the trading violations, Buffett said.
For several hours yesterday, it appeared the Treasury was going to indefinitely suspend Salomon from participating in upcoming auctions of new Treasury securities. At 10 a.m. yesterday the Treasury issued a statement saying Salomon was suspended from participating directly in Treasury auctions "until appropriate steps are taken to address irregularities and pending the results of ongoing investigations."
Under the Treasury's order, Salomon would have been suspended from acting as a broker for its customers in buying newly issued bonds and could not have purchased the bonds for its own account. But the steps taken by Salomon's board and a series of phone calls from Buffett to Brady led to the relaxation of a key portion of the suspension.
Before the board meeting, it was clear Gutfreund and Strauss were going to resign. But it had been unclear whether Meriwether, a key bond trading strategist, would stay or go. With the Treasury's threat hanging over Salomon, Meriwether resigned along with the others, saying he had done nothing wrong but wanted to let a new management team get into place, news service reports said.
Two Salomon bond traders, Paul Mozer and Thomas Murphy, who had been suspended because of their role in the trading scandal, were fired yesterday by the board.
Buffett then asked Brady to reconsider the suspension. "I said it would have been hurtful, and it would have been," Buffett said.
Buffett said Brady relented based on his personal assurances that, among other things, Salomon would cooperate completely with investigators from the Securities and Exchange Commission, the Justice Department, the Treasury and the Federal Reserve, which are examining the firm's trading violations and other practices.
Another factor was Brady's respect for Buffett, a highly regarded investor from Omaha who took the Salomon chairman's job on an interim basis in part to protect his $700 million investment in the firm. A Treasury spokesman said Brady "expressed the highest regard for Mr. Buffett and stated he looks forward to a constructive relationship with the new chairman."
"There's plenty of pressure from the Treasury to clean house," Buffett said. "In the end, my job is to clean up the sins of the past" and set Salomon on track for the future.
Buffett said Salomon's corporate culture contributed to the wrongdoing that occurred. The bond department in particular has a reputation for the brand of macho rowdiness and high jinks more commonly associated with college fraternities.
"What some people might call macho, others might call cavalier. I don't think the same things would have happened in a monastery," Buffett said.
Buffett said he would try to change the culture of Salomon, and if some people don't "get the message ... they're going to be out."
Buffett said that if he believed there were many violations beyond those already disclosed, he would not have taken the job.
Buffett said he would divide his time between Salomon and Berkshire Hathaway, shuttling between New York and Omaha. "My mother's sewn my name in the underwear, so it's all okay," he said.
Deryck C. Maughan, a vice-chairman of Salomon Brothers Inc., will assist Buffett in running the firm.
By keeping Salomon in its auctions this week of new government bonds but not allowing it to represent customers, the Treasury punished the firm without hurting the market by taking away capital. Customers who would have placed orders through Salomon will simply move to other firms. If Salomon had not been allowed to participate on its own behalf, its capital would have been taken out of the market, which could have led to criticism that the government was costing taxpayers money by raising the cost of selling the debt.
The Treasury, the Fed, the SEC and the Justice Department are investigating Salomon for possible criminal and civil violations of securities law and possible price-fixing. The investigation intensified in the last 10 days as Salomon admitted to violating Treasury auction rules on at least five occasions in the last eight months by buying more bonds than the maximum permitted. Salomon concealed its activity by buying bonds for itself in customer accounts.
The limits are there to prevent any one firm from having so much market power that it can fix prices, which would discourage other firms from trading government bonds and increase the cost of financing the government's on-going operations and the federal debt. The probe that is underway was triggered in part by complaints from traders that Salomon had broken the rules in a May auction and "squeezed them," forcing them to pay premium prices to obtain government bonds from Salomon.
There is concern on Wall Street that the Salomon scandal will lead to new regulation of the loosely structured government bond market. Congressional sources said they thought one reason the Treasury acted swiftly yesterday was to show that sufficient powers existed under current law to deal with any problems.
Fear about the fall-out increased last week after top Salomon officials admitted that they learned of a trading violation earlier in the year but waited months to inform federal regulators.
The Treasury's partial suspension of Salomon is meant to demonstrate that the government will not tolerate damage to the reputation of the government securities market, government officials said.
The government securities market is the benchmark by which stock and bond markets worldwide set rates on everything from mortgage interest to the value of the dollar. Preserving confidence that Treasury securities are traded fairly is essential, officials said.
More importantly, if that market is perceived as "rigged," then fewer buyers will participate in auctions, and that would increase the government's cost of raising money, officials said.
The White House could not tolerate the perception that the Treasury was borrowing money at anything but the lowest cost for taxpayers, officials said. Even a partial suspension could have a devastating effect on Salomon's business, Wall Street experts and government officials said. But they said even a total suspension would be unlikely to hurt the government securities markets.
The auction of short-term Treasuries, known as T-bills, today will be closely watched as will the auction of two-year and five-year Treasury notes next week, but little impact is expected, government officials said.
Government sources familiar with the situation said yesterday that Drexel Burnham Lambert was one of the two or three largest players in the government securities arena when the firm when bankrupt in 1990. Yet there was no appreciable disruption to the Treasury markets, the sources said.
One question is whether customers who can no longer place bids at Treasury auctions - the primary market in government securities - through Salomon will nonetheless continue to trade with the firm in the secondary market, where Treasury securities are bought and sold daily.
A Treasury spokesman said that the Treasury made its decision in consultation with the Fed, and then informed the White House of the decision.
But others in government said because of the potentially adverse impact of taking action against such a large firm - Salomon is one of Wall Street's two or three largest investment banking houses and the largest trader in government securities - Brady made the suspension decision after extensive consultation with the White House.
David S. Hilzenrath reported this story from New York.
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August 19, 1991, Albany Times Union, U.S. Backpedals on Trader Penalty,
Compiled from reports by the Chicago Tribune and Associated Press.
The government Sunday suspended Salomon Brothers Inc. from participating in government securities auctions, only to largely reverse itself after an appeal from Warren E. Buffett, the company's new top executive.
In an extraordinary series of events, the Treasury Department initially said that Salomon, Wall Street's biggest bond trader, could no longer buy the securities directly from the government while four federal investigations were proceeding and until the firm took steps to correct its problems.
Then Buffett got on the phone and persuaded Treasury Secretary Nicholas F. Brady to let Salomon once again buy bonds, notes and bills at Treasury auctions.
Buffett said he told Brady it would harm Salomon's efforts to overcome the scandal if it were not able to participate in the auctions.
Salomon still is prevented from buying the securities in the name of customers. Salomon Brothers Inc., the firm's brokerage, has admitted buying more than its fair share of the securities in several Treasury auctions, at times by submitting bids in the names of customers without their authorization.
At an emergency meeting Sunday, Salomon directors accepted the resignations of John H. Gutfreund, 62, chairman and chief executive of both Salomon and Salomon Brothers; Thomas W. Strauss, 49, vice chairman of Salomon and president of Salomon Brothers; and John W. Meriwether, 44, a vice chairman of Salomon Brothers.
Gutfreund and Strauss also stepped down from the Salomon Inc. board.
The firm also fired its government-bond trading chief, Paul Mozer, and a top aide, Thomas Murphy. Salomon also changed bidding and internal control procedures.
Deryk C. Maughan, 43, the Tokyo- based chairman of Salomon Brothers Asia Ltd., was named chief operating officer and will be given a large measure of autonomy to get the company back on its feet, Buffett said.
Buffett, 60, said there is no evidence of a cover-up on the part of the three top executives, whose "inexplicable and inexcusable" delay in reporting bidding irregularities has cost them their jobs and badly tarnished the firm.
But he disclosed that some records may have been altered by others. He said Sunday he has fired the two men, Paul Mozer and Thomas Murphy, who ran Salomon's Treasury securities trading desk.
"It looks to me, like in the case of the two people we fired, there were things done that you and I would characterize as a cover-up," Buffett said.
Salomon admitted Aug. 9 that it had violated Treasury Department rules prohibiting any of the 40 primary dealers from acquiring more than 35 percent of a given bond issue. On Aug. 14, the firm acknowledged its top executives had been aware of at least one violation since April.
Buffett also said senior management had been concerned enough about the problems in early July to bring in the New York law firm Weil, Gothshal & Manges for an internal investigation. He could not explain why the three executives hadn't brought the matter to anyone's attention until Aug. 9, when the government was notified.
Buffett's first official act Sunday was to personally appeal to Brady to get Salomon reinstated in the Treasury auction business.
Sunday morning, about the time the Salomon board meeting got under way, the Treasury announced it was suspending Salomon's auction rights. After Buffett's call to Brady, Treasury announced it would allow Salomon to participate in the upcoming August auction, but only for its own account and not on behalf of customers.
Buffett said he told Brady "why what they were doing would be hurtful to us. I explained what we were doing, what our attitude was."
Buffett also said the firm was implementing changes to prevent a recurrence of the incident. He wasn't more specific about the changes but said, "They certainly relate to the government bidding process. I can assure you of that."
He added there didn't appear to be a pattern of violations at the firm, but noted there are aspects of Salomon's corporate culture - "macho and cavalier" attitudes - that "could have contributed" to what happened.
"I don't think the same thing would have happened in a monastery," he said.
In the wake of the scandal, Buffett said, "People are mad about what happened. People are entitled to watch us very closely. I think we have to earn back our integrity."
Buffett, a billionaire investor and chairman of Omaha, Neb.-based Berkshire Hathaway Inc., has owned a 12 percent stake in Salomon and served on its board since he stepped in four years ago to block a hostile takeover.
He said Sunday he volunteered to run Salomon on a temporary basis after Gutfreund told him Friday that he and Strauss were prepared to quit.
Buffett said that in the past two days he had talked to 15 to 18 key Salomon managers and there was near unanimous agreement from them - shared by Buffett - that the job of chief operating officer be given to Maughan.
Maughan joined the firm in 1983 and has spent the last five years as chairman of Salomon Brothers Asia Ltd., based in Tokyo. He was named last month as co-head of investment banking.
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August 19, 1991, New York Times / Albany Times Union, Salomon Brothers Scouring Its Image, by Richard D. Hylton,
Warren E. Buffett quickly proved himself a hero Sunday, shortly after his confirmation as chief executive at Salomon Brothers, by managing to persuade the Treasury Department to partially reverse its decision to suspend Salomon from participating in auctions for Treasury securities.
But as Buffett himself said, there clearly is a lot more to do.
He must reassure clients. He must appoint new managers. He must quickly project a new image of absolute integrity for the firm.
But perhaps the most important task he faces - and the most daunting - is trying to change the "hell-bent for leather" corporate culture of Wall Street's premier trading powerhouse.
Buffett is already well into the process of trying to contain damage from the scandal, but as he indicated to the firm's executives on Friday, Salomon's way of doing business will henceforth have to be beyond reproach.
Activities that fall just within the rules, Buffett has made clear, will no longer be tolerated, and a renewed respect for regulatory authority must be injected into Salomon's corporate culture.
"I think the culture did in some ways contribute to a couple of people's behavior," said Buffet, when asked whether the firm's aggressive, derring-do atmosphere encouraged the violations of securities rules by Paul Mozer, Thomas Murphy and others on the government securities trading desk.
Buffett described the Salomon atmosphere as being "what some people might call macho and others cavalier." He added: "I don't think the same thing would have happened in a monastery."
He said that he thought the best way to change the Salomon culture was setting new examples from the top and that some of the firm's employees would have to go if they could not adapt to the new way of conducting business.
"There must be absolute insistence on the correct moral and legal behavior," said Deryk C. Maughan, the chief operating officer appointed Sunday by Salomon's board.
Salomon Brothers has long had a reputation as a hard-driving firm which has regularly taken huge risk positions in various securities and managed those risks skillfully enough to reap millions in annual profits. The high-risk atmosphere was portrayed by Michael Lewis in his best-selling 1989 book, "Liar's Poker."
The firm, probably more than any other on Wall Street, has been dominated by traders, like John H. Gutfreund, the former chairman who resigned as a result of the scandal. With Buffett now chairman and Maughan, a British investment banker, now chief operating officer, the days of traders as top managers at the firm may have come to an end.
While praising the swift move to install Buffett temporarily at the helm, Wall Street executives, management professors, analysts, public relations executives and other longtime market watchers stress that Salomon is by no means out of peril.
People on Wall Street uniformly emphasized that once Buffett decided to step aside as chief executive, it would be critical for Salomon to appoint a permanent chief executive who is a recognized leader with an unimpeachable reputation.
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August 19, 1991, Chicago Sun-Times, Salomon suspended, top officers ousted, by Dirk Beveridge,
NEW YORK The government suspended Salomon Inc. from Treasury securities auctions Sunday, but lifted key parts of the action after the firm removed top executives who withheld information on its trading scandal for months.
The Treasury's quick reversal eliminated what had been the most severe consequence of Salomon's improper purchases of government securities.
Salomon's newly appointed chairman, billionaire investor Warren Buffett, appealed to Treasury Secretary Nicholas F. Brady to lift most of the suspension after Salomon removed top managers.
At an emergency meeting, Salomon directors accepted the resignations of Chairman John H. Gutfreund, 62; President Thomas W. Strauss, 49, and Vice Chairman John W. Meriwether, 44.
The firm fired its government-bond trading chief, Paul Mozer, and a top aide, Thomas Murphy. Salomon changed bidding and internal control procedures.
Buffett, who holds a big stake in Salomon, was appointed interim chairman of the firm, the biggest bond dealer on Wall Street. Deryck C. Maughn, the Tokyo-based chairman of Salomon Bros. Asia Ltd., was named chief operating officer.
Salomon's brokerage, Salomon Bros. Inc., is still barred from making bids for customers, but can participate in auctions for its own account. It is from its own account that Salomon routinely sells securities to investors.
Salomon Bros. admitted last week that it improperly bought more than its fair share of government securities at several Treasury auctions in the winter and spring. At times, the firm bid in the names of customers without authorization.
"It looks to me, like in the case of the two people we fired, there were things done that you and I would characterize as a cover-up," Buffett said, referring to Mozer and Murphy. Buffett said it appeared records had been altered.
The Treasury Department had said Salomon could not participate in government bond, note and bill auctions while four federal investigations continue and "until appropriate steps are taken to address irregularities."
The Treasury said it welcomed Salomon's management changes and plans to address administrative problems.
Though Gutfreund, Strauss and Meriwether learned of some of the problems in April, they did not tell the government until this month, Salomon said. Meriwether said Sunday he acted properly and that he resigned so Salomon could install a new management team.
The wrongdoing, believed to have allowed Salomon to "squeeze" customers after cornering parts of the market, has created concerns in Washington that the integrity of the market could be compromised.
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August 19, 1991, Post-Tribune (IN) Government Relaxes Salomon Inc. Sanctions
NEW YORK The government Sunday barred Salomon Inc. from buying securities from the Treasury but lifted key parts of the suspension after the firm replaced top managers who kept its trading scandal secret for months.
The firm's brokerage, Salomon Brothers Inc., admitted last week that it improperly bought more than its fair share of government securities at several Treasury auctions.
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August 19, 1991, The Bond Buyer, Salomon and the case for more rules, (Editorial) by John H. Allan,
On May 22, a syndicate of bidders decided the Treasury's two-year note sale might be "an opportunity to muscle the market."
That description, from Susan Kelly's Treasury market column in May, was only partly accurate. Someone was indeed trying to muscle the market, but the syndicate apparently was fictitious.
On Aug. 11, Salomon Brothers suspended two managing partners and revealed that it had uncovered "irregularities and rule violations" in three recent Treasury note auctions. Two managing partners were suspended. Salomon admitted that it submitted bids in the names of customers who had not authorized it to do so.
The episode now unfolding will doubtless result in increased surveillance of the Treasury securities market, and there is no doubt that this market, the foundation of the world's credit markets, needs stronger oversight.
The Treasury securities market, according to Richard Breeden, chairman of the Securities and Exchange Commission, is "a largely unregulated gap."
The Government Securities Act of 1986 is up for renewal this fall, and Mr. Breeden strongly favors giving the commission more power over the secondary market in Treasury bills, notes, and bonds, a vast $3.5 trillion ocean of debt. The dealers, naturally, believe they are regulated enough.
Jon S. Corzine, a partner at Goldman Sachs & Co., testified before Congress for the Public Securities Association in June, declaring that "the surgical precision with which this market has been regulated in the past has achieved an optimal balance between investor protection and avoidance of market disruption." And he warned, "In a market this size, even modest overregulation will significantly increase cost."
We find it difficult to accept that Solomon Brothers, with its hands-on management and supersophisticated electronic equipment, would not know what was going on. To buy 85% of a $12.26 billion note issue, if that's what it did, would require the commitment of $104.2 million of capital. And even for a firm with $4 billion of capital, $104.2 million is real money.
According to Wall Street Journal, competitors and government officials suggested that Salomon's place in the Treasury market had become "so large, and its trading tactics so sophisticated, that the firm's government securities traders came to believe they could safely function outside the rules."
If that picture is accurate, Congress will give Mr. Breeden and the SEC the powers they want. Salomon has clinched the argument for increased regulation, for as Federal Reserve Chairman Alan Greenspan has said, it is "essential to guard against the perception that the auction process . . . is unfair."
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August 19, 1991, The Washington Post, Rigging the Bond Market,
SALOMON BROS. INC.'S offense is to have jeopardized the United States' reputation for running clean and straight financial markets. The trading in U.S. government securities, which usually goes over $100 billion a day, is among other things a gambling game in which investors take enormous risks. People will play only where they are assured that the game is honest and the rules are rigorously enforced. Because the federal deficit is now rising sharply again, over the coming year the Treasury is going to have to borrow hugely. That would have put the markets under strain under the best of circumstances. People's doubts about the honesty of the securities markets will be expressed in higher interest rates - not only for the government but for anyone who wants to borrow for any purpose.
These acknowledged violations by Salomon are hardly the first shadow to pass in these years over the American financial system. The costly failures of hundreds of banks and S&Ls, the scandals in the commodities markets and the collapse of the junk bond market have been enough to make even the most optimistic of investors wary. But until now the market in U.S. government debt, the largest and most important of them all, has been untouched.
The Treasury sells government securities in auctions. To prevent any one buyer from monopolizing the market, no firm is allowed to take more than 35 percent of an offering. That is the rule that Salomon acknowledges violating repeatedly. The purpose of the tactic is to diminish competition and allow the dominant player to resell at a premium. Last week the firm said that its top management was told in April of violations in a February auction, and yet a month later in a May auction it committed the same violations again. The scale of these transactions deserves your notice. The May auction sold $12.25 billion - that's billion, not million - of two-year notes. Salomon, trading for its own account and filling fake orders from customers, was apparently able to sweep up most of them.
The firm's three top executives resigned yesterday, as they should have, and new management took over. Several investigations are under way. The aim is to repair the damage to the firm and, more important, to the markets. No one can yet be sure how any of that will play out.
But it's pretty clear that this country's recent infatuation with financial deregulation is dead. The dewey-eyed idea that financial markets are self-regulating, or that the trading firms are self-policing, or that regulation is merely an outmoded and unneeded burden on business efficiency are revealed by many unhappy experiences of the recent past - but none more than this one - to be a dangerous fantasy.
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August 19, 1991, The Washington Post, The Rise And Fall Of John Gutfreund; For the Salomon Bros. Ex-Head, A High profile at Work & Play, by Cathy Horyn,
Scandal is such a dirty word. It rises from the gullet and forms a sneer, an ugly expression of contempt and loathing toward the guilty, especially if they are rich. If scandal had a sound, it would be of knives sharpening. If scandal had a smell, it would be foul and persistent, spreading without prejudice or mercy. And if one could lay a hand on this dreaded thing, it would most certainly be cold.
"I'm rather drunk at the moment," confessed Taki Theodoracopulos. The chronicler of international society was in St. Moritz, where it was almost midnight Friday in the Swiss Alps. "I saw Gianni Agnelli and I said to him, 'Avocato, I see your friend John Gutfreund is in trouble,' " says Taki, clearly amused that the powerful 61-year-old chairman of Salomon Bros. was about to resign. As the Spectator's "High Life" columnist, he had observed John and Susan Gutfreund over the years, and he didn't care for them.
"He's a philistine and she's a climber," said Taki.
But Agnelli, the chairman of Fiat and a magnetic presence at anyone's dinner table, is among Susan's most loyal admirers, and no article about her has ever failed to mention how she "conquered" the Agnellis and various Rothschilds. So Taki was having some fun with his old friend Agnelli at the expense of John Gutfreund.
And the Fiat chairman's response was: "Oh, well, poor man."
Taki, laughing, barked: "You can say anything but that!"
As it happens, anyone can - and will - say anything about the downfall of John Gutfreund, who resigned yesterday at a special meeting of Salomon's board of directors after 38 years with the investment firm, 13 as chief executive. One could say that he was not minding the store. That he was indecisive when it came to management decisions. That he was made foolish by the publicity his socially aspiring second wife generated. One could even say that his demise, in an unfolding scandal of deceit and fraud involving U.S. government securities, is a kind of epilogue to the '80s - the "King of Wall Street" dethroned.
But it is not as simple as that. Gutfreund, pronounced "good friend," is widely considered a straight shooter, a man who wouldn't put himself above the firm, much less the law. "When you read these stories, you say, `How could this happen?' " said Henry Kissinger, who has known Gutfreund for more than a decade. "It is inconceivable to me that John Gutfreund would do anything at the edge of legality or morally wrong."
Such feelings are widely held by people who know Gutfreund off The Street - longtime friends from his college days, social acquaintances in New York and Paris, where his wife spends most of her time, and colleagues who know him through his charitable interests, notably the New York Public Library. "He's very complex, very thoughtful, very shy," said Vartan Gregorian, formerly director of the public library and now president of Brown University. "John has never wanted to publicize his private values."
And yet such observations are also wildly at odds with Gutfreund's public image - the man noted in New York magazine for his "sneering contempt" of people both inside and outside Salomon Bros.; in the book "Liar's Poker," which depicted Salomon's macho culture, for his "lofty sentiments," and in the takeover saga "Barbarians at the Gate" as "Old Potatohead." To a lot of people, Gutfreund was Leon Bavardage, the other half of the nouveau-riche couple Tom Wolfe created in "The Bonfire of the Vanities": "In contrast to Inez Bavardage, Leon had all the animation of a raindrop. He had a placid, passive, lineless face... ."
However one looks at Gutfreund, he is a mass of contradictions. On the one hand, he professes to loathe the social scene. "A charity dinner is like a cocktail party for four hours," he told Institutional Investor in February. Yet he and his wife were known, and savaged in the press, for their extravagant parties. He reportedly spent $15 million (or rather Susan did) to decorate their Fifth Avenue apartment. But it annoyed him to have to spend $10 for two diet sodas at the Plaza Athenee in New York when he met with, and fended off a hostile stock bid from, Revlon Chairman Ronald Perelman. He owns a beautiful apartment in Paris, yet by his own estimate barely spends 20 nights a year there. He is said to be unpretentious, modest about his own abilities and highly principled. But he managed to get sued by his neighbors for using their terrace to hoist a 22-foot Christmas tree into his living room.
Then, of course, there is the most stunning contradiction of all: Here is a man who in the space of six years transformed a bond trading house, with $208 million in capital, into Wall Street's most powerful investment firm, with $3.5 billion in capital before the 1987 stock market crash. He fostered the culture that was Salomon Bros.: the fierce, hell-bent-for-money drive of its traders, who could use their clout and the firm's capital to risk - and make - billions of dollars in the securities markets. In fact, according to the Wall Street Journal, Salomon traders boasted of "couping" U.S. Treasury auctions - by buying up such huge amounts of securities that competitors would effectively be shut out and forced to buy from Salomon at higher prices.
To many people, John Gutfreund was Salomon Bros. And yet as chairman, as someone who valued integrity and responsibility, he brought dishonor to his house. Triumph and tragedy. If scandal has a soul, it must be this ultimate paradox.
A Man of Contradictions
"I would be very upset if this turned into a negative article about John," said George Bent, chairman of the board of trustees at Oberlin College, where Gutfreund graduated in 1951 and where he has been a trustee.
But there is no getting around the obvious: Salomon admitted 10 days ago that the firm had violated rules governing auctions of Treasury securities. In order to buy larger chunks of bonds, and thereby exert more clout in the market, Salomon's traders had exceeded the government's 35 percent limit for a single firm. They did so by placing orders for customers who hadn't authorized them. The scandal escalated last week when Salomon admitted that Gutfreund knew about the illegal bidding as early as April.
For better or worse, with or without his help, the press has cast Gutfreund as a colorless but brutal trader whose principal weaknesses are his wife, Susan, a former Pan Am stewardess, and a management style that encourages independence at the risk of alienating departments at Salomon and diminishing control. "Gutfreund doesn't run the departments; the departments run themselves," one executive close to the firm told the New York Times last week. Such comments are consistent with others made over the past few years but, repeated often enough, they tend to flatten him into a single dimension. In any case, the cliches don't help to reconcile the apparent contradictions in a man who perceives himself, by his own admission, as an outsider.
"Every article used to repeat what popped up on the computer from the last time ... that same bullshit over and over again," Gutfreund told the Times of London last summer, trying to explain why he didn't open up easily. "If you have a small soul you are afraid to give it away too cheap. You sure as hell don't want to pee it away on every Tom, Dick and Harry."
One of the most revealing portraits of Gutfreund appeared six months ago in Institutional Investor. Titled "True Confessions," the 6,600-word interview conducted by Investor editor Gilbert Kaplan is indeed a confession - about everything from Gutfreund's feelings toward his wife to the possibility of someday being considered for a government post. In view of last week's revelations about illegal bidding on Treasury bonds, Gutfreund's comments are as prescient as they are ironic.
But more than that, they shed some light on Susan Gutfreund and her influence.
If her second husband was considered bland, the sort of man who grew up in Scarsdale and spent his entire career with the Firm, Susan was the epitome of self-improvement - the sort of ambitious American woman in the mold of Wallis Warfield Simpson. The daughter of a career Air Force pilot, Susan Kaposta went to Louisiana State University for a while, ended up in Paris, where her father was stationed, and then went to work for Pan Am. In 1970, she married a Texas real estate heir named John Roby Penn; she reportedly met him on a Pan Am flight. Until their divorce in 1976, they lived primarily in Texas and Florida. By 1980, Susan Penn was living in New York and, through a mutual friend, met John Gutfreund over dinner one night. A year later, they were married and living at the Olympic Tower on Fifth Avenue. Susan was 35.
She couldn't have been more different from Gutfreund's first wife, Joyce Low. "Joyce was a nice, plain, socially interested woman - in the charity volunteer sense, not the publicity kind," said a longtime family friend. They were married about 20 years, had three children but divorced in the late '70s, about the same time that William "Billy" Salomon named Gutfreund to succeed him as head of the 81-year-old firm.
"Well, I suppose some change began in 1979, after I got divorced," Gutfreund told the Investor. "So much of my life was extremely structured, and I had become more insular by virtue of the demands of business and the discipline I had to have for business. ... You then find at the end of the day, especially as you get older, that you have less elasticity, and become more and more the captive of your business."
While Salomon Bros. was entering its period of phenomenal growth, the Gutfreunds were becoming the talk of the town. It seemed that everything Susan did was comme il faut - hiring the right socially connected decorators, sending dinner invitations by chauffeur or gifts in monogrammed shopping bags and dispatching massive flower arrangements to friends. One friend, then only an acquaintance, received enormous sprays of orchids with an invitation to one of Gutfreund's early parties. The woman responded with a floral gift of her own, only to receive yet another orchid display from Susan. It was this sort of zeal that put her into the gossip columns and gave her the nickname in Paris of Susan "Goodie Friend."
"A lot of that is really snobbish," said Kissinger, whose 60th birthday party was hosted by the Gutfreunds. "She doesn't do anything malicious or hurtful to anyone. She may have been a little extravagant, but if she had gone to the right schools, nobody would have said anything." In a sense, the fact that she didn't carry any of that High WASP baggage perhaps made her more interesting. In any case, Gutfreund didn't seem to mind the glow she cast.
"He clearly seemed to enjoy the sort of free-swinging high life that Susan brought to the marriage," says a longtime friend.
"Because Susan was so different than my first wife and different from me," said Gutfreund in the Investor interview, "my horizons opened up - in terms of seeing things in the world that I had not noticed, not thought about or had decided in fact I didn't want to see. ... The whole point is that I don't see any reason why one shouldn't continue to grow in terms of experiencing new things, new ideas and, of course, meeting interesting and different kinds of people. I'm grateful that my wife has helped me to expand my horizons."
In 1987, as the stock market was heading toward the Black Monday crash, Susan Gutfreund was in Paris, living at the Ritz with the couple's young son, John Peter, and his nanny, while the Gutfreunds' new apartment on the Left Bank was being decorated. The move took her away from the constant glare of publicity, though her generous gifts, French lessons and alliance with Jayne Wrightsman, who also served as a kind of mentor to the young Jackie Kennedy, were all duly noted in Women's Wear Daily.
There were signs that, after five or six years of the social whirl, Gutfreund himself had had enough. "The social scene turned out to be exactly what I thought it was: frivolous," he told the Investor. "The relationships seem to be mostly based on the idea that we're all affluent. I think that's ridiculous." Still, the Gutfreunds played along with that assumption. Taki remembers attending a dinner party with them, given by the designer Valentino at Le Cirque in New York.
"I was seated, because of my rude manners toward the rich, at a bad table, while my wife Alexandra was seated next to Mr. Gutfreund. But I could hear everything," said Taki, who wrote about their conversation in his book "Nothing to Declare."
According to Taki, Gutfreund mentioned how much he liked Alexandra's earrings.
"Thank you very much," she said.
"I like them and I want to buy them," said Gutfreund.
"I'm sorry, they're not for sale," she replied.
"Everything is for sale," he answered.
"In the book, I lied," said Taki. "I didn't include what I said to Gutfreund: "Don't judge everything by your wife, old boy!"
As stories went, it was no worse than any others that came along in the late '80s. Within one week in January 1988, two major articles were printed about the Gutfreunds, including an unflattering piece in New York magazine, titled "Hard to Be Rich: The Rise and Wobble of the Gutfreunds," and a New York Times Magazine cover story. The next year, Michael Lewis published "Liar's Poker," his irreverent account of shenanigans at Salomon Bros. Of his boss, he wrote: "An aspect of the genius of Gutfreund was his ability to cloak his own self-interest in the guise of high principle. The two could be, on rare occasions, indistinguishable."
Of course, it's also possible to look at Wall Street's scandals in simpler terms: sex appeal and money.
As for Susan Gutfreund, she had more or less settled in Paris. She learned how to speak French and distinguish one Louis XIV chair from another. Lately, according to friends, she has begun to mix her couture clothes with less precious pieces, the way the French do. "She has won the hearts of Paris," declared Vogue editor Andre Leon Talley, noting that Susan knows "all the best Rothschilds."
So, like the wife of the gold prospector who, upon striking it rich, declared, "Now my wife can be a lady!," she has in fact arrived. In that sense, she is distinctly American.
The Outsider
In the fall of 1988, when a group of Salomon investment bankers was meeting in Gutfreund's New York apartment to discuss the firm's participation in the leveraged buyout of RJR Nabisco - a deal eventually won by Kohlberg Kravis - the first person John Gutfreund called was his close friend Warren Buffett.
It was not the first time he sought the advice of Buffett, the chairman of Berkshire Hathaway in Omaha. The previous fall, when Ronald Perelman of Revlon was threatening to buy a chunk of outstanding Salomon stock, Gutfreund went to Buffett, who wound up with a 12 percent stake in the firm. When Gutfreund put the deal to the Salomon board, he threatened to resign if the directors didn't accept it. They did.
More interesting than the phone calls to Buffett, who became the firm's interim chairman yesterday, was the fact that Gutfreund was finally going to move Salomon into the LBO business in a big way. In the account of the meeting documented in "Barbarians at the Gate," by Bryan Burrough and John Helyar, once Buffett gave his nod, the Salomon bankers were ecstatic. "Finally, after years of talk, Salomon Brothers was actually going to do something," the authors wrote.
All along, but especially toward the end of his tenure at Salomon, Gutfreund was dogged by one criticism: that he was indecisive. Given Gutfreund's remarkable run in the early '80s, the criticism was not entirely fair. Still, it nagged him. "It's my theory Susan Gutfreund has had a lot to do with John's problems," a partner at a large brokerage house told New York magazine. "When older guys discover their sexual vitality, they're gone." Business publications raised questions about his leadership. "He just lets things happen around him," an individual at the firm told Business Week. Such comments, as Gutfreund himself knew, were the equivalent of a snowball gaining momentum.
Whatever anyone could say about his achievements, his integrity or sense of responsibility, it doesn't much matter now. But it was no small part of his character that behind the haze of cigar smoke, the gruff impatience and the inscrutable face that affirmed a certain arrogance was a man who thought himself an outsider. "Was I ever one of the boys?" he said in the Investor interview. "I don't think so."
In any case, he was never one to look back.
"You make a trade and life moves on," he said. "You move on. Everbody whom I'm interested in moves on."
The Reaction
Neither Susan nor John Gutfreund was available to be interviewed for this story. Warren Buffett did not return phone calls.
Last Wednesday, when word got out that the chairman of Salomon was in trouble, his friends were sympathetic, if not a little mystified. On Friday, doors shut. "I really don't know him that well," said Blaine Trump, reached at a hotel pool on the French Riviera. That other great character of the '80s, Donald Trump, did not call back. Bob Colacello, the Vanity Fair writer who lives in Paris and is socially acquainted with Susan Gutfreund, thought he'd better not say anything. "It sounds like it could be a Vanity Fair story," he said. Taki was playing tennis in Switzerland after promoting his new book, "Nothing to Declare," about the three months he spent in Pentonville Prison in England for cocaine possession. Michael Lewis was in Colorado, writing.
"It must just horrify him to end this way," he said of Gutfreund.
In the end, though, it wasn't the sound of knives of sharpening that one heard above all the others. It was the silence.
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August 19, 1991, New York Times / Albany Times Union, Salomon Brothers Casualty of Greed, by Floyd Norris,
At Salomon Brothers, trading has always been a form of war in which the opponent is entitled to no pity and rules are viewed as impediments to be sidestepped, if possible.
Now that attitude threatens to destroy the firm.
Just how this situation developed is not completely clear. Part of the answer may be in a change in the corporate culture of the firm, where the greed of the 1980s led to an attitude of looking out for No. 1.
The firm's compensation structure changed last year, and executives who ran very successful departments effectively had no ceiling on the money they could receive. Annual bonuses were reported to stretch into the tens of millions of dollars, arousing resentments and creating incentives to emphasize short-term profits.
Some at Salomon complained that with the change in compensation went a new feeling in the trading wars. Rather than us-against-them, the attitude tended toward every man for himself, or at least every department for itself.
"That helped unravel the structure of the firm," a Salomon official said Sunday, speaking on condition that he not be identified. "It was not the aggressiveness of the firm that went bad, it was the corruption of the compensation system."
Before the change, more qualitative judgments had gone into the bonus decisions, and departments that made big profits had felt shortchanged. Salomon officials say the new system gave many of those departments - and those at their helm - a cut in profits.
There are few better ways to profit than to corner a huge market, and it appears that Salomon traders did just that in auctions of Treasury securities. Those moves forced some traders at other firms to take huge losses as they scrambled to buy bonds that may have been available only from Salomon at prices that seemed unfair.
Now, those losing traders are preparing to sue Salomon. The firm's business has been restricted by the Treasury, and its reputation has been severely damaged.
Salomon's management style under John H. Gutfreund, who ran the firm from 1978 until Sunday, also may have played a role in the debacle. Salomon became a set of fiefs, and while the men who ran departments could be - and sometimes were - fired, there was little other scrutiny.
Salomon had an office of the chairman, which included the five vice chairmen of the firm. But Salomon's revelations have indicated that four of the five were not told of the firm's first violation of Treasury- auction rules when it become known.
Top management learned of a problem in April, and Salomon says it decided to tell federal regulators of it. For reasons that remain unclear, this was not done. Remarkably, however, Salomon has admitted to substantial violations of Treasury rules at the May auction, after top management knew there had been a problem in an earlier auction. The recurring violations speak badly of the management and made the departures of those officials who knew of the problems inevitable.
In resigning on Sunday as a vice chairman of Salomon Brothers, John W. Meriwether emphasized that he had done nothing wrong, because he had told Gutfreund and Thomas W. Strauss, the president of Salomon Brothers, of the problems as soon as he learned of them in April.
But Meriwether, who supervised the government-bond desks where the violations occurred, made no mention of having taken action to prevent a recurrence. Meriwether's comments came in a statement distributed to reporters. He did not answer questions.
Warren E. Buffett, an outside director of Salomon who became interim chairman and chief executive on Sunday, said he viewed the failure of top management to take action as inexcusable.
Salomon always was a firm controlled by traders, a very different group from the investment bankers that run some other firms. Among traders, old school ties count for nothing and contacts for very little. What count are nerve, guile and an ability to outsmart the competition.
Salomon most often got business from customers by being willing to take on trading risks. If a customer wanted to unload securities, Salomon was usually willing to put in a bid, even if other firms would not. That brought loyalty from many customers, even though they knew that Salomon tried to shave its bid low enough so that it could make a profit when it found a buyer for the securities.
Customers also knew that when they were trading against Salomon in the market, the firm could be merciless in exploiting an advantage.
Now Salomon, a firm that has prided itself on its trader mentality, will be run by a man who was never a trader. The new men at the top vow the firm's culture will be starkly different, assuring all actions are moral, as well as legal.
The big question for Salomon now is whether it can prosper under such such a culture, while still having the cloud of this scandal hanging over it. If not, the traders will be unable to trade. For a trader, that is equivalent to losing the war.
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August 19, 1991, The Bond Buyer, Salomon officials ready to resign amid treasury bidding scandal, by Steven Dickson,
Salomon Brothers Chairman John Gutfreund and President Thomas Strauss said Friday they were prepared to submit their resignations at a special board meeting called for yesterday.
Responding to the growing scandal surrounding the firm's admission of Treasury bidding rule violations, two other Salomon officials said they were ready to assume the mantle of leadership: Warren E. Buffett, a director and major shareholder in the firm, and John Meriwether, a vice chairman.
In 1987, Mr. Buffett invested $700 million in the firm, garnering a 12% share, as part of a deal to fend off a hostile takeover. Mr. Meriwether's status with the firm is still uncertain and was expected to be a topic at yesterday's board meeting.
Salomon admitted last week that at several recent Treasury auctions the firm broke bidding rules by acquiring more than 35% of a given auction, in some cases bidding on securities in the name of clients who had not authorized the purchases.
The firm suspended two managing directors and two other employees in connection with the announcement, and later revealed that top management knew of the infractions as early as April without reporting them.
"We cannot allow our unfortunate mistake of not taking prompt action, when in April we learned of one unauthorized bid at a February Treasury auction, to harm the firm," a statement from Mr. Gutfreund and Mr. Strauss says.
Company officials said Friday that all of the infractions had now been reported. "We are not aware of any problems other than those already disclosed," a statement says.
Analysts say Salomon's disclosure could lead to wide changes in government regulation of the $2.2 trillion U.S. government securities market, which is currently considered one of the least regulated of the nation's financial markets. Sen. Christopher Dodd, D-Conn., last week called on the Treasury Department to review the adequacy of government regulation of the market and report by early next month on whether legislative or regulatory steps need to be taken to tighten oversight.
Both the Treasury Department and the Securities and Exchange Commission are continuing investigations into the violations admitted by Salomon. On Friday, a Treasury spokesman said the government and the Federal Reserve" "are reviewing our relationship with the firm." Salomon said last week that fallout from the revelations could include a suspension or revocation of its status as one of 40 primary dealers in government securities.
The impact such a move would have on the firm's future business potential as well as the general uncertainty surrounding Salomon prompted Standard & Poor's on Friday to place $15 billion of debt and preferred stock on CreditWatch with negative implications.
The agency's moves affect Salomon's A-plus senior debt, A subordinated debt, A1 commercial paper, and A-minus preferred stock ratings.
"S&P is concerned over the impact that these irregularities could have on the firm as a result of potential litigation, regulatory action, and the direction of future business strategy," the rating agency said.
Treasury Market Yields
Prev. Prev.
Friday Week Month
3-Month Bill 5.37 5.46 5.73
6-Month Bill 5.50 5.60 5.97
1-Year Bill 5.59 5.76 6.22
2-Year Note 6.25 6.44 6.82
3-Year Note 6.66 6.84 7.26
4-Year Note 6.81 6.97 7.43
5-Year Note 7.30 7.48 7.89
7-Year Note 7.62 7.80 8.13
10-Year Note 7.82 7.96 8.26
20-Year Bond 8.04 8.20 8.42
30-Year Bond 8.08 8.22 8.47
Source: Cantor, Fitzgerald/Telerate
Moody's Investors Service on Thursday placed its various Salomon ratings on negative review, and Duff & Phelps took similar action Friday.
Trading in most high-grade Salomon bonds along with the company's stock was halted on the New York Stock Exchange for most of the day Friday, in anticipation of news from the firm regarding management changes.
The bonds involved were the 8% bonds due in 1996 and 1997, 11 3/4% bonds of 2005, and 11 5/8% bonds of 2015.
When equity trading resumed late Friday, Salomon was reported up 7/8, at 27 3/4, after the release of its statement regarding proposed resignations.
Market Activity
Although market participants continue trying to figure out what impact the Salomon scandal might have on the markets, more run-of-the-mill concerns are occupying most of their time.
Economic indicators, for example, continue to present a mixed view of the economy, leaving economists unsure what the Federal Reserve's next move will be. But after last week's barrage of data, this week looks to be fairly tame in comparison.
The most significant event will be tomorrow's meeting of the Federal Open Market Committee. A few market participants are still holding out hope that the Federal Reserve will use the opportunity to cut the fed funds and discount rates, to liven up the recovery.
Most analysts, however, say they believe the Fed will only decide on an easing bias tomorrow and hold off on a full-fledged rate cut until after August's employment report is released on Sept. 6.
Last week's numerous economic indicators bolstered the position of analysts predicting a delay.
Friday's industrial production and capacity utilization, for example, showed the economy is continuing to register signs of strength despite weak employment reports.
Industrial production jumped 0.5% in July on the strength of higher automobile, construction supplies, and factory materials output. It was the fourth straight monthly increase.
Also registering an increase for the fourth month in a row, industrial capacity utilization advanced 0.2%, to 79.7%, in July, the Federal Reserve Board of New York said Friday.
And the Federal Reserve Board of Philadelphia's business outlook survey last week confirmed increased manufacturing activity. Like Friday's other major indicators, the Fed report registered its fourth monthly increase.
But the gains in manufacturing have not yet translated into employment growth. Sixty-three percent of those surveyed in the Philadelphia Fed report said they had no changes in employment levels over the past month, and those indicating declines outnumbered increases.
Several analysts have pointed out, however, that employment is a lagging indicator, as manufacturers gearing up for increased output hedge their bets by deferring commensurate staff increases.
Last week's strong economic reports are "a signal to some in the markets that they ought to focus less on the employment report and focus on other indicators," said Joan Schneider, a money market analyst at Continental Bank.
In the futures market, the September contract closed up 1/16 Friday, at 97 16/32.
In the cash market, the bellwether 30-year bond was up 1/32 late in the day, to yield 8.08%.
The 7 7/8% 10-year note rose 1/8, to 100 10/32-100 14/32, to yield 7.81%, and the three-year 6 7/8% note was 3/32 higher at 100 16/32-100 18/32, to yield 6.66%.
Rates on Treasury bills were lower, with the three-month bill down five basis points at 5.24%, the six-month bill four basis points lower at 5.29%, and the year bill two basis points lower at 5.31%.
In the corporate market, both investment-grade and junk-bond securities ended the day Friday mostly unchanged.
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August 20, 1991, Los Angeles Times, Many Large Clients Say They'll Stand By Embattled Salomon, by Scot J. Paltrow,
NEW YORK — Salomon Bros.' quick steps to deal with its government securities scandal brought some positive results Monday as a number of big clients said they will continue to do their usual level of business with the company.
But the scandal showed signs of broadening as sources confirmed that the Securities and Exchange Commission has requested documents from more than a dozen other big firms that trade Treasury securities.
The sources said the letters, sent out several days ago, seek evidence of possible collusion among firms in fixing bids for Treasury notes and bonds and of other illegal practices, including making bids in the names of customers who hadn't authorized them.
William R. McLucas, the SEC's enforcement chief, declined comment on whether the agency's investigation has been extended beyond Salomon.
At Salomon, signs of customer support Monday eased fears of a massive defection of clients from the New York investment banking and brokerage company that recently admitted cornering more than an allowable share of the huge Treasury market.
Nevertheless, Salomon's stock lost $1.625 Monday to close at $26.25, continuing last week's selloff.
Big institutional investors that do business with Salomon on Monday seemed reassured by the appointment of the respected Nebraska financier Warren E. Buffett as interim chairman. Buffett has moved swiftly to tighten Salomon's internal controls and name replacements for senior executives who quit or were fired.
The Teachers Insurance and Annuity Assn.-College Retirement Equities Fund, which claims to be the largest U.S. pension fund, said it will continue to do business with Salomon, although it will closely monitor government investigations of the firm.
"Salomon Bros. appears to be taking appropriate actions to deal with the situation, and we are pleased that they have chosen a person of Warren Buffett's expertise and integrity to lead the firm through its difficulties," the pension fund said in a statement.
The giant Boston-based Fidelity group of mutual funds also said it has no plans to cut back its business with Salomon.
Salomon spokesman Robert F. Baker Jr. asserted that "clients are coming back." He declined to give numbers or identify them. Deryck C. Maughan, named Sunday as Salomon's chief operating officer, was said to have received a 1 1/2-minute ovation at the firm's morning meeting Monday.
Salomon has admitted repeatedly purchasing more than its permitted share of 35% of Treasury notes and bonds at auctions. It also acknowledged making bids in clients' names without their approval.
On Sunday, Chairman and Chief Executive John H. Gutfreund, President Thomas W. Strauss and Vice Chairman John W. Meriwether resigned from Salomon. And the Treasury Department suspended Salomon's right to make bids on behalf of customers in Treasury auctions.
The scandal has led to reports of possible widespread collusion among government securities firms in bidding at Treasury auctions. The firms have strongly denied it.
But traders say that with much greater scrutiny now in a market that long was lightly regulated, they're going to be more cautious. In particular, they expect less of the routine, permissible contacts with each other designed to get a sense of market demand for securities.
"Market participants will be more conservative in the way they approach what has been their everyday way of doing business for years and years," said William Brachfeld, an executive vice president of Daiwa Securities America Inc. and a former Salomon official.
The new conservatism and caution by traders, he said, probably will force the government to pay slightly higher interest rates on the notes and bonds that it auctions to finance the national debt.
Salomon on Monday named Eric R. Rosenfeld, 38, to temporarily head its government bond department. He replaces Paul Mozer, a Salomon managing director, who was fired Sunday by Buffett.
Rosenfeld was co-head of U.S. fixed-income arbitrage at Salomon. The firm also named Hans Ulrich Hufschmid, 35, as head of its global foreign exchange department in New York. Hufschmid has been manager of Salomon's foreign exchange operation in London.
In a separate development, the New York Stock Exchange said it is "closely monitoring" Salomon because of its admitted violations of Treasury rules.
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August 20, 1991, New York Times / Albany Times Union, Other Firms Probed as Part Of Salomon Brothers Scandal, by Kurt Eichenwald,
The scandal that has rocked Salomon Brothers Inc. widened Monday as the Securities and Exchange Commission began requesting documents from dozens of other firms, seeking evidence of possible collusion, fraud and other illegal practices in the $2.2 trillion market for U.S. Treasury issues, people who have been briefed on the inquiry said.
The far-reaching requests began to go out over the weekend, providing the first indication that government investigators suspect that illegal bidding practices of the sort disclosed at Salomon Brothers may have been more widespread than previously thought.
All primary dealers, which are the institutions authorized to trade directly with the Federal Reserve, are being asked to provide documents in the inquiry, these people, who spoke on condition that they not be identified, said.
The requests were issued after a formal order of investigation was approved by the SEC's commissioners. People involved in the case said that the government's official name of the investigation did not even mention Salomon Brothers; it is called "In the Matter of Certain Treasury Notes."
Naming the securities and not Salomon would seem to indicate that the commission believes the illegal activities might not be limited to those disclosed by the firm earlier this month.
The SEC has not yet subpoenaed other firms. Rather, it is asking for voluntary cooperation.
"They expect voluntary compliance," one person involved in the case said. "If they don't get it, they will send subpoenas right away."
The broadening of the scandal came as Salomon Brothers, deeply troubled, continued to move to restore order.
Warren E. Buffett, the Omaha investor who was named chairman and chief executive of the firm Sunday, flew to Washington on Monday to meet with a series of regulators who are investigating the firm.
Buffett, whose company, Berkshire Hathaway Inc., put $700 million into Salomon in 1987 as the firm was fighting off a hostile takeover, replaced John H. Gutfreund, who resigned as chairman and chief executive Sunday.
Salomon is under investigation by the SEC, the Treasury, the Federal Reserve and the Justice Department for its illegal bidding during the Treasury auctions.
Salomon has admitted illegally purchasing more Treasury securities than the 35 percent maximum allowed any one firm, as well as other violations.
Wall Street executives said that such actions could create the perception that a leading force in the Treasuries market was dishonest and could damage market credibility worldwide.
The firm also moved rapidly Monday to replace two senior Salomon executives who were dismissed Sunday for their role in the unfolding scandal.
Salomon told its employees that Eric R. Rosenfeld, 38, a managing director and co-head of fixed-income arbitrage, would be interim head of the government trading desk.
Hans Ulrich Hufschmid, 35, a vice president and manager of the foreign exchange desk in London, was named head of foreign exchange in New York.
The two men replace Paul Mozer and Thomas Murphy, the two former top traders on the government desk who were dismissed for their roles in submitting illegal bids during several Treasury auctions since last December.
The appointments came as Salomon's new senior management, named Sunday at a weekend meeting of the firm's board, moved swiftly to try to contain the damage, both in Washington and at the firm.
As Buffett worked in Washington, Deryck C. Maughan, the former co- head of investment banking, who was named chief operating officer Sunday, took the firm's reins, seeking to calm executives at the New York office.
In a series of morning meetings, Maughan repeatedly told the firm's executives and employees that he believed that Salomon should now turn back to its business.
Salomon was helped Monday by outside factors. With traders re-energized by the tumult created in the financial world by the coup that deposed President Mikhail S. Gorbachev of the Soviet Union, morale at the firm picked up.
"I don't mean this the wrong way, but the coup couldn't have happened at a better time," one executive with the firm said. "In this, the marketplace needs Salomon Brothers, and people here can't help but focus on the marketplace."
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August 20, 1991, Chicago Sun-Times, New heads for Salomon operations,
NEW YORK Embattled Salomon Bros. has appointed two managers for its government bond and foreign exchange operations, the brokerage's parent company said Monday.
Salomon Inc. said Eric Rosenfeld will take responsibility for bonds until a permanent head is appointed, and Hans Ulrich Hufschmid will become head of the Global Foreign Exchange department.
Rosenfeld, 38, is a managing director and co-head of Salomon Bros.' fixed-income arbitrage. Hufschmid, 35, is a vice president and manager of Salomon's foreign exchange operation in London.
A Salomon spokeswoman said Rosenfeld and Hufschmid replace Paul Mozer, who was fired Sunday as managing director.
Salomon, one of the prominent firms in the high-stakes market for U.S. Treasury securities, accepted the resignations of Chairman John Gutfreund, President Thomas Strauss and Vice Chairman John Meriwether on Sunday.
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August 20, 1991, The Boston Globe, Salomon tries to mop up the damage,
NEW YORK -- Salomon Inc. risked losing major investment customers as the Wall Street giant scrambled yesterday to contain the damage from a trading scandal that brought down three top executives.
One day after the firm's highest officials quit in disgrace and multibillionaire investor Warren E. Buffett took charge of the company, members of Congress clamored for tighter regulation of the government securities market Salomon cheated.
The company said it would cooperate fully with four federal agencies that have launched investigations of Treasury market trades by its brokerage, Salomon Brothers.
Yesterday the embattled company appointed two managers for its government bond and foreign exchange operations, the parent company said. Eric Rosenfeld will take responsibility for bonds until a permanent head is appointed. Hans Ulrich Hufschmid will become head of the Global Foreign Exchange department.
Rosenfeld, 38, is a managing director and co-head of Salomon Brothers fixed-income arbitrage. Before joining Salomon in 1984, Rosnefeld was an assistant professor at Harvard Business School.
Hufschmid, 35, is a vice president and manager of Salomon's foreign exchange operation in London. He will now be based in New York.
Rosenfeld and Hufschmid replace Paul Mozer, who was fired Sunday as managing director.
Salomon also continued to meet with shaken customers, who used the brokerage to place orders for Treasury securities. But it was clear some clients remained skeptical.
"We're not convinced that all of the internal problems have yet been addressed," said Kurt N. Schacht, general counsel of the Wisconsin Investment Board.
The Wisconsin board decided it would not deal with the brokerage after Salomon's leaders admitted last week they knew about illegal bidding by the brokerage but delayed telling regulators for months.
"It's going to take more than a few well-placed resignations," Schacht said. Wisconsin will wait until investigators have finished their work and give the firm a clean bill of health before reconsidering, he said.
Meanwhile, officials of the California Public Employees' Retirement System, the nation's largest state pension fund, have been meeting with Salomon officials every day since Thursday, a day after Salomon disclosed the most damaging details of the scandal.
"We have a very high degree of concern about our business there, particularly when you look at the impact that Salomon Brothers has in the marketplace in government securities," said a spokesman for California's state controller, Gray Davis. California has not yet decided whether it will stop investing through Salomon Brothers.
Salomon has admitted cornering more than its fair share of the Treasury market, at times by submitting bids in the names of customers without their authorization. The Treasury Department on Sunday prohibited Salomon from bidding in the names of its customers.
The brokerage is one of 40 primary dealers in the government securities market, meaning it can buy bonds, bills and notes directly from the Treasury at its auctions. Investors place orders for the securities through the primary dealers.
Salomon was the largest government securities dealer, at least before the Treasury's decision to limit its future auction participation.
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August 21, 1991, The Washington Post, Salomon Loses Major Bond Customer; California Pension Fund Drops Securities Business With N.Y. Firm, by Stan Hinden,
Salomon Brothers Inc., which is facing a widening federal investigation into its trading in the U.S. bond market, lost a major bond customer yesterday when the $63 billion California Public Employees Retirement System said it would discontinue buying government securities from the New York investment firm.
Salomon's problems with customers began to surface as a Justice Department official said the department was conducting "a wide-ranging investigation" into the government securities markets, suggesting that its probe may go beyond Salomon's recent admissions that it sought to corner the market on new government issues.
Taking part in the probe, Justice said, are the department's criminal and antitrust divisions, along with the U.S. Attorney's Office in New York.
Salomon also is facing investigations by the Treasury Department, the Federal Reserve System and the Securities and Exchange Commission.
The SEC reportedly has asked the 40 primary dealers in Treasury securities to fill out a six-page questionnaire and to furnish documents relating to their trading practices in the government bond market.
Meanwhile, in an SEC filing yesterday, Salomon revealed that it also was under investigation by the New York Stock Exchange and that nine class-action lawsuits have been filed against the firm and its top executives, Reuter reported.
Salomon Chairman John H. Gutfreund and two other top officials resigned Sunday and directors named financier Warren E. Buffett to run the company during the cleanup phase.
California was the second major state pension fund to quit doing business with Salomon. The State of Wisconsin Investment Board, which manages $26 billion, suspended its business with Salomon last week.
In the midst of all the bad news, Salomon got a boost from the $95 billion Teachers Insurance and Annuity Association-College Retirement Equities Fund (TIAA-CREF), the nation's largest pension fund. TIAA-CREF said it would continue to do business with Salomon while monitoring developments affecting the firm.
The reaction of Salomon customers spotlighted the role of public confidence in the future of the firm. A Salomon spokesman insisted yesterday that the firm's government bond business was at normal levels and its equity business was above normal.
The California decision was conveyed to Salomon by DeWitt F. Bowman, the chief investment officer for the California fund, known as Calpers, in a letter to Deryck Maughan, the newly named chief operating officer for Salomon.
"It is with a sense of outrage and concern," Bowman wrote, that Calpers had learned of the "illegal actions taken by Salomon Brothers in an apparent attempt to dominate the U.S. government bond market during recent auctions." Bowman added, "We are thus placing our investment relationship on a probationary status and will cease placing any of our current U.S. government bond business through Salomon Brothers." However, Bowman said, the state would continue to do other types of business with Salomon.
In 1989, according to state reports, the pension fund paid Salomon more than $1 million in commissions.
In a statement, Salomon said, "We regret the decision ... to suspend trading government securities with us, particularly in view of our new management and improved control procedures. ... We hope that when Calpers has had an opportunity to evaluate all of the new policies and procedures we have implemented, it will reconsider its decision."
An even more vigorous action came from the State of Wisconsin Investment Board. Executive Director Patricia Lipton wrote to Gutfreund that her state was cutting off all of its business with Salomon. "The actions of Salomon Brothers have in our view cast a cloud of suspicion over one of the most important markets in the world and serve to undermine the integrity of both your firm and the Treasury markets," she wrote.
Staff writer Kathleen Day contributed to this report.
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August 21, 1991, Chicago Sun-Times, 'Outraged' Calif. pension fund blocks Salomon as bond trader, by Gene Ramos,
WASHINGTON Salomon Bros. was suspended Tuesday as a bond trader for the nation's largest pension fund and said it was being investigated by the New York Stock Exchange, as the scandal rocking one of America's premier investment houses widened.
The California Public Employees Retirement System, known as Calpers, said it suspended Salomon as a buyer and seller of Treasury bonds, saying it was "outraged and disappointed" by revelations of illicit trading by the Wall Street powerhouse.
The investigation by the NYSE of one of its member firms comes on top of separate probes by the Securities and Exchange Commission, the Treasury Department and other federal agencies. The regulators are looking into Salomon's admitted misdeeds at several government bond auctions. The Washington Post reported Tuesday that sources said the SEC has broadened its probe to include other key players in the government bond market in addition to Salomon Bros.
Over the weekend, three top Salomon executives, including Chairman John Gutfreund, resigned and two managing directors were fired after the firm admitted it knew of violations as early as April but failed to disclose them until early August.
Salomon revealed in an SEC filing in Washington Tuesday that nine class-action lawsuits have been filed against the firm and its top executives.
The lawsuits and additional investigations indicate the brokerage's problems could drag on for some time.
Last week, the Wisconsin Investment Board suspended business with Salomon.
On Sunday the U.S. Treasury ruled that Salomon could not bid on behalf of customers at government bond auctions, although it allowed the investment house to bid for itself.
Like the Wisconsin fund, Calpers said the bond business it gave to Salomon will be parceled out among other dealers.
"We will spread it out," Basil Schwan at Calpers said.
The stock of parent Salomon Inc. fell 75 cents to $25.50 on the New York Stock Exchange. The firm did not disclose details of the probe by the Big Board, and the NYSE would neither confirm nor deny the investigation.
Salomon's list of the class-action suits was the first time the firm had publicly disclosed their existence. The suits, filed mostly by shareholders, seek unspecified damages.
Among other things, they accuse Salomon officials of "recklessly disregarding" the illegal trading practices that were carried out.
Five suits were filed with the Delaware Chancery Court and four with the U.S. District Court in Manhattan.
"They're going to have their hands full," said one lawyer. "It's going to be a lawyers' paradise."
Salomon directors also are charged with breaching their fiduciary obligations to shareholders by failing to install procedures insuring that the firm complied with Treasury bidding rules.
Salomon has admitted bidding at auctions on more government securities than regulations allowed. The limit is designed to keep any one buyer from cornering the market.
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August 21, 1991, The Washington Post, Buffett Begins Wall Street Duty in Washington, by Kathleen Day,
Warren Buffett, newly appointed chairman of scandal-plagued Salomon Brothers Inc., spent his first day on Wall Street in Washington.
He flew to the capital Monday to meet with Securities and Exchange Commission Chairman Richard C. Breeden, and yesterday he conferred with Treasury Secretary Nicholas F. Brady, according to sources familiar with Buffett's schedule.
Buffett could not be reached for comment yesterday.
That a man appointed Sunday to head one of the nation's largest securities trading firms should embark the next day for Washington was no surprise, the sources said.
After all, Buffett said during a press conference Sunday that dealing with regulators will be a major task as chairman - a post he accepted on an interim basis only.
Salomon's reputation has been sullied by revelations of wrongdoing during at least five Treasury auctions.
The disclosures include an admission by top Salomon executives that they waited months to tell regulators about one violation. When they finally informed the government Aug. 9, sources said some federal officials believe, the executives did so only because the SEC had subpoenaed documents that would have uncovered both the violation and the fact that it went unreported.
The disclosures led John Gutfreund, a legendary bond trader who had survived a decade at Salomon, to resign as chairman. Buffett, an Omaha billionaire, then agreed to step in.
His first task was to call Brady on Sunday and plead to have the Treasury lift, at least partially, a ban it had just issued excluding Salomon from bidding at government auctions. Brady complied and banned Salomon only from bidding on behalf of customers.
The prospect of living out of a suitcase on the East Coast shuttle doesn't daunt Buffett, who prefers his Midwest home.
As he said Sunday, "My mother's sewn my name in the underwear, so it's all okay."
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August 21, 1991, The Washington Post, Salomon Scandal an Object Lesson, Perhaps, for Moscow, by David Warsh,
A couple of global leaders toppled over the weekend. What is the connection between the coup that apparently has deposed Mikhail Gorbachev from the topmost pinnacle of the Soviet Union and the symbolic defenestration of John Gutfreund as chairman of Salomon Brothers Inc., perhaps the loftiest trading and investment bank in the world?
Certainly it is not the one that is popularly drawn: capitalism in disarray, even in the hour of its greatest triumph.
Instead, events in New York offer an object lesson as to what has gone so very wrong in Moscow.
The putsch of the Russian cops and generals represents the sad new chapter in the winding-down of a great experiment. The Russian Revolution of 1917 was a moment of electric hope in the history of the 20th century.
It represented the adoption of what Adam Przeworski has called "that particular blueprint that congealed in Europe between 1848 and 1891: rational administration of things to satisfy human needs." It was a blueprint that has captivated many of the best-intentioned minds of several generations. It still may serve well on a less ambitious scale.
Almost 75 years later, however, it is clear that the revolution failed in large part because of its inability to renew itself, to resolve its conflicts regularly under unchanging rules. It failed because it was profoundly undemocratic and antagonistic to change.
Political parties in the Soviet Union don't exist to lose elections, managers generally don't fear the loss of their jobs, laws are not made to be obeyed. People grumble, but they don't really expect to exert control.
In contrast, when Gerald Corrigan, president of the New York Federal Reserve Bank, called Salomon's Gutfreund for a second time last Friday, it was a sure thing that the 61-year-old bond trader soon would leave his job as quickly as if he had climbed out the window.
Leadership of the firm abruptly shifted to an outsider from Omaha - Warren Buffett - and seemed likely to devolve eventually on a 43-year-old officer of the firm who until last week had been managing its Tokyo office. Deryck Maughan was quickly boosted to the outside world as "Mr. Integrity," according to the usual recipe.
The whole thing required one newspaper article, two phone calls and a certain amount of high-stakes backstage maneuvering.
The point is that leadership shifted quickly and unequivocably from one faction on Wall Street to another. The clique that had run Salomon was out; a new and less-connected clique was in. The firm's capital base was threatened briefly as it prepared to roll over a series of IOUs before the Treasury Department steadied the Street.
Wall Street buzzed with speculation about who had put the blocks to "Solly," and why. Certainly it was not a pair of reporters for the Wall Street Journal, acting entirely on their own. Many firms stand to benefit from a diminution of the power of the 40 large "primary dealers" - investment and commercial banks - who make the market for U.S. government debt. And so the spotlight was brought to bear on the U.S. Treasuries market.
But the deed was done, and quickly. The losers now are free to fight back, to hire "spin doctors," to plant counter leaks, to retain lawyers and lobbyists, to compete ever harder in the international bond markets.
In contrast, tanks rolled through the Moscow streets as citizens assimilated the news that the Soviet Constitution itself, not some obscure bond covenant or an arcane government regulation, had been breached in its most fundamental particular. Lies were manufactured and broadcast, as the nation's ruling elite prepared to dig in, by force of arms.
It is precisely this freedom of many different political and economic competitors to contend in a stable institutional framework that has rendered the U.S. capital markets the broadest and deepest in the world. It ensures that they will remain so, at least for the foreseeable future. The Salomon scandal is just another proof of how relatively well the system works.
David Warsh is a columnist for the Boston Globe.
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August 22, 1991, The Bond Buyer, Salomon scandal could sidetrack bank measure, disclosure push,
WASHINGTON -- The unfolding government securities scandal ensnaring Salomon Brothers Inc. could help derail pending bank reform legislation and may sidetrack lawmakers, at least for the moment, from considering further regulation of municipal securities, industry sources said yesterday.
Bank lobbyists said the Salomon situation could throw more cold water on measures to overhaul the financial industry, which faced an uphill battle in both the House and the Senate even before the alleged skulduggery by Salomon traders.
Among other reforms, bills pending on both sides of Capitol Hill are aimed at gutting the 1933 Glass-Steagall Act. But bank lobbyists expect House Energy and Commerce Committee Chairman John Dingell, D-Mich., a strong opponent of bank entry into the securities business, to use the Salomon situation to help retain the act's barriers between investment and commercial banks.
"Dingell can say there's a danger in underwriting [or wrongdoing], so banking and securities shouldn't be mixed," a bank lobbyist said.
"All of this would play into Dingell's hand, I would think," said Fritz Elmendorf, a spokesman for the Consumer Bankers Association. Rep. Dingell's views are considered important because his panel is reviewing a reform bill approved in June by the House Banking Committee that would allow banks to affiliate with securities firms.
They said Rep. Dingell's hand could be strengthened by concerns about the Bank Insurance Fund, which is expected to go broke by year's end. Some of Salomon's competitors allegedly lost millions of dollars when the firm cornered the market in Treasury securities. Had those losses been absorbed by a bank affiliate, they could have strained the institution's resources and caused it to fail, the lobbyists said.
But Mr. Elmendorf said commercial banks have never been excluded from the government securities market because Glass-Steagall allows banks to underwrite and deal in general obligation bonds of the federal and municipal governments.
"So there's no real connection [between the Salomon situation and the Glass-Steagall debate], but it is a scandal," he said. "Anything like that can be used as an excuse not to act on banking legislation."
According to one lobbyist, the scandal could weaken Rep. Dingell's sway in the reform debate. "All in all, I think this is positive because it shows members of the House that Dingell spends too much time on trying to expand his [committee's] jurisdiction rather than on stuff that clearly is within his jurisdiction, like the Treasury market," he said.
"It shows that there are problems in Dingell's domain that he's not tending to because he's too busy trying to mind everyone else's business," the lobbyist added.
In the Senate, the reform bill faces an equally uncertain future. Approved by the Senate Banking Committee earlier this month on a narrow 12-9 vote, the legislation may be amended by disgruntled senators who believe there is a need to require stricter separation between banks and securities affiliates. But overhaul proponents complain that such restrictions would so burden banks that any advantages of opening securities affiliates would evaporate.
Another impact of the Salomon scandal may be to shave back air time Congress may give on issues facing the municipal bond market in upcoming Capitol Hill hearings over reauthorization of the Government Securities Act of 1986, government and industry sources say.
"A lot of attention may be diverted to Salomon" during the House's debate of the 1986 law, said a government source who asked not to be identified.
A Senate Banking Committee panel chaired by Sen. Christopher Dodd, D-Conn., has already held two hearings on the condition of the municipal bond market and the need for improved disclosure. But it is unclear whether Sen. Dodd's securities subcommittee will conduct a third in the series, as planned.
The Senate cleared legislation July 30 reauthorizing the government securities law without amendments affecting the municipal market.
In the meantime, the House Energy and Commerce Committee's subcommittee on telecommunications and finance will conduct a hearing Sept. 4 on Salomon's problems and will probably hold hearings on the Government Securities Act reauthorization later that month.
Full committee Chairman Dingell has written the SEC three times in the last year expressing concerns about the quality of disclosure in the municipal bond market, adding that the reauthorization of the government securities law may be an appropriate vehicle for an amendment on the subject.
But neither Rep. Dingell nor subcommittee Chairman Edward Markey, D-Mass., have signaled recently that they plan amendments touching on municipal bonds in the government securities legislation.
Some industry sources, however, warn that municipal bonds cannot help being drawn into the debate over government securities in the near future. "The Salomon problem adds fuel to the concern that there should be more regulation in unregulated markets," said one top Wall Street official.
"I think it could have a big impact on the municipal side. If there are abuses in the most efficient market in the world, what about other markets," he said, saying poor secondary-market disclosure and the lack of price dissemination in the municipal market could be the targets of congressional scrutiny.
SEC member Richard Roberts hinted earlier this month that Congress may get involved in municipals soon, particularly if the market does not move quickly to improve secondary-market disclosure. He said the Municipal Securities Rulemaking Board's proposed secondary-market repository, if eventually approved by the SEC, will improve the situation. But the board's efforts alone "may not carry us all the way to our destination," he said.
"Further commitment will need to come from other segments of the industry, including lawyers, and perhaps the SEC and Congress may also have a role to play," he said at an American Bar Association conference in Atlanta.
But another industry source said, "I don't think that the Salomon situation is at all related to the municipal market. The municipal market is a lot more mature than the government securities market.
"The municipal market went through in 1975 what the government securities market is going through now," he added, referring to enactment of amendments that established sales practice rules and suitability standards for the municipal market. Their situations are "totally unrelated" now, he said.
Sources say that Salomon situation could put pressure on Congress to give primary regulatory authority over sales practice standards for the government securities arena to the SEC, rather than the Treasury. The Senate bill gives the National Association of Securities Dealers the ability to write sales practice rules for its members -- subject to SEC approval -- but the Treasury could veto rules it thinks impair market liquidity or create competition problems.
A draft House version would give the SEC, which is considered a stronger regulator, more authority in regulating sales practices, while Treasury and the Federal Reserve would provide input.
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August 22, 1991, The Bergen County Record, More Investors Flee Salomon Bros,
NEW YORK -- The flight of customers from Salomon Bros. intensified Wednesday as the World Bank and more state agencies withdrew business in reaction to the brokerage's bond-trading scandal. The World Bank, which deals with Salomon worldwide in a variety of currencies, said it would suspend business with the Wall Street giant at least through September. Also on Wednesday, Salomon lost more business from two state pension funds in Massachusetts, and California Treasurer Kathleen Brown suspended some transactions from her state's $19 billion Pooled Money Investment Account. The World Bank's action was designed to send a signal to Salomon and all other bond dealers that the markets would have to stay clean, said Vice President and Treasurer Donald Roth.
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August 22, 1991, The Washington Post, Confessions of a Robber Baron, by Art Buchwald,
There has been a tremendous amount of hanky-panky going on in the banking business lately.
First, the S&Ls turned out to be full of fraud and corruption. Then the public learned that the Bank of Credit and Commerce International was not what it was cracked up to be and had even hoodwinked Clark Clifford, one of the country's wisest old men. The latest blockbuster is the Salomon Brothers scandal, which revealed that the prestigious Wall Street firm had tried to corner the trillion-dollar U.S. Treasury bond market.
All this has the public wondering whether the people who handle our money are as wonderful as we once thought they were.
The person who knows the most about our banking system is Willie Sutton, the former bank robber. When asked after being captured, "Willie, why do you rob banks?" he replied, "Because that's where the money is."
Willie is now in retirement, but, as curator of the Bank Robbers' Hall of Fame, he still keeps his eye on the country's savings institutions. He seemed to be glad that someone knew he was still alive.
I asked Willie, "Why do bankers steal money from their own banks?"
"Because it's more fun than stealing green tomatoes from a vegetable stand. Not all bankers are stick-up men, any more than all stick-up men are bankers. But when it comes to heisting a bank, nobody can do it better than the person who runs one.
"When I stuck up a bank I could only rob one teller's window at a time. There was never too much money in that. The best way to steal big cash is to do it from within. The executives at the S&Ls, BCCI and Salomon Brothers never had to use a gun," Willie said.
"Even the public understands that. What it cannot comprehend is why would a man earning $5 million a year honestly want to make $10 million dishonestly?"
"It's pure arithmetic. If you make $10 million instead of $5 million, people have twice as much respect for you. Everyone thinks that greed is the major factor in the banking business. It's not. All a man wants is the respect of his peers and neighbors. Each million he can steal is a feather in his cap. At the end of the year many Wall Streeters look as if they're wearing an Indian chief's headdress."
"Okay, so they are going for respect and not greed. Why so many banking scandals now?"
"Because money is a product that is simple to move around. It's also amazingly easy to acquire. It isn't the banker's money - it's the customers' savings. The client hands the banker a certain amount of cash and says, `Here's my nest egg. Please take my money and keep it safe for me.' Now that's really dumb. Would you give some stranger in a parking lot your life's savings and say, `Be a good guy and make it grow'?"
"Why doesn't the government do something about all this white-collar crime in banks?"
"That would mean stricter regulation of our financial institutions - and nobody wants that. It's true that a lot of S&Ls have been raped and pillaged by management, and no one knows the mess that BCCI and Salomon Brothers are going to cause the country. But as one of the greats in the bank-robbing business, I can tell you that I admire the people who are stealing from the inside.
"If I had done it their way, I would now be sitting here with a pile of U.S. Treasury bonds instead of this crummy Social Security check that I stole from my neighbor's mailbox."
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August 22, 1991, The Bond Buyer; Goldman takes Calif. taxables, with Salomon as co-manager, by Sean Monsarrat,
Goldman, Sachs & Co. won $602 million taxable California bonds yesterday, in a deal that also marked co-manager Salomon Brothers Inc.'s first foray into municipals since 1989.
The record size various purpose non-callable taxable general obligation bonds were won with a true interest cost of 7.9112%.
The bonds were aggressively priced to yield from 5.85% in 1992 to 8.15% in 2001, about 35 basis points over comparable Treasuries and about 15 basis points cheaper than where government agency paper was trading.
The issue is rated triple-A by Moody's Investors Service, Standard & Poor's Corp., and Fitch Investors Service.
Goldman, Sachs reported an unsold balance of $299 million late yesterday. There was $145 million remaining in the 2001 maturity, $57 million in the 1993 maturity, $32 million in the 1994 maturity, and $54 million in the 1995 maturity.
Six bidding syndicates competed for the issue and Merrill Lynch & Co. and Nomura Securities bidding together were the cover with a TIC of 7.9235%.
A Goldman, Sachs officer said that the issue met with some resistance because of the aggressive price, but that the deal saw broad investor interest, including traditional taxable buyers like pension funds, insurance companies, and banks.
"It was a very aggressive price and it seems to be moving along better now," said David C. Clapp, a general partner at Goldman. "We didn't expect to have it done by the end of the first day, but the government market is holding in and I think it will be okay."
Mr. Clapp added that taxable municipal bonds are a relatively new security and investors can be slower with orders.
"Investors aren't used to it, especially in this size," he said. "The taxable sector is tough. People really didn't know where this deal was going to come. New York City is really the only other large issuer and that's a different story."
New York City has included a taxable section in their recent borrowings and bonds have yielded as high as 10.9% in 2011.
Salomon Brothers, which relinquished its gip on municipal underwriting in 1987 when it bowed out of the market, was brought into the deal for its corporate marketing prowess.
"Solly is such a player in the taxable market that it makes tremendous sense to have them in," a Goldman officer acknowledged. "Their other problems aside, they move a lot of bonds."
Gedale Horowitz, a senior officer with Salomon Brothers' who once headed the firm's municipal bond department, said the deal's gilt-edged ratings made it attractive because there have been no 10-year triple-A rated corporate issues priced in the taxable primary sector.
Mr. Horowitz added that Salomon Brothers, which continued to bid on certain taxable municipals as late as 1989, might bid selectively on municipal issues in the future.
Some market participants noted that the California deal will help to define and shape boundaries in the taxable municipal sector.
"This deal will make people realize that taxable munis are not just a necessary evil," a New York trader said. "People will have to focus on the taxable sector and start thinking about it more, which will put some credibility into taxable munis. It's the perfect name at the perfect time."
In other primary action, Bear, Stearns as senior manager tentatively priced and repriced $87 million Lee County, Fla. School Board certificates of participation to raise the 2011 yield by three basis points.
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August 22, 1991, New York Times / Albany Times Union, In Wake of Treasury Scandal More Clients Drop Salomon, by Kurt Eichenwald,
Salomon Brothers Inc. suffered several new blows Wednesday in the growing Treasury markets scandal as more clients suspended doing business with the firm and a state treasury announced it would stop buying the short-term debt the firm issues to finance itself.
In addition, two more lawsuits were filed against the firm, bringing the total to 12.
The World Bank, one of the most valuable, blue-chip customers in the securities industry, also announced Wednesday that it was suspending all business activities with Salomon through Sept. 30.
In a communication to Salomon, released by the firm, the World Bank said that "if our Sept. 30 review indicates that you once again meet the high standards we set for our financial partners, we would expect to resume our normal business relationship."
California officials, who the day before suspended trading with the firm's government bond desk, said they would discontinue buying the firm's short-term commercial paper but also said they would go ahead with a $602 million issue of taxable bonds that Salomon will co-manage with Goldman Sachs.
The California treasury owns $230 million in Salomon commercial paper and will not renew those investments when they mature.
The market's confidence has been shaken, said Kathlee Brown, the California state treasurer. "California must take every step to insure the safety of the fund."
But state officials said the decision to stop making short-term investments in Salomon's commercial paper did not have any bearing on the bond issue that Salomon helped underwrite because the firm was part of the group that submitted the best bid.
The move by California was the only public indication that any of the firm's sources of funds were being affected. Brokerage firms like Salomon are heavily dependent on being able to borrow huge sums of money cheaply to finance their inventories of securities, and they borrow from banks and other institutions and by selling their own securities, including commercial paper.
Salomon had previously said it had other financial options, including backup lines of credit from banks, to continue financing its operations.
Two Massachusetts state pension funds also suspended their relationships with Salomon. The Massachusetts State Teachers and Employee Retirement Fund, and the Pension Reserve Investment Trust will halt doing business with the firm, the state treasurer, Joseph Mallone, said, until he was assured that the firm had put controls in place to prevent more violations of the law.
In one of the suits filed against the firm Wednesday, the buyers of preferred securities that Salomon issued for itself in June claimed to have been defrauded.
That lawsuit, filed by Fred and Rita Schwartz in U.S. District Court in New York, charges that the June prospectus for the $100 million worth of preferred securities failed to disclose that the senior management of Salomon, including John H. Gutfreund, who resigned Sunday as chairman and chief executive, had been told two months earlier about illegal bidding on the investment house's government securities desk.
The suit said the misleading information kept the price of the securities above where it would have otherwise been.
The Schwartzes bought 400 of the 4.25 million depository preferred shares issued in that offering at $25 each. The complaint asks that it be granted class-action status.
The preferred shares Wednesday fell $1.25 to $22.75 in New York Stock Exchange trading. Since they were sold, they have traded as high as $25.875 and as low as $22.625 - a low that was reached during Wednesday's trading.
In the second suit filed in federal court in New York Wednesday, a purchaser of $200,000 of two-year Treasury notes on May 22, said the price he had paid for the notes was inflated because of Salomon's misconduct, according to Bloomberg Business News.
The troubles for Salomon from civil litigation are not over, lawyers said. Robert N. Kaplan, a lawyer for the Schwartzes, said the complaint filed Wednesday was going to become part of a broader complaint that he is working on with other lawyers who have filed or planned to file suit to try to consolidate the claim. He said he expects it to be filed later this week.
In a sign of the significance the investigation has gained in Washington, William McLucas, the director of the enforcement division for the Securities and Exchange Commission, has decided to conduct the inquiry of Salomon personally, people involved in the case said.
McLucas is said to have made a point of telling others in the case that he is handling the details of the Salomon inquiry himself, these sources said.
Clients whose names were improperly used by former Salomon traders in its illegal bidding in several Treasury auctions began to come out Wednesday.
Mercury Asset Management, the largest pension fund manager in Britain, Wednesday said its name had been submitted on bids at two Treasury auctions, the four-year note auction last December and the five-year note auction in February, by former Salomon employees without authorization.
Mercury said it is providing information to the American authorities.
Salomon confirmed that Mercury's name was used in the bidding. "We deeply regret this clear violation of a valued customer relationship and the new management of Salomon Brothers has already taken steps to insure that it will not happen again," the firm said.
Salomon executives, meanwhile, are scrambling to reassure clients of the firm's integrity and to try to hold business. Among the clients they were visiting was British Telecom. The company had chosen Salomon earlier this month to underwrite its $8.5 billion offering.
________________________________________________________________________________
August 22, 1991, The Boston Globe, The wisdom of Salomon,
Greed and overconfidence, like alcohol and barbiturates, make a dangerous combination. At Salomon Brothers Inc., the investment banking giant now rocked by scandal, greed was institutionalized in the form of enormous payments to highly successful traders while overconfidence was fertilized by those successes. Congress and regulators may find ways of making it harder for such events to repeat, but greed and overconfidence look like partners from time to time -- in the best of houses.
Salomon's top leadership has left, Japanese style, in the wake of the disaster that may yet jeopardize the firm's preeminent position in government-bond markets. John Gutfreund, the savvy chairman who rewarded top traders with bonuses well in excess of his $2.3 million annual salary, is gone from the firm he helped transform from a sleepy bond house into a financial assemblage with few peers.
His disappearance may have been brought about by partners who sensed that his mere presence jeopardized their well-being and that the caretaker management now in the hands of the renowned Warren Buffet was their only shot at salvation.
One aspect of the Salomon deals is singularly striking. Its traders apparently cornered markets one would have thought were, by their very nature, immune to such events -- not because Treasury bonds, bills and notes are instruments of the US government but because those markets are so immense. Corner they did, however, in some new issues, and squeeze they did when other dealers were caught short. Greed resulted.
Maybe it will never happen again with Treasuries. Safe to assume that no one will be tempted to try again even if regulators cannot figure out a way to prevent it. Chances are, though, that nimble minds will figure out new ways to achieve something like the same results in some other markets. Greed and overconfidence, after all, may be forever
August 22, 1991, The Bergen County Record, More Investors Flee Salomon Bros,
NEW YORK -- The flight of customers from Salomon Bros. intensified Wednesday as the World Bank and more state agencies withdrew business in reaction to the brokerage's bond-trading scandal. The World Bank, which deals with Salomon worldwide in a variety of currencies, said it would suspend business with the Wall Street giant at least through September. Also on Wednesday, Salomon lost more business from two state pension funds in Massachusetts, and California Treasurer Kathleen Brown suspended some transactions from her state's $19 billion Pooled Money Investment Account. The World Bank's action was designed to send a signal to Salomon and all other bond dealers that the markets would have to stay clean, said Vice President and Treasurer Donald Roth.
____________________________________________________________________________
August 22, 1991, The Washington Post, Confessions of a Robber Baron, by Art Buchwald,
There has been a tremendous amount of hanky-panky going on in the banking business lately.
First, the S&Ls turned out to be full of fraud and corruption. Then the public learned that the Bank of Credit and Commerce International was not what it was cracked up to be and had even hoodwinked Clark Clifford, one of the country's wisest old men. The latest blockbuster is the Salomon Brothers scandal, which revealed that the prestigious Wall Street firm had tried to corner the trillion-dollar U.S. Treasury bond market.
All this has the public wondering whether the people who handle our money are as wonderful as we once thought they were.
The person who knows the most about our banking system is Willie Sutton, the former bank robber. When asked after being captured, "Willie, why do you rob banks?" he replied, "Because that's where the money is."
Willie is now in retirement, but, as curator of the Bank Robbers' Hall of Fame, he still keeps his eye on the country's savings institutions. He seemed to be glad that someone knew he was still alive.
I asked Willie, "Why do bankers steal money from their own banks?"
"Because it's more fun than stealing green tomatoes from a vegetable stand. Not all bankers are stick-up men, any more than all stick-up men are bankers. But when it comes to heisting a bank, nobody can do it better than the person who runs one.
"When I stuck up a bank I could only rob one teller's window at a time. There was never too much money in that. The best way to steal big cash is to do it from within. The executives at the S&Ls, BCCI and Salomon Brothers never had to use a gun," Willie said.
"Even the public understands that. What it cannot comprehend is why would a man earning $5 million a year honestly want to make $10 million dishonestly?"
"It's pure arithmetic. If you make $10 million instead of $5 million, people have twice as much respect for you. Everyone thinks that greed is the major factor in the banking business. It's not. All a man wants is the respect of his peers and neighbors. Each million he can steal is a feather in his cap. At the end of the year many Wall Streeters look as if they're wearing an Indian chief's headdress."
"Okay, so they are going for respect and not greed. Why so many banking scandals now?"
"Because money is a product that is simple to move around. It's also amazingly easy to acquire. It isn't the banker's money - it's the customers' savings. The client hands the banker a certain amount of cash and says, `Here's my nest egg. Please take my money and keep it safe for me.' Now that's really dumb. Would you give some stranger in a parking lot your life's savings and say, `Be a good guy and make it grow'?"
"Why doesn't the government do something about all this white-collar crime in banks?"
"That would mean stricter regulation of our financial institutions - and nobody wants that. It's true that a lot of S&Ls have been raped and pillaged by management, and no one knows the mess that BCCI and Salomon Brothers are going to cause the country. But as one of the greats in the bank-robbing business, I can tell you that I admire the people who are stealing from the inside.
"If I had done it their way, I would now be sitting here with a pile of U.S. Treasury bonds instead of this crummy Social Security check that I stole from my neighbor's mailbox."
______________________________________________________________
August 22, 1991, The Bond Buyer; Goldman takes Calif. taxables, with Salomon as co-manager, by Sean Monsarrat,
Goldman, Sachs & Co. won $602 million taxable California bonds yesterday, in a deal that also marked co-manager Salomon Brothers Inc.'s first foray into municipals since 1989.
The record size various purpose non-callable taxable general obligation bonds were won with a true interest cost of 7.9112%.
The bonds were aggressively priced to yield from 5.85% in 1992 to 8.15% in 2001, about 35 basis points over comparable Treasuries and about 15 basis points cheaper than where government agency paper was trading.
The issue is rated triple-A by Moody's Investors Service, Standard & Poor's Corp., and Fitch Investors Service.
Goldman, Sachs reported an unsold balance of $299 million late yesterday. There was $145 million remaining in the 2001 maturity, $57 million in the 1993 maturity, $32 million in the 1994 maturity, and $54 million in the 1995 maturity.
Six bidding syndicates competed for the issue and Merrill Lynch & Co. and Nomura Securities bidding together were the cover with a TIC of 7.9235%.
A Goldman, Sachs officer said that the issue met with some resistance because of the aggressive price, but that the deal saw broad investor interest, including traditional taxable buyers like pension funds, insurance companies, and banks.
"It was a very aggressive price and it seems to be moving along better now," said David C. Clapp, a general partner at Goldman. "We didn't expect to have it done by the end of the first day, but the government market is holding in and I think it will be okay."
Mr. Clapp added that taxable municipal bonds are a relatively new security and investors can be slower with orders.
"Investors aren't used to it, especially in this size," he said. "The taxable sector is tough. People really didn't know where this deal was going to come. New York City is really the only other large issuer and that's a different story."
New York City has included a taxable section in their recent borrowings and bonds have yielded as high as 10.9% in 2011.
Salomon Brothers, which relinquished its gip on municipal underwriting in 1987 when it bowed out of the market, was brought into the deal for its corporate marketing prowess.
"Solly is such a player in the taxable market that it makes tremendous sense to have them in," a Goldman officer acknowledged. "Their other problems aside, they move a lot of bonds."
Gedale Horowitz, a senior officer with Salomon Brothers' who once headed the firm's municipal bond department, said the deal's gilt-edged ratings made it attractive because there have been no 10-year triple-A rated corporate issues priced in the taxable primary sector.
Mr. Horowitz added that Salomon Brothers, which continued to bid on certain taxable municipals as late as 1989, might bid selectively on municipal issues in the future.
Some market participants noted that the California deal will help to define and shape boundaries in the taxable municipal sector.
"This deal will make people realize that taxable munis are not just a necessary evil," a New York trader said. "People will have to focus on the taxable sector and start thinking about it more, which will put some credibility into taxable munis. It's the perfect name at the perfect time."
In other primary action, Bear, Stearns as senior manager tentatively priced and repriced $87 million Lee County, Fla. School Board certificates of participation to raise the 2011 yield by three basis points.
_____________________________________________________________________________
August 22, 1991, New York Times / Albany Times Union, In Wake of Treasury Scandal More Clients Drop Salomon, by Kurt Eichenwald,
Salomon Brothers Inc. suffered several new blows Wednesday in the growing Treasury markets scandal as more clients suspended doing business with the firm and a state treasury announced it would stop buying the short-term debt the firm issues to finance itself.
In addition, two more lawsuits were filed against the firm, bringing the total to 12.
The World Bank, one of the most valuable, blue-chip customers in the securities industry, also announced Wednesday that it was suspending all business activities with Salomon through Sept. 30.
In a communication to Salomon, released by the firm, the World Bank said that "if our Sept. 30 review indicates that you once again meet the high standards we set for our financial partners, we would expect to resume our normal business relationship."
California officials, who the day before suspended trading with the firm's government bond desk, said they would discontinue buying the firm's short-term commercial paper but also said they would go ahead with a $602 million issue of taxable bonds that Salomon will co-manage with Goldman Sachs.
The California treasury owns $230 million in Salomon commercial paper and will not renew those investments when they mature.
The market's confidence has been shaken, said Kathlee Brown, the California state treasurer. "California must take every step to insure the safety of the fund."
But state officials said the decision to stop making short-term investments in Salomon's commercial paper did not have any bearing on the bond issue that Salomon helped underwrite because the firm was part of the group that submitted the best bid.
The move by California was the only public indication that any of the firm's sources of funds were being affected. Brokerage firms like Salomon are heavily dependent on being able to borrow huge sums of money cheaply to finance their inventories of securities, and they borrow from banks and other institutions and by selling their own securities, including commercial paper.
Salomon had previously said it had other financial options, including backup lines of credit from banks, to continue financing its operations.
Two Massachusetts state pension funds also suspended their relationships with Salomon. The Massachusetts State Teachers and Employee Retirement Fund, and the Pension Reserve Investment Trust will halt doing business with the firm, the state treasurer, Joseph Mallone, said, until he was assured that the firm had put controls in place to prevent more violations of the law.
In one of the suits filed against the firm Wednesday, the buyers of preferred securities that Salomon issued for itself in June claimed to have been defrauded.
That lawsuit, filed by Fred and Rita Schwartz in U.S. District Court in New York, charges that the June prospectus for the $100 million worth of preferred securities failed to disclose that the senior management of Salomon, including John H. Gutfreund, who resigned Sunday as chairman and chief executive, had been told two months earlier about illegal bidding on the investment house's government securities desk.
The suit said the misleading information kept the price of the securities above where it would have otherwise been.
The Schwartzes bought 400 of the 4.25 million depository preferred shares issued in that offering at $25 each. The complaint asks that it be granted class-action status.
The preferred shares Wednesday fell $1.25 to $22.75 in New York Stock Exchange trading. Since they were sold, they have traded as high as $25.875 and as low as $22.625 - a low that was reached during Wednesday's trading.
In the second suit filed in federal court in New York Wednesday, a purchaser of $200,000 of two-year Treasury notes on May 22, said the price he had paid for the notes was inflated because of Salomon's misconduct, according to Bloomberg Business News.
The troubles for Salomon from civil litigation are not over, lawyers said. Robert N. Kaplan, a lawyer for the Schwartzes, said the complaint filed Wednesday was going to become part of a broader complaint that he is working on with other lawyers who have filed or planned to file suit to try to consolidate the claim. He said he expects it to be filed later this week.
In a sign of the significance the investigation has gained in Washington, William McLucas, the director of the enforcement division for the Securities and Exchange Commission, has decided to conduct the inquiry of Salomon personally, people involved in the case said.
McLucas is said to have made a point of telling others in the case that he is handling the details of the Salomon inquiry himself, these sources said.
Clients whose names were improperly used by former Salomon traders in its illegal bidding in several Treasury auctions began to come out Wednesday.
Mercury Asset Management, the largest pension fund manager in Britain, Wednesday said its name had been submitted on bids at two Treasury auctions, the four-year note auction last December and the five-year note auction in February, by former Salomon employees without authorization.
Mercury said it is providing information to the American authorities.
Salomon confirmed that Mercury's name was used in the bidding. "We deeply regret this clear violation of a valued customer relationship and the new management of Salomon Brothers has already taken steps to insure that it will not happen again," the firm said.
Salomon executives, meanwhile, are scrambling to reassure clients of the firm's integrity and to try to hold business. Among the clients they were visiting was British Telecom. The company had chosen Salomon earlier this month to underwrite its $8.5 billion offering.
________________________________________________________________________________
August 22, 1991, The Boston Globe, The wisdom of Salomon,
Greed and overconfidence, like alcohol and barbiturates, make a dangerous combination. At Salomon Brothers Inc., the investment banking giant now rocked by scandal, greed was institutionalized in the form of enormous payments to highly successful traders while overconfidence was fertilized by those successes. Congress and regulators may find ways of making it harder for such events to repeat, but greed and overconfidence look like partners from time to time -- in the best of houses.
Salomon's top leadership has left, Japanese style, in the wake of the disaster that may yet jeopardize the firm's preeminent position in government-bond markets. John Gutfreund, the savvy chairman who rewarded top traders with bonuses well in excess of his $2.3 million annual salary, is gone from the firm he helped transform from a sleepy bond house into a financial assemblage with few peers.
His disappearance may have been brought about by partners who sensed that his mere presence jeopardized their well-being and that the caretaker management now in the hands of the renowned Warren Buffet was their only shot at salvation.
One aspect of the Salomon deals is singularly striking. Its traders apparently cornered markets one would have thought were, by their very nature, immune to such events -- not because Treasury bonds, bills and notes are instruments of the US government but because those markets are so immense. Corner they did, however, in some new issues, and squeeze they did when other dealers were caught short. Greed resulted.
Maybe it will never happen again with Treasuries. Safe to assume that no one will be tempted to try again even if regulators cannot figure out a way to prevent it. Chances are, though, that nimble minds will figure out new ways to achieve something like the same results in some other markets. Greed and overconfidence, after all, may be forever
____________________________________________________________________________
August 22, 1991, The Bond Buyer, Salomon scandal could sidetrack bank measure, disclosure push, by
Geoffrey A. Campbell, Vicky Stamas,
WASHINGTON -- The unfolding government securities scandal ensnaring Salomon Brothers Inc. could help derail pending bank reform legislation and may sidetrack lawmakers, at least for the moment, from considering further regulation of municipal securities, industry sources said yesterday.
Bank lobbyists said the Salomon situation could throw more cold water on measures to overhaul the financial industry, which faced an uphill battle in both the House and the Senate even before the alleged skulduggery by Salomon traders.
Among other reforms, bills pending on both sides of Capitol Hill are aimed at gutting the 1933 Glass-Steagall Act. But bank lobbyists expect House Energy and Commerce Committee Chairman John Dingell, D-Mich., a strong opponent of bank entry into the securities business, to use the Salomon situation to help retain the act's barriers between investment and commercial banks.
"Dingell can say there's a danger in underwriting [or wrongdoing], so banking and securities shouldn't be mixed," a bank lobbyist said.
"All of this would play into Dingell's hand, I would think," said Fritz Elmendorf, a spokesman for the Consumer Bankers Association. Rep. Dingell's views are considered important because his panel is reviewing a reform bill approved in June by the House Banking Committee that would allow banks to affiliate with securities firms.
They said Rep. Dingell's hand could be strengthened by concerns about the Bank Insurance Fund, which is expected to go broke by year's end. Some of Salomon's competitors allegedly lost millions of dollars when the firm cornered the market in Treasury securities. Had those losses been absorbed by a bank affiliate, they could have strained the institution's resources and caused it to fail, the lobbyists said.
But Mr. Elmendorf said commercial banks have never been excluded from the government securities market because Glass-Steagall allows banks to underwrite and deal in general obligation bonds of the federal and municipal governments.
"So there's no real connection [between the Salomon situation and the Glass-Steagall debate], but it is a scandal," he said. "Anything like that can be used as an excuse not to act on banking legislation."
According to one lobbyist, the scandal could weaken Rep. Dingell's sway in the reform debate. "All in all, I think this is positive because it shows members of the House that Dingell spends too much time on trying to expand his [committee's] jurisdiction rather than on stuff that clearly is within his jurisdiction, like the Treasury market," he said.
"It shows that there are problems in Dingell's domain that he's not tending to because he's too busy trying to mind everyone else's business," the lobbyist added.
In the Senate, the reform bill faces an equally uncertain future. Approved by the Senate Banking Committee earlier this month on a narrow 12-9 vote, the legislation may be amended by disgruntled senators who believe there is a need to require stricter separation between banks and securities affiliates. But overhaul proponents complain that such restrictions would so burden banks that any advantages of opening securities affiliates would evaporate.
Another impact of the Salomon scandal may be to shave back air time Congress may give on issues facing the municipal bond market in upcoming Capitol Hill hearings over reauthorization of the Government Securities Act of 1986, government and industry sources say.
"A lot of attention may be diverted to Salomon" during the House's debate of the 1986 law, said a government source who asked not to be identified.
A Senate Banking Committee panel chaired by Sen. Christopher Dodd, D-Conn., has already held two hearings on the condition of the municipal bond market and the need for improved disclosure. But it is unclear whether Sen. Dodd's securities subcommittee will conduct a third in the series, as planned.
The Senate cleared legislation July 30 reauthorizing the government securities law without amendments affecting the municipal market.
In the meantime, the House Energy and Commerce Committee's subcommittee on telecommunications and finance will conduct a hearing Sept. 4 on Salomon's problems and will probably hold hearings on the Government Securities Act reauthorization later that month.
Full committee Chairman Dingell has written the SEC three times in the last year expressing concerns about the quality of disclosure in the municipal bond market, adding that the reauthorization of the government securities law may be an appropriate vehicle for an amendment on the subject.
But neither Rep. Dingell nor subcommittee Chairman Edward Markey, D-Mass., have signaled recently that they plan amendments touching on municipal bonds in the government securities legislation.
Some industry sources, however, warn that municipal bonds cannot help being drawn into the debate over government securities in the near future. "The Salomon problem adds fuel to the concern that there should be more regulation in unregulated markets," said one top Wall Street official.
"I think it could have a big impact on the municipal side. If there are abuses in the most efficient market in the world, what about other markets," he said, saying poor secondary-market disclosure and the lack of price dissemination in the municipal market could be the targets of congressional scrutiny.
SEC member Richard Roberts hinted earlier this month that Congress may get involved in municipals soon, particularly if the market does not move quickly to improve secondary-market disclosure. He said the Municipal Securities Rulemaking Board's proposed secondary-market repository, if eventually approved by the SEC, will improve the situation. But the board's efforts alone "may not carry us all the way to our destination," he said.
"Further commitment will need to come from other segments of the industry, including lawyers, and perhaps the SEC and Congress may also have a role to play," he said at an American Bar Association conference in Atlanta.
But another industry source said, "I don't think that the Salomon situation is at all related to the municipal market. The municipal market is a lot more mature than the government securities market.
"The municipal market went through in 1975 what the government securities market is going through now," he added, referring to enactment of amendments that established sales practice rules and suitability standards for the municipal market. Their situations are "totally unrelated" now, he said.
Sources say that Salomon situation could put pressure on Congress to give primary regulatory authority over sales practice standards for the government securities arena to the SEC, rather than the Treasury. The Senate bill gives the National Association of Securities Dealers the ability to write sales practice rules for its members -- subject to SEC approval -- but the Treasury could veto rules it thinks impair market liquidity or create competition problems.
A draft House version would give the SEC, which is considered a stronger regulator, more authority in regulating sales practices, while Treasury and the Federal Reserve would provide input.
August 22, 1991, The Bond Buyer, Salomon scandal could sidetrack bank measure, disclosure push, by
Geoffrey A. Campbell, Vicky Stamas,
WASHINGTON -- The unfolding government securities scandal ensnaring Salomon Brothers Inc. could help derail pending bank reform legislation and may sidetrack lawmakers, at least for the moment, from considering further regulation of municipal securities, industry sources said yesterday.
Bank lobbyists said the Salomon situation could throw more cold water on measures to overhaul the financial industry, which faced an uphill battle in both the House and the Senate even before the alleged skulduggery by Salomon traders.
Among other reforms, bills pending on both sides of Capitol Hill are aimed at gutting the 1933 Glass-Steagall Act. But bank lobbyists expect House Energy and Commerce Committee Chairman John Dingell, D-Mich., a strong opponent of bank entry into the securities business, to use the Salomon situation to help retain the act's barriers between investment and commercial banks.
"Dingell can say there's a danger in underwriting [or wrongdoing], so banking and securities shouldn't be mixed," a bank lobbyist said.
"All of this would play into Dingell's hand, I would think," said Fritz Elmendorf, a spokesman for the Consumer Bankers Association. Rep. Dingell's views are considered important because his panel is reviewing a reform bill approved in June by the House Banking Committee that would allow banks to affiliate with securities firms.
They said Rep. Dingell's hand could be strengthened by concerns about the Bank Insurance Fund, which is expected to go broke by year's end. Some of Salomon's competitors allegedly lost millions of dollars when the firm cornered the market in Treasury securities. Had those losses been absorbed by a bank affiliate, they could have strained the institution's resources and caused it to fail, the lobbyists said.
But Mr. Elmendorf said commercial banks have never been excluded from the government securities market because Glass-Steagall allows banks to underwrite and deal in general obligation bonds of the federal and municipal governments.
"So there's no real connection [between the Salomon situation and the Glass-Steagall debate], but it is a scandal," he said. "Anything like that can be used as an excuse not to act on banking legislation."
According to one lobbyist, the scandal could weaken Rep. Dingell's sway in the reform debate. "All in all, I think this is positive because it shows members of the House that Dingell spends too much time on trying to expand his [committee's] jurisdiction rather than on stuff that clearly is within his jurisdiction, like the Treasury market," he said.
"It shows that there are problems in Dingell's domain that he's not tending to because he's too busy trying to mind everyone else's business," the lobbyist added.
In the Senate, the reform bill faces an equally uncertain future. Approved by the Senate Banking Committee earlier this month on a narrow 12-9 vote, the legislation may be amended by disgruntled senators who believe there is a need to require stricter separation between banks and securities affiliates. But overhaul proponents complain that such restrictions would so burden banks that any advantages of opening securities affiliates would evaporate.
Another impact of the Salomon scandal may be to shave back air time Congress may give on issues facing the municipal bond market in upcoming Capitol Hill hearings over reauthorization of the Government Securities Act of 1986, government and industry sources say.
"A lot of attention may be diverted to Salomon" during the House's debate of the 1986 law, said a government source who asked not to be identified.
A Senate Banking Committee panel chaired by Sen. Christopher Dodd, D-Conn., has already held two hearings on the condition of the municipal bond market and the need for improved disclosure. But it is unclear whether Sen. Dodd's securities subcommittee will conduct a third in the series, as planned.
The Senate cleared legislation July 30 reauthorizing the government securities law without amendments affecting the municipal market.
In the meantime, the House Energy and Commerce Committee's subcommittee on telecommunications and finance will conduct a hearing Sept. 4 on Salomon's problems and will probably hold hearings on the Government Securities Act reauthorization later that month.
Full committee Chairman Dingell has written the SEC three times in the last year expressing concerns about the quality of disclosure in the municipal bond market, adding that the reauthorization of the government securities law may be an appropriate vehicle for an amendment on the subject.
But neither Rep. Dingell nor subcommittee Chairman Edward Markey, D-Mass., have signaled recently that they plan amendments touching on municipal bonds in the government securities legislation.
Some industry sources, however, warn that municipal bonds cannot help being drawn into the debate over government securities in the near future. "The Salomon problem adds fuel to the concern that there should be more regulation in unregulated markets," said one top Wall Street official.
"I think it could have a big impact on the municipal side. If there are abuses in the most efficient market in the world, what about other markets," he said, saying poor secondary-market disclosure and the lack of price dissemination in the municipal market could be the targets of congressional scrutiny.
SEC member Richard Roberts hinted earlier this month that Congress may get involved in municipals soon, particularly if the market does not move quickly to improve secondary-market disclosure. He said the Municipal Securities Rulemaking Board's proposed secondary-market repository, if eventually approved by the SEC, will improve the situation. But the board's efforts alone "may not carry us all the way to our destination," he said.
"Further commitment will need to come from other segments of the industry, including lawyers, and perhaps the SEC and Congress may also have a role to play," he said at an American Bar Association conference in Atlanta.
But another industry source said, "I don't think that the Salomon situation is at all related to the municipal market. The municipal market is a lot more mature than the government securities market.
"The municipal market went through in 1975 what the government securities market is going through now," he added, referring to enactment of amendments that established sales practice rules and suitability standards for the municipal market. Their situations are "totally unrelated" now, he said.
Sources say that Salomon situation could put pressure on Congress to give primary regulatory authority over sales practice standards for the government securities arena to the SEC, rather than the Treasury. The Senate bill gives the National Association of Securities Dealers the ability to write sales practice rules for its members -- subject to SEC approval -- but the Treasury could veto rules it thinks impair market liquidity or create competition problems.
A draft House version would give the SEC, which is considered a stronger regulator, more authority in regulating sales practices, while Treasury and the Federal Reserve would provide input.
_____________________________________________________________________________
August 22, 1991, The Washington Post, Salomon: The Subject Is Survival; Few Doubt the Firm Will Last, but Many Question Its Future, by Stan Hinden,
Salomon Brothers Inc. may well survive its bout with scandal, but the cost to its reputation will be high and the aggressive trading firm will never be the same, experienced Wall Street observers predict.
The observers recalled that two other prominent Wall Street firms - E.F. Hutton & Co. and Drexel Burnham Lambert Inc. - also were caught in a whirlpool of scandal and also struggled mightily to avoid being dragged under, but eventually vanished.
"Salomon is not Drexel," said one longtime market watcher. "I believe Salomon will survive. But the franchise will be damaged."
He said he thought Salomon's failure to quickly report its violations of bidding rules in the government bond market would be especially damaging to the firm's image.
It was generally agreed, however, that Salomon's case would be helped significantly by its decision to oust chairman John H. Gutfreund and other top Solomon officials and to put Omaha investor Warren Buffett in charge of cleaning up the firm.
But it was equally clear, observers said, that Salomon's admissions had put the firm on a slippery slope that could keep it off balance for years to come.
"This has got a life of its own," one watcher said.
The multiple federal and congressional investigations that are underway - and the accompanying media coverage - will keep a continuing spotlight trained on Salomon that may drive away both customers and key employees and hurt the firm's ability to compete, observers said.
In a new revelation, the firm said yesterday that employees who have since been fired used the name of one of its customers, Mercury Asset Management, to buy securities in a recent auction of U.S. Treasury notes.
Salomon said the action was taken without Mercury's knowledge, and that Salomon had so informed regulators.
Salomon already is paying a high price for its violations.
Institutional customers have backed away from buying billions of dollars of commercial paper, or short-term debt, issued by Salomon. The firm uses the money to finance its investment activities. Customers at the World Bank and major states also have curtailed their dealings with the global securities firm.
Salomon's stock price, which had been rising because of growing profits, have fell sharply since the firm's troubles were announced, dropping from about $37 to about $25. It closed yesterday at $24.75, down 75 cents.
These are some of the developments in the Salomon case that Wall Street will be watching:
As in the E.F. Hutton and Drexel cases, Congress often becomes a vehicle for focusing attention on market abuses and for giving them high visibility. Buffett is expected to testify at just such a hearing on Sept. 4 at the House telecommunications and finance subcommittee headed by Rep. Edward J. Markey (D-Mass.).
A series of class-action lawsuits has been filed against Salomon that can be expected to keep the firm and its lawyers busy for years. The actions come from stockholders who claim that Salomon's actions in the government bond market cost them money.
Observers said they expect to see Salomon's corporate culture undergo a radical change during the next few years. With Gutfreund personifying the macho, tough-guy approach to trading, Salomon had developed a reputation as a hard-nosed, rough-and-tumble firm determined to best its competitors.
But Buffett has decreed that playing close to the line is no longer going to be allowed. And with lawyers looking over the shoulders of traders, observers expect the firm to soften its approach.
That could drive the more aggressive people away to other firms, it was suggested. But one observer said, "Salomon could lose its top 100 people and still be a helluva strong firm."
The weakness at Salomon will encourage its competitors to try to woo the customers who are shying away from Salomon. Indeed, some of the complaints against Salomon to officials in Washington apparently came from firms that lost money when Salomon bought more than its allowed share of short-term securities in May.
Howard Homonoff, counsel to the Markey subcommittee, said the panel received a number of complaints from Wall Street at the time of the alleged May market "squeeze" by Salomon. In fact, the complaints prompted Markey to write to Securities and Exchange Commission Chairman Richard C. Breeden to look into the trading, when Salomon allegedly bought up more two-year Treasury notes than allowed and raised the prices to customers who needed them.
On the customer front, the rejection slips have been piling up. In the last few days, for instance, Salomon's costs for short-term borrowing rose at a rate of $18 million a year because banks, insurance companies and other institutional investors are declining to renew their short-term, low-interest commercial paper loans to the firm, according to Treasurer John G. Macfarlane.
The reason for the refusals, Macfarlane said, was the uncertainty caused by the pending investigations and a feeling by some institutions that Salomon should be put in the "penalty box" until matters are clarified.
Salomon, which has $7.2 billion in commercial paper outstanding, paid off $1.1 billion in the last several days. Another $781 million will come due in the next seven business days.
Only 20 percent of the commercial paper holders are renewing. Macfarlane said the firm has enough securities to pay off the entire $7.2 billion, if necessary.
The "penalty box" syndrome is hitting Salomon on other fronts, too. The World Bank yesterday said it was temporarily suspending business with Salomon. And the treasurers of California and Massachusetts joined the pension funds of California and Wisconsin in cutting business connections with Salomon.
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August 23, 1991, The Washington Post, Letter, The Salomon Disaster: Nothing to Joke About, by Albert Yu,
Rep. Edward Markey's (D-Mass.) comments regarding Salomon Brothers' $1 billion "practical joke" ("A Wall Street Giant Shaken," news story, Aug. 16) have only added to the confusion and hypocrisy surrounding the unfolding scandal.
After the powerful Wall Street firm announced that it purchased an extra $1 billion in U.S. government Treasury bonds as the result of a prank gone awry, Rep. Markey said, "We cannot tolerate games of Jeopardy being played with what is in effect the public's money."
While this sounds catchy, Rep. Markey either fails to understand basic finance or is pandering to the public's fear and often justified distrust of Wall Street. The money belongs to the investors, not to the public. The public, through the government, issues bonds because the government does not receive enough money to pay for our extravagant budgets. Like investors around the world, Salomon's customers use their money, not the public's, to buy these bonds and thus finance our fiscal recklessness in exchange for principal and interest payments.
After Congress's embarrassing involvement in the savings and loan debacle, I had hoped that it would have learned from its mistakes and have developed a basic understanding of finance; Rep. Markey's remarks suggest otherwise. As Michael Lewis, who chronicled Salomon's foibles in the bestseller "Liar's Poker," wrote: "The only thing history teaches us, a wise man once said, is that history doesn't teach us anything."
ALBERT YU Bethesda
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August 24, 1991,The Economist (US) Life after Gutfreund; Salomon Brothers,
A STRANGE blend of alarm mixed with hope prevails at 7 World Trade Center as Salomon Brothers struggles to survive the biggest crisis in its 81-year history. The chairman (John Gutfreund), president (Thomas Strauss) and vice-chairman (John Meriwether), who admitted on August 14th to having sat on evidence of fiddling in the firm's Treasury-bond department, have resigned. Two others have been fired.
A new chairman and chief executive, Warren Buffett, Salomon's largest private shareholder, has swept in from the plains, vowing that he will leave as soon as he has swept out the stables. He may hand over at least part of his job to the newly appointed chief operating officer, Deryck Maughan, whose most obvious qualifications are a good British-mandarin brain and the fact that for most of the past five years he has been working in Salomon's Tokyo offices, a safe 7,000 miles from the scene of the fiddle.
The bond department has a new boss and its traders new rules. Nicholas Brady, secretary of the Treasury, was impressed enough by Mr Buffett's reputation and intentions to lift his August 18th suspension of Salomon from future Treasury auctions soon after he imposed it: Salomon may bid on its own account, though not for customers. But in fact the firm may be heading deeper into trouble, rather than out of it.
Investigations by various agencies into Salomon's rule-breaking in at least five Treasury issues continue (and have been extended to other issues and primary dealers). Civil suits against the firm and its former higher-ups are piling up.
Some big customers are deserting Salomon. The World Bank has suspended business dealings with the firm to see how the reforms are working. So has America's biggest public pension fund, the California Public Employees' Retirement System. This matters even more than the amount of lost business suggests. Barred from primary bidding for clients and with a reduced flow of trading orders from customers, Salomon may find it harder to judge the market correctly. other prestigious deals look threatened too. At mid-week the British Treasury was debating whether it should revoke its appointment of Salomon as lead-manager in America for the sale this autumn of government shares in British Telecom.
Another worry is that some $1.1 billion of Salomon's $6.5 billion in outstanding commercial paper falls due next month. If credit-rating agencies downgrade the firm, as has been muttered, its cost of money in highly leveraged operations will shoot up and profits will fall.
The trick for Salomon's new ruling team is to house-train the traders at what some call Wall Street's own Animal House well enough to pacify regulators and investing institutions, while preserving enough of their animal spirits for the firm to continue to prosper. it will not be easy. For better and for worse, Salomon bears the stamp of its fallen chairman. And between Mr Gutfreund and Mr Buffett there could not be a greater apparent contrast.
A tale of two titans John Gutfreund, the arch-priest of the immediate, is a former bond trader who thinks 24 hours ahead in his more philosophical moments. it was this very short-termism, in the days before many on Wall Street adopted it, that made Salomon so successful. Warren Buffett, a pupil of Columbia University's Ben Graham and David Dodd, who created serious securities analysis, built his billions by seeking out and investing in long-term value. More recently he took to rescuing firms threatened with unwanted takeover, among them Salomon.
Mr Gutfreund swore, smoked and shoved his way to near the top of the Wall Street heap. Mr Buffett tries to rule through intellectual persuasion; the inventive and witty annual reports of Berkshire Hathaway, the investment vehicle of which he is the chairman, are collectors' items. Mr Gutfreund is an easterner who likes the social limelight and lives in a Fifth Avenue apartment worth $20m. The much wealthier Mr Buffett prefers a modest (well, fairly) house in Omaha, Nebraska, wears baggy suits and drinks Coca-Cola from the can. Mr Gutfreund once told The Economist that all he wanted was "the money, the power and the glory." What he has left now is the money, and that is dwindling fast as Salomon's share price sinks.
Mr Buffett has come to be seen as the Jimmy Stewart of American capitalism, Mr Gutfreund as the archetypal black hat. Yet such appearances can deceive. For all his faults, John Gutfreund converted the relatively uneducated ragtag of ruffians who made up much of Salomon in the 1960s into a well-capitalised firm of international repute by the 1990s: no mean achievement. And the soft-voiced, humorously down-home Warren Buffett is a steely operator to his own spectacular advantage.
The question now is whether Mr Buffett, as active chairman rather than passive investor, can impress a more prudent ethos upon a pitilessly competitive, risk-taking trading house without losing both people and profits. It appears that, while insisting on integrity and respect for other people's rules, he intends to cultivate the firm's profitable trading core. Naming Eric Rosenfeld, former co-head of Salomon's money-spinning bond-arbitrage department, as temporary boss of its government-bond operations seems a bid to keep traders' feet firmly under their screens. They may be more prone to stray if John Meriwether, the trading ace who many reckon was forced unfairly to resign, sets up shop in competition.
Mr Buffett is no manager; neither was Mr Gutfreund. And what of the 43-year-old Mr Maughan? A former civil servant in the British Treasury, he has earned top marks recently for building Salomon's business in Tokyo into a powerful and profitable one, despite difficult days there for foreign firms. His pep-talks to the Wall Street troops early this week were well received. But he is not a trader, and not yet a manager on the scale that Salomon's troubles demand.
If all goes well for him, Deryck Maughan could in time replace Warren Buffett as chief executive of Salomon's, less probably as chairman (names mooted for the top job include that of Paul Volcker, a former head of the Federal Reserve Board). if history is any guide, however, internal feuding will make a transfer of power supremely messy. Mr Buffett has many problems to solve before he can plausibly look for the door.
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August 24, 1991, The Washington Post, Salomon's Chief Legal Officer Resigns; Buffett Pledges to Clean House at Troubled Investment Firm, by David S. Hilzenrath,
The purge at Salomon Brothers Inc. continued yesterday with the removal of the chief legal officer of the New York investment firm's parent company.
Donald M. Feuerstein, chief lawyer for Salomon Inc., resigned at the request of Warren E. Buffett, the Omaha multibillionaire and major Salomon shareholder who stepped in as acting chairman of the troubled firm Sunday.
"I fully understand Mr. Buffett's request for my resignation and appreciate that the new management team at Salomon Inc. should have in my position an individual of their own choosing," Feuerstein said in a statement released by Salomon. Neither he nor Salomon officials could be reached for further comment.
Salomon is under investigation by four federal agencies for illegally bidding at auctions of government securities. The firm disclosed this month that at several auctions it had bought larger percentages of the bonds than the 35 percent maximum allowed any one firm.
As a result, other securities dealers were forced to buy bonds from Salomon at artificially inflated prices, and confidence in the market that the federal government uses to borrow money may be shaken, investors, traders and government officials have alleged.
Three of the firm's top executives - Wall Street powerhouses John Gutfreund, Thomas Strauss and John Meriwether - resigned Sunday following disclosures that they learned of one trading violation in April but allowed months to pass without informing government regulators. Buffett said Sunday that Feuerstein also participated in a discussion of the violation in April.
The Salomon board of directors fired Treasury bond traders Paul Mozer and Thomas Murphy last Sunday. Two other employees have been suspended.
Buffett has said efforts were made to "cover up" the wrongdoing in Salomon's bond trading and that records might have been altered. Regulators are examining why Salomon lawyers responsible for monitoring compliance with rules did not detect or report the violations, sources said.
Buffett called executives' failure to immediately inform authorities in April "inexplicable and inexcusable," and pledged to clean house.
Feuerstein, 54, was a high-ranking lawyer from 1966 to 1971 at the Securities and Exchange Commission, according to "Who's Who in America." A graduate of Yale College and Harvard Law School, he joined Salomon 20 years ago. He has served on advisory boards of the Securities Regulation Law Journal and the Solomon R. Guggenheim Museum in New York, "Who's Who" said.
The fallout from the scandal widened yesterday as Salomon reported that additional lawsuits were filed against it by angry shareholders and a buyer of government securities who claimed to have lost money because of Salomon's actions.
The securities buyer, Marshall Wolf, invoked the Racketeer Influenced and Corrupt Organizations (RICO) Act, saying Salomon and several Salomon officials conspired in "an ongoing scheme to defraud treasury securities purchasers."
Also yesterday, the securities rating firm Standard & Poor's Corp. said it is likely to downgrade Salomon corporate bonds and might downgrade Salomon's commercial paper. The downgrades would mean S&P thinks Salomon bonds have become a riskier investment.
But S&P also said Salomon is in a strong enough financial position to meet debt payments coming due. Salomon stock, which has dropped more than $10 a share this month amid publicity about the scandal, closed yesterday at $23.75, up 12 1/2 cents.
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August 26, 1991, Los Angeles Times, Buffett Chooses L.A. Attorney as Salomon Counsel, by Michael Parrish,
In his lightning drive to bolster scandal-shocked Salomon Bros., the firm's new chairman, Warren E. Buffett, on Sunday named a respected Los Angeles attorney as Salomon's general counsel.
Robert E. Denham, 45, managing partner of Munger, Tolles & Olson, will replace Donald M. Feuerstein, who was Salomon's chief legal officer until Buffett asked for his resignation Friday.
"Bob was my first and only choice," Buffett said in a statement.
The two men are hardly strangers. Buffett said they have been associated for 17 years, adding: "I know he stands for exactly the same things I do."
"I think Buffett and Deryck Maughan are going to be effective in doing what has to be done," said Denham, referring to Salomon's new chief operating officer. "And Salomon is going to continue as one of the strongest firms on Wall Street."
Denham said there had not yet been time to sort out any possible continuing relationship with Munger, Tolles, one of Los Angeles' leading corporate firms. Nor has a successor been chosen as managing partner, he said.
At the firm, Denham practiced corporate and securities law. In his new job he will be responsible for the legal affairs of Salomon and its subsidiaries, including compliance with federal regulations.
A Salomon spokesman attached no significance to the change in title that attended the appointment. (Feuerstein's title was chief legal officer.)
The announcement is part of Buffett's swift campaign to install a new Salomon management team that can restore confidence in the firm and stem defections among its clients.
Feuerstein reportedly learned on April 28 that Salomon had broken the rules in the Treasury auctions at which it played so important a role. Salomon's admitted misdeeds at those auctions, and its apparent delay in reporting them, have rocked the legendary Wall Street firm and led its top management to resign.
A week ago, Buffett said in a press conference that he had "no reason to question (Feuerstein's) efforts or enthusiasm" to see that the firm contacted federal officials. But five days later Buffett asked him to quit.
In his 20-year career at Munger, Tolles, Denham's long-term clients have included the Pacific Stock Exchange; Cook Inlet Region Inc., an Alaskan native corporation; and Berkshire Hathaway Inc., of which Buffett is the revered chairman.
Denham has worked closely with Buffett on major projects for Berkshire Hathaway since 1974 and for the past eight years represented Buffett's company in every major deal it undertook.
These included the purchase of $300 million of preferred stock issued by Champion International Corp., and earlier this month, the purchase of a $300-million private stock issue from American Express Co.
Denham, who graduated from Harvard Law School in 1971, lives with his wife, Carolyn, in Pasadena. She is a professor of educational research and statistics who is associate vice president for academic programs at Cal Poly Pomona. They have two children.
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August 29, 1991, The Washington Post, Salomon Says Ex-Trader Sold Stock Before Scandal, by Robert J. McCartney,
Salomon Brothers Inc.'s former chief U.S. government bond trader, Paul Mozer, sold 46,000 shares of Salomon stock shortly before the announcement of his suspension in early August in a major scandal that caused the stock to plummet in value, the firm said this evening.
But Mozer has not been able yet to collect the $1.7 million in cash gained from the stock sale. That's because Salomon, after learning of the sale, froze the proceeds from it in Mozer's in-house trading account at the brokerage firm, a Salomon spokesman said.
Moreover, the spokesman said, the company is seeking the approval of Mozer's lawyers to cancel the stock sale altogether.
Mozer's lawyer, Lee Richards, denied the sale was based on inside information, the Associated Press reported.
Mozer's stock sale, first reported by the New York Times in Thursday's editions, occurred before the disclosure of the scandal hurt the value of the firm's shares.
Mozer and one of his top deputies on the bond trading desk were dismissed 10 days ago in a housecleaning that also included the resignations of the company's top three executives.
The Salomon spokesman made a point of saying that the firm was not aware of any stock transactions by the other executives that were similar to Mozer's.
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August 31, 1991, Los Angeles Times, Salomon Bros. Is Looking for a New Law Firm: Securities: A prominent Wall Street law firm that conducted an internal investigation of possible wrongdoing is off the case, by Scot J. Paltrow,
NEW YORK — Salomon Bros., in deep legal trouble over government securities trading, has taken a prominent Wall Street law firm off the case and is looking for new lawyers to represent it, a spokesman said Friday.
The firm, Wachtell, Lipton, Rosen & Katz, had been representing Salomon on the matter since early July, when it was asked to conduct an internal investigation of possible wrongdoing by the securities firm in Treasury auctions.
As reported, questions have been raised about when the law firm first learned of Salomon's misdeeds and whether it immediately urged Salomon's management to notify federal regulators. Neither Salomon nor the law firm has commented on those questions. However, Salomon spokesman Robert F. Baker Jr. said Friday that taking Wachtell off the case "does not in any way reflect adversely on the work that has been done by Wachtell Lipton, which has been of critical importance to Mr. (Warren) Buffett in his efforts since assuming the job of chairman."
Buffett stepped in as Salomon's chairman and chief executive Aug. 18, after then-Chairman John H. Gutfreund and two other top executives resigned. The firm acknowledged that Gutfreund and the others knew of improper bids in Treasury auctions for months without notifying federal regulators.
Wachtell is best known for its role in defending big companies in the takeover battles of the 1980s, and for its invention of anti-takeover strategies such as the "poison pill" defense.
Baker said Wachtell several times had offered to "step aside" since Buffett was named chairman. But he said Buffett asked the firm to stay on temporarily "because of the critical need for their talent and knowledge of Salomon" to help turn over information to government investigators.
He said Buffett on Friday decided to accept the offer "so as to get on with the task of forming a new team at Salomon."
Baker declined to elaborate. A week ago, Donald Feuerstein, Salomon's chief in-house lawyer, resigned at Buffett's request.
Martin Lipton, a senior partner at Wachtell, didn't respond to repeated requests for comment Friday.
Baker said Salomon is interviewing several law firms and no decision had been made on which one will replace Wachtell. In addition to the government securities investigation, Wachtell has represented Salomon's mergers and acquisition department for several years. It couldn't be learned immediately whether Wachtell would continue to represent Salomon on matters other than the legal problems linked to the firm's activities in Treasury auctions.
In a press conference Aug. 18, Deryck C. Maughan, Salomon's new chief operating officer, said Wachtell began the internal investigation at Gutfreund's request on "July 6 or 8," well after Gutfreund and other top executives had learned of the firm's wrongdoing in late April.
["July 6 or 8" is a Saturday and a Monday]
Federal regulators weren't notified until Aug. 9. During the press conference, Maughan and Buffett said they didn't know exactly when Wachtell first learned of Salomon's wrongdoing, or when the firm first advised Salomon's management to contact regulators.
A Wachtell partner declined to comment when reached Aug. 18, and lawyers at the firm haven't returned any of several calls seeking details since then.
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August 31, 1991, The Washington Post, Salomon Eyes Benefits For Ousted Executives; Four May Get Millions Under Severance Plan, by Robert J. McCartney,
Four senior Salomon Brothers Inc. executives who resigned earlier this month in a major bond-trading scandal could still receive severance packages potentially worth millions of dollars, depending on the results of an internal investigation of the affair, the company said today.
The company's directors already have granted a special exemption that could make it possible for three of the four former executives to benefit from a lucrative bonus plan set up in 1988, even though they failed to fulfill the plan's requirement that they stay at the firm through the end of this year.
Under that program alone, former president Thomas W. Strauss is slated to receive at least $3.5 million, according to the company's 1991 proxy statement filed with the Securities and Exchange Commission in March.
In a separate development, Salomon Brothers said today that the law firm that has been advising it on the investigation was stepping aside "so as to get on with the task of forming a new team at Salomon."
The law firm - Wachtell, Lipton, Rosen & Katz, one of the most prominent on Wall Street - is to "cooperate fully" with Salomon "in an effective transition to other counsel over the next 45 days," Salomon Brothers said in a prepared statement.
The four former executives who may still receive hefty severance packages are Strauss, former chairman John H. Gutfreund, former vice chairman John Meriwether and former chief lawyer Donald Feuerstein. They all were forced to resign this month following the admission that they knew as early as April that Salomon had violated rules in U.S. Treasury securities auctions, but had failed to report the violations to regulatory authorities.
Sources said the board of directors will decide on the size of the severance packages for the four according to how much responsibility each individual bore for the firm's wrongdoing. At an emergency meeting Aug. 18 where Gutfreund stepped down, the board postponed fixing the severance packages until the inquiry showed whether "one of these people did right, and another did really wrong," said a source familiar with the situation.
If the investigation clears any of the executives, the board doesn't want them to suffer the loss of both their jobs and compensation they stood to receive, the source said.
The inquiry's outcome also will determine whether Salomon Brothers will continue to pay legal fees for the four and to give them office space for studying documents relating to the investigations and lawsuits surrounding the scandal, the company's spokesman said.
To date, circumstances for the four former senior executives are significantly better than those of the two former senior bond traders, Paul Mozer and Thomas Murphy, who were in charge of the trading desk where the violations originated. Both Mozer and Murphy were fired, and they also have been barred from receiving money under the 1988 bonus plan, are paying their own legal fees and are not receiving office space from the firm.
For the four executives who resigned rather than being fired, however, their financial loss so far is limited to the halting of their salaries, the company said in response to an inquiry about the severance packages. "Until Salomon has completed its own fact-finding analysis, it would be improper for the firm to make a decision on all other compensation matters, including eligibility for the Managing Directors' Compensation Plan established in 1988," a spokesman said.
Meriwether and Feuerstein are eligible to receive bonuses under the 1988 plan, but Gutfreund is not.
An expert on executive compensation said it was not unusual for directors to grant lucrative severance packages to executives even when they are forced to resign in scandals, because the directors are "consumed with the guilt" of dismissing people with whom they had worked for many years.
"They say, `The poor guy's going, he's humiliated, his career is just absolutely a wreck, so let's not make it worse,' " said Graef S. Crystal, editor of a newsletter on executive compensation and author of four books on the subject. Crystal said directors frequently reward executives in such cases by changing rules, such as by amending the date when stock options may be exercised, or simply "by writing fat checks."
In the case of Salomon Brothers, however, Crystal questioned whether such severance packages were justified for any of the executives who were responsible for the scandal.
"The question is, why should you give these guys a nickel of severance? They've caused the shareholders hundreds of millions of dollars of losses. They've imperiled the livelihood of 9,000 employees. You could say they should be brought before the shareholders and given a beating," said Crystal, who once worked as a consultant advising Salomon Brothers and others on executive pay issues.
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September 5, 1991, The Boston Globe, Buffett endorses tougher regulation Salomon chief apologizes for firm's manipulations, by Peter G. Gosselin, Globe Staff,
WASHINGTON -- The new chairman of Salomon Brothers yesterday apologized for his firm's manipulation of the government debt market, and legislators and regulators wrangled over what, if anything, to do to prevent similar scandals in the future.
Warren E. Buffett, the billionaire Nebraska investor and major Salomon shareholder who assumed control of the New York investment house when its top executives resigned in disgrace last month, endorsed congressional efforts to toughen regulation of the market on which the government depends to finance its multitrillion-dollar debt.
"I have no problem with tough rules, tough cops and tough prosecution," Buffett told the House telecommunications and finance subcommittee, which conducted the first congressional hearing on the case since news of the manipulation broke last month.
Subcommittee chairman Edward J. Markey (D-Mass.) said Buffett's comments were an endorsement for quick legislative action to tighten controls over the huge market for government securities. Markey wants new rules governing sales practices and internal operations of firms such as Salomon, expanded powers for the Securities and Exchange Commission and tougher penalties for violations.
Bush administration regulators, who testified separately before Markey's panel, sought to dampen demands for stricter regulation, saying that swift moves could upset the market.
While officials with the Treasury, Federal Reserve and SEC called for prosecution of those involved in the scheme, they advocated lengthy studies of the case before any action is taken. Their stand sets the stage for a struggle with a regulation-minded Congress.
"Though I am deeply concerned about recent revelations . . . I do not believe that the government securities market is broken in any fundamental way," Fed vice chairman David W. Mullins Jr. told the panel. Mullins said that there was no rush for Congress to pass new laws regulating the market, an assessment that Markey labeled "unacceptable."
From their comments, it is clear that lawmakers, both Democrat and Republican, were disconcerted by the Salomon revelations. Having long been told that the market for government debt is self-policing, many seemed genuinely surprised that it could be manipulated and were furious with the Salomon officials involved in the scheme.
"Stripped of all the language of Wall Street bond traders, what the public wants to know is simply this: Are the American people being ripped off by a few aggresssive traders?" said Rep. Matthew J. Rinaldo (R-N.J.).
"They deserve nothing but a swift kick in the butt," Rep. Jim Slattery (D-Kan.) said of Salomon executives at the center of the scandal. Slattery pleaded with Buffett to deny former investment house chairman John Gutfreund and others severence pay or any legal assistance. "I hope to see them in striped suits sweeping the streets," he said.
In his testimony, Buffett provided new details of how Salomon traders violated federal rules against purchasing more than 35 percent of a government bond offering to corner the market and exact higher prices when they resold the bonds to other buyers.
Buffett said that in July 1990, then-chief trader Paul Mozer, frustrated he could not buy all the bonds he wanted, submitted a bid for well over 100 percent of the amount being offered. Treasury officials reacted by rejecting Mozer's bid and adding a rule prohibiting buyers from bidding for any more than 35 percent of an offering.
Buffett said that Mozer "in effect felt that Treasury was challenging him" with the new rule. He apparently reacted during a December 1990 bond auction by submitting a bid for 35 percent of the offering in Salomon's name and 12 percent in the name of a Salomon customer, an affilate of the investment house of S.G. Warburg & Co. Warburg never authorized the bid in its name and was never told of it.
Buffett said that Mozer made a similar unauthorized bid in another customer's name during an auction in early February. He later told Salomon executives that he had done so as a "practical joke" and had not intended to complete the purchase, Buffett said. But because of a mixup, the firm purchased $870 million of bonds in the customer's name.
Mozer stepped up the pace during a late February auction when he submitted two unauthorized customer bids as well as one in Salomon's name, a move that left the investment firm bidding for 105 percent and ultimately purchasing 57 percent of the offering. "It would have been interesting if they'd all been awarded to him," Buffett said wryly.
When Fed and Treasury officials began raising questions about the late-February bids, Buffett said that Mozer notified senior Salomon executives, who criticized him but failed to tell regulators what had been occurring.
Although regulators appeared to be closing in on the scheme, Buffett said that Mozer would not give it up, and during a late-May offering used unauthorized customer bids to buy almost 90 percent of an offering.
"It's almost like a self-destruct mechanism," Buffett said of the last purchases. "It was not the act of a rational man at all."
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September 5, 1991, Associated Press / Albany Times Union, Salomon Inc. Makes Move to Shift Blame,
Salomon Inc. on Wednesday revealed new details about its illegal bond bidding and sought to blame the violations on a renegade trader frustrated by government rules.
Salomon also said top management was unaware of violations beyond one made during a February Treasury auction until its outside law firm conducted an investigation in July.
The disclosures were contained in a 52-page statement to Congress, made in conjunction with the start of hearings into the Salomon cheating at which the firm's interim chairman, investor Warren Buffett, testified.
Salomon said the head of the firm's government trading operation knowingly skirted federal laws, lied to top management about the wrongdoing and may have arranged collusive deals with customers.
The violations focus on Paul Mozer, a managing director in charge of the government trading desk who was fired because of the scandal. His assistant, Thomas Murphy, also was fired.
Salomon has admitted breaking the law during Treasury securities auctions in December, February, April and May. The violations include entering bids in the names of customers without their authorization and failing to tell regulators promptly.
Salomon said Mozer several times deliberately sought to bypass a federal rule preventing firms from acquiring more than 35 percent of any government security issued at auctions.
Bids made by Mozer for 100 percent of a July 1990 auction led the Treasury to enact the limit, a step Mozer then criticized publicly.
In December, Salomon said, the firm placed a phony bid on behalf of Warburg Asset Management for $1 billion in four-year Treasury notes. Salomon said it is not clear whether Mozer - who was on vacation in Florida at the time - ordered the bid. Murphy denied ordering the bogus bid, Salomon said.
At a Feb. 21 auction of five-year notes, Mozer placed bids for 35 percent of the total notes offered for Salomon and 35 percent each for two customers - or bids for 105 percent of the issue. The customer bids were unauthorized, Salomon said, and the firm acquired 57 percent of the issue.
That action tipped off regulators - but not because of Salomon's unauthorized bidding but because the customers were affiliated and together would have acquired more than 35 percent of the auction, violating the Treasury's rule.
If Mozer had not chosen Warburg's name for the phony bid, it's possible the scheme never would have been disclosed, federal investigators conceded at a House panel hearing on the scandal.
"He pulled a name out of the hat - probably a name (he thought) would cause the least trouble," Buffett testified.
Salomon said a Treasury official called the firm about the bids, and at Mozer's instruction, Murphy told regulators a bid in Warburg's name should have been submitted in another name - Mercury Asset Management Co.
Mozer later modified the lie, telling a Mercury executive who was contacted by the Treasury that bid was mistakenly submitted in Mercury's name, according to Salomon's statement to Congress.
In late April, Mozer showed Salomon vice chairman John W. Meriwether a letter from the Treasury about the incident. Mozer, however, told Meriwether the Warburg- Mercury bid was the only unauthorized customer bid that had been submitted, Salomon said.
It was then that other top Salomon executives learned about the wrongdoing, but authorities weren't notified until early August. Meriwether and three others, including ex-chairman John H. Gutfreund, have resigned.
The Salomon statement offered no new explanation for the delay, even though Gutfreund and others had decided the misconduct should be reported. Buffett said the delay was "inexplicable and inexcusable."
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September 5, 1991, Associated Press / Albany Times Union, Practical Joke with $1B in Bonds Backfires,
Playing around with $1 billion in bonds wouldn't strike most people as funny, but on the Salomon Brothers Inc. trading floor it was considered a practical joke.
Salomon on Wednesday offered additional details about the incident, which it revealed last month along with other wrongdoing that has embroiled the Wall Street firm in a major scandal.
In a statement given to Congress, Salomon blamed the inadvertent bid for $1 billion in 30-year bonds - made in a customer's name during a Feb. 7 Treasury auction - on the head of its government bond trading desk, Paul Mozer.
Salomon said Mozer wanted to play a "practical joke" on an unidentified Salomon bond salesman who was retiring after the auction. The firm for the first time identified the customer as Pacific Management Co.
According to Salomon, Mozer arranged to have a Pacific Management employee submit the bogus bid for $1 billion in bonds to the salesman. Mozer intended to cancel the bid, have the money management firm complain that its bid was not filled and then "blame" the retiring salesperson.
But the joke unraveled when a clerk ignored a line that Mozer had drawn through the bid on a list prepared just before the auction, and the bid was placed with the Treasury Department.
Pacific Management ended up owning $870 million in bonds, Salomon said. Salomon quickly placed the bonds in the account of another customer - apparently without approval - to avoid some paperwork, Salomon said, and then purchased them outright.
Mozer, who also was accused of additional wrongdoing during other auctions, has been fired by the firm.
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September 5, 1991, The Washington Post, Salomon Says Trader Challenged Treasury; Firm Alleges Bond Dealer Evaded Rules, by Robert J. McCartney,
The billion-dollar bond trading violations that have rocked Salomon Brothers Inc. were primarily the work of a 36-year-old senior bond trader who repeatedly challenged the U.S. Treasury by evading rules that had been adopted specifically to constrain him, the firm said yesterday.
In its first detailed explanation of the scandal, the powerful Wall Street firm gave a report to a congressional subcommittee that described how trader Paul W. Mozer first broke the rules and then sought to cover his tracks by allegedly falsifying records and lying to his superiors in a frantic effort to avoid detection as federal regulators closed in.
Salomon Brothers' new chairman, Warren E. Buffett, told the congressional panel that Mozer's actions were almost "self-destructive." Company sources described Mozer as someone who "started feeling he was taking on the U.S. government."
"It was not the act of a rational man," Buffett told the House subcommittee on telecommunications and finance, referring to an allegedly illegal bond purchase by Mozer at a time when regulators' suspicions had already been aroused.
Attempts to contact Mozer for comment were unsuccessful. Messages left at his Manhattan and Long Island residences yesterday went unanswered. Messages also were left for his attorney, Lee Richards, who was out of his office.
Salomon's report failed to solve one central mystery: why four of the firm's top executives, including former chairman John Gutfreund, waited for more than three months to inform regulators that they were aware that Mozer had broken the rules.
Buffett suggested that only federal authorities wielding full investigative powers - such as the ability to grant immunity to witnesses and to subpoena information - would be able to determine why Gutfreund and the others had delayed. "People have clammed up on us as it's gone along," a company source said. It will be possible to get the full story only when "the people with the rubber hoses get through," said the source, who spoke on condition of anonymity.
The scandal at Salomon Brothers has cast a cloud over the integrity of the world's largest financial market, which trades $2.2 trillion in securities issued by the U.S. government to finance its debt.
Salomon Brothers had been the most aggressive and most influential firm trading in that market, and its violations have triggered calls in Congress for improved supervision by regulators.
The Salomon Brothers report, submitted as part of Buffett's testimony before the subcommittee, sought to bolster the firm's reputation by offering a full explanation of its violations and thus protect itself against possible financial punishments that could cripple the firm.
The 52-page report, based on information gathered by the firm's in-house lawyers and outside counsel, found that Mozer, with some assistance from three subordinates, had violated various government rules at five separate auctions of U.S. Treasury securities between December and May. At the time, Mozer was the managing director in charge of Salomon Brothers' Government Trading Desk, a job for which he had earned $4.75 million in 1990.
Company sources said the report was based in part on interviews conducted with Mozer before he was suspended on Aug. 9 when the firm first announced that violations had occurred.
Salomon Brothers said it had analyzed records of its own bidding at a total of 45 auctions, but it had found evidence of violations at only the five described in the report. Buffett acknowledged, however, that the inquiry was not yet complete.
As detailed in the report, Mozer used a variety of illegal practices in an effort to buy larger quantities of government securities than Salomon Brothers was allowed to purchase under the rules. His methods allegedly included falsely submitting bids for securities in the names of customers who had not ordered them, falsification of trading records and failing to divulge in full Salomon Brothers' holdings of securities, the report said.
In some of the auctions, especially in May when the violations were worst, the purpose was apparently to reap extra profits for the firm by effectively "cornering" the market in one type of security and thus commanding a premium price from other would-be buyers who could get the security only by buying from Salomon Brothers.
But company sources said Mozer also may have been motivated to show that he could get around rules - adopted by the Treasury in response to his own trading - that limited each Wall Street firm to buy no more than 35 percent of the available securities at any one auction. The Treasury adopted the 35 percent rule in response to Mozer's aggressive bidding in July 1990 at an auction of Resolution Funding Corp. bonds.
Mozer publicly criticized both the rule and the official who supervised the auction, Michael Basham, deputy assistant treasury secretary. The rule became known on Wall Street as the "Mozer-Basham rule," and Salomon Brothers sources said Mozer came to view future auctions as a personal contest between himself and Basham.
According to the report, Mozer first tested his ability to evade the rule at a December auction of four-year Treasury notes. In addition to submitting a Salomon bid for 35 percent of the available securities, the firm submitted another bid, for $1 billion more of the notes, but it did so falsely by telling the Treasury that the order was coming from a customer, Warburg Asset Management.
Although Mozer was on vacation in Florida on the day of the December auction, and his deputy, Thomas Murphy, was in charge of the trading desk, the report quoted Murphy as saying that he never ordered an unauthorized bid to be made and that Mozer called the desk several times that day.
In addition, Henry Epstein, the clerk who Salomon said subsequently arranged to falsify trading records, said he had "a general impression" that Mozer had issued the instructions.
The second instance in which Mozer submitted an unauthorized bid occurred two months later, Salomon said, at a Feb. 7 auction of 30-year bonds, in a bizarre incident that apparently arose as a result of a practical joke aimed at a Salomon Brothers salesman who was about to retire.
Mozer arranged for a client firm, Pacific Investment Management Co. (Pimco), to ask the salesman to submit a $1 billion bid for bonds that in fact Pimco did not want. The idea behind the joke was that the bid would not be made, and Pimco would then complain to the salesman.
Mozer apparently tried to prevent the bid from being submitted, but clerk Epstein misread a work sheet and the bid was submitted anyway.
Two weeks later, in the first incident to attract the attention of the regulators, Mozer submitted two unauthorized bids, each for $3.15 billion, at an auction of five-year notes, in addition to its own $3.15 billion bid, the report said.
The false bids were made in the name of Warburg and the Quantum Fund, another Salomon client. At this auction, because of the false bids, Salomon ended up with 57 percent of the available securities.
But by now, regulators had picked up hints of irregularities in the bond market and Mozer had to scramble to keep his trades from being discovered, the report said.
Mozer's trading desk received a call from the Treasury in March asking about the Warburg bid. Mozer and Murphy arranged for Murphy to provide a false story to Treasury that the firm had meant to submit the bid in the name of a Warburg subsidiary, Mercury Asset Management, the report said.
In April, however, Mozer received a copy of a letter that the Treasury sent to Charles Jackson, a senior director of Mercury, asking about the bid. In response, the report said, Mozer called Jackson and asked him not to respond to the Treasury's letter so as not to "embarrass" Mozer.
But Mozer's anxiety led him to go to his supervisor, John W. Meriwether, then a vice chairman of Salomon Brothers, and tell him he had made one unauthorized bid, the report said.
Meriwether "told Mr. Mozer that the matter was very serious and represented career-threatening conduct," the report said, adding that Mozer said that was the only violation.
Ignoring Mozer's request not to take up the matter with higher ranking executives, Meriwether "promptly" met with Thomas Strauss, the president of Salomon Brothers, and informed him. Soon afterward, Gutfreund and the firm's chief legal officer, Donald M. Feuerstein, were informed, the report said.
All four of these senior executives "have stated that they decided that Mr. Mozer's conduct should be reported to governmental authorities and discussed how this should be done," but "no final decision was made." In the end, the authorities were informed only in August, and Buffett has said the delay was "inexplicable and inexcusable."
In the most dramatic auction violation, in May, Mozer submitted a partially false bid and failed to notify authorities of Salomon Brothers' existing holdings of two-year notes. As a result, Salomon Brothers and its customers ended up with $10.6 billion out of about $11.3 billion of available notes, which led to losses on the part of other Wall Street firms and triggered widespread suspicion about Salomon Brothers' activities both on Wall Street and among regulators.
The SEC sent a letter to Salomon June 26 asking about the May auction, and the firm began an in-house investigation. Then, on July 8, the outside law firm of Wachtell, Lipton, Rosen & Katz was brought in when Salomon Brothers learned that the Justice Department also was investigating the May auction.
Gradually, Wachtell, Lipton gathered more information about Mozer's violations, and, on Aug. 6 and Aug. 7, the law firm advised senior management that "a prompt report" to the authorities and the public. But a press release issued Aug. 9 failed to disclose that top management had known of the February violation.
Ultimately, it took a warning letter from the Federal Reserve Board on Aug. 13 to force the company to admit that it had known for months of the violation.
Staff writer Kathleen Day contributed to this report.
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September 5, 1991, The Bond Buyer, Rep. Markey wants new rules this year for Treasury market; agencies urge delay. (Republican Edward J. Markey) by Vicky Stamas and Stephen A. Davies,
WASHINGTON -- The chairman of the House subcommittee studying reforms of the government securities market yesterday said he will press forward with legislation this year despite appeals by federal regulators for more time to study the implications of the recent Salomon Brothers Inc. bidding scandal.
"This area cannot wait that long," Rep. Edward Markey, D-Mass., chairman of the House Energy and Commerce Committee's subcommittee on telecommunications and finance, told a packed crowd at Congress's first hearing on reauthorization of the Government Securities Act of 1986 since Salomon Brothers officials revealed last month several instances of illegal bidding in Treasury auctions.
"We believe that we've been sufficiently attentive to the issue that we can move forward," said Rep. Markey, who spelled out six changes his panel's contemplating to the 1986 law, which expires in October.
Four top regulators appearing at the hearing called for an additional 90 days to study the Salomon situation before Congress moves on significant legislative reforms -- a period of time that probably would not expire before Congress adjourns for the year. Appealing for a delay were David Mullins Jr., vice chairman of the Federal Reserve Board; Richard Breeden, chairman of the Securities and Exchange Commission; E. Gerald Corrigan, president of the Federal Reserve Bank of New York; and Jerome Powell, assistant secretary for domestic finance at Treasury.
An aide to the Senate Banking Committee's subcommittee on securities, which scheduled a hearing on the government securities law for Sept. 11, had no comment on the question of a delay.
Meanwhile, the star witness at yesterday's hearing -- Salomon Brothers' new chairman, Warren Buffett -- told Rep. Markey he had no objections to several moves contemplated by the committee to tighten regulation of the government securities market in the wake of the bidding scandal that now plagues his firm. "I have no problems with tough rules, tough cops, and tough prosecution," Mr. Buffett said.
Rep. Makey said firms participating in the government securities market should be required to abide by standard internal procedures that act as a front line defense against illegalities.
Consideration should be given to some form of large trader reporting from customers in the market to gauge better where major positions are occurring, he said.
The Sec's general antifraud authority should be augmented to make it crystal clear that any fraudulent or manipulative activity in the auction process violates the federal securities laws, Rep. Markey also suggested.
Mr. Buffett said he also would not object to another of Rep. Markey's proposals -- to give the SEC authority to oversee the manner in which price and trading information gets to the public -- although he said he has seen no major problems in that area. "I'm not aware of big gaps," he said.
Rep. Markey also said the SEC should be given authority to write sales practice rules for the market and that consideration should be given to formalizing cooperation among the SEC, the Treasury, and the Fed over the marketplace.
But Mr. Buffett said yesterday that regulators may already have some simple but effective remedies within their graps to discourage socalled "note squeezes," and other illegal bidding in the market. He said any time regulators detect illegal bidding in any particular offering they should simply reopen the issue, in effect flooding the market. Such a move presumably would lower prices of bonds already on the market.
"I think if I were in the position of influencing policy, any time an issue appeared to be behaving abnormally, I would put the world on notice that Treasury will be coming back with $10 billion more of those notes," he said. "It wouldn't happen again."
Mr. Corrigan, in later testimony before the subcommittee, endorsed Mr. Buffett's suggestion. Mr. Corrigan also said he favors enhanced disclosure of quotes offered by primary dealers in govenment bond auctions, but said the general system of having primary dealers is "not at risk."
Mr. Buffett detailed a series of violations of Treasury auction procedures by firm officials, describing them as "inexplicable and inexcusable." He suggested much of the blame falls on the shoulders of the firm's chief government bond trader, Paul Mozer, particularly since Mr. Mozer continued to orchestrate illegal trades after federal enforcement officials were notified of Salomon violations.
"It was not the act of a rational man at all," Mr. Buffett said. "It's almost like a self-destructive mechanism."
In a statement accompanying Mr. Buffett's testimony, Salomon disclosed the names of several customers for whom it submitted unauthorized bids, including the Quantum Fund, Mercury Asset Management Co., Steinhardt Partners, Tudor Jones, and Tiger Securities.
He also walked panel members through a "practical joke" orchestrated by Mr. Mozer that backfired and resulted in the firm purchasing nearly $1 billion in Treasury notes.
Federal regulators testifying before the subcommittee acknowledged that the bidding violations by Salomon Brothers could prompt the need for tougher rules. Mr. Breeden said the review of the government securities market undertaken by the SEC, the Treasury, and the Fed should be completed over the next 90 days.
Mr. Breeden also acknowledged that the Salomon Brothers scandal had raised "serious questions" about the firm's conduct in the bond market. But he also praised the company for the measures it has taken so far, which include a reorganization of senior management as well as the ongoing cooperation with federal regulators.
David Mullins, the Federal Reserve Board's vice chairman, said while the Salomon episode was troubling, "it is not apparent that sweeping changes in regulation are warranted."
Mr. Mullins said government authorities have already tightened existing surveilland and enforcement procedures. Moreover, he said the bond market has continued to function efficiently in the wake of the probe into the scandal.
"The smooth functioning of this market in recent months demonstrates that there appears to have been no economically meaningful loss of confidence in this market as yet," Mr. Mullins said.
Still, he added, "it may well be that upon review, additional rules or reporting requirements or significant changes in the auction process" may be needed.
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September 6, 1991, The Washington Post, Trader Allegedly Sought Client's Cooperation on Bid;Salomon Dealer Said to Cite Embarrassment, by David S. Hilzenrath,
Last April, officials at Mercury Asset Management Co., a London investment firm, received an unusual plea from the head of the government securities desk at Salomon Brothers Inc. in New York.
Salomon Managing Director Paul W. Mozer, whom Salomon now places at the center of the government securities trading abuses at the firm, told Mercury officials Charles Jackson and Nick Ritchie that he had mistakenly bid on Treasury securities in Mercury's name, according to a report Salomon submitted to Congress this week.
By Salomon's account, Mozer submitted unauthorized bids for Treasury securities in the name of "Warburg," apparently a reference to Mercury's affiliate, S.G. Warburg & Co. This allowed Mozer to bid for a greater share of Treasury securities than Salomon was allowed, the firm said.
Mozer asked the Mercury officials not to report the error to the U.S. Treasury Department, which had sent a letter to Mercury and Mozer days earlier identifying a possible rule violation involving the bid, the Salomon report said. "Mr. Mozer requested that Mr. Jackson not embarrass Mr. Mozer with the Treasury," the report said.
Sources close to the investigation of the Salomon scandal indicated that neither Mercury nor S.G. Warburg told the Treasury Department about Mozer's calls.
Mercury's conduct after Mozer asked it to keep quiet is now being studied by government officials here. "The appropriate officials are reviewing that situation to determine what actions would be appropriate," a spokeswoman for the Treasury said yesterday.
The chief administrative officer for Warburg's U.S. operations, Donald Kittell, referred questions to Mercury officials in London yesterday. There, Mercury spokesman Simon Lewis declined to comment on the matter.
In testimony before a congressional subcommittee Wednesday, Assistant Treasury Secretary Jerome H. Powell said Salomon informed the Treasury of the unauthorized bid on Aug. 9.
In a February auction, Salomon bought $1.7 billion of Treasury notes ostensibly on behalf of "Warburg." Later, Salomon bought the notes from Warburg's account at the same price paid in the auction. Salomon ended up buying about 57 percent of the notes sold in the auction, Salomon said, far exceeding the 35 percent limit for any one bidder.
The Treasury Department began inquiring about the Warburg bid because, unknown to Mozer, Warburg had separately submitted a $100 million bid of its own. When that bid was combined with the false Salomon bid, Warburg would have exceeded the 35 percent bidding limit, Salomon said. Mozer answered an initial inquiry from the Treasury Department by saying that the Warburg bid should have been submitted in the name of Mercury, the Warburg affiliate, Salomon said.
On April 17, the Treasury Department wrote a letter to Jackson in London discussing a possible violation of the 35 percent rule, sources said. The government sent copies of the letter to other Warburg officials and Mozer.
The letter reflected the government's belief that Mercury had authorized the February bid Salomon placed in its name. When Mercury responded to the Treasury Department on April 25, it said nothing to disabuse the government of that notion, sources said.
In a separate development yesterday, Salomon's interim chairman, billionaire investor Warren E. Buffett, apologized to Tudor Investment Corp. for a statement to a congressional subcommittee Wednesday raising questions about Tudor's involvement in a bid placed by Salomon. Buffett said yesterday he did not "mean to suggest any wrongdoing on the part of Tudor."
Tudor complained in a statement Wednesday that Salomon "would speculate on Tudor's activities before a congressional committee with an incomplete understanding of the relevant facts and without Salomon Brothers ever having requested any information from Tudor about any aspect of the transaction."
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September 8, 1991, The Washington Post, Is This Any Way to Make a Market?; Critics Calling for Change Say Treasury Bond Auctions Have Long Been Open to Abuses, by Robert J. McCartney and Kathleen Day,
New York financier Jay Cooke wielded a tight grip over the market in U.S. government bonds. He and his allies routinely dominated the purchase of securities issued to finance the nation's debt. Eventually, an outraged competitor, the Morgan banking group, pressured the Treasury to break his monopoly.
That was how it was back in 1873, according to Ron Chernow's recent book, "The House of Morgan."
Today, another leading Wall Street firm, Salomon Brothers Inc., is under fire for doing much the same thing as Cooke. It said last week that its former top U.S. bond trader, Paul W. Mozer, arranged to control 94 percent of the government notes available in a May auction. Like Cooke, Mozer allegedly gained a big enough chunk of the market to set prices, and thus reap extra profits, if he wanted to. He has yet to tell the public his story about the events now under investigation by four federal agencies.
While Mozer never approached the influence that Cooke wielded, the similarity between their strategies highlights the extent to which the market for U.S. government securities has been a breeding ground for abuse and controversy for more than a century.
The Salomon Brothers affair also has focused attention on the regulatory role of the Treasury Department, which, some critics say, has grown too dependent on the Wall Street firms that buy the securities it issues.
The government securities market, dominated by a handful of firms and operating with much looser supervision and oversight than the stock market, has repeatedly been seen as marred by collusion among traders and illicit sales practices, while providing scanty information about prices for the public.
The Salomon Brothers violations also are drawing attention to the auction system the Treasury uses to sell new securities to raise cash. The system has for decades drawn criticism from economics professors, government officials and even some Wall Street executives.
The complaint is that the Treasury, by relying heavily in the auction on an exclusive club of middlemen known as primary dealers, permits and even encourages collusion and other abuses of the sort that Salomon Brothers has admitted.
Moreover, critics say, efforts in the past to reform the system have been stymied because of coziness between Treasury officials and the dealers, a closeness encouraged in part by a revolving-door syndrome in which executives and staff move back and forth between Wall Street and the Treasury.
Milton Friedman, the Nobel Prize-winning economist who warned publicly as early as 1959 that the auction system was flawed, says the market is dominated by "a cabal" of Wall Street dealers who earn profits "at the expense of the Treasury and the taxpayer." He and other critics favor another system, known as a "Dutch auction," in which the role of the primary dealers, or middlemen, would be drastically reduced.
"They {the Treasury} are paying more than they should because of the method they have chosen to auction," which relies on the primary dealers, Friedman said in an interview. "Once they have chosen that method, the cabal is inevitable."
Similar views also are expressed privately by many market experts on Wall Street, although they are reluctant to be identified for fear that their opinions could get them in trouble with their firms.
"It's been a growing problem. There is a `good old boy' network in the government securities market" that colludes to set prices, said a senior Wall Street executive who has been following the market for more than 15 years. "I would say that it happens not with regularity, but with some degree of frequency, that certain firms, if not explicitly, implicitly agree" on how to bid in the auction, he said.
The executive added that the problem did not come as a great surprise to him. "I've always had some questions in my mind as to whether the Treasury was using the best bidding methodology, and whether the methodology that was used was being efficiently and effectively policed, and carried out ethically," he said.
Dutch Auction Experiment
The Treasury experimented with using Dutch auctions in the early 1970s, under the guidance of then-Treasury secretary George P. Shultz, who had been influenced by Friedman's views when both taught at the University of Chicago. But after William Simon, a Salomon Brothers senior partner, replaced Shultz in 1974, the experiments were halted.
When asked last week to comment, Shultz referred a reporter to a recent Wall Street Journal article by Friedman, who wrote, "For all his admirable qualities, Bill Simon was too recently a bond trader on Wall Street to welcome an experiment vigorously opposed by professional government bond dealers."
Simon said he believes the current system is "very efficient," but that he cannot recall today, 17 years after the fact, why the experiment was stopped. He said he does remember that at that time he rarely made decisions on his own and that the choice would have been the result of discussions with two key deputies, Paul A. Volcker (later to become Federal Reserve chairman) and Jack Bennett. Both Volcker and Bennett were traveling last week and were unavailable to return calls.
The issues are critical because of the market's size - $2.2 trillion in securities outstanding - and importance. The tug of supply and demand in the market sets the interest rates that influence private rates - such as those on home mortgages and bank accounts - and other interest rates around the world.
Given its importance, many observers have pointed to the irony that such a large and influential market, in the world's leading free-market economy, is relatively secretive and dominated by a small number of players.
Calls for Regulation
One such critic is Securities and Exchange Commission Chairman Richard C. Breeden, who would like to see the same rules that apply to the stock market extended to the government securities arena. He has lobbied to get more control for the SEC over the government securities market under legislation now before Congress.
That legislation would renew and amend the Government Securities Act of 1986, which created a limited regulatory structure that applied to all banks and securities firms active in the business. It established for the first time that the Treasury was the rulemaker, and it fixed sales practices and capital requirements for firms.
In recent months, the Treasury has said that existing rules and oversight are adequate. But a senior Treasury official acknowledged last week, "We're all brought short by the Salomon admissions and prepared to take a fresh look."
The 1986 law was adopted in response to the failure of several unregulated government securities dealers. One of the collapses, of E.S.M. Government Securities Inc. of Fort Lauderdale, Fla., in 1985, triggered a series of savings and loan failures in Ohio and marked the beginning of the nation's thrift industry debacle.
While the new legislation may give the SEC and Treasury more oversight powers, there is no formal move under way to change the actual auction system itself. The Treasury says that it has reviewed the process many times and considered alternatives, but says that the current method is the best because it sells the securities at the lowest cost.
Points of Controversy
There are two characteristics of the system that have aroused particular controversy. One is the fact that securities are issued at different interest rates, according to what each buyer is willing to bid. The other, which is related to the first, is that the bidding is dominated by firms that are officially designated by the Federal Reserve Board as primary dealers.
The differences in interest rates bid at an individual auction are tiny, measured in hundredths of a percentage point. But they can mean the difference between profit and loss to the dealers, who routinely trade hundreds of millions, or billions, of dollars worth of securities.
Although the bond market has not been tainted by a major collusion scandal, the suspicion has always been present that traders shared information on their bidding plans.
Critics say that a result of the current auction system is a strong incentive for dealers to collude by swapping their bidding strategies before the auction. That increases their chance of bidding about the same as everybody else and thus minimizes the possibility that they will get stuck holding securities paying relatively low interest rates.
"It's important to know what other people's opinions are," said Vernon L. Smith, an expert on auctions who teaches economics at the University of Arizona.
The differences in interest rates received by different bidders also increase the importance of the primary dealers in the auction. While anybody - even an individual - can go to a Federal Reserve Bank on auction day and submit a bid, the overwhelming majority of investors use one of the 39 primary dealers to benefit from the dealers' inside knowledge of the market.
Smith, who suspects that dealers collude under the current system, said, "All they're doing is what comes naturally. It seems to me the important thing is for the government to structure the rules to make it harder to do what comes naturally."
The principal advantage of a switch to a Dutch auction, Smith and other critics say, is that all of the securities are issued at a single interest rate. In a Dutch auction, dealers submit different bids, and the Treasury accepts the most favorable until it sells all its securities. But everyone is paid the same interest rate, which is the highest one that the Treasury agrees to pay. Since everybody gets the same rate, the theory goes, there is no reason to collude, and no incentive for investors to place bids with dealers in hope of getting the best deal.
Defenders of the existing method, including Treasury officials, argue that the government loses some revenue under a Dutch auction because some buyers who were willing to accept a lower interest rate for the securities end up getting a higher rate.
But Friedman and Smith say that various empirical studies have suggested that the Dutch auction actually raises more revenue. That's because investors tend to bid a bit higher than otherwise in order to make sure they get as many securities as they want.
In 1976, two Treasury economists found similar results favoring a Dutch auction when they did a study of the Dutch auctions that the Treasury had conducted on an experimental basis in 1973 and 1974.
The Treasury, when asked about the study, said that a 1981 memo that turned up last week revealed that one of the study's authors, Anthony J. Vignola, later cited a methodological error in the study.
Vignola, now the chief economist at Kidder, Peabody & Co., said that he does not consider the study definitive, but that he thought it represented an important first step in analyzing whether the Dutch auction was preferable.
Vignola also said, and the Treasury confirmed, that the study was not made public because of opposition from his superiors, some of whom disagreed with the conclusions.
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September 10, 1991, Associated Press / The Boston Globe, Firm involved in $1b 'joke' suspends Salomon business, by Stefan Fatsis,
NEW YORK -- The investment company involved in a $1 billion "practical joke" bond transaction with Salomon Brothers Inc. suspended Monday its Treasury bond business with the scandal-tarnished firm.
Pacific Investment Management Co. is the latest Salomon customer to halt dealings with the firm because of admissions it violated federal rules governing auctions for government bonds.
The money manager, known as Pimco, participated in an attempted "joke" a Salomon bond executive wanted to play on a retiring saleswoman. But the joke flubbed and a bid for $1 billion in government bonds was made in Pimco's name.
Separately, a Justice Department official confirmed reports the government's investigation into Salomon and the Treasury bond market appeared to be widening.
The official, speaking on condition of anonymity, said federal prosecutors were conducting civil and criminal investigations along with the Federal Reserve Board, Securities and Exchange Commission and Treasury Department.
The investigation initially was led by the Justice Department's antitrust division to examine whether traders colluded to "squeeze" the market, or control enough securities to increase profits from their sale to investors.
Now, however, the US Attorney's Office in Manhattan and the Justice Department's criminal division are involved in the case, the official said.
A published report yesterday said prosecutors were studying the possibility of charges of securities fraud, mail fraud and conspiracy against Salomon. A Salomon spokesman declined to comment on the investigations.
John Carroll, head of securities and commodities fraud unit at the US Attorney's Office, also declined to comment.
Salomon last month admitted it violated federal rules at five separate Treasury auctions since December. Top executives, including former chairman John H. Gutfreund, have resigned in an overhaul of Salomon management.
Pimco suspended Salomon from government bond dealings indefinitely but plans to continue trading with the firm in other areas, including corporate bonds, mortgage-backed securities and equities. Pimco, of Newport Beach, Calif., manages $32 billion for investors.
"We respect their decision. We hope when they look at the extraordinary steps new management has taken they'll see fit to reinstate us when the time is right," Salomon spokesman Robert F. Baker Jr. said.
Pimco has admitted it played a role in the bid. William Gross, a Pimco managing director, did not return several telephone calls seeking comment.
In addition to Pimco, at least six states and several big customers, including the World Bank, have suspended dealings with Salomon.
Salomon said in a report to Congress last week that it made an inadvertent bid for $1 billion in 30-year bonds in Pimco's name during a Feb. 7 Treasury auction.
Salomon said Paul Mozer -- the former head of Salomon's government bond unit, on whom the firm has blamed much of its wrongdoing -- arranged to have a Pimco employee submit the bogus bid for $1 billion to the Salomon saleswoman.
Mozer intended to cancel the bid, have the money management firm complain that its bid was not filled and then "blame" the retiring saleswoman.
But a clerk misread a hand-written instruction from Mozer to cancel the bid and Pacific Management ended up owning $870 million in bonds, Salomon said.
Salomon transferred the bonds to another customer's account, apparently without approval, and then bought the bonds outright. It was unclear whether any part of the incident was illegal.
Mozer, who also was accused of additional wrongdoing during other auctions, has been fired by Salomon and is a central figure in the criminal and civil investigations.
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September 10, 1991, The Boston Globe, Kicking the dickens out of US bonds, by David Warsh, Globe Staff,
To the extent that Wall Street had a New York Yankees in the 1980s, it was Salomon Brothers. In many categories, the firm was simply the best trading organization there was. If its reputation for being a little -- well, hard-driving -- grew apace, it didn't seem to matter. After all, the firm wasn't even slightly involved in the insider trading scandals. Chairman John Gutfreund liked to brag that his firm was so good it didn't need to cheat. He gloried in the sobriquet bestowed on him by breathless Business Week: "The King of Wall Street."
Until last month. Then the US Treasury Department fell on "Solly" like a ton of bricks, charging that several of its traders had flouted governmental authority by rigging some auctions for US Treasury bonds. Gutfreund, resigned in disgrace. Mega-rich, squeaky-clean investor Warren Buffett of Nebraska, who had backed Gutfreund when he needed help against raiders, took over.
Herewith a guide to help understand the subtext of the story.
To begin with, it is a reasonable hypothesis that it was that old gang, the Brady Commission, now installed at the Treasury Department, which orchestrated the scandal overall. The government investigation ostensibly began when competitors complained in May of a Salomon squeeze on an auction of 2-year notes. But the Treasury quickly seems to have seized the opportunity to bust the "primary dealers," a powerful little cartel of 39 big bond buying firms that for decades has controlled the largest, deepest market in the world.
A little background. The Federal Reserve Bank of New York, which conducts the Treasury auctions, uses the enormous market in government debt to manage the money supply, buying securities from dealers when it wants to inject new money into the system, selling securities from its portfolio when it wants to sop up reserves. The dealer banks, the only customers authorized to deal directly with the New York Fed, evolved to make this an orderly process.
But with that peculiar mix of tradition and deference that is endemic to Wall Street, the dealer banks have clung to an outmoded underwriting procedure as a way of inflating their importance -- and their profits -- even stuffing their handwritten orders into a box. The system is "right out of Dickens," says one regulator. It is also made for abuse.
Once before, the US Treasury tried to change the procedure. A series of "dutch auctions," in which all securities are sold at a single price, run by undersecretary Jack Bennett when George Schultz was Treasury Secretary in Richard Nixon's second term, saved the government money. But when former bond-trader William Simon took over the Treasury under Gerald Ford, he put an end to the experiments.
In Salomon's Paul Mozer, the Treasury has a perfect foil. The 36-year-old wunderkind, head of the goverment bond-trading desk, apparently was a closet cowboy, who routinely pushed to the limits of what was permitted -- and then beyond. After the complaints in the May auction, government regulators quickly set a trap in the aftermarket in June -- and caught not just Mozer but his superiors as well.
The press? The results of the investigation were leaked to the Wall Street Journal, which did a bang-up job of following up. This is the way things are often done in Washington these days. The controversy over the safety in the nation's nuclear weapons facilities was amplified in much the same way. And the outrage over "hubris" quickly came to dominate the situation.
It will take weeks of canny investigating to reach an opinion of who exactly among the regulators had the overall conn of the situation -- the New York Fed, the Securities and Exchange Commission and the Justice Department were involved as well. And now US Reps. John Dingell (D-Mich.) and Edward Markey (D-Mass.) are piling on, seeking to accord a larger regulatory role to the SEC (which they oversee) at the expense of the Treasury and the Fed (over which they have little control).
But the Treasury Department has directed the New York Fed to speed up its plans to computerize US auctions, and the likelihood is that the days of the primary dealers are numbered. The big problem apparently is the transition from the old system to the new -- but that is a technical problem, susceptible to solution. So deep reform is coming to the bond market. Meanwhile, the leading bully on Wall Street has been clobbered. In short, the episode is a chapter in the development of kinder, gentler, more market-oriented and more patient financial system. The administration deserves more credit than it gets.
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September 10, 1991, The Washington Post, Salomon's John Gutfreund Most Definitely Knew Better, by Allan Sloan,
It's not safe to go on vacation in August anymore. Here I was sunning myself, far away from my word processor, when the Salomon Brothers Inc. scandal blew up and Chairman John Gutfreund was forced to walk the plank. Very inconsiderate of Salomon's new chairman, Warren Buffett, to feed Gutfreund to the sharks before Labor Day.
A month of Salomon mania notwithstanding, I still don't understand how on earth Gutfreund, who correctly predicted that some of Drexel Burnham Lambert Inc.'s and Michael Milken's sleazier junk bond activities would lead to disaster, managed to destroy himself by doing some of the same self-destructive things.
You expect someone like Gutfreund to display greed, ego and a hunger for power - that's the way people like Gutfreund, a veteran securities trader, usually behave. But utter folly? That's something you don't expect, especially since Gutfreund knew better. How do I know he knew better? Because years ago, he used to criticize the same practices that he ended up condoning at Salomon.
Starting in 1984, when I wandered into the junk bond universe, sources of mine at Salomon used to tell me about Gutfreund's table-pounding denunciations of Drexel and its now-fallen junk bond king, Milken. Years before Drexel-bashing became a popular sport, Gutfreund went around screaming that Drexel and Milken were rigging the junk bond market by locking up key issuers and key buyers of junk and that the whole thing would fall apart and cause a disaster. Right on, John.
Gutfreund also used to carry on about the failure of Drexel's management to control Milken who, among other things, never disclosed in any meaningful way that he and other Drexeloids owned stakes in key Drexel customers that seemed to get very special treatment from the firm. Right again.
After Drexel blew up, Gutfreund gloated - and rightly so - about how Salomon had emerged unscathed from the junk and insider trading scandals.
Oh, well. Having accurately predicted what would happen to Drexel and Milken, Gutfreund let Salomon do some of the same things that led to the destruction of Drexel and Milken.
As we now know, Salomon tried to rig parts of the government market by controlling all the bonds - the same thing that Drexel did with junk. Salomon is trying to put most of the blame on the now-departed Paul Mozer, who ran its government-bond trading desk. But Gutfreund spent much of his time on the trading floor. Even if he didn't know exactly what Mozer was doing, he must have had a pretty good idea. If everything was Mozer's fault - which is more than a little hard to believe - why didn't Gutfreund rein him in, or fire him? Heaven knows, Gutfreund fired enough people in his time.
Even worse, in my opinion, is that Gutfreund let key Salomon employees buy into an investment fund run by one of Salomon's biggest customers without making any meaningful disclosure to Salomon customers. This is absolutely nuts. Why? Because it creates a conflict of interest.
Think of it. Some Salomon employees had a direct, personal financial stake in having this fund get the best possible deal from Salomon. They didn't have a similar stake in having the California state employee pension fund, say, or a Minneapolis savings and loan get the best possible deal. Which customer do you think the Salomon trader is likely to work harder for? The fund in which he has a direct personal financial stake, or a regular customer? You get one guess.
This, of course, is why it was wrong for Drexel to let Milken and his associates own pieces of junk bond issuers and junk bond buyers. When you dealt with Drexel, you didn't know whose interest Drexel was serving.
When Salomon rigged the market in some two-year government notes, it wasn't just fun and games in which Salomon made money at the expense of rivals such as Goldman, Sachs & Co. and Nomura Securities Co. Even if the Treasury didn't get swindled by paying too high an interest rate, Salomon cheated all its customers outside the golden circle by making those securities more expensive than they should have been - and by making securities whose prices are tied to those securities more expensive.
If you wanted to play the junk game during Drexel's glory days, you pretty much had to deal with Drexel, because the firm influenced not only the big buyers of junk bonds, but also many of the big issuers. Even if Drexel was ripping you off and you knew it, it was practically the only game in town.
Not so with Salomon. The firm doesn't control the U.S. Treasury or the major issuers of corporate L bonds. You can do business in those markets without Salomon - and customers will do business without Salomon if they think they're being cheated.
So Warren Buffett's real problem isn't placating the government. You can do that by admitting guilt, blaming everything on your predecessor and offering up a few human sacrifices, as he has done. His real problem is convincing customers that Salomon has stopped cheating them. If he can't do that, Salomon might as well go out of business.
Why did Gutfreund do the same things he condemned Drexel for doing? Beats me. Some day soon, though, some congressional committee will probably subpoena the man and haul him in front of TV cameras. If he doesn't cop out by pleading the Fifth Amendment, maybe we'll all find out. Allan Sloan is a columnist for Newsday in New York.
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September 10, 1991, The Washington Post, Firm Halts Treasury Bond Deals With Salomon, by David S. Hilzenrath,
A California investment firm involved in a $1 billion "practical joke" that went awry at Salomon Brothers Inc. said yesterday that it had decided to suspend all dealings in Treasury securities with Salomon.
Pacific Investment Management Co. compared its relationship with Salomon to "a marriage gone sour," Dow Jones News Service reported. The firm, based in Newport Beach, Calif., said that it was accepting responsibility for its part in the practical joke and was not trying "to push it off on Salomon," Dow Jones said.
Meanwhile, another Salomon client, New York-based Tudor Investment Corp., declined to comment on Salomon's account that Tudor was sent information last April that could have alerted it to irregular bond trading activity in Tudor's name.
Last week, Tudor criticized Salomon for questioning its conduct in testimony to a congressional subcommittee - and Salomon quickly offered Tudor a public apology.
The issue revolves around a bid that a Salomon trader placed on Tudor's behalf on April 25 in an auction of five-year Treasury notes. Paul W. Mozer, the Treasury bond trader who Salomon said was chiefly responsible for the violations at the firm, placed a $2.5 billion bid on behalf of Tudor and related accounts, Salomon said. Tudor has said that was $1 billion more than Tudor had ordered.
The government awarded Tudor $2.1 billion of the notes, and on the same day Salomon bought $600 million of those from Tudor at the auction price, Salomon said.
If the $1 billion over the $1.5 billion that Tudor said it ordered was considered part of Salomon's bid on behalf of itself, then Salomon would have exceeded the government's limit on how much any one firm could bid.
Salomon said that the firm sent Tudor a routine daily confirmation statement reflecting both the initial $2.1 billion purchase for Tudor and the subsequent $600 million sale to Salomon.
Tudor spokesman Clyde Ensslin yesterday said he was "not in a position to discuss" what information Tudor received from Salomon about the April 25 transactions or what it did with the information.
Tudor also said last week it conducted an internal review after Salomon's activities in the April 25 auction were reported in the press on Aug. 15. The review "revealed no irregularities or improprieties in Tudor's conduct," Tudor said in a press release.
In testimony to a House subcommittee last Wednesday, Salomon said "a question exists" as to whether Mozer had an agreement with Tudor to place the higher bid and buy back the $600 million in notes. When Tudor objected, Salomon Chairman Warren Buffett said he had "no reason to doubt Tudor's statement that there was never any preauction agreement."
Salomon has admitted using several clients' names to bid on Treasury securities without the clients' authorization.
In the Pacific Investment case, the California firm became involved in bizarre events at Salomon in February, when Mozer asked one of its employees to submit a $1 billion bond bid to a Salomon employee as a practical joke.
The plan was that Mozer would stop the bid from being submitted to the government, and the Pacific Investment employee would then complain that the bid was not filled, according to Salomon.
The joke went awry when a Salomon clerk submitted it and Pacific Investment was awarded $870 million of bonds at the auction.
Pacific Investment said yesterday that while it was cutting off its bond business with Salomon, it would continue to deal with Salomon in stocks and other securities, Dow Jones said.
In a separate development yesterday, Buffett barred the company's energy-related commodities subsidiary from doing business with the controversial firm Marc Rich & Co., industry sources told Reuter.
Marc Rich & Co. of Switzerland is owned by Marc Rich, a commodities trader who fled the United States and faces criminal charges here.
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September 11, 1991, Chicago Sun-Times, Big Bonuses Told,
A trader at the center of the Salomon Inc. government bond trading scandal was paid more than $11 million in bonuses by the firm over the past three years, documents revealed Tuesday. Meanwhile, the first legislation proposing Treasury securities market reforms in the wake of the scandal was introduced in the Senate on Tuesday. The enormous bonuses Salomon paid the former head of the government trading desk, Paul Mozer, were revealed in a letter to a House panel investigating the scandal. According to the letter from interim Salomon Chairman Warren E. Buffett, Mozer was paid bonuses of $2.85 million for 1988, $3.85 million for 1989 and $4.6 million for 1990. As a managing director, Mozer received a $150,000 annual salary before bonuses. No bonus has been was paid in 1991 for the period during which Salomon admitted violating Treasury auction rules
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September 11, 1991, The Bond Buyer, Dodd offers bill to make auction deceptions subject to securities laws' antifraud provisions. (Christopher Dodd) by Vicky Stamas,
WASHINGTON -- Firms that use false or misleading statements in connection with bids in government securities auctions would face federal fraud charges and stiff civil fines under legislation introduced yesterday by Sen. Christopher Dodd, D-Conn.
The bill, sponsored by the chairman of the Senate Banking Committee's subcommittee on securities, is Capitol Hill's latest response to revelations by Salomon Brothers that it manipulated the market for Treasury securities earlier this year.
The measure would make clear that any false or misleading statements made in connection with bids for or purchases of government securities violate the antifraud provisions of the federal securities laws.
Under tough legislation passed last year, the Securities and Exchange Commission can levy hefty fines of up to $100,000 for each securities law violation by an individual and up to $500,000 for each violation by a corporation.
According to Sen. Dodd, whose subcommittee was scheduled today to begin two days of hearings on the Salomon case and broader issues facing the market, the bill will tighten oversight of traders.
Managers of government securities firms will be alerted that they have a clear responsibility to prevent wrongdoing by supervising their employees, he said, and the New York Stock Exchange and the National Association of Securities Dealers will gain more power to police the government securities market and develop examination procedures to test for compliance with the bill.
"This will greatly increase the likelihood that violations will be uncovered," said the senator, who this summer has shepherded through the Senate several provisions amending the Government Securities Act of 1986, which expires in August.
These would reauthorize the 1986 law, authorize new sales practice rules for government securities dealers, and direct the Treasury Department, the SEC, and the Federal Reserve to closely monitor the dissemination of government securities prices and report back on the need for legislation in that area.
But Sen. Dodd said yesterday that the Salomon Brothers case, which erupted after the Senate acted, has added a "new dimension" to the debate.
He said that none of the reports issued before the news of Salomon's conduct suggested that there were any problems or gaps in the regulation of the government securities auctions.
"The Salomon revelations have forced all of us -- the regulators and the Congress -- to take a long, hard look at the adequacy of existing laws, rules, and policies to prevent and detect abuses in the auction of government securities," Sen. Dodd said. "It also has forced us to take a fresh look at whether the existing auction structure provides for the issuance of government securities at the lowest possible cost to the American taxpayer."
Rep. Edward Markey, D-Mass., chairman of the House Energy and Commerce Committee's subcommittee on telecommunications and finance, is expected to propose a similar provision as part of a package of amendments he is drafting in response to the Salomon situation and the expiration of the government securities law, including a requirement for large trader reporting.
Rep. Markey said yesterday he will ask federal regulators to comment by mid-October on the legislation, which he wants Congress to enact before adjournment this year. Sen. Dodd, meanwhile, signaled he may be willing to wait until 1992 to enact some broader reforms, in response to requests by financial regulators for 90 days to study the issues. But the provisions already cleared by the Senate and his new antifraud legislation should be enacted now, he said.
In a related development, Salomon Brothers informed Rep. Markey in a letter that Paul Mozer, the firm's former government bond trader who was fired for submitting illegal bids at several Treasury auctions, earned a bonus of $4.6 million in 1990 in addition to his annual salary of $150,000. In 1989 and 1988, Mr. Mozer was paid bonuses of $3.85 million and $2.85 million.
However, Salomon said, Mr. Mozer was not paid any bonus for the auctions that are being investigated by the government. The firm also said it will not advance legal expenses to Mr. Mozer and other top executives who have resigned in connection with the Salomon scandal, including former Chairman John Gutfreund.
The firm also said it is unable at present to determine how much it earned in profits from the four Treasury auctions in which it has admitted to bidding irregularities, beginning with a Dec. 27 sale of four-year notes. Salomon said it has assigned accountants to determine how much the firm profited and will provide the information "as soon as it can developed in a reliable fashion."
The letter from Salomon was in response to a request from Rep. Markey, who asked interim Chairman Warren Buffett to provide details of the firm's bond market dealings.
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September 11, 1991, Associated Press / The Boston Globe, Salomon paid trader extra $6.6m Senate acts to close Treasury bidding gaps, by John M. Doyle,
WASHINGTON -- A trader at the center of the Salomon Inc. government bond trading scandal was paid $6.6 million in bonuses by the firm over the last two years, documents revealed yesterday.
Meanwhile, the first legislation proposing Treasury securities market reforms in the wake of the scandal was introduced in the Senate.
The enormous bonuses Salomon paid the former head of its government trading desk, Paul Mozer, were revealed in a letter to a House panel investigating the scandal.
According to the letter from Warren E. Buffett, interim Salomon chairman, Mozer was paid bonuses of $2.85 million for 1988 and $3.85 million for 1989.
Mozer, a managing director who received a $150,000 annual salary plus bonuses, was due to get a $4.6 million bonus for 1990, but Buffet said the Salomon board last week decided not to pay it.
Buffett's information came in reply to questions posed by Rep. Edward Markey (D-Mass.), chairman of the House finance subcommittee before which Buffett testified last week.
"No mathematical formula determined the amount of Mr. Mozer's bonus at the end of the year," wrote Buffett. "Assessment of Mozer's contribution to profit, however, had an important effect on the bonus that he was likely to receive."
Salomon last month disclosed it had violated legal limits in bidding during several recent Treasury auctions, sometimes by submitting bids in the names of customers without their approval.
The revelations resulted in the ouster of the firm's management and have spawned criminal and civil investigations of Salomon, as well as a broad probe of the multitrillion-dollar Treasury bond market.
Salomon has placed most of the blame on Mozer, claiming he knowingly skirted federal laws, lied to top management about the wrongdoing and may have arranged collusive deals with customers.
Mozer was fired because of the scandal, as was his assistant, Thomas Murphy. Buffett said Salomon will not be paying Murphy any more, either.
Salomon has admitted breaking the law during Treasury securities auctions in December, February, April and May. The violations include entering bids in the names of customers without their authorization and failing to tell regulators promptly.
The reform bill, introduced by Sens. Donald Riegle (D-Mich.) and Christopher Dodd (D-Conn.) would specify that fraudulent or manipulative practices in the Treasury auctions are a securities law violation.
The change would, in effect, expand Securities and Exchange Commission authority in the $2.3 trillion government securities market -- long considered the safest but also one of the least regulated in the world.
Richard Breeden, SEC chairman who has been lobbying Congress to widen his agency's authority over government securities, last week told Markey's subcommittee that under current law, the SEC can only step in when there are allegations of fraud. Current rules, however, limit what regulators can do to detect such fraud, Breeden said.
Because Treasury securities are backed by the government, oversight is less stringent than in markets for corporate stocks and bonds to keep costs low and volume high. That, in turn, made it easier and cheaper for the government to borrow money.
The Riegle-Dodd bill would clear up some of the current fuzziness over Treasury market violations and which regulator is in charge of them.
Similar proposals are being readied in the House by Markey and his subcommittee.
Buffett, Breeden and other regulators are slated to testify before the Senate Banking Committee, which Riegle chairs, today.
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September 11, 1991, Albany Times Union, Former Salomon Trader Received $11M in Bonuses,
A trader at the center of the Salomon Inc. government bond trading scandal was paid more than $11 million in bonuses by the firm during the past three years, documents revealed Tuesday.
Meanwhile, the first legislation proposing Treasury securities market reforms in the wake of the scandal was introduced in the Senate on Tuesday.
The enormous bonuses Salomon paid the former head of the government trading desk, Paul Mozer, were revealed in a letter to a House panel investigating the scandal.
According to the letter from interim Salomon Chairman Warren E. Buffett, Mozer was paid bonuses of $2.85 million for 1988, $3.85 million for 1989 and $4.6 million for 1990. As a managing director, Mozer received a $150,000 annual salary before bonuses.
No bonus has been was paid in 1991 for the period during which Salomon admitted violating Treasury auction rules.
Buffett's information came in reply to questions posed by Rep. Edward Markey, D-Mass., chairman of the House finance subcommittee before which Buffett testified last week.
"No mathematical formula determined the amount of Mr. Mozer's bonus at the end of the year," wrote Buffett. "Assessment of Mozer's contribution to profit, however, had an important effect on the bonus that he was likely to receive."
Salomon last month disclosed it had violated legal limits in bidding during several recent Treasury auctions, sometimes by submitting bids in the names of customers without their approval.
The revelations caused the ouster of the firm's management and have spawned criminal and civil investigations of Salomon, as well as a broad probe of the multi-trillion-dollar Treasury bond market.
Salomon has placed most of the blame on Mozer, claiming he knowingly skirted federal laws, lied to top management about the wrongdoing and may have arranged collusive deals with customers.
Mozer was fired because of the scandal, as was his assistant, Thomas Murphy. Buffett said Salomon will not be paying Murphy any more either.
Salomon has admitted breaking the law during Treasury securities auctions in December, February, April and May. The violations include entering bids in the names of customers without their authorization and failing to tell regulators promptly.
The reform bill, introduced by Sens. Donald Riegle, D-Mich., and Christopher Dodd, D-Conn., would specify that fraudulent or manipulative practices in the Treasury auctions are a securities law violation.
The change would, in effect, expand Securities and Exchange Commission authority in the $2.3 trillion govrnment securities market - long considered the safest but also one of the least regulated in the world.
SEC Chairman Richard Breeden, who has been lobbying Congress to widen his agency's authority over government securities, told Markey's subcommittee last week that under current law, the SEC can only step in when there are allegations of fraud. Current rules, however, limit what regulators can do to detect such fraud, Breeden said.
Because Treasury securities are backed by the government, oversight is less stringent than in markets for corporate stocks and bonds to keep costs low and volume high. That, in turn, made it easier and cheaper for the government to borrow money.
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September 11, 1991, The Washington Post, Fannie Mae Adopts Bond Safeguards; Dodd, Riegle Sponsor Bill to Stop Phony Bids in Treasury Auctions, by David S. Hilzenrath and Stan Hinden,
The Federal National Mortgage Association (Fannie Mae) yesterday said it is adopting new safeguards following disclosures by Salomon Brothers Inc. and other securities dealers that they repeatedly misled Fannie Mae in their efforts to buy its bonds.
Fannie Mae said that any securities dealers who mislead it in a similar way in the future will be disqualified from acting as intermediaries in the sale of Fannie Mae bonds, which it sells to provide financing for home loans.
Salomon said in congressional testimony last week that its traders "had a practice" of misleading Fannie Mae and other federal agencies as to the size of its customers' orders for securities issued by the agencies.
The practice was separate from the bidding abuses that Salomon admitted in the government securities market.
The size of the orders a dealer brings to the table is one factor that Fannie Mae and other agencies may consider when they decide how to apportion their securities among bidding dealers.
"This behavior is totally unacceptable," Fannie Mae Chairman James A. Johnson said in a press release. "These activities are wrong and cannot in any way be condoned or tolerated."
Salomon remains eligible to act as a middleman in the sale of Fannie Mae bonds, from which it earns commissions, said David R. Jeffers, Fannie Mae vice president for corporate relations.
Fannie Mae is still gathering information about the deception and has the option of disciplining individual dealers by awarding them fewer securities.
Fannie Mae believed there was some "hype" on the part of dealers but did not realize the extent of the exaggeration until Salomon first disclosed its conduct last month, Jeffers said.
Other firms came forward after Salomon to admit that they misled Fannie Mae, Jeffers said.
The deception does not appear to have caused losses for Fannie Mae or any buyers of the bonds, Fannie Mae said.
Meanwhile, on Capitol Hill, the first piece of legislation in response to the Salomon affair was introduced yesterday by Sen. Christopher J. Dodd (D-Conn.), chairman of the Senate securities subcommittee, with the support of Sen. Donald W. Riegle Jr. (D-Mich.), chairman of the Senate Banking Committee.
Dodd's subcommittee will open two days of hearings on the Salomon matter today.
The bill would make it illegal to submit phony bids in the auctions of Treasury bills, notes or bonds, and would prohibit the use of false or inaccurate information in the bidding process.
"It is absolutely essential that the integrity and efficiency of the government securities market be maintained," Dodd said.
Rep. Edward J. Markey (D-Mass.), chairman of the House subcommittee on telecommunications and finance, said yesterday he also plans to seek legislation to augment the Securities and Exchange Commission's anti-fraud authority and to require firms to adopt internal procedures to prevent future episodes of wrongdoing.
Both Dodd and Markey support the adoption of sales practices that will ensure customers are not misled when they buy securities that are based on government securities but are much more risky.
In a letter to Markey yesterday, Salomon Chairman Warren Buffett disclosed that the firm's former chief government bond trader, Paul W. Mozer, earned $11.2 million in bonuses in 1988, 1989 and 1990, on top of a $150,000-a-year salary.
Mozer was fired for putting in phony bids for government securities in the names of unsuspecting customers and for buying more securities than permitted.
Salomon said the bonuses had been approved by its board's compensation committee and were based on "an assessment of Mr. Mozer's contribution to profit..."
Buffett also told Markey that he would send him copies of Salomon's internal audits of the firm's role in 45 government auctions - although Salomon has admitted to wrongdoing in only five auctions.
The effect will be to provide more detailed information about Salomon's government securities business than has been available to date.
Buffett added, "We have instructed the company's lawyers to offer to conduct a 'walk through' meeting, showing the staff how these materials were assembled, organized and used."
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September 12, 1991, American Banker, Corrigan warns against stalling bank reform. (E. Gerald Corrigan),
WASHINGTON - Using the Salomon Brothers Inc. bond bidding scandal to delay action on a banking bill "would be a mistake," E. Gerald Corrigan, president of the Federal Reserve Bank of New York, told Congress.
In testimony prepared for delivery Wednesday to the Senate Securities Subcommittee, Mr. Corrigan said, "Some might look at the Salomon episode as a reason to further delay much needed progressive banking legislation.
"That, in my view, would be a mistake, which I hope we can avoid," he said.
Mr. Corrigan also attacked compensation practices in the financial sector as excessive, singling out pay for securities traders and foreign exchange traders.
Just an Old-Fashioned Guy
"Maybe I'm too old-fashioned, but I cannot see the merit of compensation practices that yield millions of dollars per year, for example, for individual securities or foreign exchange traders," Mr. Corrigan said in testimony centering on the Salomon Brothers bidding scandal.
Salomon Brothers, as reported, has disclosed that Paul Mozer, recently deposed as head of its government bond trading desk, got bonuses in 1988, 1989, and 1990, respectively, of $2,850,000, $3,850,000, and $4,600,000.
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September 12, 1991, The Washington Post, Salomon Saga, by Hobart Rowen,
In his effort to salvage Salomon Bros. Inc., from its self-inflicted wounds, Warren E. Buffett is adding respect for his candor to his reputation for investment wizardry. But even Mr. Clean may not be able to save the once honorable firm.
Buffett, now Salomon's interim chairman, has a new directive to employees: "Lose money for the firm, and I will be understanding; lose a shred of reputation for the firm, and I will be ruthless."
Keen on sports analogies, Buffett insists that every Salomon player now hit the ball "down the middle" of an imaginary tennis court, and avoid play too close to the sidelines - the boundary between legal and illegal acts. Reportedly, he has already killed one high-profit, legal deal that was too close to the "sidelines" for his comfort.
Buffett is a breath of fresh air on Wall Street; but for Salomon, his CPR may be too late. Congressional demands for significant, visible punishment are justifiable.
Things will never be the same for Salomon - or in the market for government securities - as a consequence of the Salomon scandal, in which a handful of scoundrels at the very top played games with billions of dollars of taxpayers' money.
They were caught not because government regulators were fast off the mark, but only because the fake-bidding excesses of Salomon trading desk manager Paul Mozer were "almost like a self-destruct mechanism," Buffett told Congress.
But the onus cannot be fobbed off on Mozer alone. Salomon chairman John Gutfreund knew about Mozer's illegal activities no later than April yet failed to disclose the situation to authorities in Washington until August. For Gutfreund, there is neither sympathy nor excuses.
The Salomon saga points up a clubby, dangerous relationship between Treasury and Federal Reserve regulators and a handful of Wall Street insiders. The self-policing regulatory system that had been worked out for Salomon and other "primary dealers" in government bonds has been exposed as the equivalent of a cozy cartel. Treasury officials indicate that at least one other firm may also be charged with illegal activities.
Buffett argues that it would be wrong to punish Salomon's new management for the mistakes of the old one. But at a minimum, the authorities must consider suspending Salomon as a primary dealer in government securities - if the current system of marketing them is continued - at least until federal investigations are completed.
Key congressmen on a House investigative committee were stunned to discover the inattention given by Gutfreund and other top executives to their trading-desk subordinates. Record keeping was primitive - only oral reports were required in some cases.
"There should not be a dime spent by the firm to defend the wrongdoers. These men should be in striped suits, sweeping up Wall Street," Rep. Jim Slattery (D-Kan.) told Buffett in hearings last week.
The next day, Buffett announced that Gutfreund and his team - who had resigned after covering up the illegal bidding scheme - would get no compensation, severance pay or reimbursement for legal expenses, breaking Wall Street tradition for the tender care of downfallen executives.
Gutfreund let Mozer continue to make faked bids in May, and Mozer had the audacity to rig bids for 105 percent of Treasury notes available for competitive bidding. Result: Salomon wound up controlling $10.6 billion out of $11.3 billion, an incredible 93.8 percent. The legal limit for any dealer is 35 percent.
Rep. Edward Markey (D-Mass.), a pioneer in trying to improve regulation in all securities markets, told Treasury, Fed and Securities and Exchange officials that "the way this has been responded to is totally unacceptable."
One revelation in Buffett's statement to Congress illustrates Markey's point. When Mozer in April discovered that the Treasury was alert to one of his phony bids in the name of Mercury Asset Management Co. and had written Mercury to inquire about it, Mozer told Mercury's Charles Jackson that the bid had been "mistakenly" submitted:
"Mr. Mozer requested that Mr. Jackson not embarrass Mr. Mozer with the Treasury and the Federal Reserve by responding to the Treasury's letter. {The letter did not ask for a response.} Mr. Mozer also apparently asked Nick Ritchie, Salomon's customer contact at Mercury, not to volunteer Salomon's `error' to the Treasury," Buffett said.
Jackson did respond to the Treasury letter, but didn't mention that Salomon's bidding in Mercury's name was unauthorized. The Treasury didn't follow up. Nor did the Fed, which had a copy of the Treasury letter. Why not? Treasury and Fed officials have a lot of explaining to do.
But cracking down on Salomon and on those regulators whose heads were in the sand is only part of the necessary remedy.
Steps will be taken to tighten regulation and increase record-keeping and surveillance in the government securities market. Buffett wisely counseled Congress: "We need tough rules, tough cops and tough prosecutors."
In addition, the Treasury needs to offer a convincing response to experts who say the present flawed system of selling government securities should be replaced with another method less susceptible to fraud and collusion among a handful of favored dealers.
The Bush administration and Congress must make sure that no one will ever again distort the $2 billion Treasury securities market the way Gutfreund allowed Mozer to do.
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September 14, 1991, The Economist (US), In bondage: the Salomon scandal,
WARREN BUFFETT, the temporary chairman of embattled Salomon Brothers,is a wily old charmer. Congress,furious at the firm's flouting of the rules for bidding in the Treasury bond market, has been questioning him eagerly. And yet in the past ten days he has had first the House and then the Senate Banking Committees eating out of his hand.
Mr Buffett needs more than charm to restore confidence in Salomon. The firm's share price has tumbled 30% since it admitted on August 9th to wrongdoing in several Treasury auctions since February. It has lost customers, and faces huge fines and legal claims. Gerald Corrigan, president of the New York Fed, has confirmed that its status as a primary Treasury-bond dealer is under review. Every day seems to bring new allegations of rule violations and cover-ups by Salomon's former chief, John Gutfreund.
Mr Buffett told legislators on September 11th that, at a meeting in June with Treasury officials to discuss Salomon's alleged short squeeze on the market in May, Mr Gutfreund promised the firm's co-operation and denied knowledge of any impropriety. He also stayed mum on a fake bid in the February auction, about which he had known since April. That silence remains baffling. Then, Mr Gutfreund could probably have passed off the February fakery as a minor mistake and kept his job with no more than a reprimand.
Another baffling silence is that of Mercury Asset Management, the branch of S.G. Warburg in whose name Salomon submitted the fake February bid. When consulted by the Treasury, it did not immediately say it had not made a bid. It transpires that Paul Mozer, the disgraced Salomon bond-trader who submitted the bid, asked Mercury to cover for him. Warburgs is being summoned by the Treasury and the Federal Reserve to explain why it agreed.
This episode reinforces suspicions that collusion in the Treasury-bond market may have been widespread. Richard Breeden, chairman of the Securities and Exchange Commission (SEC), told Congress on September 11th that a "distressingly large" number of firms have been breaking the rules. Congress is considering changing the structure of auctions. And the Treasury has announced four changes to its running of auctions:
* It will require customers to verify large, winning bids prior to settlement and their receipt of the bonds. This is aimed at ensuring the authenticity of bids placed on behalf of a customer by a primary dealer.
* It will release details of its quarterly borrowing needs two days ahead of each auction, before its routine soundings about market demand for government bonds.
* It has created a joint auction-surveillance team with the Federal Reserve and the SEC.
* Along with the SEC, it Will speed up automation of auctions. This would give the Treasury access to a wider range of bidders than primary dealers. It could also improve regulation of the secondary market in government bonds.
These changes go most of the way to addressing congressional concerns about Treasury auctions. But some members of the committees that oversee the securities industry have a hidden agenda: their plans for the current round of banking-reform legislation. Edward Markey, chairman of the House Energy and Commerce subcommittee, and his full committee chairman, John Dingell, want to bar banks from the securities industry. Notions of regulatory incompetence in the Salomon scandal may give them a new weapon.
The House energy committee's version of the banking legislation, due to be taken up next week, will remove the Fed's powers to allow banks to expand their securities businesses. Instead, all banks would have to put their securities business in separate affiliates. Rather than bear that expense, banks might prefer to stick to banking.
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September 15, 1991, The Boston Globe, Wowing those clients,
You have to hand it to Idea Management of Stoneham, one of the firms charged by the Federal Trade Commission last week for preying on amateur inventors by taking fees to promote their products -- and then failing to successfully market any of them. Idea Management actually conceded to the FTC that of its 2,132 clients in the past five years, only four ever received more money from their product than they paid Idea Management in fees. If you're thinking well, at least four persons got something useful from the company, try this: the FTC responds that according to its calculations, not a single one of Idea Management's clients came out ahead. Yet, declared president Suzanne Kameese after settling with the FTC, her company's "services will continue uninterrupted and at the same high level of quality." What was that again? To the Cleaners
Finally: an investigation by state Attorney General Scott Harshbarger into a scam women have known about for years: It costs more -- usually two or three times more -- to get a woman's shirt laundered than a man's shirt, even when they're basically the same. At one Beacon Hill drycleaner's, the same shirt was brought in once by a female staffer (price quoted for laundering it: $3) and once by a male staffer (price quoted for laundering it: $1.50.) Obvious moral: Only men should take in the drycleaning. Then tie them up
Seen on a billboard along a highway between Spartanburg and Greenville, S.C.: "If you took all the economists in the world and lined them up end to end . . . it would be a good thing." Keep the change
We know bonuses are the biggest part of many executives' salaries, but check out these numbers: Paul Mozer, the former head of Salomon Brothers' government securities trading desk who brought down on the firm the biggest scandal in its history, earned $150,000 in straight salary, plus the following bonuses, approved by chairman John Gutfreund: a $2.8 million bonus in 1988, a $3.8 million bonus in "89 and a $4.6 million bonus in "90. You have to wonder what the straight salary was for. Tips?
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September 16, 1991, The Washington Post, Salomon Blamed Illegal Bid on Error; British Client Was Told Not to Respond to Letter Sent by Treasury, by David S. Hilzenrath,
S.G. Warburg Group PLC, a London-based client of Salomon Brothers Inc., said yesterday it did not alert U.S. government officials to Salomon's unauthorized use of its name in an illegal bid for Treasury securities because Salomon told it the problem was a clerical error.
Warburg said it had accepted Salomon trader Paul Mozer's explanation that Salomon had caught the mistake and that Salomon would report the error to the U.S. Treasury Department.
"No one at ... Warburg had any reason to believe or suspect that what was described by a managing director of Salomon as a clerical error was in fact part of a pattern of improper or unlawful activities or that Salomon would not, as Mozer had committed to do, itself bring the matter to the Treasury's attention," Warburg said in a statement.
Salomon's aggressive trading practices in government securities are the subject of an investigation by government regulators.
Warburg representatives met in Washington last week with officials of the Treasury, the Federal Reserve Board and the Securities and Exchange Commission, who are investigating Warburg's conduct in the matter. Details of the talks were not released.
By Salomon's account, Salomon used Warburg's name without authorization to buy $510 million in Treasury notes last December and $1.7 billion of Treasury notes last February. When those bids were combined with others, Salomon violated a 35 percent limit on the amount of securities any one firm may buy at a Treasury auction.
The February bid caught Treasury officials' attention because a Warburg affiliate had bid in the same auction on its own, presenting the appearance of a potential violation of the 35 percent rule by Warburg itself. In April, the Treasury sent Warburg officials and Mozer a letter discussing the February Warburg bids.
Mozer, who has since been fired, asked Warburg officials not to "embarrass" him by answering the Treasury's letter, Salomon said this month in a report submitted to Congress.
Believing that Salomon was addressing the matter with the Treasury Department, Warburg "did not, when it acknowledged receipt of the Treasury's letter, point out that it had not in fact submitted any bid in the February auction," Warburg said.
Warburg said it did not learn Salomon had used its name improperly in the December and February auctions until Salomon disclosed its improper bidding activity last month.
Sources familiar with both transactions said that even before the Treasury Deparment sent the April letter, Salomon had sent Warburg account statements for the months of December and February that reflected the unauthorized movement of securities through Warburg accounts. A statement showing the purchase and sale of the $510 million of notes in December was sent to a "Mr. G. Sim" at Warburg offices in London, one source said.
Warburg spokesman Simon Lewis said last week his firm had no record of having received such account statements, but he added the firm had not conducted an exhaustive search.
Another Salomon client, Quantum Fund, also was sent a February account statement that might have raised alarms about Salomon's trading practices before Salomon's attempt to essentially cornered a May securities auction, sources said.
The statement included what Salomon has described as unauthorized securities purchases totaling $2.57 billion in Quantum's name, sources said. The statement showed the securities then being sold by Quantum Fund at the same prices. The securities that were moved through Quantum's account included $870 million in bonds that Salomon said it accidentally bought from the government in a practical joke that got out of control.
Quantum declined to comment last week.
In congressional testimony, Salomon said certain clients whose names were used in unauthorized transactions were sent account statements that reflected those transactions.
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September 16, 1991, Albany Times Union, Bond Dealer Claims Salomon Misled Firm,
S.G. Warburg, a government bond dealer tangled in the Salomon Brothers Inc. bidding scandal, said Sunday that it didn't alert regulators to an improper bid because a Salomon executive blamed it on a clerical error.
Warburg said Salomon's government bond chief, Paul Mozer, convinced the firm that the bid was an honest mistake and asked Warburg to allow Salomon to work it out with Treasury officials.
Warburg officials met with U.S. Treasury investigators Thursday and Securities and Exchange Commission officials Friday trying to explain why it hadn't mentioned the irregular bid before the Salomon scandal came to light.
It wasn't until August, when Salomon disclosed the illegal bidding, that Warburg and its affiliate, Mercury Asset Management, realized that Salomon had been using its name and had never told regulators about the so-called clerical error.
The bogus bid came to light after the Treasury sent Warburg a letter explaining that bids made by Warburg and Mercury would be considered as coming from the same firm. The letter noted a $3.15 billion bid submitted by Salomon for Mercury and a $100 million bid by Warburg at February's five-year note auction.
Mozer offered his explanation after Mercury asked him about the unauthorized $3.15 billion bid, which amounted to more than a third of the notes sold by the government at the February auction.
Mercury said it acknowledged receiving the letter from Treasury, but didn't mention the curious bid because it thought Salomon was correcting the matter with the Treasury.
In what promises to be a new wrinkle on the issue of media cross-ownership, Gannett Co.'s recent purchase of five daily papers in the Washington suburbs has prompted a challenge to the company's license to operate WUSA-TV, a CBS affiliate based in Washington. The current license is up for renewal on Oct. 1.
Two groups are fighting Gannett's application to renew the license on the ground that Gannett's ownership of the five dailies violates the Federal Communications Commission's rule against joint ownership of a daily newspaper and a television station in the same community.
The rule was adopted in 1975 to prevent any one party from exerting too much control over a community's sources of information and advertising.
The challenges also argue that Gannett's ownership of USA Today, a national newspaper that sells some local advertising for the edition that appears in the Washington area, aggravates the violation of cross-ownership rules.
For six months in 1990, copies of USA Today circulated in the Washington area included a weekly real estate section prepared by the five suburban dailies, but a USA Today spokesman said the section had not appeared for a year because of the slow real estate market.
Nynex, the telephone holding company that underwent one of the largest and longest strikes in 1989, said it had reached an unusual midcontract extension of its union contracts in an effort to avoid another disruptive labor dispute.
Details of the accord, which is expected to include a wage increase, are scheduled to be announced at a news conference today.
The participants will be representatives of Nynex's New York Telephone and New England Telephone units, and the Communications Workers of America, the company's principal union, as well as the International Brotherhood of Electrical Workers, the smaller union.
Nynex and the unions declined to disclose details until the news conference.
The agreement extends to August 1995 an accord that would have expired in August next year. It covers nearly 38,000 telephone technicians, installers, operators, repair workers and others.
POUGHKEEPSIE - IBM will shut down most operations at its three mid-Hudson Valley computer factories for five days in July, officials said.
The shutdown is a cost-cutting measure, spokesmen said. The move is expected to save on energy costs and encourage the 26,400 workers at the three sites to use vacation time instead of cashing out at retirement, spokesmen told the Poughkeepsie Journal.
IBM last idled mid-Hudson plants in the 1960s, spokesmen said.
James Monahan, spokesman at IBM Poughkeepsie, said the shutdown is not related to forecasts for computer demand next year.
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September 17, 1991, The Washington Post, $12 Billion Question: Is Cornering A Treasury Market an Illegal Act?; Intent Is Key Factor in a Tricky Wall Street Issue, by Kathleen Day,
Congress may not like it.
The public may think it stinks.
But cornering the market and squeezing prices is a fact of life in the government securities market, and it's legal under most circumstances, according to experts in securities and antitrust law.
The unfolding scandal at Salomon Brothers Inc., which was the subject of congressional hearings in the last two weeks, has focused debate on one of the more complicated issues of business law: When is cornering a market - acquiring enough of a security to control its price - illegal?
In theory, said Columbia Law School professor John Coffee, the answer is relatively straightforward.
Whenever a corner involves evidence of market manipulation - artificially interfering with supply and demand to force prices up or down - that's a violation of securities fraud laws.
Or whenever a corner involves evidence that two or more parties have agreed to restrict supply, fix prices or otherwise restrain trade, that's a violation of antitrust law. It's also a violation of antitrust law for an individual or firm to attempt to corner a market unfairly - by breaking trading rules or regulations.
In reality, however, proof that one corner is legal and another not, even if they appear identical, often rests on the motivation of the Wall Street traders or investors involved, Coffee and other securities lawyers said. And proving intent can be extremely tricky, they said.
But when a firm breaks government rules or laws in the attempt to orchestrate a corner, as Salomon apparently did in the May 22 auction for $12.25 billion in two-year Treasury notes, then that can serve as evidence of a malevolent frame of mind, establishing intent, they said.
In the May 22 auction, for example, federal regulators determined in late May and early June that Salomon and three of its customers had cornered 93 percent of the auction. They also determined that, because of that concentration in the hands of a few, a price squeeze occurred when the newly issued notes were resold in the days following the auction. Buyers caught in such a squeeze must pay a premium to purchase the securities.
Federal Reserve Board governor John LaWare told a Senate committee investigating the matter in June, "While ... the extent of concentration here was not typical, it was not that unusual. It was toward the high end of concentrations in a successful auction, but it was not just an event that only happens every five years by all means, at all."
When asked if there were anything illegal in the auction, he said at the time, "I don't think so."
The Fed and the Treasury changed their viewpoint radically on Aug. 9, however, when Salomon announced that Paul W. Mozer, the Salomon managing partner in charge of the firm's government securities desk, had violated trading rules in five auctions, including the one on May 22.
Specifically, Mozer had placed a bid for a customer without authorization to obtain a higher percentage of the auctioned notes for Salomon than Treasury rules allow, Salomon has said. What regulators had thought was a legal corner suddenly became suspicious.
In a 56-page report, Salomon detailed how prior to the auction Mozer discussed with three key clients - Tiger Management Corp., Quantum Fund and Steinhardt Partners - the possibility of Salomon lending them money, possibly as much as $15 billion in total, to bid on notes in the auction.
By providing such financing, Salomon would be given the clients' two-year notes as collateral. That would give Salomon control not only over the large block of notes it bought for itself, but also, at least temporarily, over the large block of securities it bought for its customers.
That, securities lawyers said, could put the trading firm in a position to squeeze prices up in the secondary market, where newly issued notes are resold.
In fact, Salomon ended up financing only Quantum, but days after the auction it purchased Tiger's entire $1.5 billion position. The financing of Quantum and the purchase from Tiger, coupled with Salomon's own holding, gave Salomon control of 93 percent of the securities sold to dealers at the auction.
Another indication of Mozer's intent may have come when he met shortly before the auction with Tiger officials over dinner at a New York restaurant, Le Refuge. According to Salomon, he apparently told the Tiger representatives that he expected "substantial customer interest" in the May 22 auction. Tiger said the discussion did not constitute a conspiracy or agreement to control the market. Government investigators are focusing on what actually took place at this meeting, sources said.
Mozer, through his attorney, and Quantum have declined repeated requests for comment. An attorney for Steinhardt Partners said the partnership "was not a party to any arrangement to corner the government securities auction."
Distinguishing between a legal and illegal corner is especially hard in the government securities market because the 39 primary dealers have a special status that gives them special access to information about the market.
Designated by the Federal Reserve Board, primary dealers must bid at Treasury auctions. While anyone is permitted to bid at such auctions, only primary dealers may bid on behalf of customers.
Many mutual funds, pension funds and other large institutional investors elect to bid through primary dealers rather than on their own to benefit from the dealer's expertise about the market - information on what price to bid and so on.
But customers seeking advice also augment a primary dealer's intelligence about the market by providing details about what they, as large bidders, are likely to demand at any given auction. This information is so valuable to primary dealers, in fact, that some dealers say they serve customers for that reason alone, given the slim or often nonexistent profit margins they earn in the process.
There is a fine line between using such information to advise clients about the market and using it to forge illegal bidding practices to gain control in a market and set prices, securities lawyers said.
Deciding when the line is crossed "is the $64,000 question," according to one government attorney, who spoke on condition that his name not be used.
For example, investigators looking into the meeting at Le Refuge will try to determine whether Mozer was performing a duty to clients by giving them informed advice and intelligence about the market, or whether he was sending them an illegal signal that if Tiger bid it would help make a corner possible.
"Nowhere is there an established body of rules and regulations as to what is and what is not proper ethics in bidding behavior," said a senior executive at a major Wall Street investment banking firm, who also spoke on condition his name not be used. "Nowhere is there any kind of guideline as to what is communicable between people."
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September 18, 1991, Albany Times Union, Salomon Scandal Probes Spread,
Securities regulators in 33 states and the District of Columbia said Tuesday they will conduct an investigation of the Salomon Brothers bond scandal.
Federal investigators already are conducting civil and criminal investigations into Salomon's admission that it violated rules governing Treasury securities auctions, as well as the government bond market at large.
States can revoke or suspend Salomon's license to sell securities within state borders. In previous cases, states have imposed heavy fines on firms as part of settlements allowing them to keep their licenses.
"The goal of this multi-state effort will be to simplify the inquiry of the participating states and to recommend appropriate remedies when the probe is completed," New Mexico Securities Division Director Nancy Smith said.
Salomon last month admitted it made illegal bids at Treasury auctions without customers' knowledge and bypassed a federal rule preventing bidders from acquiring more than 35 percent of any government security at auction.
Meanwhile, a published report Tuesday quoted unidentified Wall Street lawyers as saying that Paul Mozer, Salomon's former government bond desk chief, has approached the government about negotiating a deal.
However, the government and Mozer's lawyer, Lee Richards, disagree over whether some of the activities in question were crimes, The New York Times reported.
Salomon has blamed much of the illegal bidding on Mozer. Salomon executives have admitted they waited several months before reporting the violations to authorities.
Richards was said to be in a meeting and did not return a telephone call for comment.
Salomon already is under scrutiny from federal investigators in New York and Washington including the Justice and Treasury departments, the Securities and Exchange Commission, the FBI and the Federal Reserve Board.
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September 20, 1991, The Boston Globe, Salomon Brothers reveals two more bid violations, by Michael K. Frisby, Globe Staff,
WASHINGTON -- Salomon Brothers last night informed congressional officials that a review of their records has disclosed two additional instances when unauthorized bids were made for government securities.
The bids, according to congressional sources, were made last year on behalf of firms unaware that Salomon was placing them.
The purchases allowed Salomon to hide their own interest in the purchases and put them in a better position of controlling sales on the secondary markets, the sources said.
Last night, Salomon Brothers relayed this information to staff members of Rep. Edward Markey's Energy Committee's subcommittee on telecommunications and finance.
Markey, a Malden Democrat, last night confirmed the new infractions, saying, "The further revelations by Salomon Brothers underscores yet again the need for tougher regulations of the government securities market that needs to be overseen by tougher cops."
Further, Markey said the incidents illustrate that tougher reforms need to be passed immediately. "Congress can't wait until next year to pass reforms," Markey insisted.
In hearings on Sept 3d, government agencies overseeing the sale of government securities had asked that Congress delay any reforms until next year.
The new revelations were found during an investigation by the brokerage firm, the Securities and Exchange Commission, the Federal Reserve Bank of New York and the US attorney's office in New York.
Salomon officials told congressional aides that Paul Mozer, who was fired for his alleged involvement in previous violations, is also believed to be responsible for the latest infractions.
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September 20, 1991, Chicago Sun-Times, Salomon tells more cheating, by Rick Gladstone,
NEW YORK Salomon Inc. today disclosed more cheating in a Treasury auction bidding scandal that has engulfed the Wall Street powerhouse, and said it was likely to find additional violations.
In a one-page statement, Salomon said it promptly reported the misconduct, which involved submission of two unauthorized customer bids for Treasury securities by the firm's government bond trading desk.
The firm said the bids did not allow the firm to exceed a 35 percent purchase limit for a single government securities auction. Salomon again blamed the violations on individuals who already have been implicated in the scandal.
Salomon last month disclosed it violated federal rules governing auctions in the $2.2 trillion market for Treasury notes, bills and bonds at five separate auctions from December, 1990, through May.
Salomon did not identify the dates of the newly reported violations, which it said were discovered after reviewing documents from government authorities that were not in Salomon's files.
"It seems to us likely that still other instances of similar behavior will be uncovered in the future through our internal review or by the investigating authorities," Salomon said. "We have provided the details of these two instances of misconduct to the investigating authorities and will continue to do so as and if additional misconduct is discovered," the firm said.
The New York Times reported today that the discoveries include another instance of illegal bidding involving the S.G. Warburg Group PLC, whose name Salomon has already said it used illegally in other bids. A Salomon spokesman declined comment.
Salomon didn't identify the customers whose names were used without permission, but said "we have no reason to believe that persons other than one or more persons from the Government Securities Desk - already implicated in misconduct - were involved."
At the center of the allegations is Paul W. Mozer, the former head of Salomon's government bond desk, who was fired after the scandal was revealed. A top associate was fired, and several top Salomon executives, including Chairman John H. Gutfreund, resigned.
Salomon in several auctions in which it admitted wrongdoing said it violated the 35 percent cap on how much a single bidder can obtain. In one auction, Salomon and its customers controlled 94 percent of the securities issued.
The scandal has shaken investor faith not only in Salomon but in the entire process for the bidding of government securities, which are used to keep the government running and finance the public debt. It also has led to a widespread government inquiry and tighter rules by the Treasury Department.
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September 21, 1991, The Washington Post; Salomon Finds More Auction Improprieties, by Kathleen Day,
Salomon Brothers Inc., the scandal-ridden Wall Street investment firm, said yesterday it has found two more unauthorized bids for customers in Treasury auctions and that it expects to find more instances of such abuse.
"It seems to us likely that still other instances of similar behavior will be uncovered ... through our internal review or by the investigating authorities," the firm said in a statement.
The disclosure follows weeks of bad news for Salomon, which last month shocked Wall Street by admitting that it had broken Treasury rules - and possibly securities and antitrust laws - in at least five Treasury auctions in the past year. It also intensifies questions about Salomon's relationship with several of its largest customers, whose names were used in the phony bids.
In the wake of Salomon's admissions last month, the Securities and Exchange Commission, the Justice Department, the Federal Reserve Board and the Treasury are conducting substantial probes to determine the extent of possible price-fixing, collusion or other wrongdoing in the multibillion-dollar government securities market.
Salomon said yesterday that it discovered the two additional cases of abuse "after receiving documentation from governmental authorities that was not in the files of Salomon."
Presumably, the government obtained the documentation through its request, by letter and by subpoena, for thousands of pages of information from Salomon and other Wall Street firms and from large investors in government securities, sources said.
Salomon, saying it was acting at the request of the Justice Department, would not identify the customers in whose name the two newly reported instances of unauthorized bids were made, or any other details of the alleged wrongdoing. A spokesman for S.G. Warburg & Co., a London-based financial giant, said he had no knowledge about whether Salomon used accounts of his firm to submit the illegal bids just found, as was suggested in yesterday's New York Times.
Last month, Salomon admitted that on several occasions it had submitted bids for customers without their permission. The purpose in some instances appeared to be to circumvent Treasury rules forbidding any single bidder from bidding for or buying more than 35 percent of the bonds sold at any auction.
Salomon said the two unauthorized bids that it disclosed yesterday did not result in the firm's exceeding that 35 percent purchase limit, but it was silent about whether the firm exceeded the 35 percent bidding limit.
Salomon said yesterday it believes the two newly disclosed abuses were the work of the same one or two Salomon partners who, it has said, orchestrated the abuses disclosed last month.
The two partners, Paul Mozer and Thomas Murphy, who ran Salomon's government securities trading desk, were fired last month. They have been unavailable for comment.
Rep. J.J. Pickle (D-Tex.), chairman of the House Ways and Means oversight subcommittee, said he expects a full accounting of Salomon's latest revelations at hearings next week. "I wish I could say that this latest admission was shocking or surprising, but in reality it was only to be expected," Pickle said in a prepared statement.________________________________________________________________
September 21, 1991, Chicago Sun-Times, Salomon confesses to more violations, by Alice Cathcart,
NEW YORK Salomon Bros., the Wall Street trading house battered by scandal, said Friday it has discovered two more instances in which its employees made unauthorized bids for U.S. Treasury securities.
The brokerage, now at the center of several government investigations over its conduct in the $2.2 trillion Treasury market, admitted last month to violating government rules by making unauthorized and excessive bids in several auctions.
Several employees have been dismissed for the improper trading and four of Salomon's top executives, including chairman John Gutfreund, were forced to resign in disgrace.
The latest disclosure, made in a brief statement by the firm, said Salomon had discovered the new violations after receiving documents from government authorities that were not in the company's files.
"It seems to us likely that still other instances of similar behavior will be uncovered in the future through our internal review or by the investigating authorities," the statement added.
Salomon did not specify in the statement when the latest violations occurred but said they were committed by the same people on the firm's government securities desk who already have been implicated in misconduct.
Paul Mozer, chief of government securities trading for Salomon, was dismissed when the scandal first came to light, as was Salomon managing director Thomas Murphy.
Salomon said neither of the two latest unauthorized bids resulted in the firm getting more than the 35 percent of any one issue permitted under Treasury rules.
Outside analysts were not surprised by the new revelations.
Stock in Salomon Inc., the parent company, closed down 25 cents at $22.50.
The stock lost $1.25 Thursday and has fallen nearly 40 percent from its pre-scandal level of $36.625 on Aug. 8.
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*September 21, 1991, The Washington Post, Salomon Finds More Auction Improprieties, by Kathleen Day,
Salomon Brothers Inc., the scandal-ridden Wall Street investment firm, said yesterday it has found two more unauthorized bids for customers in Treasury auctions and that it expects to find more instances of such abuse.
"It seems to us likely that still other instances of similar behavior will be uncovered ... through our internal review or by the investigating authorities," the firm said in a statement.
The disclosure follows weeks of bad news for Salomon, which last month shocked Wall Street by admitting that it had broken Treasury rules - and possibly securities and antitrust laws - in at least five Treasury auctions in the past year. It also intensifies questions about Salomon's relationship with several of its largest customers, whose names were used in the phony bids.
In the wake of Salomon's admissions last month, the Securities and Exchange Commission, the Justice Department, the Federal Reserve Board and the Treasury are conducting substantial probes to determine the extent of possible price-fixing, collusion or other wrongdoing in the multibillion-dollar government securities market.
Salomon said yesterday that it discovered the two additional cases of abuse "after receiving documentation from governmental authorities that was not in the files of Salomon."
Presumably, the government obtained the documentation through its request, by letter and by subpoena, for thousands of pages of information from Salomon and other Wall Street firms and from large investors in government securities, sources said.
Salomon, saying it was acting at the request of the Justice Department, would not identify the customers in whose name the two newly reported instances of unauthorized bids were made, or any other details of the alleged wrongdoing. A spokesman for S.G. Warburg & Co., a London-based financial giant, said he had no knowledge about whether Salomon used accounts of his firm to submit the illegal bids just found, as was suggested in yesterday's New York Times.
Last month, Salomon admitted that on several occasions it had submitted bids for customers without their permission. The purpose in some instances appeared to be to circumvent Treasury rules forbidding any single bidder from bidding for or buying more than 35 percent of the bonds sold at any auction.
Salomon said the two unauthorized bids that it disclosed yesterday did not result in the firm's exceeding that 35 percent purchase limit, but it was silent about whether the firm exceeded the 35 percent bidding limit.
Salomon said yesterday it believes the two newly disclosed abuses were the work of the same one or two Salomon partners who, it has said, orchestrated the abuses disclosed last month.
The two partners, Paul Mozer and Thomas Murphy, who ran Salomon's government securities trading desk, were fired last month. They have been unavailable for comment.
Rep. J.J. Pickle (D-Tex.), chairman of the House Ways and Means oversight subcommittee, said he expects a full accounting of Salomon's latest revelations at hearings next week. "I wish I could say that this latest admission was shocking or surprising, but in reality it was only to be expected," Pickle said in a prepared statement.
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September 22, 1991, The Washington Post, When Wall Street Bond Traders Make Millions: How Much Is Too Much?, by Robert J. McCartney,
Wall Street is one of the few places on earth where an employee in his thirties could receive nearly $5 million for one year's work and still feel underpaid.
For his labors buying and selling U.S. government securities for Salomon Brothers Inc. during 1990, Paul W. Mozer, 36, now at the center of a major Wall Street scandal, received a $4.6 million bonus on top of his 150,000 salary.
Just two aisles over, however, another trader, Lawrence E. Hilibrand, 32, was doing much better. He received $23 million for his success in 1990 in carrying out a complex trading strategy called bond arbitrage.
Today, a month after Salomon Brothers was rocked by its disclosure that Mozer had engaged in illegal bidding practices, the affair is being blamed in part on bitter rivalries within Salomon fueled by the competition to get enormous bonuses, according to current and former executives of the firm.
Although Salomon says Mozer's primary reason for breaking the rules was a personal vendetta with the Treasury - he has not spoken publicly on the subject after being fired last month - others suspect that he also was driven by the desire to shine more than other executives at the firm, and thus improve his chances of boosting his paycheck.
"The compensation system at Salomon Brothers was working so that, if one area on the floor worked better, it got paid more. He {Mozer} looked at Larry Hilibrand and thought, he got 23 {million}, I want to get 23," said a former executive of the firm who knows both men.
In the wake of the Salomon Brothers scandal, federal regulators, Congress and the public are questioning whether Wall Street can justify the mammoth pay packages that it customarily gives its top executives.
Some regulators and members of Congress ask whether traders such as Mozer are being compensated for skills that are all that valuable, or whether they merely benefit from a system that channels hundreds of billions of dollars of business through a few securities firms and enables people to reap big profits by taking a tiny slice from each transaction.
The current system of rewarding performance with huge amounts of money can encourage traders to take excessive risks, or to cut corners legally or ethically, these officials say.
"Maybe I'm too old-fashioned, but I cannot see the merit of compensation practices that yield millions of dollars per year, for example, for individual securities or foreign exchange traders," New York Federal Reserve Bank President E. Gerald Corrigan told a Senate committee investigating the Salomon Brothers affair.
Corrigan himself earned $231,500 last year for heading the institution that, among other things, conducts the auctions of Treasury securities where Salomon broke the rules.
While saying he was "under no illusions" that more conservative pay policies by themselves would prevent future abuses, Corrigan said the current pay system encourages people like Mozer to cross the line into wrongful behavior.
"Human nature being what it is, compensation practices that hold out the potential for millions of dollars of annual income seem to me to entail the clear danger that reasonable standards of prudence and ethics can, all too easily, be cast aside for the sake of writing that next {trade} ticket," Corrigan said.
Outside of the entertainment and sports fields, the securities industry is the only arena in American business where multimillion-dollar paychecks are routinely given to employees several rungs down the corporate ladder from the top.
About 90 Salomon Brothers employees were paid more than $1 million each in 1990, the firm's new chairman, Warren Buffett, told the Senate committee.
Mozer was at least four notches down the corporate hierarchy. His supervisor was a vice chairman - one of nine at the firm - who in turn had the president and chairman above him.
Hilibrand was even further down the ladder, but he benefited from a special pay arrangement in which his group of high-tech traders - who based their trades on results of extremely sophisticated computer analysis - received 15 percent of the profits that the group generated during the year.
The group earned about $400 million in profits for Salomon from its trading, so its members divided up $60 million, with Hilibrand getting the biggest single chunk.
In one of many fights over pay at the firm, other Salomon executives complained loudly about the special deal when they learned of it in December. One executive called the complaints "a mass uprising," but the deal went through anyway.
Buffett praised Hilibrand's work, saying that he "was the closest thing to a .400 hitter" - in baseball, an extremely good hitter - that Salomon had in 1990.
But Buffett acknowledged that some other executives received million-dollar bonuses despite doing mediocre work because the pay scale as a whole was inflated by earnings such as Hilibrand's.
"There is great talk about paying for performance there {at Salomon Brothers}. But on top of that, there was a tremendous amount of payment for nonperformance," Buffett said.
The principal talent that a trader like Mozer or Hilibrand brings to work each day is the ability to analyze the constantly changing, worldwide market in bonds, or interest-paying securities issued by governments or corporations.
In particular, that means that the trader recognizes when the myriad tugs of supply and demand create artificial, temporary differences in price among different bonds. That offers the opportunity to profit by buying the security when it is underpriced and selling it later when the price recovers.
Mozer performed that task from minute to minute, hour to hour, as he supervised 15 other traders and salesmen on the desk at Salomon Brothers that handled billions of dollars a day in trades of Treasury bonds and other U.S. government securities.
Hilibrand, who worked at one of the few serene spots in the generally frantic trading room, made investments that could take months or even years to earn a profit, and could involve simultaneous investments in markets in several countries.
Like all traders at Salomon Brothers, both Mozer and Hilibrand had to have a large tolerance for risk, because the investment house consistently bets more money in the bond market than any other firm on Wall Street. If market forces turned against these traders, and their firm suffers severe losses, their jobs could be in jeopardy.
"That place does not tolerate losses for long," a former Salomon executive said.
But the huge volume of trading at Salomon Brothers also created opportunities that allow its traders to profit just by skimming a little cream off the business, according to Wall Street executives and finance professors.
Samuel L. Hayes III, a professor of investment banking at Harvard Business School, said the large paychecks at Salomon Brothers were partly a result of "being at the right place at the right time."
"In a protected market, with a large amount of capital and the willingness to take risk that characterizes Salomon Brothers, you can play a very big role {in the market}. In a sense, that's sheer muscle," Hayes said.
But Hayes said brains also played a big role, particularly in the high-tech trading done by Hilibrand's group. By using complicated computer forecasts, he said, the firm provided a valuable service by helping clients to protect against losses on investments.
Defenders of Wall Street's pay practices point out that Salomon Brothers and other big firms also play a critical role in lending money to cover the federal budget deficit, and that very high pay levels also are found in sports and entertainment.
"Salomon is a major financier of the U.S. government," and deserves to earn a return for performing that function, said Howard A. Gabler, a codirector of G.Z. Stephens Inc., an executive search firm that specializes in the investment field. "Michael Jordan stuffs a ball in a hole and makes $16 million - what's the social justification for that?"
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September 24, 1991, The Boston Globe, Salomon working out the 'dents' Firm tells customers it will survive trading scandal, by Jolie Solomon,
NEW YORK -- Warren Buffett and other Salomon Brothers Inc. executives tried to reassure hundreds of the firm's biggest customers yesterday that it would emerge from its Treasury securities scandal as a powerful force on Wall Street.
In a meeting with some 300 customers at its headquarters here, Buffett, the firm's new chairman, and his team relied not only on statistics and legal arguments but also colorful analogies and a free lunch to get their argument across.
At one point during the meeting, which was linked by satellite to Salomon offices in Boston and around the country, chief operating officer Deryck Maughan compared the former managers of Salomon to drunk drivers, but said the firm had suffered only a "dent."
According to one person in the audience, Maughan told the crowd that the firm was like a high-performance car that had done some reckless driving and gotten "a dent," but had now acquired a "sober" driver and hoped to get its driver's license back and the dent "pulled out."
Many critics of Salomon might argue that the damage includes at least some bashed headlights and a ruptured fender. Neal Sullivan, Massachusetts' deputy secretary of state and chief of the securities division, attended the meeting in Boston and said that some in the group were a skeptical about Salomon's prospects. One attendee suggested that it would be some months before anyone will know whether Salomon would survive.
In the last month, the firm has admitted to substantial violations of Treasury securities trading rules, and there have been repeated revelations that indicate a cover-up and a pattern of wrongdoing. Big customers have abandoned Salomon and several civil and criminal investigations have been launched.
But Buffett and his two top officers took pains to suggest that the "worst is behind them," said Sullivan. Buffett suggested that the government would not file criminal charges because Salomon has cleaned up its act and is actively helping investigators. He also said Salomon would not go under because, unlike Drexel Burnham Lambert or E.F. Hutton, firms that died in other scandals, Salomon has not "circled the wagons and stonewalled."
The audience in Boston reportedly included representatives of Fidelity Investments, Massachusetts Financial Services and the Harvard University fund. They listened to the presentation through a satellite transmission and were then treated to a buffet lunch. A spokesman for Salomon said about 300 people had gathered in New York for the meeting, but refused to comment on the substance of the discussion.
However, according to audience members, Buffett said that Salomon will take an unspecified charge in the third quarter to cover expected legal expenses and possible damages, but that he sees no prospect of operating losses.
He said the firm had lost 4 percent of its customer base, but he said he expects to get many public pension funds, for example, back as clients, once the political and media attention dies down. Buffett said that the World Bank, which withdrew some business from Salomon, was planning to review the situation yesterday, and he intimated that that could be the first instance of a client returning to the fold.
Buffett also rebutted critics who have warned that Salomon, in selling off securities to raise cash, is greatly reducing its strength. He argued that the firm's balance sheet is down only from the historically high level it had reached this summer, but that it matches last year's level, retaining its position as one of the strongest on Wall Street.
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September 27, 1991, The Washington Post, Panel Told Of Treasury, Trader Clash, by David S. Hilzenrath,
The trader who allegedly orchestrated Salomon Brothers Inc.'s illegal bids for government securities clashed last year with a Treasury official who accused him of trying to "game the system," the official said yesterday.
The description of the confrontation between the Salomon trader, Paul W. Mozer, and Michael E. Basham, then deputy assistant Treasury secretary, offered a detailed picture of Mozer in action. Salomon officials have depicted him as a man driven by ego to flout the Treasury. Mozer himself has not spoken publicly since the illegal bidding at Salomon came to light last month.
Basham told a House Ways and Means subcommittee yesterday that in June 1990, Salomon bid for more than 100 percent of the notes the Treasury was offering in an $8 billion auction. Basham said Mozer was trying to "game the system" - to manipulate the process to ensure that Salomon was awarded the maximum possible share when the Treasury finished dividing the securities among competing bidders.
Basham said he called Mozer after the auction and asked him not to do it again. "I said, `Paul, quite frankly the nature of the process is designed to encourage you to bid a higher price than the next guy, not to try to game the system, and we would prefer that you not' " do it again, said Basham, who recently left the Treasury to work for the Wall Street firm of Smith Barney, Harris Upham & Co.
Mozer, who was fired as head of Salomon's government securities desk last month, did not make any promises, Basham said. Instead, he told Basham that "he hoped that no one else would find out about this," Basham testified.
Then, about a week later, Salomon again bid for more than 100 percent of the securities being offered in a government auction. Another unnamed securities dealer also bid for more than 100 percent.
The Treasury rejected both of those bids. The unnamed dealer apologized, but Mozer was not ready to take no for an answer, Basham said. Mozer threatened to have John H. Gutfreund, the Salomon chairman who resigned last month amid the scandal, go over Basham's head and call the Treasury secretary, Basham said.
At the time, the excessive bids were not illegal. But soon afterward, the Treasury adopted a policy known as the Mozer-Basham Rule that prohibited firms from bidding for more than 35 percent of the securities offered for sale in an auction. In a series of later auctions, Mozer circumvented the new rule by placing unauthorized bids in the names of Salomon customers, Salomon has reported in news releases and congressional testimony.
In other testimony yesterday, Securities and Exchange Commission Chairman Richard C. Breeden said his agency is investigating whether Salomon's improper activity in the government bond market extended to trading in foreign currencies.
"I would certainly agree that it is possible to manipulate interest rates and seek to profit from that manipulation in the foreign exchange market," Breeden said.
Deryck Maughan, Salomon chief operating officer, said he doubted "very much" that advance knowledge of the prices on longer term securities such as the ones Mozer was buying "would allow you to make a killing in the foreign exchange market."
In addition to breaking rules in Treasury auctions, Salomon has admitted that it misled government sponsored enterprises such as the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac) when placing orders for their bonds. At yesterday's hearing, an executive from Freddie Mac said that 18 of the brokerage firms that act as dealers for its bonds have reported that they exaggerated the size of their customers' orders. The inflated orders might have helped the firms trade a higher volume of bonds and earn more commissions.
Members of the committee excoriated Fannie Mae and Freddie Mac for not penalizing Salomon and for continuing to do business with it.
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September 27, 1991, Albany Times Union, Salomon Foreign Desk Probed,
WASHINGTON - Securities and Exchange Commission Chairman Richard Breeden told Congress Thursday that the agency is investigating foreign exchange trading operations at scandal- plagued Salomon Inc.
"We are looking. The answer is 'yes,'" Breeden said in response to questions from the oversight subcommittee of the House Ways and Means Committee.
The subcommittee chairman, Rep. J.J. Pickle, D-Texas, said it was investigating any possibly illegal links between the Salomon's foreign currencies desk and its government securities operation, which has been implicated in a number of Treasury auction irregularities.
Paul Mozer, a Salomon managing director who was fired after the scandal surfaced, headed both the government securities and foreign exchange desks, Salomon officials told the panel.
In other developments at the hearing, the fourth on Capitol Hill this month concerning Salomon:
*A Federal Home Loan Mortgage Corp. official said two-thirds of the firms that sell its bonds inflated customer orders;
*A Federal Reserve Board member said Salomon's activities had caused "very little, if any damage" to the government securities markets;
*Pickle threatened to subpoena top Salomon officials if they were not more forthcoming in the information supplied to Congress.
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September 27, 1991, The Washington Post, Panel Told Of Treasury, Trader Clash, by David S. Hilzenrath,
The trader who allegedly orchestrated Salomon Brothers Inc.'s illegal bids for government securities clashed last year with a Treasury official who accused him of trying to "game the system," the official said yesterday.
The description of the confrontation between the Salomon trader, Paul W. Mozer, and Michael E. Basham, then deputy assistant Treasury secretary, offered a detailed picture of Mozer in action. Salomon officials have depicted him as a man driven by ego to flout the Treasury. Mozer himself has not spoken publicly since the illegal bidding at Salomon came to light last month.
Basham told a House Ways and Means subcommittee yesterday that in June 1990, Salomon bid for more than 100 percent of the notes the Treasury was offering in an $8 billion auction. Basham said Mozer was trying to "game the system" - to manipulate the process to ensure that Salomon was awarded the maximum possible share when the Treasury finished dividing the securities among competing bidders.
Basham said he called Mozer after the auction and asked him not to do it again. "I said, 'Paul, quite frankly the nature of the process is designed to encourage you to bid a higher price than the next guy, not to try to game the system, and we would prefer that you not' " do it again, said Basham, who recently left the Treasury to work for the Wall Street firm of Smith Barney, Harris Upham & Co.
Mozer, who was fired as head of Salomon's government securities desk last month, did not make any promises, Basham said. Instead, he told Basham that "he hoped that no one else would find out about this," Basham testified.
Then, about a week later, Salomon again bid for more than 100 percent of the securities being offered in a government auction. Another unnamed securities dealer also bid for more than 100 percent.
The Treasury rejected both of those bids. The unnamed dealer apologized, but Mozer was not ready to take no for an answer, Basham said. Mozer threatened to have John H. Gutfreund, the Salomon chairman who resigned last month amid the scandal, go over Basham's head and call the Treasury secretary, Basham said.
At the time, the excessive bids were not illegal. But soon afterward, the Treasury adopted a policy known as the Mozer-Basham Rule that prohibited firms from bidding for more than 35 percent of the securities offered for sale in an auction. In a series of later auctions, Mozer circumvented the new rule by placing unauthorized bids in the names of Salomon customers, Salomon has reported in news releases and congressional testimony.
In other testimony yesterday, Securities and Exchange Commission Chairman Richard C. Breeden said his agency is investigating whether Salomon's improper activity in the government bond market extended to trading in foreign currencies.
"I would certainly agree that it is possible to manipulate interest rates and seek to profit from that manipulation in the foreign exchange market," Breeden said.
Deryck Maughan, Salomon chief operating officer, said he doubted "very much" that advance knowledge of the prices on longer term securities such as the ones Mozer was buying "would allow you to make a killing in the foreign exchange market."
In addition to breaking rules in Treasury auctions, Salomon has admitted that it misled government sponsored enterprises such as the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac) when placing orders for their bonds. At yesterday's hearing, an executive from Freddie Mac said that 18 of the brokerage firms that act as dealers for its bonds have reported that they exaggerated the size of their customers' orders. The inflated orders might have helped the firms trade a higher volume of bonds and earn more commissions.
Members of the committee excoriated Fannie Mae and Freddie Mac for not penalizing Salomon and for continuing to do business with it.
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September 30, 1991, Albany Times Union, Top Pay Issue in Salomon Bond Scandal,
Wall Street is one of the few places on earth where an employee in his 30s could receive nearly $5 million for one year's work and still feel underpaid.
For his labors buying and selling U.S. government securities for Salomon Brothers Inc. during 1990, Paul W. Mozer, 36, now at the center of a major Wall Street scandal, received a $4.6 million bonus on top of his $150,000 salary.
Just two aisles over, however, another trader, Lawrence E. Hilibrand, 32, was doing much better. He received $23 million for his success in 1990 in carrying out a complex trading strategy called bond arbitrage.
Today, a month after Salomon Brothers was rocked by its disclosure that Mozer had engaged in illegal bidding practices, the affair is being blamed in part on bitter rivalries within Salomon fueled by the competition to get enormous bonuses, according to current and former executives of the firm.
Although Salomon says Mozer's primary reason for breaking the rules was a personal vendetta with the Treasury - he has not spoken publicly on the subject after being fired last month - others suspect that he also was driven by the desire to shine more than other executives at the firm, and thus improve his chances of boosting his paycheck.
"The compensation system at Salomon Brothers was working so that, if one area on the floor worked better, it got paid more. (Mozer) looked at Larry Hilibrand and thought, he got 23 (million dollars), I want to get 23," said a former executive of the firm who knows both men.
In the wake of the Salomon Brothers scandal, federal regulators, Congress and the public are questioning whether Wall Street can justify the mammoth pay packages that it customarily gives its top executives.
Some regulators and members of Congress ask whether traders such as Mozer are being compensated for skills that are all that valuable, or whether they merely benefit from a system that channels hundreds of billions of dollars of business through a few securities firms and enables people to reap big profits by taking a tiny slice from each transaction.
The current system of rewarding performance with huge amounts of money can encourage traders to take excessive risks, or to cut corners legally or ethically, these officials say.
"Maybe I'm too old-fashioned, but I cannot see the merit of compensation practices that yield millions of dollars per year, for example, for individual securities or foreign exchange traders," New York Federal Reserve Bank President E. Gerald Corrigan told a Senate committee investigating the Salomon Brothers affair.
Corrigan himself earned $231,500 last year for heading the institution that, among other things, conducts the auctions of Treasury securities where Salomon broke the rules.
While saying he was "under no illusions" that more conservative pay policies by themselves would prevent future abuses, Corrigan said the current pay system encourages people like Mozer to cross the line into wrongful behavior.
Outside of the entertainment and sports fields, the securities industry is the only arena in American business where multimillion-dollar paychecks are routinely given to employees several rungs down the corporate ladder from the top.
Defenders of Wall Street's pay practices point out that Salomon Brothers and other big firms also play a critical role in lending money to cover the federal budget deficit, and that very high pay levels also are found in sports and entertainment.
"Salomon is a major financier of the U.S. government," and deserves to earn a return for performing that function, said Howard A. Gabler, a codirector of G.Z. Stephens Inc., an executive search firm that specializes in the investment field. "Michael Jordan stuffs a ball in a hole and makes $16 million - what's the social justification for that?"
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October 3, 1991, The Washington Post, Salomon Says Illegal Bidding Began Earlier, by Robert J. McCartney,
Salomon Brothers Inc. said today that its illegal bidding at auctions of U.S. Treasury securities began in July 1990, five months earlier than it had previously publicly acknowledged, and also said that it had made a number of "inappropriate" but legal bids in the first half of 1990.
The firm also said it appeared that it had made unauthorized bids at a total of eight auctions between July 1990 and May 1991. Until now, it had uncovered evidence of wrongdoing at only seven, although it had said that it expected to discover additional infractions as the investigation continued.
Salomon Brothers made the disclosures in a statement announcing that it had completed its internal examination of the activities of its U.S. government securities trading desk, which is at the center of the scandal that has rocked both the big investment bank and all of Wall Street.
Salomon Brothers will continue to look at whether wrongdoing also occurred in other parts of the firm, such as its foreign exchange or finance operations. But sources familiar with the inquiry stressed that there was no evidence so far of any infractions outside the government trading desk.
Although the company did not release all details of its investigation, the sources said the inquiry confirmed the firm's previously disclosed account that Paul Mozer, the former head of the government trading desk, had made the illegal bids on his own initiative because of his desire to evade Treasury rules limiting the amount of securities that one firm could buy.
That version seemed to be bolstered by the firm's account today that the first illegal bid occurred in July 1990. That was immediately after the Treasury adopted a new rule, specifically aimed at Mozer, that barred any firm from bidding for more than 35 percent of the securities to be sold at a single auction.
In addition, the firm said for the first time that the government trading desk had submitted several bids before July 1990 that "were not in violation of the rules at the time, but nonetheless were inappropriate."
In those instances the firm submitted bids for 100 percent or more of the available securities, sources said.
Mozer, who was fired in August when the affair first became public, has not commented on the firm's allegations.
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October 5, 1991, The Economist (US), Investing for fun and profit: American hedge funds,
PAUL MOZER, formerly the chief trader in government securities at Salomon Brothers, is the object of more than ordinary attention these days. All Wall Street is waiting to learn whether he agrees to tell all-and maybe more than all-to the federal investigators looking into auction-rigging in the government-bond market, to which his former employer has admitted. Few can be more interested than the powerful private investment consortiums that featured prominently in the Salomon affair.
"Hedge funds" have transformed the face of America's securities markets in recent years, yet they are not widely known. They are private investment partnerships, many with fewer than 100 partners (which allows them to escape registering with the Securities and Exchange Commission), and some with an offshore domicile (which has tax advantages). They sprang up in the 1960s as a way for rich investors to pool their money and do all sorts of things that mutual funds, and even registered investment managers, cannot ordinarily do: go long and short, hedge in derivatives markets, borrow lots of money, invest any proportion of their capital in any sort of asset.
Those with the highest profile these days (not least because they did regular business with Salomon) are Quantum Fund, Tiger Fund and Steinhardt Partners. They are the punter's punters. They bet big and they borrow big. And they are acutely uncomfortable sharing the limelight with Salomon.
A bevy of regulators wants to know whether the hedge funds plotted with Salomon to squeeze the secondary market in May two-year Treasury bonds. Salomon, acting for itself, Tiger and Quantum, bought $10.6 billion of the $113 billion of bonds available. In the when-issued market before the auction, Salomon bought $1.3 billion of the bonds for Steinhardt, which in all amassed $6 billion-worth. Few other investment managers would have the stomach or the resources to take such pOSItions.
All three funds deny any culpability in Salomon's squeeze. They say they were making a typical bet that interest rates would fall and the bonds would increase in value. They were right: the yield on them fell in secondary trading from 6.81% to 6.14%. Owners of the May two-year bonds made a profit of $11.5m for each $1 billion held.
The hedge funds were not alone in calling that particular shot. Speculators in the Chicago futures markets also took huge long positions in the May two-year Treasuries. But the hedgers were able to make bigger bets than most. The primary dealers' best customers, they can use the repurchase market to borrow large quantities of Treasuries at low interest rates and, essentially, punt without putting money down.
Though hedge funds do from time to time go bust, Quantum, Tiger and Steinhardt have outpaced the broad market averages that are the benchmarks for all investment managers. Since their inception, George Soros's Quantum (1969), Michael Steinhardt's partners (1967), and julian Robertson's Tiger (1980) have achieved compound annual returns of more than 30%. A $100,000 sum invested in Quantum when it was founded would have become $50m today. Last year the $2.5 billion fund paid out $611m to its investors.
As well as making their investors rich, they have also made their owner-founders among the wealthiest investment managers in America. They are an unusual bunch, with little but their wealth in common.
Mr Soros is a Hungarian refugee absorbed by the economies of Eastern Europe and global trends. He deals as happily in currencies, index futures and options as he does in stocks and bonds.
Mr Steinhardt, a compulsive and instinctive trader, accounted in the 1970s for more commission business for Wall Street firms than any other investment manager, and is still near the top. His investors include Jack Dreyfus, who founded the Dreyfus group of unit trusts, as well as several Salomon officials like Thomas Strauss, its former president, and William Salomon, its honorary chairman. Preferring bonds to high-multiple stocks this year, he has done less well than some money managers. Steinhardt's earnings will nonetheless be about 20% up on last year's.
Julian Robertson, the courtly North Carolinian who founded the $2.1 billion Tiger Fund, counts Tom Wolfe, author of the ultimate Wall Street novel, Bonfire of the Vanities", among his investors. Mr Robertson dismisses the funds' speculative image. "The beauty of hedge funds", he says, "is that you can buy the stocks you love, and sell short the ones you hate." They may look less beautiful if Mr Mozer decides to save his own neck as best he can.
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October 12, 1991, The Economist (US) Hanging in there: Salomon Brothers,
IF WARREN BUFFETT, its interim chairman, is Salomon's Jimmy Stewart, chief operating officer Deryck Maughan is its Daniel. He headed off to the lion's den this week to face the hundreds of bankers, central bankers and finance ministers gathered in Bangkok for the annual meetings of the IMF and World Bank. These are people whose credit and custom Salomon needs if it is to survive in any sort of shape until American authorities rule on the wrongdoing in government-bond auctions to which its former bosses admitted in August.
For Salomon, the priorities are clear. its new bosses are busier managing relations with the government, the banks and the clients than managing the firm itself. Salomon's internal investigation has been completed, throwing up only one further example of apparent rule-breaking. With its third-quarter results at the end of October, Salomon will announce the sum it intends to put away against possible fines and civil damages. outsiders speculate that this may be around $250m, but the firm itself can do no more than guess what is appropriate.
Salomon's balance sheet has been trimmed by more than a quarter, to around $110 billion. The mix of assets has been changed so that more are now liquid and cheaper to fund. With about $11 billion in equity and long-term debt to fall back on, Salomon now need not fear a financing crisis in the near term, says Mr Maughan.
As for its clients, according to Salomon, most have proved loyal. Even some of the large institutions that felt forced to break links have provided discreet help behind the scenes. Without the need to provide against penalties, Salomon's profits for 1991, like those in the first half, would have been the highest in the firm's history, it says.
What next? Salomon's new team wants to refocus the business, to price and allocate internal capital more systematically, and to recreate a sense of committed partnership. All that must remain a dream until federal investigators pronounce on Salomon's fate. And that could prove a lengthy process. Their interest has long since broadened to include the rest of the Treasury-bond market's primary dealers and multi-billion-dollar "hedge funds". Salomon is unlikely to be let out of the pillory until the possibility of broader collusion has been ruled out.
Lower-profile investigations into another government market, meanwhile, are also turning up some dirt. The bonds of government-sponsored enterprises like those providing mortgage credit are sold through dealer syndicates. Freddie Mac, one of the "agencies", has found that 18 of its 25 dealers (which include various big banks and securities firms as well as Salomon) have been lying about customers' orders, inflating them to get more bonds to sell.
Offenders are escaping lightly, however-whether because there is safety in numbers or because (as dealers claim) the agency knew about the fiddle all along. Freddie Mac has set a fine equal to one-fifth of commissions earned this year and last. Sallie Mae, which supports student loans, is content with getting its offending dealers to promise to be good. The far-bigger Fannie Mae has yet to decide what to do. The SEC is also looking into the market. Quite rightly, it will probably be a lot tougher-no matter how many firms it has to discipline.
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October 22, 1991, Associated Press / Albany Times Union, Buffett Keeping Salomon Reins For Now, by John M. Doyle.
Salomon Inc. Chairman Warren Buffett told state-level securities regulators Monday that he will remain at the helm until federal investigators complete their probe of the scandal-plagued firm.
Buffett also said two months of cleaning house at Salomon has turned up no new evidence of wrongdoing.
The plain-spoken Omaha multibillionaire, who took over Salomon's top position in the aftermath of a government bond trading scandal, said an in-house probe has uncovered no additional securities laws violations, although federal investigators still are looking.
"We have not found a widening of bad behavior. We have looked and looked and looked," Buffett said in speech to the North American Association of Securities Administrators.
He added: "We have not found anything that seems pervasive."
Buffett also said he would stay on as chairman "until I feel I am no longer needed," which he believed would not be until federal regulators conclude their investigations.
Buffett said Salomon expects "significant monetary costs" as a result of the scandal. He did not give a loss figure but said it would be reported in third quarter earnings.
In August, Salomon admitted it made illegal bids at Treasury Department auctions without customers' knowledge and bypassed a federal rule preventing bidders from acquiring more than 35 percent of any government security at auction.
The auctions are the main way the governmen finances the budget deficit and are critical to the smooth functioning of the U.S. economy.
Then-Salomon Chairman John H. Gutfreund also disclosed that he and other top executives were aware of the wrongdoing and waited months to tell regulators.
Buffett told his 700 listeners Monday that he still has no explanation why top Salomon management didn't report the wrongdoing.
"It just doesn't make any sense," Buffett said repeatedly.
Gutfreund and three top executives resigned from Salomon Aug. 17 and the next day Buffett, who holds a 14 percent stake in Salomon, took over as chairman.
NASAA, representing state-level securities regulators from all 50 states plus several Canadian provinces, is holding its annual fall conference in San Diego through Thursday.
Several states have ceased doing business with Salomon and others are suing the Wall Street investment house.
More than 30 states are conducting a joint investigation of Salomon following this past summer's disclosures.
The Securities and Exchange Commission, the Justice Department and the FBI also are investigating Salomon.
As he has before, Buffett said he welcomed the probe by law enforcement agencies and pledged to cooperate.
Buffett also continued to lay most of the blame for the scandal at the feet of Paul Mozer, the former head of Salomon's goverment securities trading desk who was later fired.
Buffett characterized Mozer's activities as "motivated by a desire to best the U.S. Treasury" because his alleged illegal dealings would not have earned him any more money, would not have significantly increased his annual bonus.
Buffett acknowledged that the scandal has hurt Salomon, costing it business, prestige and a lot of money in legal fees.
"I'm going to be the American Bar Association's 'Man of the Year,'" said Buffett, 61. Asked what his worst day had been, Buffett joked that he hoped it had already occured in the first two months of his tenure.
He also said Salomon's fate as a primary dealer, a key player in the Treasury Department's securities auctions, was still in the hands of officials a the Federal Reserve Bank in New York, which runs the auctions.
However, Buffett said: "We have no reluctance to make ammends for the past misconduct of Salomon employees but we don't think anything that would cripple the operation really would be in the best interests of regulators or in society's interest."
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October 25, 1991, The Washington Post, Salomon Says Illicit Trading Netted $5 Million, by Robert J. McCartney,
Salomon Brothers Inc. said today that it earned less than $5 million in extra profits from its improper bidding at eight U.S. Treasury auctions, which it described as a relatively small amount.
But the big Wall Street company also said that its total profits at the most controversial auction, in May, were unusually high at more than $16 million. It said it did not yet know enough to answer the critical question of whether it had illegally conspired with other firms at that auction to create the artificial shortage of securities that led to the big profit.
In a separate development, Salomon Brothers Chairman Warren Buffett said an undetermined number of top executives at the company may leave in early 1992, after collecting their year-end bonuses, because they are unhappy with the strict adherence to the rules that he has demanded since he became chairman in August as a result of the scandal.
"I think some people may find they don't want to play in the kind of atmosphere I'm trying to create," Buffett said in answering questions after a luncheon speech here to big institutional investors.
Salomon Brothers' announcement of its calculation of total profits earned from illicit trading was an important step in the process of trying to put the scandal behind it. The total will influence both the size of any penalties imposed by the government and the firm's total liability in 38 lawsuits filed against it as a result of its wrongdoing.
The company said it reported its calculations to the Securities and Exchange Commission, the Treasury Department, the Justice Department and the New York Federal Reserve Bank.
The company said a generous estimate of its total profits reaped from improper bidding in eight auctions between July 1990 and May 1991 was $3.3 million to $4.6 million.
"Even a penny is too much, but I think this total is less than people outside the firm had expected," said attorney Frederick Schwarz Jr., an outside counsel for Salomon. The company's net income over the period in which the improper bidding occurred totaled $515 million.
Schwarz also said the figures showed that the employee whom Salomon has blamed for the scandal - its former chief U.S. government securities trader, Paul Mozer - was motivated by something other than a desire for profit. The company has portrayed Mozer's wrongdoing as a result of his obsession with evading rules adopted by the Treasury to restrain his aggressive bidding.
"We can't psychoanalyze him, but it doesn't look like profit was his motive," said Schwarz, who is a partner at the New York firm of Cravath, Swaine & Moore.
But a senior Wall Street executive familiar with the auctions challenged Salomon's interpretation. He said Mozer had hoped to make extra money from the wrongful bidding, regardless of whether he succeeded. "You don't commit that kind of money only out of ego. You do it to make money, but there's no guarantee it's always going to be profitable," the executive said.
At the most controversial auction, the one in May for two-year Treasury notes, Salomon said it earned a total profit of $16.7 million to $18.4 million. About $3 million of that profit was a result of the illicit bidding, it said.
It appears that the illicit bidding helped Mozer to create a squeeze, or artificial shortage, of securities that yielded the big earnings. It is not clear whether there was illegal collusion as well, the company said. "That's a subject to be dealt with after all the facts are in," Schwarz said.
In the other seven auctions in question, Salomon said the total of illicit and legitimate profits was relatively low - less than the average gross profits of 11 other auctions that it examined for comparison.
Buffett's comments about a possible exodus of top executives addressed an issue that is central to Salomon's future: whether Wall Street rivals will woo away its most important asset, its talent, at a time when the firm is laboring with the stigma caused by the scandal.
In a recent, welcome bit of positive news for the firm, Citicorp and J.P. Morgan & Co. agreed to provide Salomon Brothers with a $2 billion line of credit that it needs to help support its trading activities.
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October 30, 1991, Albany Times Union, Salomon's Profits Increase Despite Legal Troubles,
Salomon Inc. said Tuesday it set aside $200 million to pay for troubles stemming from its bond market wrongdoing, but the firm recorded a surprising increase in third-quarter profits after slashing compensation.
The developments were announced in an unusual two-page newspaper advertisement by interim Chairman Warren Buffett, who renewed a pledge to clean up the investment firm and put a lid on astronomical payouts.
"Employees producing mediocre returns for owners should expect their pay to reflect this shortfall," Buffett said in a report to shareholders. "In the past that has neither been the expectation at Salomon nor the practice."
In response to the announcement, Salomon's stock soared $2.25 a share, or 8.6 percent, to $28.375 in heavy New York Stock Exchange trading. Salomon was the third most-active stock, with 3.05 million shares changing hands.
The stock price gain continued a recovery from a low of $20.75 after the scandal broke in August at the firm's Salomon Brothers Inc. brokerage unit.
The money to cover fines and litigation had been expected to wipe out Salomon's quarterly profits. But the firm avoided a loss by reducing a pool for year-end bonuses by $110 million as part of a revamped pay structure.
For the three months ended Sept. 30, Salomon said profits rose 7.6 percent to $85 million, or 60 cents per share, from $79 million, or 55 cents per share, a year earlier. Total revenue dropped to $2.42 billion from $2.57 billion due to a 35 percent drop in trading activity.
Profits at the Salomon Brothers unit more than tripled because of favorable bond market conditions, to $194 million from $60 million, Buffett said. Salomon's Phibro Energy unit made just $10 million, down from $369 million.
After considering tax effects, the $200 million charge and $110 million gain for lower compensation reduced profits by $75 million, Buffett said.
The profit gain was small compared to huge increases posted by other brokerages that have enjoyed a revival in stock market activity and corporate securities underwriting from a dismal 1990.
But analysts said the report wasn't a good indicator of Salomon's status because the firm had wide discretion over how much it allocated to pay for the scandal and cut compensation. Also, the scandal's final impact is unclear.
"The problems that make this an unusual quarter are not resolved," said John Keefe, an analyst with Lipper Analytical Securities Corp.
But the report gave Buffett, the respected Nebraska multibillionaire investor who owns 14 percent of Salomon, another opportunity to temper the scandal's fallout with tough talk about the firm's future.
"We have the prospect of correcting certain weaknesses at Salomon Brothers that were likely to remain unaddressed absent a change in management," Buffett said.
"I believe that we can earn ... superior returns playing aggressively in the center of the court, without resorting to close-to-the-line acrobatics," he said. "Good profits are simply not inconsistent with good behavior."
Buffett again maintained the wrongdoing was confined to a few individuals. "I believe that we had an extremely serious problem, but not a pervasive one," he said.
Salomon has blamed the former head of its government-bond trading desk, Paul Mozer, for violating government rules at Treasury auctions. The firm faces several criminal and civil investigations, as well as 38 lawsuits.
Last week, Salomon said it made no more than $19.7 million from eight auctions in which it submitted illegal bids, including a maximum $4.6 million directly from the bids. If the government agrees with the estimates, Salomon's legal exposure could be far less than initially envisioned.
Buffett said the money for fines and litigation was a preliminary amount that could change. But he said the firm's $4 billion equity base "virtually insures that they will not be crippling."
The chairman attacked past Salomon management for an "irrational" pay system in which compensation increased sharply regardless of performance. In 1990, 106 Salomon Brothers employees made more than $1 million, despite unspectacular results.
Buffett said in 1991 and beyond top-paid employees would get much of their compensation in Salomon stock. He admitted the scheme would cause some executives to quit, but that "would not necessarily be bad."
"In the end we must have people to match our principles, not the reverse," he said.
Buffett also said Salomon would continue reducing assets. Facing credit problems, Salomon has sold more than $50 billion in assets to raise money since the scandal, reducing total assets to $97 billion at the quarter's end.
In the first nine months of the year, Salomon earned $536 million, or $4.31 per share, on revenue of $7.62 million. That compares with $318 million, or $2.32 per share, on revenue of $7.02 billion in the first nine months of 1990.
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November 20, 1991, Chicago Sun-Times, Salomon reportedly fires 140 employees,
Salomon Bros., reshaping its business following a bond-trading scandal, has fired 140 employees, including 10 high-ranking managing directors, sources close to the firm said Tuesday. The dismissals came in the brokerage firm's stock and investment banking divisions, with the banking unit taking the heaviest hit. The firm also slashed its equities staff, leading some employees to conclude that Salomon will focus even more on the business that enmeshed the firm in scandal: bond trading. Sources said the investment banking division suffered about 100 dismissals and U.S. equities had lost about 30. The parent of the New York-based brokerage,Salomon Inc., employs about 8,900.
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December 3, 1991, Associated Press / The Boston Globe, Salomon, World Bank resume ties, by John M. Doyle,
WASHINGTON -- Salomon Brothers Inc., in a sign of recovery from a major bond-trading scandal, yesterday said that it has resumed business with the World Bank after a three-month ban.
The World Bank suspended all business dealings with Salomon in August after the firm revealed it violated Treasury Department auction rules on numerous occasions.
Salomon said it made illegal bids at Treasury auctions without customers' knowledge and bypassed a federal rule preventing bidders from acquiring more than 35 percent of any government security at auction.
Several federal financial regulators are investigating Salomon and the loosely regulated $2.3 trillion market in government bonds, notes and bills.
The Treasury, Securities and Exchange Commission, and Federal Reserve are due to report their findings to Congress later this month. The Justice Department also has launched civil and criminal probes.
Salomon issued a brief statement announcing the resumption of business with the World Bank. Sheldon Rappaport, a spokesman for the Washington-based international bank, declined to comment.
A resumption of dealings between Salomon and the bank, which is one of the the world's biggest issuers of notes and bonds, would be a big plus for the Salomon Inc. unit.
The end of Salomon's exile suggests the World Bank believes the firm will be allowed by the government to retain its status as a primary dealer in Treasury issues. It also shows that some Salomon clients approve of the changes made at the firm under interim chairman Warren Buffett.
Buffett has cut ties to old management, slashed bonuses and dismissed scores of investment bankers and stock traders. He also created a new executive management committee headed by chief operating officer Deryck Maughan.
The International Bank for Reconstruction and Development, known as the World Bank, is owned by the major industrial countries and lends money to developing nations. It is among the world's largest borrowers of US dollars.
Salomon had handled a number of major deals for the bank, including serving as lead underwriter for a $2 billion bond issue in September 1990 and a $1.5 billion issue in September 1989.
But it was barred in September from a huge offering of dollar-denominated bonds because of the World Bank's suspension. It has also been unable to trade with the bank, which has a $20 billion fixed-income portfolio.
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December 3, 1991, The Washington Post, World Bank Ends Ban On Salomon,
Salomon Brothers Inc., in a sign of recovery from a major bond-trading scandal, said yesterday that it has resumed business with the World Bank after a three-month ban.
The World Bank suspended all business dealings with Salomon in August after the firm revealed it violated Treasury Department auction rules on numerous occasions.
Salomon said it made illegal bids at Treasury auctions without customers' knowledge and bypassed a federal rule preventing bidders from acquiring more than 35 percent of any government security at auction.
Salomon issued a brief statement announcing the resumption of business with the World Bank. A spokesman for the Washington-based international bank declined to comment.
A resumption of dealings between Salomon and the bank, which is one of the the world's biggest issuers of notes and bonds, could be a big plus for the Salomon Inc. unit.
The end of Salomon's exile suggests the World Bank believes the firm will be allowed by the government to retain its status as a primary dealer in Treasury issues. It also shows that some Salomon clients approve of the changes made at the firm under interim chairman Warren E. Buffett.
Buffett has cut ties to old management, slashed bonuses and dismissed scores of investment bankers and stock traders. He also created an executive management committee headed by chief operating officer Deryck Maughan.
Several federal financial regulators are investigating Salomon and the loosely regulated $2.3 trillion market in government bonds, notes and bills.
The Treasury, Securities and Exchange Commission, and Federal Reserve are due to report their findings to Congress later this month.
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December 20, 1991, The Bergen County Record, Salomon Vice President to Resign,
NEW YORK -- The former head of investment banking at Salomon Bros. Inc. will resign at the end of the year, the company said Thursday. The departure of Jay F. Higgins, a vice chairman who worked for Salomon for 22 years, was expected after he was left off a top management committee created by
Salomon last month to run the company. Salomon's interim chairman, Warren Buffett, has radically overhauled the brokerage since it admitted in August to widespread wrongdoing in the government-bond market. Higgins founded Salomon's mergers and acquisitions department in 1978 and was named head of corporate finance in 1986. He was made a vice chairman and named to Salomon's executive committee in 1988. There had been speculation that Higgins would leave Salomon since last December, when he was replaced as investment-banking head by Deryck Maughan, now Salomon's chief operating officer, and Leo Higdon.
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January 21, 1992, Chicago Tribune / Dow Jones News Service,Fed Acts To Limit Primary Dealers In Treasury Auctions,
WASHINGTON — The Federal Reserve has decided to recast its primary dealer system in a way that will downgrade the importance and prestige of primary dealers, according to the draft of a joint agency report on the government securities market.
Prepared by the Treasury, Fed and Securities and Exchange Commission, the draft report said that "it has become both feasible and appropriate for the Federal Reserve to amend its dealer selection criteria to provide for a more open system of trading relationships." That, presumably, will lead over time to an increase in the number of such dealers.
The draft report said the Federal Reserve Bank of New York will discontinue its dealer surveillance activities related to primary dealers even as it steps up its market surveillance activities.
The draft said: "One feature of the amended criteria is that existing as well as new primary dealers will no longer be required to maintain a 1 percent share of the total customer activity reported by all primary dealers in the aggregate."
The document said that "further expansion in the number of primary dealers will be feasible" following automation of Treasury auctions, which is expected to be done by early next year. There are 38 primary dealers.
Some market participants knowledgeable in the ways of the New York Fed have been predicting privately that there would be modest changes to reduce the importance of being a primary dealer and that the Fed wants to cut its "moral hazard risk" by making it clear that being designated a primary dealer doesn't carry special approval from a creditworthiness point of view.
The proposed change to an automated, open-auction system may lessen Treasury's reliance on primary dealers to distribute Treasury securities, the draft said.
The draft document also noted that auction changes announced by the Treasury Oct. 25 eliminated other distinctions favoring primary dealers.
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January 23, 1992, The Washington Post, U.S. to Propose Tough Penalties for Salomon; Federal Probe Nearing Finish, Sources Say, by Robert J. McCartney and Brett D. Fromson,
The government plans to seek stiff sanctions, including a large fine, against Salomon Brothers Inc. for its illegal bidding at U.S. Treasury auctions, according to sources familiar with the case.
The government is nearing the end of its investigation of the affair and the penalties are likely to be significant even though Salomon Brothers calculated that it earned less than $5 million in profits from the improper bids, the sources said.
One source familiar with the investigation said the authorities have doubts about Salomon's estimates and would be foolish to accept them at face value. The source said that in any case the government also will consider much more than Salomon's profits in setting the penalty. An important factor will be a calculation of the risks that the company's actions posed for the entire $2 trillion government bond market, the source said.
A spokesman for Salomon said the company was "confident" of the accuracy of its calculations. The company has already taken a $200 million charge against its profits in anticipation of all fines, penalties and other costs related to the affair.
It is unclear how the timing of a settlement with the company might affect other, related legal inquiries in the case. Several individuals implicated in the wrongdoing - especially Paul Mozer, the bond trader who Salomon said submitted false bids at Treasury auctions from July 1990 through May 1991 - are expected to seek legal settlements of their own.
One crucial question is whether the government will require Salomon Brothers to plead guilty to one or more felonies as part of the price of settling the case, sources said.
The company admitted last August that a senior bond trader used the names of customers without their knowledge to bid for Treasury securities, and the firm as a whole may be held liable for his actions. But Salomon Brothers hopes that its extensive cooperation with the government since it disclosed the wrongdoing, and its replacement of the top executives who failed to halt the abuses, will lead the authorities to stop short of seeking a felony charge against it, sources said.
While the government certainly will give Salomon credit for its cooperation, authorities view the wrongdoing as very serious and believe it potentially threatened the nation's largest securities market, sources said.
Salomon Brothers fears that it might be put out of business altogether if it pleaded guilty to a felony, both because its lenders might cut it off from financing and because some clients such as state pension funds might stop doing business with it, sources said.
"We don't believe that anyone in government has any desire to see us go out of business. We believe that whatever the outcome may be with the government, it will be something that we will survive," Salomon Brothers Chairman Warren E. Buffett said.
There are other risks as well. Salomon Brothers President Deryck Maughan warned Congress last September that harsh punishment of Salomon could threaten the health of the financial system.
Investigators from the Securities and Exchange Commission and the Manhattan U.S. Attorney's office are still taking testimony from witnesses and have not reached the stage where they can approach Salomon Brothers with a proposed settlement.
But a source familiar with the investigation said it was close to conclusion and that a settlement with the company might be reached as early as April. Salomon Brothers is eager to put the affair behind it and would be very pleased if that timetable could be met.
Once the government proposes a settlement, Salomon Brothers will be under considerable pressure to accept it, according to lawyers and other experts. The firm has essentially bet its future on its cooperation with the government and it could lose that good will if it chose to fight.
"Salomon will have to settle. They cannot afford to litigate against the federal government," said a former senior SEC official.
The government's doubts over Salomon's calculation of the profits it made from the illegal bidding could affect the penalties the company faces. The profit estimates not only will influence the amount of any fine, but also will affect the host of investor lawsuits that have been filed so far.
In October, shortly before Salomon released its estimates, the government put the firm's profits from the May auction of two-year notes at more than $30 million, sources said. The firm's estimate was between $16.7 million and $18.4 million, which Salomon said did not result from illegal bidding.
If the government determines that the profit numbers are significantly higher than Salomon stated, then it could undercut the good will built up with government investigators.
Many on Wall Street have also questioned Salomon's profit estimates. "Those numbers didn't sound like enough money to me," said a former senior Salomon Brothers executive. He was particularly suspicious about the company's data, because it suggested that Salomon made less money in auctions where it had cornered the market than when it hadn't.
Salomon stands by its numbers. "We are confident of our numbers and our analysis, and we are aware of no critique of the report furnished to the government," a Salomon spokesman said.
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March 26, 1992, The Washington Post, Salomon's Ex-Chief Asking $14 Million; Other Ousted Officials File Severance Claims, by Robert J. McCartney,
Former Salomon Brothers Inc. chairman John H. Gutfreund, who resigned in disgrace last August amid a major U.S. Treasury bond auction scandal, has asked the company for more than $14 million in back pay, severance benefits and rights to stock, the company said today.
Three other former top executives, all of whom also were forced to quit in the scandal, have made "comparable" claims, the Wall Street firm said. Former president Thomas W. Strauss has asked for cash and stock now worth a total of about $15 million, it said.
The company already has paid Gutfreund $1.14 million for his work last year. His demands on top of that include claims for $4.5 million of severance pay and a $2 million bonus for 1991. In that year, the company nearly collapsed when it was revealed that Gutfreund and other top executives had waited four months to inform authorities of illegal bidding by Salomon at Treasury auctions.
Gutfreund's lawyer issued a statement saying that most of his claims involved money that he had earned in 1991 and prior years, but that had not yet been paid to him. "An appropriate severance payment would reflect Mr. Gutfreund's contributions to Salomon Brothers over a 38-year career," the statement said.
Strauss said through a spokesman that the claims were "based on contractual and other commitments made by the company."
Salomon said it was not yet clear whether Gutfreund and the other former executives had a right to all the money. A legal battle was possible, as the firm suggested it might assert claims of its own against the four.
In a related development, Warren E. Buffett, who replaced Gutfreund as chairman, said in Salomon's annual report that the securities firm's parent company, Salomon Inc., planned to build up extra financial strength because of the risks of "major shocks" in both the securities and energy industries. In line with this new policy, the Salomon Brothers subsidiary paid a $1 billion dividend to the parent at the end of last year, he said.
Buffett also said the firm's current No. 2 executive, Deryck C. Maughan, would eventually succeed him as head of Salomon Brothers, but not as chairman of the parent company.
Instead, Buffett said he would recommend hiring another executive - possibly on a part-time basis - to serve as chairman and chief executive of the parent company. That executive would oversee both of the parent companies' subsidiaries, the oil and commodities trading company Phibro Energy Inc., as well as the securities company Salomon Brothers. In the past, the CEO of Salomon Brothers has also been CEO of the parent.
Buffett, a prominent investor who owns 14 percent of the parent company, reaffirmed that he would step down only after Salomon has settled its dealings with government regulators arising from last year's scandal. The Securities and Exchange Commission is expected to levy a hefty fine on the firm, possibly by early summer, and the company may face other sanctions.
The Treasury auction scandal erupted when Salomon admitted that its former top U.S. bond trader, Paul Mozer, repeatedly had submitted false bids at Treasury auctions to help win a larger share of the securities being sold. Gutfreund, Strauss and two other top executives were forced to quit in August because they had known of at least one such illegal bid by Mozer since April, but had failed to report it.
Salomon disclosed estimates of Gutfreund's and Strauss's claims in proxy materials sent out to shareholders in advance of the company's annual meeting. The two had not made "definitive" claims, it said, and might ask for even more.
In addition to requesting $4.5 million in severance and a $2 million bonus for 1991, Gutfreund asked for $343,497 under a special bonus plan, stock options with a current value of $5.6 million, and Salomon shares currently worth $1.4 million.
He also asked for an unspecified amount under another bonus plan, which could total an additional several million dollars.
Buffett fulfilled an earlier pledge to accept a salary of $1 a year from Salomon, according to the proxy. But Buffett's Salomon stock earned him $26.3 million in dividends during the year, and has risen in value by $10.6 million since he took over.
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April 21, 1992, The Bond Buyer, Salomon bond clerk said to have been offered immunity in federal probe. (Salomon Brothers Inc., Henry Epstein, Treasury market trading fraud investigation) by Charles Gasparino,
Henry Epstein, the Salomon Brothers Inc. bond clerk suspended in the wake of the company's Treasury market scandal last year, has been offered immunity from criminal prosecution pending his complete cooperation with federal investigators, a source close to the investigation said yesterday.
The source, who spoke on the condition of anonymity, said the U.S. attorney's office for the Southern District of New York recently sent the immunity documents to Mr. Epstein, who is expected to accept the agreement early this week.
Mr. Epstein's lawyer, Michael Shaw, an attorney with Stillman, Friedman & Shaw in New York, said he had no comment on the matter. Officials at the Justice Department also refused to comment.
Despite the Justice Department's immunity plan, Mr. Epstein faces possible civil charges from the Securities and Exchange Commission. An SEC official refused to comment on the investigation.
The immunity offer is the first such offer the government has made since it began investigating Salomon Brothers' primary dealer unit and other Treasury dealer firms in August 1991.
Sources said they did not know of the status of the government's investigation of Paul W. Mozer and Thomas F. Murphy, former senior officials of Salomon's primary dealer unit, who were fired in the wake of the scandal.
Mr. Mozer's lawyer, well-known criminal attorney Stanley Arkin, a partner at Chadbourne & Parke, did not return telephone calls. Mr. Murphy could not be reached for comment.
The status of note trade Christopher F. Fitzmaurice, who was suspended by the firm in reaction to the scandal, could not be determined. Mr. Fitzmaurice's attorney, Andrew M. Lawler, did not return telephone calls.
The source said Mr. Fitzmaurice met with the U.S. attorney's office two weeks ago.
The Salomon trading scandal forced several high-level resignations at the firm, including that of John Gutfreund as chairman and chief executive, and caused the government to significantly alter the way Treasury securities are sold and traded.
The investigation of Salomon and other firms by the SEC and the Justice Department is continuing. The U.S. attorney's office recently interviewed several current employees of Salomon's primary dealer unit, the source said.
Mr. Epstein, who was suspended in August, remains a key witness in the government's investigation of Salomon Brothers's primary dealer unit, its customers, and possibly other firms.
Mr. Epstein, for example, provided government investigators with information about Salomon Brothers auction bidding activities going back to a December 1990 four-year note auction, the source said.
Mr. Epstein placed auction bids on the orders of Mr. Mozer. Government investigators also questioned Mr. Epstein about Mr. Mozer's relationship with other primary dealers, certain hedge funds that purchase government securities, brokers of Treasury securities, and the overall conduct of traders and salesmen in Salomon's primary dealer unit.
The source said Mr. Epstein will ask Salomon Brothers to reinstate him as a full-time employee. A Salomon Brothers spokeswoman declined to comment on the matter.
The immunity offer is an indication that "the information he [Epstein] provided is presumably valuable," said Harvey Pitt, an attorney with Fried, Frank, Harris, Shriver & Jacobson and an expert in securities law. "If immunity is granted, they have a real interest in his testimony."
Both the SEC and the Justice Department have interviewed Mr. Epstein extensively as part of their investigation of Mr. Mozer and other Salomon employees for attempting to corner the Treasury market on several occasions.
An independent Salomon Brothers investigation concluded that the primary dealer unit, largely under Mr. Mozer's direction, violated Treasury bidding rules on eight occasions, dating back several years.
Specifically, the rules prohibit any one firm from purchasing any more than 35% of an auction in its own name. Mr. Mozer and possibly other Salomon officials allegedly violated the 35% rule by submitting fake orders through the unauthorized use of customer names, according to Salomon's internal probe. By obtaining the large amount of auctioned securities, Salomon Brothers was apparently able to corner the market on several occasions, "squeezing" rival firms who needed the securities to cover short positions.
The "squeeze" largely occurred in the repo market, where traders at other firms were forced to lend money at low or no interest expense to Salomon Brothers in exchange for the securities needed to cover short positions.
During the May 22 auction of two-year notes, Salomon later admitted to controlling more than 80% of the issue.
The Justice Department is investigating whether Salomon violated criminal statutes and antitrust laws by colluding with other firms to gain an unfair advantage in the Treasury market, the source said.
The SEC, which has the power to bar individuals from the securities markets and levy fines through civil proceedings, is largely concerned with the bidding violations, sources said.
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May 21, 1992, The Washington Post, Salomon, .S. Settle Bond Case; Wall Street Brokerage To Pay $290 Million, by Robert J. McCartney and David S. Hilzenrath,
Salomon Brothers Inc. agreed yesterday to pay $290 million in fines and other penalties to settle government civil complaints in the biggest scandal ever in the giant U.S. Treasury securities market.
The big Wall Street firm viewed the settlement with what a spokesman called "quiet relief" because it escaped being charged with a crime, which might have driven it out of business.
The settlement caps a 10-month investigation of Salomon, which disclosed last August that its chief government bond trader, Paul Mozer, had repeatedly submitted false bids at U.S. Treasury auctions, where the government sells tens of billions of dollars of bonds each year to finance the federal budget deficit.
The disclosure led to the resignations of Salomon's chairman, John Gutfreund, and three other top executives. It also triggered a series of congressional hearings and a major regulatory review of the $2 trillion Treasury bond market.
Mozer, who was fired by Salomon, and other individuals and firms directly involved in the scandal remain under investigation, officials said.
The scandal aroused concern on Wall Street, in Congress and within the Bush administration because it damaged the reputation of the market in government debt, which heavily influences interest rates, the stock market and the value of the dollar.
In announcing the settlement, however, Securities and Exchange Commission Chairman Richard Breeden said the investigation "did not substantiate that wrongdoing was a common, everyday occurrence" in the market for Treasury securities.
Breeden also said that Salomon had engaged in "serious wrongdoing," but that the misconduct had been confined to "a fairly limited part of the firm" and involved only a small number of employees.
Otto G. Obermaier, U.S. attorney for the southern district of New York, said that while Salomon clearly had committed securities crimes, it would not serve "the ends of justice" to bring criminal charges because the firm had done such a good job of investigating its own wrongdoing and taking steps to make sure such offenses never happened again.
Salomon's cooperation was "virtually unprecedented," and the monetary fine and penalties were large enough to serve as an adequate deterrent, he said, adding that "$290 million is enough to say 'ouch.'"
In the settlement, made public at simultaneous press conferences in Washington and New York, the government confirmed for the first time that it believed that one or more unidentified firms had conspired with Salomon to artificially drive up the price of certain Treasury notes last summer. It also disclosed that Salomon had engaged in a series of sham trades in Treasury securities at the end of 1986 to create the false appearance of $168 million of losses for tax purposes.
The settlement resolved complaints by the SEC, the Justice Department's antitrust division and its U.S. Attorney's Office for the southern district of New York. It included modest sanctions by the Federal Reserve Board and Treasury Department, which will be lifted on Aug. 3.
Reaction to the settlement was favorable both on Capitol Hill and in the stock market. Rep. Edward J. Markey (D-Mass.), chairman of the House telecommunications and finance subcommittee of the Energy and Commerce Committee, called the outcome "just and equitable."
Both Markey and Energy and Commerce Committee Chairman John Dingell (D-Mich.) also said the scandal underlined the need for reforms in the government securities market, such as tougher standards for record-keeping, reporting of bond ownership, and sales regulation.
The stock market, responding principally to the absence of a criminal charge, sent Salomon shares up 9 percent. They rose $2.87 1/2 to close at $33 1/2.
The $290 million included $190 million in fines and forfeitures, plus creation of a $100 million fund to compensate Salomon Brothers' victims, who are suing it in about 50 separate actions.
Salomon, which had already set aside $200 million to deal with the case, announced that it was taking an additional charge against earnings of $185 million in the second quarter as a result of the settlement. The size of the charge suggested that the firm's total legal expenses in the case could be as much as $95 million.
While the cost has been hefty, the key issue for Salomon had been whether it would be charged with a crime. Insiders at the firm, and many outside observers, believed it would have gone out of business if it had been indicted on a felony count because many customers would have refused to do business with it anymore.
As a result, the firm's strategy has been full disclosure and complete cooperation, with the goal of winning the government's mercy, ever since prominent investor Warren E. Buffett took over as chairman when Gutfreund resigned in disgrace. Buffett, who also is chairman and principal owner of Berkshire Hathaway Inc., which owns a $700 million stake in Salomon, wryly noted that Salomon is happy principally because the affair now is largely behind it.
"All's well that ends," he told associates.
At his press conference, Breeden noted that one of Salomon's biggest missteps in the affair had been the failure of Gutfreund and other top executives to notify authorities immediately when they learned in April 1991 that Mozer had submitted a false bid at a February Treasury auction.
In submitting false bids from July 1990 until May 1991, Mozer generally was seeking to obtain more government securities for Salomon than the firm otherwise would get.
Sometimes that enabled Mozer to make more money for the firm, although Salomon has said he was largely driven by a personal feud with a Treasury official who had sought to restrain his aggressive bidding.
Gutfreund, in his first public comment on the affair since his resignation, noted that Salomon had disclosed most of the wrongdoing while he was still chairman. "I take some comfort in the fact that no significant acts of misconduct were found other than those that we and our counsel uncovered and announced last summer," he said in a statement issued by his lawyer, Aaron Marcu.
But Gutfreund did not address the question that led to his departure: why he and others neglected to inform the authorities of the first instance of Mozer's wrongdoing when they learned of it.
No criminal investigation of Gutfreund is underway, said sources familiar with the investigation. But he could face SEC regulatory charges, particularly an allegation that he failed to adequately supervise Mozer.
The disclosure of Salomon's alleged 1986 tax violation was unusual because it occurred more than three years before the activities by Mozer that triggered the scandal. Breeden said unidentified witnesses told investigators of the transactions. They were designed to help Salomon get tax benefits earlier than it was legally entitled to them, sources said.
The SEC also alleged in the complaint that a false bid was submitted on Salomon's behalf at an August 1989 Treasury bill auction. The Dow Jones News Service quoted sources identifying Daiwa Securities America Inc. as the primary dealer that submitted a $3 billion bid for Salomon. The SEC and a spokesman for Daiwa declined comment on the matter.
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May 21, 1992, Albany Times Union, Salomon Inc. to Pay $290M To Settle Case,
Capping a 10-month investigation, the government announced Wednesday that Salomon Inc. will pay $290 million but avoid criminal prosecution to resolve charges of widespread fraud in the Treasury bond market.
The settlement is the second-largest ever for wrongdoing on Wall Street behind the $650 million paid by now-defunct Drexel Burnham Lambert Inc. in the 1980s trading scandals.
In August, Salomon admitted repeated illegal and unethical behavior in government securities auctions - including unauthorized orders in customers' names and a $1 billion bid in a botched practical joke. Its top executives acknowledged concealing the illegalities for months.
The settlement with the Securities and Exchange Commission and Justice Department includes $190 million in fines and forfeitures related to cheating in Treasury auctions, in which the government sells bills, notes and bonds to the public.
Also, a $100 million fund will be established by Salomon to compensate victims who lost money as a result of the wrongdoing.
The penalties far exceed Salomon's estimate of a maximum $4.6 million in profits from illegal securities bidding. That reflects regulators' strong belief that the violations undermined the credibility of the financial system.
"Salomon's pattern of submitting false bids created a risk to the integrity of the government securities market, which is a market on which the federal government and ultimately all federal taxpayers depend," SEC Chairman Richard C. Breeden said in Washington.
The SEC, which polices the financial markets, said Salomon had submitted or caused the submission of 10 false bids totaling $15.5 billion in nine Treasury auctions between August 1989 and May 1991.
Salomon was accused of violating anti-fraud and record-keeping provisions of federal securities laws. But the Justice Department decided against criminal charges against Salomon or its Salomon Brothers Inc. brokerage unit, where the wrongdoing occurred.
Otto Obermaier, the Manhattan U.S. attorney, said Salomon was spared criminal indictment because it had cooperated extensively in the investigation and restructured management to prevent future misconduct.
"We did enough looking to satisfy us that $290 million was enough to say 'ouch,'" Obermaier told a news conference.
But he said investigations were continuing into unidentified individuals involved in the scandal. Those under investigation include Paul Mozer, the former head of Salomon's government bond trading desk, whom the firm has blamed for the illegal bidding.
Obermaier would not comment on whether former Salomon chairman John H. Gutfreund, who resigned after the scandal broke, also was under investigation.
As part of the settlement, Salomon Brothers will be suspended from trading with the Federal Reserve Bank of New York for two months starting June 1. Also, the Treasury Department said that on Aug. 3 it will lift sanctions imposed on Salomon last August, allowing the firm to resume submitting bids for customers.
The $190 million penalty includes asset forfeitures stemming from charges that Salomon and unidentified others conspired in June and July to control the market in May 1993 Treasury notes.
The Justice Department said the alleged conspiracy sought to raise prices of the securities by controlling the supply. Salomon last year admitted to controlling 94 percent of the notes in that auction.
Breeden said the government probe also uncovered a scheme in which Salomon underpaid income taxes in 1986 by engaging in sham transactions in Treasury securities that created the appearance of $160 million in trading losses. The settlement does not include the back taxes owed, which Salomon must pay.
Investors responded favorably to news the firm finally had resolved its case, sending Salomon stock up $2.875 to $33.50. The stock tumbled as low as $20.75 after the scandal.
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May 21, 1992, Chicago Sun-Times, Salomon settles, will pay $290 million, by Stefan Fatsis,
NEW YORK Capping a 10-month investigation, the government announced Wednesday that Salomon Inc. will pay $290 million but avoid criminal prosecution to resolve charges of widespread fraud in the Treasury bond market.
The settlement is the second-largest ever for wrongdoing on Wall Street behind the $650 million paid by now-defunct Drexel Burnham Lambert in the 1980s trading scandals.
Last August, Salomon admitted repeated illegal and unethical behavior in government securities auctions - including unauthorized orders in customers' names and a $1 billion bid in a botched practical joke. Its top executives acknowledged concealing the illegalities for months.
The settlement with the Securities and Exchange Commission and Justice Department includes $190 million in fines and forfeitures related to cheating in Treasury auctions, in which the government sells bills, notes and bonds to the public.
Also, a $100 million fund will be established by Salomon to compensate victims who lost money as a result of the wrongdoing.
The penalties far exceed Salomon's estimate of a maximum $4.6 million in profits from illegal securities bidding. That reflects regulators' strong belief that the violations undermined the credibility of the financial system.
"Salomon's pattern of submitting false bids created a risk to the integrity of the government securities market, which is a market on which the federal government and ultimately all federal taxpayers depend," SEC Chairman Richard C. Breeden said in Washington.
The SEC, which polices the financial markets, said Salomon had submitted or caused the submission of 10 false bids totaling $15.5 billion in nine Treasury auctions between August, 1989, and May, 1991.
Salomon was accused of violating anti-fraud and record-keeping provisions of federal securities laws. But the Justice Department decided against criminal charges against Salomon or its Salomon Brothers brokerage unit, where the wrongdoing occurred.
Otto Obermaier, the Manhattan U.S. attorney, said Salomon was spared criminal indictment because it had cooperated extensively in the investigation and restructured management to prevent future misconduct.
"We did enough looking to satisfy us that $290 million was enough to say `Ouch,' " Obermaier told a news conference.
But he said investigations were continuing into unidentified individuals involved in the scandal. Those under investigation include Paul Mozer, the former head of Salomon's government bond trading desk, whom the firm has blamed for the illegal bidding.
As part of the settlement, Salomon Brothers will be suspended from trading with the Federal Reserve Bank of New York for two months starting June 1. Also, the Treasury Department said that on Aug. 3 it will lift sanctions imposed on Salomon last August, allowing the firm to resume submitting bids for customers.
The $190 million penalty includes asset forfeitures stemming from charges that Salomon and unidentified others conspired last June and July to control the market in May, 1993, Treasury notes.
The Justice Department said the alleged conspiracy sought to raise prices of the securities by controlling the supply.
Breeden said the government probe also uncovered a scheme in which Salomon underpaid income taxes in 1986 by engaging in sham transactions in Treasury securities that created the appearance of $160 million in trading losses. The settlement does not include the back taxes owed, which Salomon must pay.
Salomon's interim chairman, Warren E. Buffett, the billionaire investor who took over after the scandal, said Salomon would take an additional $185 million charge against second-quarter earnings to pay for the settlement.
Salomon last fall set aside $200 million to cover costs associated with the scandal, but said this month it would need additional money for legal fees, penalties and lawsuits.
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December 3, 1992, Associated Press / Albany Times Union, SEC Accuses 2 of Making Fake Treasury Bids,
Federal regulators on Wednesday accused two former Salomon Inc. executives of submitting false Treasury auction bids and other securities law violations in the bond scandal at the firm.
The allegations against Paul Mozer and Thomas Murphy, both former managing directors of Salomon Brothers Inc., the firm's brokerage unit, were the first against Salomon executives in the scandal that shocked Wall Street last year.
The Securities and Exchange Commission accused Mozer and Murphy of submitting false bids in auctions of government bonds used to finance the national debt. Mozer also was accused of insider trading and helping Salomon engineer $168 million in phony trading losses to avoid taxes.
Mozer was in charge of government securities trading at Salomon Brothers and Murphy was his assistant.
Both were fired in the wake of the August 1991 scandal that prompted a shakeup of Salomon management and numerous probes by regulators and Congress.
Salomon admitted numerous violations of the auction rules, including making bids in customers' names without their knowledge and bypassing federal limits that prevent bidders from acquiring more than 35 percent of any government security offering in an auction.
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December 3, 1992, The Washington Post, Two Former Salomon Officials Sued by SEC; Agency Seeks Bond Trading Scandal Penalties, by David S. Hilzenrath,
The government yesterday sued former Salomon Brothers Inc. managing directors Paul W. Mozer and Thomas F. Murphy, accusing them of responsibility in the securities trading scandal that shook Wall Street and the Treasury Department last year.
The Securities and Exchange Commission alleged that Mozer and Murphy submitted false bids in a series of auctions for Treasury securities between 1989 and 1991 in an effort to circumvent the rules.
The SEC called for unspecified monetary penalties against Mozer and Murphy, and it sought to ban Mozer from serving as an officer or director of any publicly held company.
Sources said the SEC will announce settlements soon - perhaps as early as today - of administrative actions against former Salomon Brothers chairman John Gutfreund and two other top executives who left the firm following disclosure of the bidding violations. Under the settlements, the three former executives will neither admit nor deny the SEC's complaint against them, but each will pay monetary penalties, sources said.
In the lawsuit filed yesterday in U.S. District Court in Manhattan, the SEC also charged that Mozer had violated insider trading rules by selling 46,000 shares of Salomon Brothers stock three days before Salomon Brothers first disclosed improprieties in its bidding for securities issued by the government to finance the national debt.
Stanley S. Arkin, Mozer's attorney, said, "We will resist these charges to the extent we can."
Arkin said Mozer acknowledges responsibility for two unauthorized bids in a Feb. 21, 1991 auction, which he termed "administrative violations." But "everything else is unjustified and factually baseless," Arkin said.
"Mr. Murphy denies that he violated the securities laws and intends to vigorously contest the allegations made against him," said Eugene Goldman, his attorney.
Salomon Brothers, a major global financial house based in New York, settled civil complaints by the government last May by agreeing to pay $290 million in fines and penalties.
The SEC is still pursuing its investigation "as to other individuals and other firms," said William R. McLucas, director of the SEC's enforcement division.
According to sources, the SEC in an administrative complaint will accuse Gutfreund, former Salomon president Thomas W. Strauss and former vice chairman John W. Meriwether of failing to supervise Mozer and failing to report his alleged misconduct to the government until several months after they first learned of it in early 1991.
"The issue is they didn't act fast enough to follow up on what they learned," one source said.
But the SEC will make "no suggestion" that the three participated in "affirmative wrongdoing," the source said.
Mozer was allowed to continue in his job after senior Salomon executives learned that the bidding rules were violated, according to the firm.
As part of the settlement, Gutfreund agreed that he would not again serve as chairman or chief executive of a securities firm unless the SEC grants him permission, another source said. Gutfreund, whose participation in the securities business will not otherwise be restricted, has accepted the largest monetary penalty, sources said. Strauss and Meriwether will be suspended from the securities business temporarily, sources said.
Lawyers for the three declined to comment.
Salomon Brothers itself has portrayed Mozer, who ran its government securities trading desk, as a rogue employee and ringleader in efforts to manipulate the Treasury auctions. He and Murphy are the first individuals the government has acted against in the investigation.
The SEC alleged that Mozer was responsible for eight false bids totaling $13.5 billion and involving seven Treasury auctions - not including the time he allegedly submitted a false bid when a practical joke on a retiring colleague went awry.
Murphy, who worked under Mozer, was involved in three false bids, the SEC alleged.
Apart from those alleged manipulations, the SEC alleged that Mozer arranged trades in 1986 intended "to create fictitious trading losses for tax purposes."
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December 3, 1992, Chicago Sun-Times, Salomon Execs Accused,
Federal regulators on Wednesday accused two former Salomon Inc. executives of submitting false Treasury auction bids and other securities law violations in the bond scandal at the firm. The allegations against Paul Mozer and Thomas Murphy, both former managing directors of Salomon Brothers Inc., the firm's brokerage unit, were the first against Salomon executives in the scandal that shocked Wall Street last year.
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December 4, 1992, Associated Press / Albany Times Union, Ex-Salomon Boss Agrees to Penalty,
Former Salomon Inc. Chairman John H. Gutfreund will pay a $100,000 fine and never again run a Wall Street brokerage firm to settle charges from last year's government bond scandal, officials said Thursday.
Gutfreund and two other former top Salomon officials consented - without admitting wrongdoing - to suspensions and fines as a result of allegations by the Securities and Exchange Commission that they failed to adequately supervise the firm's brokerage unit, which has admitted placing phony bids in Treasury bond auctions.
The SEC accused the three in an administrative proceeding of being asleep at the switch in supervising Paul Mozer, former head of Salomon's government bond trading desk, and then doing too little too late when they learned of his alleged wrongdoing in April 1991.
On Wednesday, the SEC accused Mozer and his top assistant in a civil lawsuit of submitting more than $13.5 billion in false bids at Treasury auctions between August 1989 and May 1991. Both Mozer and his former aide, Thomas Murphy, are contesting the SEC charges.
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December 4, 1992, The Bond Buyer, Gutfreund agrees to pay $100,000 SEC. (John H. Gutfreund, Securities and Exchange Commission) by Stephen A. Davies,
WASHINGTON - John Gutfreund, former chairman and chief executive officer at Salomon Brothers, has agreed to pay a $100,000 fine to settle charges in connection with illegal trading in the government bond market, the Securities and Exchange Commission announced yesterday,
Gutfreund will also be barred for life from acting as chairman or chief executive officer of any brokerage firm or investment company as part of the settlement, the agency said.
Former Salomon President Thomas Strauss, who was also charged in the case agreed to pay a $75,000 fine and to be suspended from associating with any securities firm for six months. Former Vice Chairman John Meriwether agreed to pay a $75,000 fine and to stay out of the securities business for three months.
The settlement came one day after the commission sued two former managing directors at Salomon, Paul Mozer and Thomas Murphy, for submitting false bids totaling over $15 billion in the government bond market from 1989 to 1991.
The SEC said Gutfreund did not participate in the false bids, but that he and Strauss and Meriwether failed to investigate promptly after learning in April 1991 from the firm's counsel of two false customer bids submitted by Mozer at a three-year note auction. The false bids of $3.15 billion each. along with one made by Salomon on its own account, enabled the firm to capture over $5.1 billion of a three-year note sale totaling $9 billion.
The officers also delayed reporting the violation to government authorities, which was followed by other auction rule violations, the SEC said yesterday in announcing the settlement.
"This has been, and continues to be, a very sad case," SEC Chairman Richard Breeden said yesterday in a speech to the Securities Industry Association in Boca Raton, Fla. "A very large and successful securities firm was nearly pushed out of existence because of serious wrongdoing by two senior members of the firm."
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December 4, 1992, The Washington Post, Ex-Officers At Salomon To Pay Fines; Gutfreund, 2 Others Settle With SEC, by David S. Hilzenrath and Brett D. Fromson,
Former Salomon Brothers Inc. chairman John H. Gutfreund and two other former top Salomon executives have agreed to pay a total of $225,000 in penalties to settle government charges that they committed "a serious breach of their supervisory obligations" in the scandal that rocked the market for U.S. government securities last year.
After learning that one of their senior traders had committed an apparent "criminal act," Gutfreund, former Salomon president Thomas W. Strauss and former vice chairman John W. Meriwether took no action for months while the trader remained on the job and continued to violate securities laws, the Securities and Exchange Commission said in a statement of its findings released yesterday.
In agreeing to the settlement, the three former executives neither admitted nor denied the SEC's findings. All three were forced to resign from the firm last year when the violations were disclosed.
Gutfreund, 63, who built Salomon into a global financial powerhouse and became a prominent Manhattan social figure, has agreed to be barred from serving as chairman or chief executive of a securities firm, the SEC said. He will pay a $100,000 fine, the maximum civil penalty the SEC can impose per violation and the first fine ever imposed for a failure to supervise.
Strauss accepted a $75,000 penalty and a six-month suspension from the securities business, while Meriwether agreed to a $50,000 penalty and a three-month suspension.
SEC Chairman Richard C. Breeden, who announced the settlements at a meeting of securities professionals in Florida, called Gutfreund's conduct "truly shocking."
"Faced with wrongdoing, it is not sufficient for the senior management of a firm to turn their heads and allow the conduct to reoccur," Breeden said.
Gutfreund issued a written statement accepting responsibility but claiming a measure of vindication.
"As the firm's chief executive, I held myself ultimately accountable, and I accept the consequences," Gutfreund said. "I look forward to going back to work," he said.
Gutfreund added that the SEC "has found that neither I nor my colleagues at the firm condoned" what he called "the inexplicable misconduct" of senior bond trader Paul W. Mozer. "When we realized we had been deceived by the man responsible, we investigated, reported the facts to the government and the public, and fired the wrongdoers," he said.
But the SEC report cast the facts in a different light.
In April 1991, it said, Salomon's general counsel told the three top executives that Mozer's submission of a false bid at a U.S. Treasury auction appeared criminal and should be reported to the government. "However, for a period of months, none of the executives took action to investigate the matter or to discipline or impose limitations on Mozer," it said.
The firm began investigating the matter only after government officials began asking questions about Mozer's bid, the SEC said, and Salomon did not disclose that violation and others until August 1991.
According to the SEC report, Gutfreund, Strauss, Meriwether and General Counsel Donald M. Feuerstein each said someone else was responsible for investigating Mozer's conduct and restraining him. Their collective failure "caused unnecessary risks to the integrity" of the government securities market, the SEC said.
The revelation that Salomon had manipulated Treasury auctions prompted a sweeping review of the way the government sells securities to finance the national debt. Some changes were adopted, but a major set of reform proposals was defeated in Congress.
Salomon Brothers settled an SEC complaint in May by agreeing to pay $290 million. Mozer and one of his subordinates, Thomas F. Murphy, are contesting an SEC lawsuit filed Tuesday.
Some observers said the SEC action was mild punishment compared with the loss the three executives suffered when they left Salomon in disgrace.
"I think the message to Wall Street was delivered {previously} - if a CEO on Wall Street learns of serious criminal activity at his firm and does nothing, he cannot survive ... This SEC action is simply adding insult to injury," said Columbia University law professor John C. Coffee Jr.
Rep. Edward J. Markey (D-Mass.), chairman of the House subcommittee on telecommunications and finance, said that the relative lightness of the penalties showed that the SEC needs greater powers to enforce the securities laws.
The fines were not seen as great burdens for the three top executives. Gutfreund's cash compensation for 1990 and 1991 totaled $3.5 million. He has been trying to collect back pay, severance benefits and stock options from Salomon that are valued at more than $19 million. Strauss has made a similar claim.
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December 19, 1992, The Buffalo News, Ex-Salomon Trader to Plead Guilty,
The former chief of Salomon Inc.'s government bond trading desk has agreed to plead guilty to two felony counts to settle criminal charges linked to his role in last year's Treasury auction scandal, sources said Friday.
Sources knowledgeable of the case said the settlement involving Paul Mozer is due to be announced around Jan. 7.
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January 6, 1993, The Bond Buyer, Salomon reinstates Treasury trader suspended after short-squeeze scandal. (Salomon Brothers Inc., Christopher Fitzmaurice) by Charles Gasparino,
Salomon Brothers Inc. announced yesterday that it will reinstate bond trader Christopher Fitzmaurice, who was suspended in the wake of the firm's 1991 government bond scandal.
The firm said Fitzmaurice, who traded five-year Treasury notes at the time of his suspension, had "cooperated fully with all authorities" and that he "was neither charged with any wrongdoing, nor did the authorities' reports refer to any of his conduct as being part of the misconduct of others."
Robert Baker, Salomon's spokesman, said Fitzmaurice will join the firm's government trading operations sometime this week.
Fitzmaurice was suspended by the company, a unit of Salomon Inc.. after the firm disclosed in August 1991 that its government bond trading desk, under the leadership of Paul W. Mozer, had violated Treasury auction bidding rules dating back several years.
The company, in response, fired Mozer, a managing director, as well as his second in command, Managing Director Thomas F. Murphy.
The scandal's impact also forced the resignation of several top executives of the firm, including John H. Gutfreund, the former chairman and chief executive officer; John W. Meriwether, a former vice chairman; and Thomas W. Strauss, Salomon's former president and chief operating officer.
On Monday. Salomon announced that it had settled compensation agreements with Meriwether and Strauss.
Henry Epstein, a clerk on the government desk, was also suspended. Sources close to the company say that Salomon has asked Epstein to resign with one month of salary. Baker would not comment on Epstein's current employment status.
In a telephone interview, Fitzmaurice would not elaborate on what role he will now play at the firm, which has undergone a dramatic overhaul since his suspension. "Obviously, I look forward to going back. I'm excited," he said. "But I have no comment. I'm trying to reestablish my career."
The scandal sparked wide-ranging investigations by the Securities and Exchange Commission and the U.S. Justice Department into the $3 trillion Treasury securities market.
In December, the SEC announced in a civil suit that it was charging Mozer and Murphy with several securities law violations. The Justice Department has not revealed its findings.
Mozer's lawyer, Stanley Arkin, did not return telephone calls. Elkan Abramowitz, Murphy's lawyer, said his client is innocent of the charges and "hopes to be vindicated."
Details of the Salomon Treasury market scandal emerged after market players reported a short-squeeze in the May 1991 two-year notes.
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January 6, 1993, The Buffalo News, Salomon to Pay $4 Million For Trading Claims,
Salomon Inc. has agreed to pay $4 million to resolve claims by regulators in 39 states and the District of Columbia stemming from its 1991 Treasury bond scandal, officials said today.
Salomon will pay $2 million into a new nationwide trust fund to be supervised by state securities regulators, and the remaining $2 million will be split among the local governments, with each receiving $50,000.
The settlement is based on information in Salomon's agreement last May to pay $290 million to resolve Securities and Exchange Commission charges for submitting false bids in Treasury securities auctions between 1989 and 1991.
Several top Salomon executives resigned in the scandal. The firm was overhauled but did not face criminal charges.
The states not involved in the Salomon settlement are Alaska, Arizona, California, Connecticut, Florida, Idaho, Ohio, New York, Rhode Island, Virginia and Wisconsin. Those states may settle individually with Salomon.
On Tuesday Salomon reinstated a government bond trader who was suspended with pay 17 months ago during the firm's Treasury bond scandal.
The trader, Christopher Fitzmaurice, was suspended on Aug. 9, 1991, along with the head of government bond trading, Paul Mozer; a top aide, Thomas Murphy; and a clerk, Henry Epstein.
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January 7, 1993, The Buffalo News, Key Salomon Exec to Plead Guilty,
Paul Mozer, a central figure in the Salomon Brothers Inc. Treasury bond scandal, today filed court papers that set the stage for his guilty plea to two criminal charges of making false statements to the government.
At an arraignment in Manhattan, Mozer attorney Stanley Arkin told federal District Court Judge Leonard Bernikow that his client "pleads not guilty for the purposes of this proceeding."
But a hearing was set for Monday, at which time Mozer is expected to formally enter his guilty plea.
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January 8, 1993, The Washington Post, Former Salomon Trader Will Plead Guilty in Bond Scandal; Mozer to Pay $500,000 on 2 Felony Counts, by Jay Mathews,
Paul W. Mozer, the former Salomon Brothers Inc. executive who was at the center of the Treasury securities market's biggest scandal, revealed today he has agreed to plead guilty to two felony counts of making false statements to the government and to pay $500,000.
Mozer, 37, a short, bespectacled man in a dark gray suit, entered a not guilty plea before a U.S. magistrate as a formality this morning, but his attorney, Stanley S. Arkin, filed papers and issued a statement saying Mozer would plead guilty at a Monday hearing under terms negotiated with federal prosecutors.
The plea bargain, described in a letter to Arkin from U.S. Attorney Otto G. Obermaier, reduces the "offense level" of Mozer's crimes, making it unlikely he will serve the maximum five years for each count. Arkin has attempted to prevent any jail time and said today he hoped for a "humane and just sentence."
Arkin ridiculed the federal charges, also filed today, as overkill against unauthorized Treasury auction bids that "produced no loss to the government or Salomon's customers nor ... any gain for Mr. Mozer or Salomon."
He said a publicity campaign by Salomon and its new chairman, Warren E. Buffett, portraying Mozer as a rogue employee made it "inevitable that the prosecutorial appetite would be sated only by serving up of a scapegoat and that Mr. Mozer was the chosen morsel."
Salomon, a global financial house based here, fired Mozer and Mozer's top aide, Thomas Murphy, and paid $290 million in fines and penalties to settle Securities and Exchange Commission charges. The firm's chairman at the time of the unauthorized bids, John Gutfreund, and three other top executives resigned. Gutfreund and two others were disciplined by the SEC, but Mozer is the only person to have had criminal charges filed against him.
Mozer is accused of submitting false bids for two Salomon clients, Quantum Fund and Warburg Asset Management, at a Feb. 21, 1991, auction of five-year U.S. Treasury notes. Using the clients' names without their permission allowed Mozer to purchase $5.1 billion in notes, about 57 percent of the securities at that auction, in violation of a Treasury procedure limiting any single buyer to 35 percent.
Arkin said Mozer, then a managing director in charge of Salomon's government trading desk, violated the procedure as "an administrative convenience" because the firm "needed some additional bonds" and had kept his job after telling superiors what he had done. Arkin said similar violations by other firms had brought no criminal penalties. Mozer not only did not profit, Arkin said, but "forfeited over $6 million to Salomon because of his actions."
Salomon officials have speculated Mozer broke the rules to settle a score with a Treasury official who had tried to restrain Mozer's aggressive bidding.
The SEC, in a separate and still unresolved case, has accused Mozer of arranging improper trades in 1986 to create fictitious losses for tax purposes and violating insider trading rules by selling 46,000 shares of Salomon stock three days before the firm disclosed the scandal. It said he also submitted a false bid as part of a clumsy practical joke on a retiring colleague.
In the plea agreement, Mozer promised to put $500,000 - the equivalent of the probable maximum fine for the two counts - in a government escrow account to pay SEC fines or civil claims, with the remainder going to the Treasury. Stanley M. Grossman, an attorney representing investors claiming losses from the unauthorized bids, said the amount was "grossly inadequate" relief for losses he said might be in "the hundreds of millions of dollars."
Assistant U.S. attorney John W. Auchincloss II said the plea bargain does not preclude criminal antitrust charges, but Hays Gorey Jr., a trial attorney working on the case for the antitrust division of the Justice Department, declined to comment.
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January 12, 1993, Associated Press / Albany Times Union, Bond Trader's Plea Deal Collapses,by Rob Wells,
A delicate plea bargain between federal prosecutors and former Salomon Bros. bond trader Paul Mozer was crushed in federal court Monday when attorneys couldn't agree on the scope of the document.
Mozer had agreed to plead guilty to two counts of making false statements to the government concerning unauthorized bids he directed at a Feb. 21, 1991, Treasury bond auction. Under that deal, he faced a maximum 10 years in prison and agreed to pay $500,000 into a special government fund.
However, Mozer wasn't expected to serve the maximum term based on his cooperation with government investigators. His future is in question because he now faces the risk of indictment and conviction on more serious charges.
The deal collapsed when Mozer's attorney, Stanley Arkin, continued to express his reservations about an important but technical aspect of the plea deal during a hearing in U.S. District Court in Manhattan. Arkin contended that the plea would bar the U.S. Justice Department from bringing antitrust charges against Mozer.
Arkin said his belief is based on discussions with members of the U.S. attorney's office, on behalf of the Justice Department, during the complicated plea negotiations.
Assistant U.S. Attorney Laurie Brecher disagreed.
"There have been no such representations made by this office," she said. Brecher said the U.S. attorney's office now intends to proceed with an indictment. The office also plans to nullify a criminal "information" it filed Thursday against Mozer. An information is a document similar to an indictment that specified the allegations underpinning the plea.
U.S. District Judge Robert Patterson Jr. said he would not accept the plea without both sides coming to "a meeting of the minds."
"I don't like to take a plea from any defendant unless he knows where he stands," Patterson said.
"It is fairly clear that this agreement does not embody the understanding of the parties, at least in your mind," Patterson said, referring to Arkin.
Arkin, however, contended that his position is supported by the language contained within the plea agreement. Arkin said he intends to file court papers later this week asking the court to enforce the deal.
Brecher said the agreement isn't binding on any other branch of the government except the U.S. attorney's office in Manhattan. The Justice Department is investigating Mozer on possible antitrust violations but has yet to file charges.
Patterson said he could not accept the plea because of the dispute.
Mozer, 36, did not speak at the hearing and sat quietly while Arkin argued the case. Salomon Brothers fired Mozer as head of the brokerage's government bond trading desk in August 1991 after the firm admitted to improper bidding at several Treasury bond auctions between 1989 and 1991.
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January 12, 1993, The Buffalo News, Plea Agreement Collapses for Salomon Bond Trader,
A delicate plea bargain between federal prosecutors and former Salomon Brothers bond trader Paul Mozer was crushed in federal court Monday when attorneys couldn't agree on the scope of the document.
Mozer had agreed to plead guilty to two counts of making false statements to the government concerning unauthorized bids he directed at a Feb. 21, 1991, Treasury bond auction. Under that deal, he faced a maximum 10 years in prison and agreed to pay $500,000 into a special government fund.
However, Mozer wasn't expected to serve the maximum term based on his cooperation with government investigators. His future now is in question because he now faces the risk of indictment and conviction on more serious charges.
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January 12, 1993, The Bond Buyer, Federal judge rejects Mozer plea agreement. (Paul Mozer) by Charles Gasparino, Charles,
A U.S. district judge yesterday refused to accept a plea agreement hammered out between federal prosecutors and Paul Mozer, the former chief trader for government bonds at Salomon Brothers Inc.
Under the agreement with the U.S attorney's office in New York, Mozer would have pleaded guilty to two felony counts of lying to Treasury officials about his role in the August 1991 Salomon Treasury market scandal.
The agreement was designed to help prevent Mozer, who Salomon officials say was responsible for submitting false bids during several Treasury market auctions, from going to jail, his attorney said.
But U.S. District Judge Robert Patterson Jr. said he could not accept the plea agreement because several issues remained unresolved in the government's case against Mozer.
Patterson said, for example, that Mozer could still face a criminal indictment for antitrust violations by the Justice Department's antitrust division. Mozer also faces a civil suit brought by the Securities and Exchange Commission.
Mozer's attorney, Stanley Arkin, said that despite the judge's ruling, the agreement is still valid. "The plea agreement is completely enforceable," he said.
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January 12, 1993, The Washington Post, Mozer's Plea Agreement Collapses; Judge in Bond-Trading Case Says Too Many Issues Left Unresolved, by Jay Mathews,
An agreement for a guilty plea by Paul W. Mozer, the alleged instigator of the Treasury securities market's biggest scandal, collapsed today and prosecutors said they would seek an indictment of the former Salomon Brothers Inc. executive.
Mozer's attorney, Stanley S. Arkin, and assistant U.S. attorney Laurie E. Brecher disagreed, sometimes vehemently, in court today over the meaning of a plea bargain announced Thursday that would have forced Mozer to accept two felony counts and pay $500,000.
After an hour-long court session in the morning and another hour in the afternoon, U.S. District Judge Robert Patterson Jr., who has been supervising several aspects of the Salomon scandal, said there were too many unresolved issues and he could not accept the plea bargain.
The agreement broke down over Arkin's objections to language in the charges filed by federal prosecutors Thursday. The charges said Mozer, Salomon's former head of government bond trading, covered up by "trick, scheme and device" his February 1991 purchase of Treasury notes using clients' names without their permission. He also objected to Brecher's insistence that the plea bargain did not shield Mozer from potential federal antitrust charges.
Arkin said federal attorneys had promised him Mozer would not be tried on antitrust charges. He threatened to call those attorneys to testify. He said he wanted Patterson to accept the plea bargain but allow him to argue it precluded other charges. Mozer, Arkin said, "won't plead to anything that smells of mail fraud or stock fraud."
Brecher said she knew of no promises to Mozer not covered in U.S. Attorney Otto G. Obermaier's letter to Arkin outlining the plea agreement. It required Mozer to plead guilty to two counts of making false statements to the government and put $500,000 in a government escrow account to pay Securities and Exchange Commission fines or settle civil claims, with the remainder going to the Treasury.
"We simply have no agreement and can pursue an indictment," Brecher said. Arkin said he would file papers by Wednesday arguing that the agreement should be put in force, but Brecher said the differences were too great to support the plea bargain.
The plea bargain reduced the "offense level" of the two felonies, making it unlikely Mozer would receive the maximum prison sentence of five years on each count. Arkin had sought an agreement that would rule out jail time. Mozer faces civil SEC charges as well as possible antitrust criminal prosecution.
Arkin has accused the government of using Mozer as a scapegoat while being lenient with his former superiors at Salomon. Mozer violated trading procedures as "an administrative convenience" and did not profit from the bond purchases, Arkin said.
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January 13, 1993, Chicago Sun-Times, Ex-Salomon Bros. Exec Charged With Fraud,
NEW YORK Former Salomon Bros. Managing Director Paul Mozer, a central figure in the Treasury market scandal that engulfed the investment firm, was indicted Tuesday on securities fraud charges, according to court papers.
The indictment comes one day after a plea agreement between Mozer and prosecutors fell apart.
Mozer, who ran Salomon's government trading desk, was charged by a federal grand jury with securities fraud, two counts of false statements and one count of false books and records.
The indictment claimed Mozer ran a scheme designed to enable Salomon to buy Treasury notes "greatly in excess" of 35 percent of the total auctioned - the limit set by Treasury rules - by submitting false bids.
When it auctions bonds, notes and bills, the Treasury limits the amount any firm may purchase so one firm cannot corner the market and drive up the price as the securities are resold to investors.
The court papers charged that Mozer ran the scheme to obtain unlawful profits for Salomon and, indirectly, for himself.
Mozer's plea deal collapsed Monday in a dispute between his lawyer and prosecutors over proposed language and the question of whether the pact would protect the former trader from prosecution by other federal agencies.
Mozer had agreed in writing with the U.S. Attorney's office in Manhattan last week to plead guilty to two counts of lying to the government in connection with a Treasury auction.
But his lawyer, Stanley Arkin, objected to language that implied Mozer was involved in a conspiracy and possibly committed mail or wire fraud.
A Salomon representative had no comment on the indictment.
Salomon has admitted it purchased more securities than a single firm is allowed to have in order to corner the market in that and other cases.
The scandal echoed throughout Wall Street and brought a $290 million payment by the firm to settle the case.
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January 13, 1993, The Washington Post, Mozer Is Indicted on Four Felony Counts, by Jay Mathews,
A federal grand jury today indicted Paul W. Mozer, the alleged instigator of the Treasury security market's biggest scandal, on four felony counts after his attorney's complaints killed a plea bargain that would have involved only two counts.
The grand jury charged Mozer, 37, the former head of the Salomon Brothers Inc. government bond trading desk, with the two counts of making false statements to the government included in the plea bargain, and added one count of securities fraud and one count of keeping false books and records.
The two original counts carry a maximum prison sentence of five years each, which would have been significantly reduced under the plea bargain. The two new counts carry a maximum prison sentence of 10 years each.
The indictment charges Mozer with violating federal competitive bidding rules and then concealing his offense in connection with a Feb. 21, 1991, auction of U.S. Treasury notes. Mozer's attorney, Stanley S. Arkin, has admitted that his client submitted bids in the name of two Salomon clients without their permission, but has described the offense as an "administrative convenience" that hurt no one and did not merit a criminal penalty.
Salomon, a global financial house based here, fired Mozer and Mozer's top aide after the scandal became public and paid $290 million in fines and penalties to settle Securities and Exchange Commission charges. Three top Salomon executives who left the firm were disciplined by the SEC but Mozer is the only person involved in the case to have been indicted.
In a statement released today, Arkin said the indictment is "outrageous conduct by the government and we will address it in court." A federal judge declined Monday to accept a plea bargain Arkin negotiated with the government after Arkin complained that prosecutors were not keeping a promise to shield Mozer from possible antitrust charges.
The indictment charges that Mozer submitted the false bids "for the purpose of obtaining unlawful profits for Salomon and, indirectly, the defendant." The court has not resolved a strenuous debate over how much was lost by whom during the scandal, which included false bids at other auctions not mentioned in the indictment. Salomon officials have denied profiting from the February 1991 false bids.
Under the indictment, Mozer is liable for fines of up to $2.5 million or twice any amount illegally gained in the transaction, whichever is more. Under the plea bargain, he had promised to put $500,000 in a government escrow account to pay SEC fines or settle civil claims, with the remainder going to the Treasury.
Salomon officials have suggested that Mozer made the false bids to retaliate against a Treasury official who had complained about his aggressive trading. Arkin said he did it as a favor to other Salomon executives who needed more notes.
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January 13, 1993, The Buffalo News, Mozer Indicted in Bond Scandal,
Former Salomon Brothers bond trader Paul Mozer was indicted Tuesday on securities fraud and related offenses, a day after the collapse of a plea agreement that involved less serious charges.
Mozer, 37, was the head of the brokerage's government bond trading desk until August 1991. The firm had admitted to improper bidding at several Treasury bond auctions between 1989 and 1991.
John Auchincloss, an assistant U.S. Attorney in Manhattan, said a federal grand jury indicted Mozer on one count of securities fraud, two counts of false statements and one count of causing a broker-dealer to keep false booking records.
Mozer is accused of "falsely and fraudulently" identifying Warburg Asset Management, a Salomon customer, as the bidder for $3.15 billion in five-year Treasury notes on Feb. 21, 1991, when Salomon was the true bidder.
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January 13, 1993, Associated Press / Albany Times Union, Trader Indicted on New Charges,
NEW YORK - Former Salomon Brothers bond trader Paul Mozer was indicted Tuesday on securities fraud and related offenses, a day after the collapse of a plea agreement that involved less serious charges.
Mozer, 37, was the head of the brokerage's government bond trading desk until August 1991. The firm had admitted to improper bidding at several Treasury bond auctions between 1989 and 1991.
John Auchincloss, an assistant U.S. Attorney in Manhattan, said a federal grand jury indicted Mozer with one count of securities fraud, two counts of false statements and one count of causing a broker-dealer to keep false booking records.
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February 2, 1993, The Washington Post, Digest,
T-bill rates were mixed. The Treasury auctioned three-month bills at an average discount rate of 2.97 percent, down from 2.98 percent last week, and six-month bills at an average of 3.10 percent, up from 3.09 percent. The actual return to investors will be 3.04 percent for three-month bills, and 3.19 percent for six-month bills. Separately, the Fed said the average yield for one-year Treasury bills fell to 3.41 percent last week from 3.47 percent the previous week.
Construction spending rose 6.2 percent in 1992, the largest increase in six years, the government said. But spending remained unchanged in December after three monthly increases, and the October and November increases were revised downward substantially.
The Treasury estimated that it will need to borrow $67 billion in the January-March quarter.
Former Salomon Brothers bond trader Paul Mozer tried to resurrect a plea agreement stemming from the investment firm's Treasury bond scandal, but a federal judge indicated he may reject the deal once more.
General Dynamics will receive $1.4 billion in contracts from Belgium, the Netherlands, Norway and Denmark for upgrades on the countries' F-16 Falcon aircraft.
Mobil acquired a 10 percent interest in Qatar Liquefied Gas Co. and the associated offshore development contract in the second agreement in two months by the two companies to develop natural gas reserves off Qatar.
Student Loan Marketing Association (Sallie Mae) is negotiating to buy land in Reston to build an office complex for employees who now work in six rented facilities in Herndon. Sallie Mae reiterated that its headquarters will remain in the District.
GM named to its board Louis W. Sullivan, president of the Morehouse School of Medicine and former secretary of the Department of Health and Human Services, and John H. Bryan, chairman and CEO of Sara Lee.
WorldCorp of Herndon announced the formation of a fourth operating business, WorldGames. It is the exclusive worldwide licensee of technology developed by US Order for applications in parimutuel betting, lotteries and other gaming operations.
Ford will invest $400 million to convert its St. Louis assembly plant to produce Explorer vans.
IBM sued Japan's Kyocera Corp. in Tokyo for $150 million in damages for alleged infringement of a copyright on basic software built into personal computers.
Dell Computer said it has been cleared by federal regulators in a foreign exchange-trading investigation and that it would not be required to restate earnings for fiscal 1992 and 1993. As a result, it will able to go forward with a planned 4 million-share stock offering.
Sears said it is re-evaluating plans to force the closure of all 2,000 of its independently owned catalog stores. Instead, it may opt to keep as many as 25 percent of them open, not as catalog stores but as retail outlets.
Humana said the IRS approved its split into two companies through a tax-free stock spinoff.
Blockbuster said earnings rose 55 percent in the fourth quarter and 52 percent for the year.
Macy's said it earned $147.7 million in December, the first profit the retailer has reported since filing for Chapter 11 bankruptcy protection a year ago.
Japan's unemployment rate in 1992 climbed for the first time in six years. The government said the unadjusted unemployment rate rose on average to 2.2 percent in calendar 1992 from 2.1 percent a year earlier.
Paul Bilzerian was ordered by a federal judge to pay back $33 million in profits from takeover attempts involving Cluett, Peabody and Hammermill Paper.
Theodore Cooper, Upjohn's chairman and CEO, has been diagnosed with a bone marrow tumor but is responding well to treatment, Upjohn said.
Mel Levine, who served in the House as a Democrat representing California from 1983 to 1993, has joined the law firm of Gibson, Dunn & Crutcher as a partner.
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May 18, 1993, The Boston Globe, Those May '93 notes reach real maturity, by David Warsh, Globe Staff,
It was just about two years ago that the most famous auction in Treasury Department history was held -- May 22 to be exact. Salomon Brothers wound up owning $10.6 billion of the $11.3 billion of the May 1993 notes, and the ensuing squeeze cost its competitors tens of millions of dollars. It also nearly cost the most powerful investment house on Wall Street its very existence.
All that summer a scandal oozed delicately behind the scenes. When Salomon's chairman John Gutfreund retreated to his Nantucket summer house in August 1991 after a week of tough negotiations with federal regulators, he knew that the New York Times would run a front-page story the next day detailing Salomon's problems for having apparently cornered the market. It didn't matter, he thought. Nobody reads the paper on Saturday, anyway. His wife told her friends, "John says it's like getting a traffic ticket."
That it wasn't is owed mainly to a mild-mannered business school professor from Brookline named Robert Glauber, who as a deputy treasury secretary oversaw federal borrowings. It was Glauber whom Gutfreund had tried to fool about the events of May in June 1991, arguing that the squeeze wasn't really a squeeze at all. (A later reconstruction showed a yield curve in the weeks after the auction that looked for all the world like the Big Dipper.)
And it was Glauber, along with Federal Reserve Bank of New York president Gerald Corrigan and Securities and Exchange Commission chairman Richard Breeden who decisively clobbered Salomon, beginning with quietly sourced newspaper stories in August. (No thanks here to Federal Reserve System governor John LaWare, who told the papers: "I don't think that anyone involved in it was significantly damaged by it.")
The result today is that Gutfreund is out of the securities business; Warren Buffett is in as a kind of caretaker of the damaged Salomon; and it is US Rep. Ed Markey from Malden with whom Salomon (and all the other big dealers in US government securities) must negotiate over the rules that govern their markets. The New York Fed's Corrigan is going off to private life to make some money, and Karen Horn, once a lowly staff economist for the Bank of Boston, president for a time of the Federal Reserve Bank of Cleveland, is among the leading candidates to succeed him in that powerful position.
These details (except the last) are just a few among many to be gleaned from Martin Mayer's latest book, "Nightmare on Wall Street: Salomon Brothers and the Corruption of the Market," just published by Simon and Schuster. It is perhaps one of the two best candidates for summer reading for those who follow the financial community.
Along with Kathleen Day's "S&L Hell: The People and the Politics Behind the $1 Trillion Savings and Loan Scandal," it is strong testimony of the remarkable power of a savvy reporter to construct a narrative and bring coherence to remarkably complicated events.
Mayer, whose first book about Wall Street dates back for more than 20 years, has just gone on getting better and better as a combination of investigative journalist and moral philosopher of the marketplace. His newest volume has all his trademark virtues: an ear for the good quotation, a willingness to follow good stories where they lead (former Salomon partner Michael Bloomberg's mutation into a titan of financial news hasn't been better told than here), and inexhaustable patience in explaining how market mechanisms actually work.
Mayer does a good job of getting the motives for the Salomon corner in context. He shows how Paul Mozer, the chief government securities trader for the financial powerhouse, was seeking to settle a score with rapacious hedge funds -- led by the likes of George Soros, Bruce Kovner, Michael Steinhardt, Julian Robertson and Paul Tudor Jones -- that had been taking advantage of government interest rate policies to play the bond markets almost risk free. Salomon got caught for treating government regulation cavalierly, and was justly punished -- but the buccaneering that had tipped them into misbehavior went largely unnoticed. And now the behavior has spread to the international currency markets.
Indeed, when you think about it, the clever attempt to play the angles of obscure government guarantees that lay at the deepest level beneath the Salomon scandal are not so very different from the more transparent and familiar attempts to use government insurance programs to finance heads-I-win-tails-you-lose behavior that are described in Day's crisp account of "S&L Hell." She covered the story for the Washington Post. She makes it abundantly clear the variety of ways in which caution was thrown to the winds by regulators, politicians and lenders.
Should it surprise us that once the government makes it virtually impossible to fail, that crooks (of both the self-conscious and unconscious variety) arrive in droves, just as surely on Main Street as on Wall Street? Perhaps not. But as Day's account makes clear, it did surprise us, shareholders, regulators and legislators alike -- over and over again. I don't know about the economics of it, but "Nightmare on Wall Street" and "S&L Hell" make me proud to be an alumni of the reporters' trade.
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July 18, 1993, The Washington Post, Book Review, Cleaning Up the Junk, by Stan Hinden,
NIGHTMARE ON WALL STREET: Salomon Brothers and the Corruption of the Marketplace, by Martin Mayer (Simon & Schuster) 272 pp. $23
IF WALL STREET had a Hall of Shame, junk-bond king Michael Milken and arbitrageur Ivan Boesky would be the focus of dramatic exhibits on market manipulation.
But those displays would pale besides the awesome diorama that would be devoted to Salomon Brothers, its former chairman John Gutfreund and the firm's role in manipulating the $2.2-trillion U.S. government bond market.
For, as one of Martin Mayer's Wall Street sources observed, Milken was just playing games with corporations. Salomon was playing games with the U.S. government - and with the bond auctions that the Treasury Department relies upon to finance the operations of our government.
An experienced investigative reporter, Mayer has produced a detailed, informative but uneven and sometimes hard-to-follow narrative on the 1991 scandal that nearly devastated Salomon Brothers, one of Wall Street's most powerful trading and investment banking firms.
What happened, it was alleged, was that Salomon's 36-year-old chief bond trader, Paul Mozer, put in fake bids and tried to corner the market in Treasury securities and, to cover it up, gave orders to falsify Salomon's books. Salomon eventually admitted to breaking bidding rules in Treasury auctions nine times and paid $290 million in fines. Mozer's case is pending.
Gutfreund learned about the Mozer episodes but failed to report them until the investigators closed in. Indeed, at one point, Gutfreund tried to convince a Treasury official that nothing improper had happened.
As the scandal became public, Gutfreund and several associates were forced out of Salomon, and the reins of the firm were handed to billionaire investor Warren Buffett, who had invested $700 million in the firm several years earlier. Known as "Mr. Clean," Buffett was able to save Salomon by promising Congress and federal and state regulators he would clean house and tell all.
Mayer takes the reader through the history of the 83-year-old firm. By the time the bond scandal broke, Salomon had become a global giant, with $4 billion in capital and major operations in London and Tokyo. In 1986, Mayer reports, Salomon Brothers had more than 500 officers who made more than $500,000 a year.
Salomon's reputation for arrogance and excess was skewered in two books: Liar's Poker, by former Salomon employee Michael Lewis, and Bonfire of the Vanities, a novel by Tom Wolfe that forever branded Salomon traders as "Masters of the Universe."
Mayer argues persuasively that "Management didn't tell the authorities about Mozer's misbehavior because it didn't want to tell the authorities, not because people were forgetful."
"In the 1980s," Mayer writes, "too much of America lost the fear of shame that used to police behavior; in the 1980s, it became fashionable to respect people for putting up with shame - provided they were paid well to do so."
Mayer blames government regulators, too: "Salomon did cheat and disgracefully, but a lot of the blame for what happened rested with the government agencies that failed to supervise this market at precisely the time when it most needed supervision," he writes.
The Treasury Department and the Federal Reserve, Mayer contends, not only failed to prevent bond auction violations but did not take vigorous action after the scandal. "Unfortunately, after the first burst of fear and loathing of Salomon," he writes, "neither the Fed nor the Treasury was willing to take significant steps to clean up the government securities markets."
The pertinent word here is "significant," because the Treasury and the Fed did, indeed, change many of the auction rules and began computerizing the auctions. Mayer apparently does not consider them to be "significant," nor does he offer much analysis of whether they will work.
Few journalists understand Wall Street and the financial markets better than Mayer. And his explanations of Wall Street's complicated strategies are useful, although they may be difficult for many readers to comprehend.
WHAT IS ultimately disappointing about Mayer's book is that it doesn't tell us nearly as much as we would like to know about what happened inside Salomon during those final hours before it all came crashing down.
Perhaps it was just too soon to get people to talk. As Mayer was writing the book, the principals in the scandal were still up to their eyebrows in lawyers and regulators, trials and lawsuits.
The Nightmare on Wall Street was all too real, but the full story has yet to be told.
Stan Hinden is a financial columnist at The Washington Post.
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July 29, 1993, Albany Times Union, Judge Reinstates Trader's Plea Deal,
NEW YORK -- A judge on Wednesday reinstated a plea agreement for former Salomon Brothers bond trader Paul Mozer, saying the deal had been unfairly withdrawn by prosecutors "irked by the defendant's independent and uncooperative attitude."
U.S. District Judge Pierre N. Leval said Mozer can plead guilty to two counts of making false statements to the Federal Reserve Board in a prosecution that stemmed from Salomon's illegal bidding at Treasury bond auctions. The agreement allows Mozer, 38, to pay a $500,000 fine and possibly serve prison time.
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July 29, 1993, The Bond Buyer, Deficit reduction talk prompts welcome Treasury market lift. (Treasury Market) (Column) by William Pesek,
Good news on the deficit reduction package being tossed around congress helped the Treasury market end yesterday's session on a strong note.
The 30-year bond was the star performer on the yield curve, finishing the session up 13/32, to yield 6.64%.
Speculation about deficit reduction preoccupied the market yesterday. The market came under selling pressure on concerns that some Democrats might withdraw support for the budget plan.
But reports that President Clinton is considering an executive order to control entitlement spending growth gave the market a much-needed lift. The control would probably involve little more than notification of Congress when outlays exceed limits, but the fact that Clinton is focusing on the entitlement problem was encouraging to the market.
The long bond, which had been down as much as 11/32, managed to finish the day in positive territory on the news.
Strong demand for the second round of the Treasury's monthly note auctions this week was also supportive to the market. Sixteen billion dollars in five-year notes was awarded at 5.25%. The bid cover was a respectable 2.77 and non-competitive bids were relatively strong at $635 million.
"The budget news and the auction results helped us end strong after declines this morning," said Marilyn Schaja, money market economist at Donaldson, Lufkin & Jenrette Securities Corp.
In overseas trading, the intermediate and long sectors of the curve came under selling pressure in Asia and London on concerns about the passage of Clinton's budget.
That weakness carried over into the New York trading session and was exacerbated by an attempt by market participants to build a concession into the five-year note ahead of the auction.
A 3.8% increase in durable goods orders for June added further selling pressure. Most analysts were looking for an increase in the neighborhood of 1.0%.
David Wyss, chief financial economist at DRI/McGraw Hill, said a swing in the volatile transportation component was behind much of the rise in orders. But overall, "the data confirm our opinion that we'll get slightly more strength in the second quarter of the year," Wyss said.
One head trader agreed that the durable goods report, coupled with other recent signs of economic growth, supported the view that the U.S. economy continues to expand, and he said those indicators will weigh on the minds of market participants as the market approaches the quarterly refunding.
"With more supply on the way, the economy improving, and inflation picking up, the market is paying closer attention to every piece of data that comes out," said Tony Crescenzi, head fixed-income trader at Miller, Tabak, Hirsch & Co.
The market still has a few hurdles to clear this week before participants can get a firm grasp on overall market fundamentals.
One is today's preliminary report on gross domestic product for the second quarter, which will provide the market with its first comprehensive look at economic activity in the first half the year. Of particular interest will be the fixed weight deflator contained within the overall release, as the market is especially sensitive to signs of upward price pressure these days.
Analysts polled by The Bond Buyer generally expect a 2.2% increase on overall GDP and 2.8% rise in the deflator.
"The market will take a close look at GDP and then at the employment report next week to see where it's headed," said Jim Winder, money market economist at Merrill Lynch Capital Markets.
Initial claims may also attract some interest, with most economists forecasting an increase of 25,000 claims, after last week's increase of 24,000. But economists cautioned that the number is likely to be skewed higher by floods in the Midwest and the General Motors plant shutdown, and thus will not provide the market with a clear view of activity in the employment sector.
Supply is likely to once again move to the forefront next week ahead of the Treasury's quarterly refunding announcement.
In other news, a federal judge ruled yesterday that former Salomon Brothers trader Paul Mozer, who was indicted for his role in the 1991 Treasury securities bidding scandal, can plead guilty to lesser charges.
According to court papers released today, U.S. District Judge Pierre Leval ruled that Mozer must be allowed to plead guilty to the terms of the original plea agreement that contained two counts of making false statements.
A spokesman for the firm refused to comment on the ruling.
In the cash markets, the 4 1/8% two-year note was quoted late yesterday Up 2/32 at 100.02-100.03 to yield 4.20%; the 5 1/8% five-year note ended up 5/32 at 99.21 -99.23 to yield 5.18%; the 6 1/4% 10-year note was Up 5/32 at 102.21-102.23 to yield 5.87%; and the 7 1/8% 30-year bond was up 13/32 at 106.02-106.04 to yield 6.64%.
In when-issued trading, the five-year note -- to be auctioned Wednesday -- was quoted at 99.12.
The three-month Treasury bill was down two basis points at 3.09%; the six-month bill was down two basis points at 3.24%; and the year bill was down one basis point at 3.46%.
Treasury Market Yields
Prev. Prev.
Tuesday Week Month
3-Month Bill 3.13 3.12 3.06
6-Month Bill 3.31 3.27 3.20
1-Year Bill 3.58 3.48 3.43
2-Year Note 4.20 4.12 3.99
3-Year Note 4.46 4.45 4.31
5-Year Note 5.18 5.16 5.03
7-Year Note 5.51 5.50 5.42
10-Year Note 5.87 5.83 5.77
30-Year Bond 6.64 6.65 6.67
Source: Cantor, Fitzgerald/Telerate
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December 6, 1993, The Bond Buyer, SEC zeroing in on firms failing to catch lawbreakers, by Vicky Stamas,
The clock is ticking in Washington.
So said Securities and Exchange Commission member J. Carter Beese Jr. Thursday in a speech before the Securities Industry Association where he put Wall Street on notice that regulators are cracking down on officials at firms that inadequately police brokers and look the other way when they smell a violation of federal securities laws.
It's called "failure to supervise," the SEC has been bringing a lot of these cases lately, the most celebrated of which was its blowout of top brass at Salomon Brothers Inc. for failing to adequately rein in false bidding by Paul Mozer in U.S. Treasury securities auctions.
Judging from Beese's speech, which had broad endorsement from other commissioners, the SEC is going to be bringing a lot more of these cases.
Interestingly enough, the municipal securities market got kudos along these lines from Beese, who lauded the 17 major securities firms who have "stopped the practice of pay to play" as part of a crackdown on political contributions.
"This |gang of 17' firms is sending a message that the toughest laws and the strictest regulations could never send - that we are here to serve the public, and that the public interest is not for sale," Beese said.
But political contributions aside. Beese said that the SEC, along wide self-regulatory groups like the National Association of Securities Dealers, must seek increased sanctions against brokers who commit abuses of sale practice, suitability, and other standards - and against their supervisors.
So what's this "failure to supervise" business all about? A review of the basics may be in order here, with help from SEC commissioner Mary Schapiro, who recently outlined the area in a speech before the NASD. According to Schapiro, such cases are without question among the toughest cases that the commission handles
She said the agency is authorized to bring failure to supervise cases under Section 15(B)(4)(E) and 15(b)(6) of the Securities Exchange Act, which requires the agency to find that a firm or individual "failed reasonably to supervise, with a view to preventing violations ... another person who commits such a violation."
The statute includes an "affirmative defense" that provides that no person may be charged with failure to supervise as long as he or she "reasonably discharged the duties and obligations incumbent upon him by reason of his firm's procedures," and had no reasonable basis for believing that those procedures were not being followed.
But distinguishing between who is and who isn't a supervisor is difficult for the SEC because organizational charts often do not reflect the real lines of authority at securities shops.
Schapiro pointed to the SEC's reversal in 1989 of an administration law judge's finding that a branch manager's assistant failed to reasonably supervise a salesperson.
The assistant was responsible for identifying sales practice problems, but he had only a very limited authority to take corrective action.
Nevertheless, as grave problems with the broker continued, and the branch manager failed to respond effectively, the assistant reported the matter to the firm's director of surveillance, Schapiro said.
After reviewing the case, the commission concluded that "a supervisory employee with even limited authority must ... go beyond his limited authority to contact the firm's national headquarters concerning a rogue broker's activities." In the view of the SEC, the assistant branch manager fulfilled that requirement, Schapiro said.
The facts of the case demonstrate the grayness of the failure to supervise area. They also show that officials at firms will only be on solid ground with regulators if they refuse to look the other way when there is evidence of wrongdoing.
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December 15, 1993, The Buffalo News, Salomon Trader Given Four Months,
Former Salomon Brothers Inc. trader Paul Mozer will spend four months in prison for lying to regulators about illegal bids he authorized in the 1991 Treasury auction scandal.
U.S. District Judge Pierre N. Leval, sentencing Mozer Tuesday, rejected a defense request for probation, citing the seriousness of the offense.
Mozer pleaded guilty in October to two counts of making false statements to Federal Reserve Bank investigators concerning two illegal bids he authorized for $6 billion of 5-year Treasury notes on Feb. 21, 1991. The bids were $2 billion above Salomon's permitted share in the auction.
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December 30, 1993, Chicago Sun-Times, Ex-Salomon Trader Fined, Banned,
NEW YORK Federal regulators fined an ex-Salomon Brothers trader $300,000 and banned him from future Treasury auctions today, the harshest punishment yet against an individual in the brokerage's bond cheating scandal.
The action by the Securities and Exchange Commission against Thomas Murphy settles administrative charges he faced as a result of the 1991 scandal, in which Salomon flouted government rules in Treasury auctions, a critical operation for financing the national debt and making the economy run smoothly.
The Murphy punishment comes less than a month after a federal judge in Manhattan sentenced Murphy's old boss, Paul Mozer, to four months in prison for lying to regulators about illegal bids he authorized for Treasury bonds. The SEC still has civil charges pending against Mozer.
The SEC had charged Murphy, a former managing director and head government bond trader at Salomon, with submitting false customer bids for Treasuries in three auctions. It also charged that Murphy caused Salomon to keep false books and records in connection with the trades.
In addition to the fine and banishment, the SEC order barred Murphy from employment in the securities industry for two years.
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December 31, 1993, Chicago Sun-Times, Nation / Business In Brief,
EX-SALOMON TRADER FINED NEW YORK - Federal regulators fined an ex-Salomon Brothers trader $300,000 and banned him from future Treasury auctions Thursday, the harshest punishment yet against an individual in the brokerage's bond cheating scandal. The action by the Securities and Exchange Commission against Thomas Murphy settles administrative charges he faced as a result of the 1991 scandal, in which Salomon flouted government rules in Treasury auctions, a critical operation for financing the national debt and making the economy run smoothly. The Murphy punishment comes less than a month after a federal judge in Manhattan sentenced Murphy's old boss, Paul Mozer, to four months in prison for lying to regulators about illegal bids he authorized for Treasury bonds.
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January 3, 1994, The Bond Buyer, SEC fines, bars trader formerly with Salomon for alleged bid rigging. (Thomas Murphy) by Stephen A. Davies,
WASHINGTON - Former Salomon Brothers government bond trader Thomas Murphy has agreed to pay a $300,000 civil fine and stay out of the securities business for two years in a settlement with the Securities and Exchange Commission on charges of rigging bids in three Treasury debt auctions during 1990.
The SEC announced the terms of the settlement of Thursday after it was filed in U.S. District Court for the Southern District f New York. Under the agreement, Murphy neither denied nor admitted guilt, and pledged to cooperate on ongoing federal litigation against former Salomon bond trader Paul Mozer. Murphy was a managing director and head trader at Salomon before he was fired when the company's false bidding activities came to light.
SEC officials charged Murphy with submitting false customer bids of $1 billion each in a five-year Treasury note auction on Aug. 29, 1990, and a four-year note auction on Dec. 27, 1990. He was also charged with a false bid of $1 billion in a two-year note auction on Dec. 26, 1990. In each case, Murphy was said to have made the bids without customer approval.
Under the settlement, Murphy is permanently barred from biding at Treasury debt auctions.
He is also barred from associating with any broker, dealer, underwriter, investment company, or investment adviser for two year. He may then reapply to work in the securities business in a nonsupervisory, nonproprietary job. After five years, Murphy may reapply to work in a proprietary or supervisory position.
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April 1, 1994, Futures (Cedar Falls, IA). Meriwether Hedges Bets, by Miriam Bensman,
David Mullins resigned his post as vice chairman of the Federal Reserve in early February to sign on as partner at Long-Term Capital Management. No doubt the former Fed mandarin brings a powerful understanding of financial markets, but he also brings a valuable respectability to a group dominated by alumni of Salomon Brothers' renowned bond and derivatives trading desks.
Pete Peterson's former role in the Nixon Cabinet did wonders for the glamour of The Blackstone Group. Similar glamour might aid Long-Term Capital's bold effort to raise $2.5 billion for its first fund. Failure to meet a 81 billion minimum caused the firm to delay the start of trading one month, until early March.
But market sources said the key obstacles to Merrill Lynch's efforts to line up institutional investors were the fund's $10 million investment minimum and steep fees that virtually guarantee partners make money even if clients don't. The firm would collect 2% of funds under management, plus 25% of each customer's profits. Officials at the firm declined to comment.
Former Salomon Vice Chairman John Meriwether established the Greenwich, Conn.-based firm in September, planning to replicate Salomon's fabled bond arbitrage desk -- without the huge overhead of a full-service firm. In some years, Salomon's bond traders generated most of the firm's profits, but they nearly brought down the firm in 1991, when chief Treasury trader Paul Mozer was implicated for manipulating Treasury auctions.
Salomon forced Meriwether to resign, and the Securities and Exchange Commission (SEC) suspended him from the industry for three months and fined him $50,000 for failing to supervise Mozer sufficiently. Meriwether neither admitted nor denied wrongdoing.
At Long-Term Capital, Meriwether has a chance to test a theory that often divided Salomon officials: Did the trading desk's fat profits derive mostly from trading brilliance or from its unparalleled view of customer flows from atop the biggest bond brokerage and dealing house?
Meriwether reassembled much of the talent. Besides Mullins, his new partners include Lawrence Hilibrand, dubbed the $23 million man because of the bonus he received for his trading prowess in 1990; Eric Rosenfeld, who had replaced Mozer as head of Treasuries; and Myron Scholes, co-author of the Black-Scholes option model and architect of Salomon's triple-A swap subsidiary.
He also set up an alternative source of market-flow information, establishing close ties with several non-U.S. banks. Will it be enough?
One thing is sure: If it meets its $2.5 billion target, and operates on the 100-to-1 leverage likely for a bond arb, Long-Term Capital will be well positioned to do the kind of market-moving trades Meriwether was famous for at Salomon -- and that Federal Reserve officials announced in late February they plan to investigate.
If so, bank regulators watching hedge funds' aggressive trading practices may soon find themselves toe-to-toe not just with Meriwether, but with Mullins, their former superior.
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April 24, 1994, The Independent, Phantom Profits on Wall Street, by Larry Black,
THERE are some troubling parallels in the mercurial careers of Joseph Jett, the Kidder Peabody treasuries trader, and Paul Mozer, the Salomon Brothers treasuries trader.
Both men, at 36, rose to become head of the government securities desks at their firms from relatively humble origins. Both were also intensely competitive, bristling whenever their judgement was challenged. Mr Jett would literally roar at subordinates who displeased him, while Mr Mozer once told a deputy assistant US Treasury secretary he was going to have him sacked.
And in the tough, post- 1980s regulatory climate on Wall Street, both men wound up being accused of engineering schemes that cost their employers hundreds of millions of dollars.
Mr Jett was dismissed last week after allegedly booking some $350m-worth of illusory profits. He has yet to tell his side of the story - apparently because his bank accounts have been frozen and he has been unable to retain a lawyer.
Mr Mozer, for his part, recently pleaded guilty to criminal charges of lying to regulators about his 1990 attempt to corner the market in US Treasury securities. He is to go on trial in June on separate charges filed by the US Securities and Exchange Commission.
The fact that both scandals have implicated young professionals is no coincidence, securities enforcement officials say. A Master's degree in business administration has become indispensable for taking on the hi-tech markets where big money is being made.
Derivative debt instruments such as the Treasury "strips" Mr Jett allegedly manipulated - the interest-paying portion of a bond that has temporarily been divorced from its principal - represent ripe ground for a clever and opportunistic trader. Not only regulators have trouble monitoring these markets; George Soros, the best-known hedge fund manager, conceded last week that not even he understands some of the more arcane products.
US regulators say the complexity of the bond market is leading to a rash of new frauds. "Hi-tech and computers make it easier to move money, easier to hide it, easier to steal it," says James Dudine, a former enforcement chief with the US Federal Deposit Insurance Corporation.
What stands out about both the Kidder and Salomon episodes, however, is that they involved relatively straight- forward deception. In both cases, a lack of supervision would have been a key factor in allowing such schemes to work.
The alleged scheme at Kidder exploited a shortcoming of the company's computer accounting system, which carries the value of "forward" trades - agreements to sell a security at a future date - at their eventual sale price. Typically, this is higher than current value. The difference between the prices, which normally narrows as the sale date approaches, is treated by the system as a profit - essentially ignoring the cost of carrying the strip in the meantime.
The "profit" would normally disappear once the security was sold. But by "rolling over" the trade - in this case, allegedly re-selling the strip to a non-existent buyer - the system maintained a profit on the account.
But as was the case with the Salomon ploy - which involved overbidding at US Treasury auctions to ensure Salomon controlled a huge share of the issue - the Kidder scheme was curiously flawed. To keep reporting profits, one would be condemned to keep rolling over the same trades with ever-longer maturities and for ever-bigger amounts.
Sooner or later, the game would have to come to an end, according to bond traders from rival firms. "The mystery," said a compliance officer at another Wall Street firm, "is that in neither case did anyone seem to have prepared for that eventuality."
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July 15, 1994, The Independent, Business and City in Brief: Mozer settles,
Paul Mozer, former head of Salomon's government securities trading, agreed to pay $1.1m to settle the Securities and Exchange Commission's civil charges related to a treasury bond bidding scandal. He has also agreed to be permanently barred from associating with any broker, dealer, municipal securities dealer or investment adviser.
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July 15, 1994, The Buffalo News, Ex-Salomon Trader Fined, Barred,
The man at the center of the Salomon Brothers bond bidding scandal, Paul Mozer, was barred from the securities industry for life and fined $1.1 million under a settlement of civil charges, the Securities and Exchange Commission said Thursday.
Mozer, who ran Salomon's powerful bond trading desk, was charged with authorizing eight false bids totaling $13.5 billion in seven Treasury auctions between August 1989 and May 1991. The bids were an attempt to corner the market for certain bonds.
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July 15, 1994, Post-Tribune (IN), Salomon Scandal Figure Barred From Securities,
SALOMON SCANDAL FIGURE BARRED FROM SECURITIES
WASHINGTON - The man at the center of the Salomon Brothers bond bidding scandal, Paul Mozer, was barred from the securities industry for life and fined $1.1 million under a settlement of civil charges, regulators said.
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July 15, 1994, Albany Times Union, Salomon trader agrees to fine, by Betsy Feldstein,
Salomon trader agrees to fine - WASHINGTON A former top trader at Salomon Brothers Inc. has agreed to pay a $1.1 million fine and accepted a permanent ban from the securities industry for his role in a 1991 Treasury bond auction scandal, the Securities and Exchange Commission announced Thursday. - Paul Mozer, the former head of Salomon's government securities trading, already has served four months in jail on criminal charges stemming from the scandal. He agreed to the fine and ban in settling a civil lawsuit filed by the commission. - Mozer neither admitted nor denied wrongdoing in the settlement, which was approved on Wednesday by the U.S. District Court in Manhattan. - Mozer's lawyer, Stanley Arkin, was traveling Thursday and did not return telephone calls to his office for comment.
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November 23, 1994, The Bond Buyer, Basham replaces recently retired Williams at First Fidelity. (Michael E. Basham, Alexander S. Williams, First Fidelity Securities Group) by Joyce Hanson,
Veteran municipal market executive Alexander S. Williams retired last week as head of trading and banking at First Fidelity Securities Group in Newark, N.J.
Michael E. Basham, a former debt official at the U.S. Treasury Department and managing director at Smith Barney Inc., replaced Williams effective Monday, a firm spokesman said. Williams ended his tenure with the regional bond firm last Friday. Williams could not be reached for comment.
The spokesman said Basham, like Williams, will hold the title of executive vice president. In his new role, Basham will serve as manager of First Fidelity's capital markets group. Williams served as manager of the securities group.
Williams, who joined the firm in 1970, worked in a variety of Treasury market and investment banking positions. Williams also worked at the firm of Drexel, Hardman, Ripley Inc. in New York City as a vice president in charge of national municipal bond trading.
Basham, who also could not be reached for comment, resigned from Smith Barney several months ago, a spokesman for the firm said. Basham joined Smith Barney in August 1991.
Previously, Basham worked in the U.S. Treasury Department as assistant secretary for federal finance. He served as an adviser to former Treasury Secretary Nicholas Brady in formulating the government's debt management policy.
In that role, Basham also worked as a liaison between the Treasury and government securities dealers. In 1990, Basham clashed with former Salomon Brothers trader Paul W. Mozer, who allegedly orchestrated the firm's illegal bids of Treasury securities.
Afterward, the Treasury adopted the so-called Mozer-Basham role, prohibiting firms from acquiring more than 35% of any Treasury offering sold at auction.
Market sources have speculated that First Fidelity may see more top-level public finance executives leave the finn.
'There is a major house cleaning going on at First Fidelity;' said a source with knowledge of New Jersey public finance.
In response to the speculation, company spokesman Paul Levine said, "As a matter of policy, we don't comment on minors. The only personnel rumors we respond to as policy are retirements and new hires."
Among senior managers nationwide, First Fidelity Securities Group has ranked 391h in 1994, with 62 issues totaling $558 million for a market share of 0.4%, according to Securities Data Co. For all of 1993, the firm ranked 361h, with 100 issues totaling $974.5 million for a market share of 0.3%.
For New Jersey bond sales so far in 1994, First Fidelity Securities Group ranked third among senior managers for competitive sales and fourth for negotiated sales.
So far this year, First Fidelity was senior manager on 17 negotiated New Jersey issues totaling $152.8 million and 38 competitive issues totaling $350.1 million.
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September 28, 1995, The Boston Globe, Scandals beg question: Who is minding the store?, by Steven Syre, Globe Staff,
In the 1980s, Wall Street became notorious as a place where rogues could makes millions seemingly overnight. These days the rogues are those losing hundreds of millions -- seemingly without their employers knowing what they were up to.
The latest example: Daiwa Bank Ltd. executive Toshihide Iguchi, who Tuesday was charged with hiding bond trading losses of $1.1 billion built up over a decade in an effort to cover a relatively modest $200,000 loss. Operating in New York, thousands of miles from his bank's home office, Iguchi was caught only after he wrote a confession letter to Daiwa's president.
Before Iguchi came Nicholas Leeson, a brash trader for London's Barings Bank who was operating a half a world away in Singapore when his high-risk strategy in Japanese markets went sour. Leeson guessed wrongly when he doubled his bets, creating a crippling $1.4 billion loss for the British bank. He fled Singapore in February and was arrested in Germany the next month.
Joseph Jett's problem wasn't bad trades. It was trades that never happened, according to his employer, Kidder Peabody. Jett allegedly maneuvered around Kidder's internal controls to credit himself with $350 million in profits from fictious trades worth $9 million in commissions. He steadfastly denies any wrongdoing.
The charges against Jett, Leeson and now Iguchi have made them the most recognizable faces on a '90s market phenomena, the rogue trader. Other lesser known names, including Yukihusa Fujita of Showa Shell Seklyu, Howard Rubin of Merrill Lynch and Paul Mozer of Salomon Brothers, are also alleged to have stepped over the line in the course of trading.
But their backgrounds, apparent motivations and reactions to staggering losses have all been dramatically different. Their cases, and others like them, consistently say more about the institutions left to manage the losses rather than the rogues themselves.
Those institutions that get in trouble tend to be in moderate-growth businesses and highly focused on driving profits by leveraging their capital, according to consultants, academics and others.
"The phenomena is probably more prevalant because of the scope and scale of parties involved," said Brad Warner, who runs Bank of Boston Corp.'s treasury department. "The reality is these markets can be very brutal."
And in most cases their actions suggest a company looking away from early signs of trouble, or at least an improbable degree of gullibility.
In many of the cases "you have to ask yourself how it could go on for so long without people looking the other way," said William Saubert of Arthur D. Little, who runs the consulting company's financial institutions practice.
But many large trading organizations are built with inadequate resources to protect themselves against the damage some traders can do, accounting firms say.
"It's a little bit like building a car with a 24-cylinder engine and no breaks," said Richard Breeden, former chairman of the US Securities and Exchange Commission who now runs the worldwide financial services practice at Coopers & Lybrand.
"Your building high-power organizations to deal in risks and it's not always the case that companies have invested equally in having an adequate-sized, independent and highly sophisticated control network," he said. "When a trader gets in trouble, whether he's American, Japanese or British, the instinct is to double bets and double them again is as old as human history."
In at least two cases, at Barings and Daiwa, the traders also managed their back offices, a practice that is not allowed in most companies because it creates the opportunity to manipulate settlement reports.
But supervision of aggressive trading has become a taller order in recent years, even when auditors and others have all information available.
The increasing complexity of derivative investments used by traders sometimes makes it more difficult to access the degree of leverage, and risk, involved with a particular position.
And some senior executives simply don't understand what their traders are doing.
"You've got management that doesn't know as much as the people they are managing," said Richard Schechter, managing director of Aesop Systems L.P. of Chicago, which develops software for trading risk management.
"There is this saving-face factor at the management level," he said.
And there is no reason to ask questions when traders are making money. Managers overtaken by the complexity of trades made by their company are rarely in a position to scrutinize if the position makes money.
"When market participants win, very often people will have the attitude that it doesn't matter why they succeeded. Don't mess with success," said Andrew Lo, a finance professor at the Sloan School of Management at the Massachusetts Institute of Technology.
"A lot of the problems that have come about are due to the fact that there isn't enough financial technology in large organizations. I don't mean computers, I mean a true understanding of quantitative models that comprise financial engineering.
"The problems you see are not so much the evils of derivatives but that senior management does not understand the intricacies of these products," he said.
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October 5, 1998, AP Online, Does John Meriwether still have the Midas touch?, by Dennise Lavoie,
STAMFORD, Conn. (AP) -- For David Ellis, a young trader with the ink barely dry on his MBA, there was a moment one afternoon in July 1983 that captured the essence of John Meriwether.
Meriwether, then a general partner at Salomon Brothers, was already a legendary bond trader on Wall Street and revered by Salomon trainees such as Ellis.
"After the market closed one day, one of us asked him if he believed in efficient markets, and his answer was, "I MAKE them efficient."
"It epitomized him," said Ellis.
Finding market inefficiencies and pouncing on them is what made Meriwether a star trader at Salomon and later the wonder boy at Long-Term Capital Management LP, a wildly successful hedge fund he founded in the tony town of Greenwich in 1994.
Meriwether's brilliant reputation took a sudden hit when Long-Term Capital nearly collapsed, requiring a $3.6 billion rescue from a consortium of banks and brokerage houses hastily assembled by the Federal Reserve Bank of New York.
Now, Wall Street is wondering whether this genius trader with the Midas touch can recover and rise again as a major player.
Some analysts believe Meriwether's reputation will probably only suffer short-term damage. Investors are well aware of the inherent high-risk nature of hedge funds, which are largely unregulated funds for the wealthy.
"I don't think he's tarnished as a trader; I think he's tarnished as a superhero," said Stephen Buser, a finance professor at Ohio State University.
"He has a stellar reputation as a trader. He doesn't have a crystal ball," he said.
Meriwether, 51, a notoriously private man who rarely speaks to the media, declined through a spokesman to be interviewed for this article.
Until its bailout, Meriwether and his fund were seen as something of a sure thing for rich investors. Meriwether's star-studded team at Long-Term Capital include Nobel economic laureates Robert Merton and Myron Scholes; former Federal Reserve Board vice chairman David Mullins Jr. and several arbitrage veterans from Salomon Brothers.
Some analysts predicted investors will be very forgiving of Meriwether and Long-Term Capital, which is now under the control of the bailout consortium. They cited problems even Meriwether and his brilliant partners couldn't have predicted, particularly the Russian bond market and the defaulting of ruble currency hedges by Russian banks.
"If a driver gets hit by a meteor while he's driving, you don't take away his driver's license," said Rene Stulz, editor of The Journal of Finance.
But others think it could be difficult for Meriwether to restore the confidence of investors and to attract capital the way he once did.
At the time of the bailout, Meriwether's firm had about $2.2 billion in capital from investors, but it had borrowed money from financial institutions to buy securities worth more than $90 billion. Fund managers then used those securities as collateral to make speculative bets representing $1.25 trillion.
"Certainly, since he's the head of (the fund), as Truman said, the buck stops there. It's definitely a setback for him," said Joseph F. Sinkey, a finance professor at the University of Georgia.
Some predict he and at least some of his partners will leave Long-Term Capital within a year to start another hedge fund. Others predict Meriwether will end up as a shining star at Goldman Sachs or another big brokerage house.
"He's talented, and talented people attract money," said David Mauer, a finance professor at Southern Methodist University.
This is not the first time Meriwether has had to reinvent himself. He left Salomon Brothers after being tainted by the 1991 bond bid-rigging scheme, one of the biggest scandals ever to hit Wall Street.
In 1991, Paul Mozer, a trader under Meriwether's supervision, submitted a false bid on U.S. Treasury notes. Although Meriwether told his bosses about the violations, they were not reported to the Treasury until months later. The scandal forced the resignations of Salomon's chairman, John Gutfreund, and president, Thomas Strauss.
Meriwether also resigned and later agreed to a three-month suspension and $50,000 fine in a settlement with the Securities and Exchange Commission in which he did not admit or deny negligence as a supervisor.
Analysts do not consider Long-Term Capital's problems a scandal, but instead simply a disaster caused by an overleveraged firm whose luck ran out.
"They are a hedge fund and they were supposed to take risks. Sometimes those risks don't work out. The only unusual thing here is that the Fed stepped in," said Stulz.
New York Fed officials feared that if Long-Term Capital collapsed, commercial banks and investment houses it borrowed from would have faced huge losses. They also worried that the fund's collapse would lead to a selloff that could devalue stocks and leave banks unable to extend credit.
Ellis, now a professor at Babson College, is one of many young traders who idolized Meriwether. He said he thinks Meriwether will re-establish himself, but probably not at Long-Term Capital.
"He's a trader par excellence," he said. "I think he'll pick himself up and dust himself off."
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April 1, 2000, Personnel Psychology, The leadership Moment: Nine True Stories of Triumph and Disaster and Their Lessons for Us All, by Richard Blackburn,
Michael Useem. The Leadership Moment: Nine live Stories of Triumph and Disaster and Their Lessons for Us All. New York: Times Business (Random House), 1998, 329 pages, $25.00.
Reviewed by Richard Blackburn, Associate Professor, Kenan-Flagler Business School, University of North Carolina, Chapel Hill, NC.
Consider the following situations. What actions would you take in each and, more important, why would you choose those actions?
Scenario #1. Your firm, a publicly owned organization, has invented a drug that would virtually eliminate an insidious illness afflicting millions of people each year. Development costs for the drug have been substantial, but those who would most benefit from the drug are among the poorest people in the world. Would you make the drug available to those who need it at no cost, forgoing any opportunity to recoup the development costs, although realizing that shareholders expect real returns on R&D investments?
Scenario #2. You receive reports that one of your subordinates has violated federal bond trading regulations. The offenses seem minor, and you believe that a stern reprimand should prevent further violations. Would you inform federal authorities about these violations, even though such revelations could result in harsh penalties for your firm? Or would you remain silent, knowing your firm reaps millions of dollars in profits from trading in government bonds?
These episodes reflect what Michael Useem calls "leadership moments." Examining these "moments" in depth allows those in or those aspiring to leadership positions to learn much about leaders and leading. The moments described above are two of the nine moments that Useem presents in his book by the same name. Scenario #1 highlights the difficult choice that Roy Vagelos had to make in the late 1980s about a new drug his organization, Merck & Company, had developed to cure river blindness in Africa. Vagelos opted to provide the drug without charge in the belief that he was doing the right thing-individually, organizationally, and communally.
Scenario #2 illustrates the situation in which John Gutfreund found himself in the early 1990s as the Chairman and CEO of Salomon, Inc. Government bond trader Paul Mozer had violated several Treasury bond purchasing regulations to inflate the percentage of bonds that Salomon purchased at a bond auction. Gutfreund's failure to take timely action against Mozer and to inform the Treasury Department of these infractions, resulted in Gutfreund losing his job at Salomon and nearly destroying Salomon and several other financial institutions. In this case, inaction from one in a leadership position created serious repercussions for the leader and his organization.
Arguing persuasively that the sharing of vivid leadership stories "can direct and inform our actions," Useem combines masterful story telling with insightful analysis to offer the reader opportunities to think about leadership under the gun. Nine moments are presented in separate chapters in the book. In addition to the two moments described above, we are also introduced to the following leaders and their leadership moments: Wagner Dodge, forest fire jump team leader, who lost 13 of his team members when they were overrun by fire in the Mann Gulch fire in 1949. Eugene Kranz, flight director for Apollo 13, who led the successful efforts of a large NASA team to return a crippled spacecraft and three astronauts to earth in 1970. Arlene Blum, leader of an allwomen climbing expedition to Annapurna in 1978 during which four of her teammates reached the peak, while two died in the attempt. Joshua Lawrence Chamberlain, a Union commander, whose troops played a key role in defending Little Round Top during the Battle of Gettysburg in 1863. Clifton Wharton, CEO of TIAA-CREF, who turned a hide-bound, bureaucratic, nonresponsive financial organization into a customer-friendly, adaptable, and flexible provider of financial products during the late 1980s. Nancy Barry, president and CEO of Women's World Banking, who left a powerful position at the World Bank to lead and grow a fledging institution offering microloans throughout the developing world in the early 1990s. Alfredo Cristiani, president of El Salvador, and the man most responsible for bringing the warring factions in a decades-long civil war to the negotiating table and arriving at a settlement acceptable to all parties in the early 1990s. As one might surmise from this lineup, Useem has provided the reader with a variety of leadership moments in a variety of leadership contexts. While discussing each moment, Useem distills several "leadership implications" from his analysis. Some forty of these leadership implications are summarized in "A Leader's Guide" following the book's final integrative chapter. In this final chapter, the author also identifies that particular leadership principle he derives from each story. Leadership principles drawn from the nine leadership moments include:
Useem summarizes his analysis of the nine leadership moments by noting that "[the single most important lesson from these moments is the overwhelming significance of vision and action."
In general, there is little to argue with his set or any one of his principles. On the other hand, the admonition to always "move fast" may create problems if fast movement eliminates reasoned thought. "Remaining steadfast" in the face of overwhelming odds or in the pursuit of a wrong-headed vision may be leader-like, but may also result in failed leadership efforts. In fact, strict adherence to these nine principles might create additional leadership moments. An appreciation of the leadership context would seem to be imperative.
This collection of leadership stories provides a compelling way to think about issues of leadership and to appreciate those moments when leaders must make decisions that can have monumental effects on the lives of few or many. Of particular delight in Useem's book is his ability to engage the reader in the stories told. I often found myself more interested in the stories than in the analyses. In addition, I learned much about several different leadership contexts: fighting forest fires, climbing mountains, or trading in government bonds, for example.
I have only minor quibbles with the resulting volume. The quality of the few pictures in the book is not particularly good. Black-and-white photos of climbing areas on Annapurna or the terrain in Mann's Gulch, for example, are so small and without referent that it is difficult to tell what is being illustrated. Although Useem found leadership stories that allowed a diverse set of leaders to be highlighted, few of his readers may be able to identify successfully with these leadership contexts. Perhaps an "heroic" leadership moment from middle management or from a context considered more "mundane" might have been a useful addition to the existing line-up. Finally, although proponents of heroic theories of leadership would find support for their position in these pages, in some of the stories the culture or context greatly influenced the leader's judgement. The actions taken (or not) Ray Vagelos and John Gutfreund seem to have been as much a function of their corporate cultures as their own leadership propensities. Some comment to that effect would have been welcomed where appropriate.
These are minor quibbles, and on the whole I believe Useem's collection of leadership stories to be well worth the investment of time. I have already found myself making reference to some of these leadership moments in leadership classes that I have been teaching. Although some of these "moments" took months or years to evolve, taking a shorter moment to read Useem's book should greatly benefit both current and aspiring leaders.
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November 16, 2011, Reuters Hedgeworld, U.S. SEC Targets Low-Level Bankers, Spares Top Execs
WASHINGTON (Reuters) - The U.S. government is not taking advantage of an enforcement tool that could potentially hold top Wall Street figures accountable for their role in the recent financial crisis, despite its prior success.
Broker-dealers, investment advisers, and others regulated by the U.S. Securities and Exchange Commission are required to supervise their representatives. If a trader engages in misconduct, the SEC can sue the management with "failure to supervise."
But in some of the biggest cases the SEC has brought in recent months - against units of JPMorgan, Goldman Sachs, and Citigroup - the agency has sued only low-level bankers.
Public anger following the U.S. government bailout of major banks in 2008 is fueling such disparate movements as Occupy Wall Street and the Tea Party, but government lawyers say they are bringing cases based on the evidence they have. Some experts argue the agency could be doing more.
"There is an affirmative obligation of supervisors to supervise their subordinates, but not a hint of that here," Duke University law professor James Cox said, referring to the SEC's recent cases against broker-dealer units of the top banks. "What I see as a method of operation is big entity fines, but not holding any responsible person responsible, thereby robbing enforcement of substantial deterrent effects."
An SEC spokesman declined to comment on its enforcement strategy.
The banks in question have paid between(JP Morgan) and(Goldman) since last summer to settle charges that they misled investors on complicated mortgage bond deals. Citigroup agreed to paylast month to settle similar allegations.
Bankers at the three institutions, the SEC said, hid the fact that they structured the deal to bet against it themselves or on behalf of clients who planned to do so.
A failure-to-supervise claim may have been challenging to bring in these mortgage cases. If the manager's actions, for example, didn't violate any of the firm's policies, it could be a tough case to make. In some of the deals at issue, it was the policies themselves that were at fault.
But the SEC has used the tool in the past to go after some of the most iconic figures on Wall Street.
When the SEC sued Salomon Brothers in 1992 over illegal bidding in Treasury auctions, for example, it didn't stop with the trader, Paul Mozer. It charged three members of the firm's top management with "failure to supervise" the trader: Salomon's chief executive, John Gutfreund, a vice-chairman and a president.
The SEC extracted from Mr. Gutfreund an agreement never to run a securities firm again, while the others agreed to brief suspensions from Wall Street. All paid fines of $50,000 to $100,000.
Such sanctions could be more difficult today, when companies often demand implicit agreement from the SEC to leave senior management alone in exchange for settling.
"Generally, I think there is a desire by most companies to try to not have their employees be on the firing line," said former Republican SEC commissioner Paul Atkins.
Companies also seek to settle, while individuals will fight back, making the cases more difficult and time-consuming to bring. The SEC brought its case against Mr. Gutfreund for knowing about the misconduct but failing to alert authorities. Whether higher-ups knew about the conduct at issue in the mortgage cases is unclear.
Defenders of the SEC say the agency is sensitive to public pressure to hold Wall Street responsible and is doing everything it can to bring those cases.
If the actions against JP Morgan and Citigroup had been brought several years ago, the SEC likely wouldn't have charged any individuals, even lower-level ones, said one securities lawyer, who declined to be named.
"They are looking for these cases, they are just not finding the evidence to support them," the lawyer said.
But other securities experts say failure-to-supervise cases are important to pursue due to the reputational impact they have, and the related deterrent effect.
"Maybe the facts weren't there, but I find that hard to believe," Mr. Cox said.
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August 22, 1991, The Washington Post, Salomon: The Subject Is Survival; Few Doubt the Firm Will Last, but Many Question Its Future, by Stan Hinden,
Salomon Brothers Inc. may well survive its bout with scandal, but the cost to its reputation will be high and the aggressive trading firm will never be the same, experienced Wall Street observers predict.
The observers recalled that two other prominent Wall Street firms - E.F. Hutton & Co. and Drexel Burnham Lambert Inc. - also were caught in a whirlpool of scandal and also struggled mightily to avoid being dragged under, but eventually vanished.
"Salomon is not Drexel," said one longtime market watcher. "I believe Salomon will survive. But the franchise will be damaged."
He said he thought Salomon's failure to quickly report its violations of bidding rules in the government bond market would be especially damaging to the firm's image.
It was generally agreed, however, that Salomon's case would be helped significantly by its decision to oust chairman John H. Gutfreund and other top Solomon officials and to put Omaha investor Warren Buffett in charge of cleaning up the firm.
But it was equally clear, observers said, that Salomon's admissions had put the firm on a slippery slope that could keep it off balance for years to come.
"This has got a life of its own," one watcher said.
The multiple federal and congressional investigations that are underway - and the accompanying media coverage - will keep a continuing spotlight trained on Salomon that may drive away both customers and key employees and hurt the firm's ability to compete, observers said.
In a new revelation, the firm said yesterday that employees who have since been fired used the name of one of its customers, Mercury Asset Management, to buy securities in a recent auction of U.S. Treasury notes.
Salomon said the action was taken without Mercury's knowledge, and that Salomon had so informed regulators.
Salomon already is paying a high price for its violations.
Institutional customers have backed away from buying billions of dollars of commercial paper, or short-term debt, issued by Salomon. The firm uses the money to finance its investment activities. Customers at the World Bank and major states also have curtailed their dealings with the global securities firm.
Salomon's stock price, which had been rising because of growing profits, have fell sharply since the firm's troubles were announced, dropping from about $37 to about $25. It closed yesterday at $24.75, down 75 cents.
These are some of the developments in the Salomon case that Wall Street will be watching:
As in the E.F. Hutton and Drexel cases, Congress often becomes a vehicle for focusing attention on market abuses and for giving them high visibility. Buffett is expected to testify at just such a hearing on Sept. 4 at the House telecommunications and finance subcommittee headed by Rep. Edward J. Markey (D-Mass.).
A series of class-action lawsuits has been filed against Salomon that can be expected to keep the firm and its lawyers busy for years. The actions come from stockholders who claim that Salomon's actions in the government bond market cost them money.
Observers said they expect to see Salomon's corporate culture undergo a radical change during the next few years. With Gutfreund personifying the macho, tough-guy approach to trading, Salomon had developed a reputation as a hard-nosed, rough-and-tumble firm determined to best its competitors.
But Buffett has decreed that playing close to the line is no longer going to be allowed. And with lawyers looking over the shoulders of traders, observers expect the firm to soften its approach.
That could drive the more aggressive people away to other firms, it was suggested. But one observer said, "Salomon could lose its top 100 people and still be a helluva strong firm."
The weakness at Salomon will encourage its competitors to try to woo the customers who are shying away from Salomon. Indeed, some of the complaints against Salomon to officials in Washington apparently came from firms that lost money when Salomon bought more than its allowed share of short-term securities in May.
Howard Homonoff, counsel to the Markey subcommittee, said the panel received a number of complaints from Wall Street at the time of the alleged May market "squeeze" by Salomon. In fact, the complaints prompted Markey to write to Securities and Exchange Commission Chairman Richard C. Breeden to look into the trading, when Salomon allegedly bought up more two-year Treasury notes than allowed and raised the prices to customers who needed them.
On the customer front, the rejection slips have been piling up. In the last few days, for instance, Salomon's costs for short-term borrowing rose at a rate of $18 million a year because banks, insurance companies and other institutional investors are declining to renew their short-term, low-interest commercial paper loans to the firm, according to Treasurer John G. Macfarlane.
The reason for the refusals, Macfarlane said, was the uncertainty caused by the pending investigations and a feeling by some institutions that Salomon should be put in the "penalty box" until matters are clarified.
Salomon, which has $7.2 billion in commercial paper outstanding, paid off $1.1 billion in the last several days. Another $781 million will come due in the next seven business days.
Only 20 percent of the commercial paper holders are renewing. Macfarlane said the firm has enough securities to pay off the entire $7.2 billion, if necessary.
The "penalty box" syndrome is hitting Salomon on other fronts, too. The World Bank yesterday said it was temporarily suspending business with Salomon. And the treasurers of California and Massachusetts joined the pension funds of California and Wisconsin in cutting business connections with Salomon.
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August 23, 1991, The Washington Post, Letter, The Salomon Disaster: Nothing to Joke About, by Albert Yu,
Rep. Edward Markey's (D-Mass.) comments regarding Salomon Brothers' $1 billion "practical joke" ("A Wall Street Giant Shaken," news story, Aug. 16) have only added to the confusion and hypocrisy surrounding the unfolding scandal.
After the powerful Wall Street firm announced that it purchased an extra $1 billion in U.S. government Treasury bonds as the result of a prank gone awry, Rep. Markey said, "We cannot tolerate games of Jeopardy being played with what is in effect the public's money."
While this sounds catchy, Rep. Markey either fails to understand basic finance or is pandering to the public's fear and often justified distrust of Wall Street. The money belongs to the investors, not to the public. The public, through the government, issues bonds because the government does not receive enough money to pay for our extravagant budgets. Like investors around the world, Salomon's customers use their money, not the public's, to buy these bonds and thus finance our fiscal recklessness in exchange for principal and interest payments.
After Congress's embarrassing involvement in the savings and loan debacle, I had hoped that it would have learned from its mistakes and have developed a basic understanding of finance; Rep. Markey's remarks suggest otherwise. As Michael Lewis, who chronicled Salomon's foibles in the bestseller "Liar's Poker," wrote: "The only thing history teaches us, a wise man once said, is that history doesn't teach us anything."
ALBERT YU Bethesda
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August 24, 1991,The Economist (US) Life after Gutfreund; Salomon Brothers,
A STRANGE blend of alarm mixed with hope prevails at 7 World Trade Center as Salomon Brothers struggles to survive the biggest crisis in its 81-year history. The chairman (John Gutfreund), president (Thomas Strauss) and vice-chairman (John Meriwether), who admitted on August 14th to having sat on evidence of fiddling in the firm's Treasury-bond department, have resigned. Two others have been fired.
A new chairman and chief executive, Warren Buffett, Salomon's largest private shareholder, has swept in from the plains, vowing that he will leave as soon as he has swept out the stables. He may hand over at least part of his job to the newly appointed chief operating officer, Deryck Maughan, whose most obvious qualifications are a good British-mandarin brain and the fact that for most of the past five years he has been working in Salomon's Tokyo offices, a safe 7,000 miles from the scene of the fiddle.
The bond department has a new boss and its traders new rules. Nicholas Brady, secretary of the Treasury, was impressed enough by Mr Buffett's reputation and intentions to lift his August 18th suspension of Salomon from future Treasury auctions soon after he imposed it: Salomon may bid on its own account, though not for customers. But in fact the firm may be heading deeper into trouble, rather than out of it.
Investigations by various agencies into Salomon's rule-breaking in at least five Treasury issues continue (and have been extended to other issues and primary dealers). Civil suits against the firm and its former higher-ups are piling up.
Some big customers are deserting Salomon. The World Bank has suspended business dealings with the firm to see how the reforms are working. So has America's biggest public pension fund, the California Public Employees' Retirement System. This matters even more than the amount of lost business suggests. Barred from primary bidding for clients and with a reduced flow of trading orders from customers, Salomon may find it harder to judge the market correctly. other prestigious deals look threatened too. At mid-week the British Treasury was debating whether it should revoke its appointment of Salomon as lead-manager in America for the sale this autumn of government shares in British Telecom.
Another worry is that some $1.1 billion of Salomon's $6.5 billion in outstanding commercial paper falls due next month. If credit-rating agencies downgrade the firm, as has been muttered, its cost of money in highly leveraged operations will shoot up and profits will fall.
The trick for Salomon's new ruling team is to house-train the traders at what some call Wall Street's own Animal House well enough to pacify regulators and investing institutions, while preserving enough of their animal spirits for the firm to continue to prosper. it will not be easy. For better and for worse, Salomon bears the stamp of its fallen chairman. And between Mr Gutfreund and Mr Buffett there could not be a greater apparent contrast.
A tale of two titans John Gutfreund, the arch-priest of the immediate, is a former bond trader who thinks 24 hours ahead in his more philosophical moments. it was this very short-termism, in the days before many on Wall Street adopted it, that made Salomon so successful. Warren Buffett, a pupil of Columbia University's Ben Graham and David Dodd, who created serious securities analysis, built his billions by seeking out and investing in long-term value. More recently he took to rescuing firms threatened with unwanted takeover, among them Salomon.
Mr Gutfreund swore, smoked and shoved his way to near the top of the Wall Street heap. Mr Buffett tries to rule through intellectual persuasion; the inventive and witty annual reports of Berkshire Hathaway, the investment vehicle of which he is the chairman, are collectors' items. Mr Gutfreund is an easterner who likes the social limelight and lives in a Fifth Avenue apartment worth $20m. The much wealthier Mr Buffett prefers a modest (well, fairly) house in Omaha, Nebraska, wears baggy suits and drinks Coca-Cola from the can. Mr Gutfreund once told The Economist that all he wanted was "the money, the power and the glory." What he has left now is the money, and that is dwindling fast as Salomon's share price sinks.
Mr Buffett has come to be seen as the Jimmy Stewart of American capitalism, Mr Gutfreund as the archetypal black hat. Yet such appearances can deceive. For all his faults, John Gutfreund converted the relatively uneducated ragtag of ruffians who made up much of Salomon in the 1960s into a well-capitalised firm of international repute by the 1990s: no mean achievement. And the soft-voiced, humorously down-home Warren Buffett is a steely operator to his own spectacular advantage.
The question now is whether Mr Buffett, as active chairman rather than passive investor, can impress a more prudent ethos upon a pitilessly competitive, risk-taking trading house without losing both people and profits. It appears that, while insisting on integrity and respect for other people's rules, he intends to cultivate the firm's profitable trading core. Naming Eric Rosenfeld, former co-head of Salomon's money-spinning bond-arbitrage department, as temporary boss of its government-bond operations seems a bid to keep traders' feet firmly under their screens. They may be more prone to stray if John Meriwether, the trading ace who many reckon was forced unfairly to resign, sets up shop in competition.
Mr Buffett is no manager; neither was Mr Gutfreund. And what of the 43-year-old Mr Maughan? A former civil servant in the British Treasury, he has earned top marks recently for building Salomon's business in Tokyo into a powerful and profitable one, despite difficult days there for foreign firms. His pep-talks to the Wall Street troops early this week were well received. But he is not a trader, and not yet a manager on the scale that Salomon's troubles demand.
If all goes well for him, Deryck Maughan could in time replace Warren Buffett as chief executive of Salomon's, less probably as chairman (names mooted for the top job include that of Paul Volcker, a former head of the Federal Reserve Board). if history is any guide, however, internal feuding will make a transfer of power supremely messy. Mr Buffett has many problems to solve before he can plausibly look for the door.
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August 24, 1991, The Washington Post, Salomon's Chief Legal Officer Resigns; Buffett Pledges to Clean House at Troubled Investment Firm, by David S. Hilzenrath,
The purge at Salomon Brothers Inc. continued yesterday with the removal of the chief legal officer of the New York investment firm's parent company.
Donald M. Feuerstein, chief lawyer for Salomon Inc., resigned at the request of Warren E. Buffett, the Omaha multibillionaire and major Salomon shareholder who stepped in as acting chairman of the troubled firm Sunday.
"I fully understand Mr. Buffett's request for my resignation and appreciate that the new management team at Salomon Inc. should have in my position an individual of their own choosing," Feuerstein said in a statement released by Salomon. Neither he nor Salomon officials could be reached for further comment.
Salomon is under investigation by four federal agencies for illegally bidding at auctions of government securities. The firm disclosed this month that at several auctions it had bought larger percentages of the bonds than the 35 percent maximum allowed any one firm.
As a result, other securities dealers were forced to buy bonds from Salomon at artificially inflated prices, and confidence in the market that the federal government uses to borrow money may be shaken, investors, traders and government officials have alleged.
Three of the firm's top executives - Wall Street powerhouses John Gutfreund, Thomas Strauss and John Meriwether - resigned Sunday following disclosures that they learned of one trading violation in April but allowed months to pass without informing government regulators. Buffett said Sunday that Feuerstein also participated in a discussion of the violation in April.
The Salomon board of directors fired Treasury bond traders Paul Mozer and Thomas Murphy last Sunday. Two other employees have been suspended.
Buffett has said efforts were made to "cover up" the wrongdoing in Salomon's bond trading and that records might have been altered. Regulators are examining why Salomon lawyers responsible for monitoring compliance with rules did not detect or report the violations, sources said.
Buffett called executives' failure to immediately inform authorities in April "inexplicable and inexcusable," and pledged to clean house.
Feuerstein, 54, was a high-ranking lawyer from 1966 to 1971 at the Securities and Exchange Commission, according to "Who's Who in America." A graduate of Yale College and Harvard Law School, he joined Salomon 20 years ago. He has served on advisory boards of the Securities Regulation Law Journal and the Solomon R. Guggenheim Museum in New York, "Who's Who" said.
The fallout from the scandal widened yesterday as Salomon reported that additional lawsuits were filed against it by angry shareholders and a buyer of government securities who claimed to have lost money because of Salomon's actions.
The securities buyer, Marshall Wolf, invoked the Racketeer Influenced and Corrupt Organizations (RICO) Act, saying Salomon and several Salomon officials conspired in "an ongoing scheme to defraud treasury securities purchasers."
Also yesterday, the securities rating firm Standard & Poor's Corp. said it is likely to downgrade Salomon corporate bonds and might downgrade Salomon's commercial paper. The downgrades would mean S&P thinks Salomon bonds have become a riskier investment.
But S&P also said Salomon is in a strong enough financial position to meet debt payments coming due. Salomon stock, which has dropped more than $10 a share this month amid publicity about the scandal, closed yesterday at $23.75, up 12 1/2 cents.
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August 26, 1991, Los Angeles Times, Buffett Chooses L.A. Attorney as Salomon Counsel, by Michael Parrish,
In his lightning drive to bolster scandal-shocked Salomon Bros., the firm's new chairman, Warren E. Buffett, on Sunday named a respected Los Angeles attorney as Salomon's general counsel.
Robert E. Denham, 45, managing partner of Munger, Tolles & Olson, will replace Donald M. Feuerstein, who was Salomon's chief legal officer until Buffett asked for his resignation Friday.
"Bob was my first and only choice," Buffett said in a statement.
The two men are hardly strangers. Buffett said they have been associated for 17 years, adding: "I know he stands for exactly the same things I do."
"I think Buffett and Deryck Maughan are going to be effective in doing what has to be done," said Denham, referring to Salomon's new chief operating officer. "And Salomon is going to continue as one of the strongest firms on Wall Street."
Denham said there had not yet been time to sort out any possible continuing relationship with Munger, Tolles, one of Los Angeles' leading corporate firms. Nor has a successor been chosen as managing partner, he said.
At the firm, Denham practiced corporate and securities law. In his new job he will be responsible for the legal affairs of Salomon and its subsidiaries, including compliance with federal regulations.
A Salomon spokesman attached no significance to the change in title that attended the appointment. (Feuerstein's title was chief legal officer.)
The announcement is part of Buffett's swift campaign to install a new Salomon management team that can restore confidence in the firm and stem defections among its clients.
Feuerstein reportedly learned on April 28 that Salomon had broken the rules in the Treasury auctions at which it played so important a role. Salomon's admitted misdeeds at those auctions, and its apparent delay in reporting them, have rocked the legendary Wall Street firm and led its top management to resign.
A week ago, Buffett said in a press conference that he had "no reason to question (Feuerstein's) efforts or enthusiasm" to see that the firm contacted federal officials. But five days later Buffett asked him to quit.
In his 20-year career at Munger, Tolles, Denham's long-term clients have included the Pacific Stock Exchange; Cook Inlet Region Inc., an Alaskan native corporation; and Berkshire Hathaway Inc., of which Buffett is the revered chairman.
Denham has worked closely with Buffett on major projects for Berkshire Hathaway since 1974 and for the past eight years represented Buffett's company in every major deal it undertook.
These included the purchase of $300 million of preferred stock issued by Champion International Corp., and earlier this month, the purchase of a $300-million private stock issue from American Express Co.
Denham, who graduated from Harvard Law School in 1971, lives with his wife, Carolyn, in Pasadena. She is a professor of educational research and statistics who is associate vice president for academic programs at Cal Poly Pomona. They have two children.
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August 29, 1991, The Washington Post, Salomon Says Ex-Trader Sold Stock Before Scandal, by Robert J. McCartney,
Salomon Brothers Inc.'s former chief U.S. government bond trader, Paul Mozer, sold 46,000 shares of Salomon stock shortly before the announcement of his suspension in early August in a major scandal that caused the stock to plummet in value, the firm said this evening.
But Mozer has not been able yet to collect the $1.7 million in cash gained from the stock sale. That's because Salomon, after learning of the sale, froze the proceeds from it in Mozer's in-house trading account at the brokerage firm, a Salomon spokesman said.
Moreover, the spokesman said, the company is seeking the approval of Mozer's lawyers to cancel the stock sale altogether.
Mozer's lawyer, Lee Richards, denied the sale was based on inside information, the Associated Press reported.
Mozer's stock sale, first reported by the New York Times in Thursday's editions, occurred before the disclosure of the scandal hurt the value of the firm's shares.
Mozer and one of his top deputies on the bond trading desk were dismissed 10 days ago in a housecleaning that also included the resignations of the company's top three executives.
The Salomon spokesman made a point of saying that the firm was not aware of any stock transactions by the other executives that were similar to Mozer's.
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August 31, 1991, Los Angeles Times, Salomon Bros. Is Looking for a New Law Firm: Securities: A prominent Wall Street law firm that conducted an internal investigation of possible wrongdoing is off the case, by Scot J. Paltrow,
NEW YORK — Salomon Bros., in deep legal trouble over government securities trading, has taken a prominent Wall Street law firm off the case and is looking for new lawyers to represent it, a spokesman said Friday.
The firm, Wachtell, Lipton, Rosen & Katz, had been representing Salomon on the matter since early July, when it was asked to conduct an internal investigation of possible wrongdoing by the securities firm in Treasury auctions.
As reported, questions have been raised about when the law firm first learned of Salomon's misdeeds and whether it immediately urged Salomon's management to notify federal regulators. Neither Salomon nor the law firm has commented on those questions. However, Salomon spokesman Robert F. Baker Jr. said Friday that taking Wachtell off the case "does not in any way reflect adversely on the work that has been done by Wachtell Lipton, which has been of critical importance to Mr. (Warren) Buffett in his efforts since assuming the job of chairman."
Buffett stepped in as Salomon's chairman and chief executive Aug. 18, after then-Chairman John H. Gutfreund and two other top executives resigned. The firm acknowledged that Gutfreund and the others knew of improper bids in Treasury auctions for months without notifying federal regulators.
Wachtell is best known for its role in defending big companies in the takeover battles of the 1980s, and for its invention of anti-takeover strategies such as the "poison pill" defense.
Baker said Wachtell several times had offered to "step aside" since Buffett was named chairman. But he said Buffett asked the firm to stay on temporarily "because of the critical need for their talent and knowledge of Salomon" to help turn over information to government investigators.
He said Buffett on Friday decided to accept the offer "so as to get on with the task of forming a new team at Salomon."
Baker declined to elaborate. A week ago, Donald Feuerstein, Salomon's chief in-house lawyer, resigned at Buffett's request.
Martin Lipton, a senior partner at Wachtell, didn't respond to repeated requests for comment Friday.
Baker said Salomon is interviewing several law firms and no decision had been made on which one will replace Wachtell. In addition to the government securities investigation, Wachtell has represented Salomon's mergers and acquisition department for several years. It couldn't be learned immediately whether Wachtell would continue to represent Salomon on matters other than the legal problems linked to the firm's activities in Treasury auctions.
In a press conference Aug. 18, Deryck C. Maughan, Salomon's new chief operating officer, said Wachtell began the internal investigation at Gutfreund's request on "July 6 or 8," well after Gutfreund and other top executives had learned of the firm's wrongdoing in late April.
["July 6 or 8" is a Saturday and a Monday]
Federal regulators weren't notified until Aug. 9. During the press conference, Maughan and Buffett said they didn't know exactly when Wachtell first learned of Salomon's wrongdoing, or when the firm first advised Salomon's management to contact regulators.
A Wachtell partner declined to comment when reached Aug. 18, and lawyers at the firm haven't returned any of several calls seeking details since then.
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August 31, 1991, The Washington Post, Salomon Eyes Benefits For Ousted Executives; Four May Get Millions Under Severance Plan, by Robert J. McCartney,
Four senior Salomon Brothers Inc. executives who resigned earlier this month in a major bond-trading scandal could still receive severance packages potentially worth millions of dollars, depending on the results of an internal investigation of the affair, the company said today.
The company's directors already have granted a special exemption that could make it possible for three of the four former executives to benefit from a lucrative bonus plan set up in 1988, even though they failed to fulfill the plan's requirement that they stay at the firm through the end of this year.
Under that program alone, former president Thomas W. Strauss is slated to receive at least $3.5 million, according to the company's 1991 proxy statement filed with the Securities and Exchange Commission in March.
In a separate development, Salomon Brothers said today that the law firm that has been advising it on the investigation was stepping aside "so as to get on with the task of forming a new team at Salomon."
The law firm - Wachtell, Lipton, Rosen & Katz, one of the most prominent on Wall Street - is to "cooperate fully" with Salomon "in an effective transition to other counsel over the next 45 days," Salomon Brothers said in a prepared statement.
The four former executives who may still receive hefty severance packages are Strauss, former chairman John H. Gutfreund, former vice chairman John Meriwether and former chief lawyer Donald Feuerstein. They all were forced to resign this month following the admission that they knew as early as April that Salomon had violated rules in U.S. Treasury securities auctions, but had failed to report the violations to regulatory authorities.
Sources said the board of directors will decide on the size of the severance packages for the four according to how much responsibility each individual bore for the firm's wrongdoing. At an emergency meeting Aug. 18 where Gutfreund stepped down, the board postponed fixing the severance packages until the inquiry showed whether "one of these people did right, and another did really wrong," said a source familiar with the situation.
If the investigation clears any of the executives, the board doesn't want them to suffer the loss of both their jobs and compensation they stood to receive, the source said.
The inquiry's outcome also will determine whether Salomon Brothers will continue to pay legal fees for the four and to give them office space for studying documents relating to the investigations and lawsuits surrounding the scandal, the company's spokesman said.
To date, circumstances for the four former senior executives are significantly better than those of the two former senior bond traders, Paul Mozer and Thomas Murphy, who were in charge of the trading desk where the violations originated. Both Mozer and Murphy were fired, and they also have been barred from receiving money under the 1988 bonus plan, are paying their own legal fees and are not receiving office space from the firm.
For the four executives who resigned rather than being fired, however, their financial loss so far is limited to the halting of their salaries, the company said in response to an inquiry about the severance packages. "Until Salomon has completed its own fact-finding analysis, it would be improper for the firm to make a decision on all other compensation matters, including eligibility for the Managing Directors' Compensation Plan established in 1988," a spokesman said.
Meriwether and Feuerstein are eligible to receive bonuses under the 1988 plan, but Gutfreund is not.
An expert on executive compensation said it was not unusual for directors to grant lucrative severance packages to executives even when they are forced to resign in scandals, because the directors are "consumed with the guilt" of dismissing people with whom they had worked for many years.
"They say, `The poor guy's going, he's humiliated, his career is just absolutely a wreck, so let's not make it worse,' " said Graef S. Crystal, editor of a newsletter on executive compensation and author of four books on the subject. Crystal said directors frequently reward executives in such cases by changing rules, such as by amending the date when stock options may be exercised, or simply "by writing fat checks."
In the case of Salomon Brothers, however, Crystal questioned whether such severance packages were justified for any of the executives who were responsible for the scandal.
"The question is, why should you give these guys a nickel of severance? They've caused the shareholders hundreds of millions of dollars of losses. They've imperiled the livelihood of 9,000 employees. You could say they should be brought before the shareholders and given a beating," said Crystal, who once worked as a consultant advising Salomon Brothers and others on executive pay issues.
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September 5, 1991, The Boston Globe, Buffett endorses tougher regulation Salomon chief apologizes for firm's manipulations, by Peter G. Gosselin, Globe Staff,
WASHINGTON -- The new chairman of Salomon Brothers yesterday apologized for his firm's manipulation of the government debt market, and legislators and regulators wrangled over what, if anything, to do to prevent similar scandals in the future.
Warren E. Buffett, the billionaire Nebraska investor and major Salomon shareholder who assumed control of the New York investment house when its top executives resigned in disgrace last month, endorsed congressional efforts to toughen regulation of the market on which the government depends to finance its multitrillion-dollar debt.
"I have no problem with tough rules, tough cops and tough prosecution," Buffett told the House telecommunications and finance subcommittee, which conducted the first congressional hearing on the case since news of the manipulation broke last month.
Subcommittee chairman Edward J. Markey (D-Mass.) said Buffett's comments were an endorsement for quick legislative action to tighten controls over the huge market for government securities. Markey wants new rules governing sales practices and internal operations of firms such as Salomon, expanded powers for the Securities and Exchange Commission and tougher penalties for violations.
Bush administration regulators, who testified separately before Markey's panel, sought to dampen demands for stricter regulation, saying that swift moves could upset the market.
While officials with the Treasury, Federal Reserve and SEC called for prosecution of those involved in the scheme, they advocated lengthy studies of the case before any action is taken. Their stand sets the stage for a struggle with a regulation-minded Congress.
"Though I am deeply concerned about recent revelations . . . I do not believe that the government securities market is broken in any fundamental way," Fed vice chairman David W. Mullins Jr. told the panel. Mullins said that there was no rush for Congress to pass new laws regulating the market, an assessment that Markey labeled "unacceptable."
From their comments, it is clear that lawmakers, both Democrat and Republican, were disconcerted by the Salomon revelations. Having long been told that the market for government debt is self-policing, many seemed genuinely surprised that it could be manipulated and were furious with the Salomon officials involved in the scheme.
"Stripped of all the language of Wall Street bond traders, what the public wants to know is simply this: Are the American people being ripped off by a few aggresssive traders?" said Rep. Matthew J. Rinaldo (R-N.J.).
"They deserve nothing but a swift kick in the butt," Rep. Jim Slattery (D-Kan.) said of Salomon executives at the center of the scandal. Slattery pleaded with Buffett to deny former investment house chairman John Gutfreund and others severence pay or any legal assistance. "I hope to see them in striped suits sweeping the streets," he said.
In his testimony, Buffett provided new details of how Salomon traders violated federal rules against purchasing more than 35 percent of a government bond offering to corner the market and exact higher prices when they resold the bonds to other buyers.
Buffett said that in July 1990, then-chief trader Paul Mozer, frustrated he could not buy all the bonds he wanted, submitted a bid for well over 100 percent of the amount being offered. Treasury officials reacted by rejecting Mozer's bid and adding a rule prohibiting buyers from bidding for any more than 35 percent of an offering.
Buffett said that Mozer "in effect felt that Treasury was challenging him" with the new rule. He apparently reacted during a December 1990 bond auction by submitting a bid for 35 percent of the offering in Salomon's name and 12 percent in the name of a Salomon customer, an affilate of the investment house of S.G. Warburg & Co. Warburg never authorized the bid in its name and was never told of it.
Buffett said that Mozer made a similar unauthorized bid in another customer's name during an auction in early February. He later told Salomon executives that he had done so as a "practical joke" and had not intended to complete the purchase, Buffett said. But because of a mixup, the firm purchased $870 million of bonds in the customer's name.
Mozer stepped up the pace during a late February auction when he submitted two unauthorized customer bids as well as one in Salomon's name, a move that left the investment firm bidding for 105 percent and ultimately purchasing 57 percent of the offering. "It would have been interesting if they'd all been awarded to him," Buffett said wryly.
When Fed and Treasury officials began raising questions about the late-February bids, Buffett said that Mozer notified senior Salomon executives, who criticized him but failed to tell regulators what had been occurring.
Although regulators appeared to be closing in on the scheme, Buffett said that Mozer would not give it up, and during a late-May offering used unauthorized customer bids to buy almost 90 percent of an offering.
"It's almost like a self-destruct mechanism," Buffett said of the last purchases. "It was not the act of a rational man at all."
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September 5, 1991, Associated Press / Albany Times Union, Salomon Inc. Makes Move to Shift Blame,
Salomon Inc. on Wednesday revealed new details about its illegal bond bidding and sought to blame the violations on a renegade trader frustrated by government rules.
Salomon also said top management was unaware of violations beyond one made during a February Treasury auction until its outside law firm conducted an investigation in July.
The disclosures were contained in a 52-page statement to Congress, made in conjunction with the start of hearings into the Salomon cheating at which the firm's interim chairman, investor Warren Buffett, testified.
Salomon said the head of the firm's government trading operation knowingly skirted federal laws, lied to top management about the wrongdoing and may have arranged collusive deals with customers.
The violations focus on Paul Mozer, a managing director in charge of the government trading desk who was fired because of the scandal. His assistant, Thomas Murphy, also was fired.
Salomon has admitted breaking the law during Treasury securities auctions in December, February, April and May. The violations include entering bids in the names of customers without their authorization and failing to tell regulators promptly.
Salomon said Mozer several times deliberately sought to bypass a federal rule preventing firms from acquiring more than 35 percent of any government security issued at auctions.
Bids made by Mozer for 100 percent of a July 1990 auction led the Treasury to enact the limit, a step Mozer then criticized publicly.
In December, Salomon said, the firm placed a phony bid on behalf of Warburg Asset Management for $1 billion in four-year Treasury notes. Salomon said it is not clear whether Mozer - who was on vacation in Florida at the time - ordered the bid. Murphy denied ordering the bogus bid, Salomon said.
At a Feb. 21 auction of five-year notes, Mozer placed bids for 35 percent of the total notes offered for Salomon and 35 percent each for two customers - or bids for 105 percent of the issue. The customer bids were unauthorized, Salomon said, and the firm acquired 57 percent of the issue.
That action tipped off regulators - but not because of Salomon's unauthorized bidding but because the customers were affiliated and together would have acquired more than 35 percent of the auction, violating the Treasury's rule.
If Mozer had not chosen Warburg's name for the phony bid, it's possible the scheme never would have been disclosed, federal investigators conceded at a House panel hearing on the scandal.
"He pulled a name out of the hat - probably a name (he thought) would cause the least trouble," Buffett testified.
Salomon said a Treasury official called the firm about the bids, and at Mozer's instruction, Murphy told regulators a bid in Warburg's name should have been submitted in another name - Mercury Asset Management Co.
Mozer later modified the lie, telling a Mercury executive who was contacted by the Treasury that bid was mistakenly submitted in Mercury's name, according to Salomon's statement to Congress.
In late April, Mozer showed Salomon vice chairman John W. Meriwether a letter from the Treasury about the incident. Mozer, however, told Meriwether the Warburg- Mercury bid was the only unauthorized customer bid that had been submitted, Salomon said.
It was then that other top Salomon executives learned about the wrongdoing, but authorities weren't notified until early August. Meriwether and three others, including ex-chairman John H. Gutfreund, have resigned.
The Salomon statement offered no new explanation for the delay, even though Gutfreund and others had decided the misconduct should be reported. Buffett said the delay was "inexplicable and inexcusable."
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September 5, 1991, Associated Press / Albany Times Union, Practical Joke with $1B in Bonds Backfires,
Playing around with $1 billion in bonds wouldn't strike most people as funny, but on the Salomon Brothers Inc. trading floor it was considered a practical joke.
Salomon on Wednesday offered additional details about the incident, which it revealed last month along with other wrongdoing that has embroiled the Wall Street firm in a major scandal.
In a statement given to Congress, Salomon blamed the inadvertent bid for $1 billion in 30-year bonds - made in a customer's name during a Feb. 7 Treasury auction - on the head of its government bond trading desk, Paul Mozer.
Salomon said Mozer wanted to play a "practical joke" on an unidentified Salomon bond salesman who was retiring after the auction. The firm for the first time identified the customer as Pacific Management Co.
According to Salomon, Mozer arranged to have a Pacific Management employee submit the bogus bid for $1 billion in bonds to the salesman. Mozer intended to cancel the bid, have the money management firm complain that its bid was not filled and then "blame" the retiring salesperson.
But the joke unraveled when a clerk ignored a line that Mozer had drawn through the bid on a list prepared just before the auction, and the bid was placed with the Treasury Department.
Pacific Management ended up owning $870 million in bonds, Salomon said. Salomon quickly placed the bonds in the account of another customer - apparently without approval - to avoid some paperwork, Salomon said, and then purchased them outright.
Mozer, who also was accused of additional wrongdoing during other auctions, has been fired by the firm.
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September 5, 1991, The Washington Post, Salomon Says Trader Challenged Treasury; Firm Alleges Bond Dealer Evaded Rules, by Robert J. McCartney,
The billion-dollar bond trading violations that have rocked Salomon Brothers Inc. were primarily the work of a 36-year-old senior bond trader who repeatedly challenged the U.S. Treasury by evading rules that had been adopted specifically to constrain him, the firm said yesterday.
In its first detailed explanation of the scandal, the powerful Wall Street firm gave a report to a congressional subcommittee that described how trader Paul W. Mozer first broke the rules and then sought to cover his tracks by allegedly falsifying records and lying to his superiors in a frantic effort to avoid detection as federal regulators closed in.
Salomon Brothers' new chairman, Warren E. Buffett, told the congressional panel that Mozer's actions were almost "self-destructive." Company sources described Mozer as someone who "started feeling he was taking on the U.S. government."
"It was not the act of a rational man," Buffett told the House subcommittee on telecommunications and finance, referring to an allegedly illegal bond purchase by Mozer at a time when regulators' suspicions had already been aroused.
Attempts to contact Mozer for comment were unsuccessful. Messages left at his Manhattan and Long Island residences yesterday went unanswered. Messages also were left for his attorney, Lee Richards, who was out of his office.
Salomon's report failed to solve one central mystery: why four of the firm's top executives, including former chairman John Gutfreund, waited for more than three months to inform regulators that they were aware that Mozer had broken the rules.
Buffett suggested that only federal authorities wielding full investigative powers - such as the ability to grant immunity to witnesses and to subpoena information - would be able to determine why Gutfreund and the others had delayed. "People have clammed up on us as it's gone along," a company source said. It will be possible to get the full story only when "the people with the rubber hoses get through," said the source, who spoke on condition of anonymity.
The scandal at Salomon Brothers has cast a cloud over the integrity of the world's largest financial market, which trades $2.2 trillion in securities issued by the U.S. government to finance its debt.
Salomon Brothers had been the most aggressive and most influential firm trading in that market, and its violations have triggered calls in Congress for improved supervision by regulators.
The Salomon Brothers report, submitted as part of Buffett's testimony before the subcommittee, sought to bolster the firm's reputation by offering a full explanation of its violations and thus protect itself against possible financial punishments that could cripple the firm.
The 52-page report, based on information gathered by the firm's in-house lawyers and outside counsel, found that Mozer, with some assistance from three subordinates, had violated various government rules at five separate auctions of U.S. Treasury securities between December and May. At the time, Mozer was the managing director in charge of Salomon Brothers' Government Trading Desk, a job for which he had earned $4.75 million in 1990.
Company sources said the report was based in part on interviews conducted with Mozer before he was suspended on Aug. 9 when the firm first announced that violations had occurred.
Salomon Brothers said it had analyzed records of its own bidding at a total of 45 auctions, but it had found evidence of violations at only the five described in the report. Buffett acknowledged, however, that the inquiry was not yet complete.
As detailed in the report, Mozer used a variety of illegal practices in an effort to buy larger quantities of government securities than Salomon Brothers was allowed to purchase under the rules. His methods allegedly included falsely submitting bids for securities in the names of customers who had not ordered them, falsification of trading records and failing to divulge in full Salomon Brothers' holdings of securities, the report said.
In some of the auctions, especially in May when the violations were worst, the purpose was apparently to reap extra profits for the firm by effectively "cornering" the market in one type of security and thus commanding a premium price from other would-be buyers who could get the security only by buying from Salomon Brothers.
But company sources said Mozer also may have been motivated to show that he could get around rules - adopted by the Treasury in response to his own trading - that limited each Wall Street firm to buy no more than 35 percent of the available securities at any one auction. The Treasury adopted the 35 percent rule in response to Mozer's aggressive bidding in July 1990 at an auction of Resolution Funding Corp. bonds.
Mozer publicly criticized both the rule and the official who supervised the auction, Michael Basham, deputy assistant treasury secretary. The rule became known on Wall Street as the "Mozer-Basham rule," and Salomon Brothers sources said Mozer came to view future auctions as a personal contest between himself and Basham.
According to the report, Mozer first tested his ability to evade the rule at a December auction of four-year Treasury notes. In addition to submitting a Salomon bid for 35 percent of the available securities, the firm submitted another bid, for $1 billion more of the notes, but it did so falsely by telling the Treasury that the order was coming from a customer, Warburg Asset Management.
Although Mozer was on vacation in Florida on the day of the December auction, and his deputy, Thomas Murphy, was in charge of the trading desk, the report quoted Murphy as saying that he never ordered an unauthorized bid to be made and that Mozer called the desk several times that day.
In addition, Henry Epstein, the clerk who Salomon said subsequently arranged to falsify trading records, said he had "a general impression" that Mozer had issued the instructions.
The second instance in which Mozer submitted an unauthorized bid occurred two months later, Salomon said, at a Feb. 7 auction of 30-year bonds, in a bizarre incident that apparently arose as a result of a practical joke aimed at a Salomon Brothers salesman who was about to retire.
Mozer arranged for a client firm, Pacific Investment Management Co. (Pimco), to ask the salesman to submit a $1 billion bid for bonds that in fact Pimco did not want. The idea behind the joke was that the bid would not be made, and Pimco would then complain to the salesman.
Mozer apparently tried to prevent the bid from being submitted, but clerk Epstein misread a work sheet and the bid was submitted anyway.
Two weeks later, in the first incident to attract the attention of the regulators, Mozer submitted two unauthorized bids, each for $3.15 billion, at an auction of five-year notes, in addition to its own $3.15 billion bid, the report said.
The false bids were made in the name of Warburg and the Quantum Fund, another Salomon client. At this auction, because of the false bids, Salomon ended up with 57 percent of the available securities.
But by now, regulators had picked up hints of irregularities in the bond market and Mozer had to scramble to keep his trades from being discovered, the report said.
Mozer's trading desk received a call from the Treasury in March asking about the Warburg bid. Mozer and Murphy arranged for Murphy to provide a false story to Treasury that the firm had meant to submit the bid in the name of a Warburg subsidiary, Mercury Asset Management, the report said.
In April, however, Mozer received a copy of a letter that the Treasury sent to Charles Jackson, a senior director of Mercury, asking about the bid. In response, the report said, Mozer called Jackson and asked him not to respond to the Treasury's letter so as not to "embarrass" Mozer.
But Mozer's anxiety led him to go to his supervisor, John W. Meriwether, then a vice chairman of Salomon Brothers, and tell him he had made one unauthorized bid, the report said.
Meriwether "told Mr. Mozer that the matter was very serious and represented career-threatening conduct," the report said, adding that Mozer said that was the only violation.
Ignoring Mozer's request not to take up the matter with higher ranking executives, Meriwether "promptly" met with Thomas Strauss, the president of Salomon Brothers, and informed him. Soon afterward, Gutfreund and the firm's chief legal officer, Donald M. Feuerstein, were informed, the report said.
All four of these senior executives "have stated that they decided that Mr. Mozer's conduct should be reported to governmental authorities and discussed how this should be done," but "no final decision was made." In the end, the authorities were informed only in August, and Buffett has said the delay was "inexplicable and inexcusable."
In the most dramatic auction violation, in May, Mozer submitted a partially false bid and failed to notify authorities of Salomon Brothers' existing holdings of two-year notes. As a result, Salomon Brothers and its customers ended up with $10.6 billion out of about $11.3 billion of available notes, which led to losses on the part of other Wall Street firms and triggered widespread suspicion about Salomon Brothers' activities both on Wall Street and among regulators.
The SEC sent a letter to Salomon June 26 asking about the May auction, and the firm began an in-house investigation. Then, on July 8, the outside law firm of Wachtell, Lipton, Rosen & Katz was brought in when Salomon Brothers learned that the Justice Department also was investigating the May auction.
Gradually, Wachtell, Lipton gathered more information about Mozer's violations, and, on Aug. 6 and Aug. 7, the law firm advised senior management that "a prompt report" to the authorities and the public. But a press release issued Aug. 9 failed to disclose that top management had known of the February violation.
Ultimately, it took a warning letter from the Federal Reserve Board on Aug. 13 to force the company to admit that it had known for months of the violation.
Staff writer Kathleen Day contributed to this report.
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September 5, 1991, The Bond Buyer, Rep. Markey wants new rules this year for Treasury market; agencies urge delay. (Republican Edward J. Markey) by Vicky Stamas and Stephen A. Davies,
WASHINGTON -- The chairman of the House subcommittee studying reforms of the government securities market yesterday said he will press forward with legislation this year despite appeals by federal regulators for more time to study the implications of the recent Salomon Brothers Inc. bidding scandal.
"This area cannot wait that long," Rep. Edward Markey, D-Mass., chairman of the House Energy and Commerce Committee's subcommittee on telecommunications and finance, told a packed crowd at Congress's first hearing on reauthorization of the Government Securities Act of 1986 since Salomon Brothers officials revealed last month several instances of illegal bidding in Treasury auctions.
"We believe that we've been sufficiently attentive to the issue that we can move forward," said Rep. Markey, who spelled out six changes his panel's contemplating to the 1986 law, which expires in October.
Four top regulators appearing at the hearing called for an additional 90 days to study the Salomon situation before Congress moves on significant legislative reforms -- a period of time that probably would not expire before Congress adjourns for the year. Appealing for a delay were David Mullins Jr., vice chairman of the Federal Reserve Board; Richard Breeden, chairman of the Securities and Exchange Commission; E. Gerald Corrigan, president of the Federal Reserve Bank of New York; and Jerome Powell, assistant secretary for domestic finance at Treasury.
An aide to the Senate Banking Committee's subcommittee on securities, which scheduled a hearing on the government securities law for Sept. 11, had no comment on the question of a delay.
Meanwhile, the star witness at yesterday's hearing -- Salomon Brothers' new chairman, Warren Buffett -- told Rep. Markey he had no objections to several moves contemplated by the committee to tighten regulation of the government securities market in the wake of the bidding scandal that now plagues his firm. "I have no problems with tough rules, tough cops, and tough prosecution," Mr. Buffett said.
Rep. Makey said firms participating in the government securities market should be required to abide by standard internal procedures that act as a front line defense against illegalities.
Consideration should be given to some form of large trader reporting from customers in the market to gauge better where major positions are occurring, he said.
The Sec's general antifraud authority should be augmented to make it crystal clear that any fraudulent or manipulative activity in the auction process violates the federal securities laws, Rep. Markey also suggested.
Mr. Buffett said he also would not object to another of Rep. Markey's proposals -- to give the SEC authority to oversee the manner in which price and trading information gets to the public -- although he said he has seen no major problems in that area. "I'm not aware of big gaps," he said.
Rep. Markey also said the SEC should be given authority to write sales practice rules for the market and that consideration should be given to formalizing cooperation among the SEC, the Treasury, and the Fed over the marketplace.
But Mr. Buffett said yesterday that regulators may already have some simple but effective remedies within their graps to discourage socalled "note squeezes," and other illegal bidding in the market. He said any time regulators detect illegal bidding in any particular offering they should simply reopen the issue, in effect flooding the market. Such a move presumably would lower prices of bonds already on the market.
"I think if I were in the position of influencing policy, any time an issue appeared to be behaving abnormally, I would put the world on notice that Treasury will be coming back with $10 billion more of those notes," he said. "It wouldn't happen again."
Mr. Corrigan, in later testimony before the subcommittee, endorsed Mr. Buffett's suggestion. Mr. Corrigan also said he favors enhanced disclosure of quotes offered by primary dealers in govenment bond auctions, but said the general system of having primary dealers is "not at risk."
Mr. Buffett detailed a series of violations of Treasury auction procedures by firm officials, describing them as "inexplicable and inexcusable." He suggested much of the blame falls on the shoulders of the firm's chief government bond trader, Paul Mozer, particularly since Mr. Mozer continued to orchestrate illegal trades after federal enforcement officials were notified of Salomon violations.
"It was not the act of a rational man at all," Mr. Buffett said. "It's almost like a self-destructive mechanism."
In a statement accompanying Mr. Buffett's testimony, Salomon disclosed the names of several customers for whom it submitted unauthorized bids, including the Quantum Fund, Mercury Asset Management Co., Steinhardt Partners, Tudor Jones, and Tiger Securities.
He also walked panel members through a "practical joke" orchestrated by Mr. Mozer that backfired and resulted in the firm purchasing nearly $1 billion in Treasury notes.
Federal regulators testifying before the subcommittee acknowledged that the bidding violations by Salomon Brothers could prompt the need for tougher rules. Mr. Breeden said the review of the government securities market undertaken by the SEC, the Treasury, and the Fed should be completed over the next 90 days.
Mr. Breeden also acknowledged that the Salomon Brothers scandal had raised "serious questions" about the firm's conduct in the bond market. But he also praised the company for the measures it has taken so far, which include a reorganization of senior management as well as the ongoing cooperation with federal regulators.
David Mullins, the Federal Reserve Board's vice chairman, said while the Salomon episode was troubling, "it is not apparent that sweeping changes in regulation are warranted."
Mr. Mullins said government authorities have already tightened existing surveilland and enforcement procedures. Moreover, he said the bond market has continued to function efficiently in the wake of the probe into the scandal.
"The smooth functioning of this market in recent months demonstrates that there appears to have been no economically meaningful loss of confidence in this market as yet," Mr. Mullins said.
Still, he added, "it may well be that upon review, additional rules or reporting requirements or significant changes in the auction process" may be needed.
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September 6, 1991, The Washington Post, Trader Allegedly Sought Client's Cooperation on Bid;Salomon Dealer Said to Cite Embarrassment, by David S. Hilzenrath,
Last April, officials at Mercury Asset Management Co., a London investment firm, received an unusual plea from the head of the government securities desk at Salomon Brothers Inc. in New York.
Salomon Managing Director Paul W. Mozer, whom Salomon now places at the center of the government securities trading abuses at the firm, told Mercury officials Charles Jackson and Nick Ritchie that he had mistakenly bid on Treasury securities in Mercury's name, according to a report Salomon submitted to Congress this week.
By Salomon's account, Mozer submitted unauthorized bids for Treasury securities in the name of "Warburg," apparently a reference to Mercury's affiliate, S.G. Warburg & Co. This allowed Mozer to bid for a greater share of Treasury securities than Salomon was allowed, the firm said.
Mozer asked the Mercury officials not to report the error to the U.S. Treasury Department, which had sent a letter to Mercury and Mozer days earlier identifying a possible rule violation involving the bid, the Salomon report said. "Mr. Mozer requested that Mr. Jackson not embarrass Mr. Mozer with the Treasury," the report said.
Sources close to the investigation of the Salomon scandal indicated that neither Mercury nor S.G. Warburg told the Treasury Department about Mozer's calls.
Mercury's conduct after Mozer asked it to keep quiet is now being studied by government officials here. "The appropriate officials are reviewing that situation to determine what actions would be appropriate," a spokeswoman for the Treasury said yesterday.
The chief administrative officer for Warburg's U.S. operations, Donald Kittell, referred questions to Mercury officials in London yesterday. There, Mercury spokesman Simon Lewis declined to comment on the matter.
In testimony before a congressional subcommittee Wednesday, Assistant Treasury Secretary Jerome H. Powell said Salomon informed the Treasury of the unauthorized bid on Aug. 9.
In a February auction, Salomon bought $1.7 billion of Treasury notes ostensibly on behalf of "Warburg." Later, Salomon bought the notes from Warburg's account at the same price paid in the auction. Salomon ended up buying about 57 percent of the notes sold in the auction, Salomon said, far exceeding the 35 percent limit for any one bidder.
The Treasury Department began inquiring about the Warburg bid because, unknown to Mozer, Warburg had separately submitted a $100 million bid of its own. When that bid was combined with the false Salomon bid, Warburg would have exceeded the 35 percent bidding limit, Salomon said. Mozer answered an initial inquiry from the Treasury Department by saying that the Warburg bid should have been submitted in the name of Mercury, the Warburg affiliate, Salomon said.
On April 17, the Treasury Department wrote a letter to Jackson in London discussing a possible violation of the 35 percent rule, sources said. The government sent copies of the letter to other Warburg officials and Mozer.
The letter reflected the government's belief that Mercury had authorized the February bid Salomon placed in its name. When Mercury responded to the Treasury Department on April 25, it said nothing to disabuse the government of that notion, sources said.
In a separate development yesterday, Salomon's interim chairman, billionaire investor Warren E. Buffett, apologized to Tudor Investment Corp. for a statement to a congressional subcommittee Wednesday raising questions about Tudor's involvement in a bid placed by Salomon. Buffett said yesterday he did not "mean to suggest any wrongdoing on the part of Tudor."
Tudor complained in a statement Wednesday that Salomon "would speculate on Tudor's activities before a congressional committee with an incomplete understanding of the relevant facts and without Salomon Brothers ever having requested any information from Tudor about any aspect of the transaction."
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September 8, 1991, The Washington Post, Is This Any Way to Make a Market?; Critics Calling for Change Say Treasury Bond Auctions Have Long Been Open to Abuses, by Robert J. McCartney and Kathleen Day,
New York financier Jay Cooke wielded a tight grip over the market in U.S. government bonds. He and his allies routinely dominated the purchase of securities issued to finance the nation's debt. Eventually, an outraged competitor, the Morgan banking group, pressured the Treasury to break his monopoly.
That was how it was back in 1873, according to Ron Chernow's recent book, "The House of Morgan."
Today, another leading Wall Street firm, Salomon Brothers Inc., is under fire for doing much the same thing as Cooke. It said last week that its former top U.S. bond trader, Paul W. Mozer, arranged to control 94 percent of the government notes available in a May auction. Like Cooke, Mozer allegedly gained a big enough chunk of the market to set prices, and thus reap extra profits, if he wanted to. He has yet to tell the public his story about the events now under investigation by four federal agencies.
While Mozer never approached the influence that Cooke wielded, the similarity between their strategies highlights the extent to which the market for U.S. government securities has been a breeding ground for abuse and controversy for more than a century.
The Salomon Brothers affair also has focused attention on the regulatory role of the Treasury Department, which, some critics say, has grown too dependent on the Wall Street firms that buy the securities it issues.
The government securities market, dominated by a handful of firms and operating with much looser supervision and oversight than the stock market, has repeatedly been seen as marred by collusion among traders and illicit sales practices, while providing scanty information about prices for the public.
The Salomon Brothers violations also are drawing attention to the auction system the Treasury uses to sell new securities to raise cash. The system has for decades drawn criticism from economics professors, government officials and even some Wall Street executives.
The complaint is that the Treasury, by relying heavily in the auction on an exclusive club of middlemen known as primary dealers, permits and even encourages collusion and other abuses of the sort that Salomon Brothers has admitted.
Moreover, critics say, efforts in the past to reform the system have been stymied because of coziness between Treasury officials and the dealers, a closeness encouraged in part by a revolving-door syndrome in which executives and staff move back and forth between Wall Street and the Treasury.
Milton Friedman, the Nobel Prize-winning economist who warned publicly as early as 1959 that the auction system was flawed, says the market is dominated by "a cabal" of Wall Street dealers who earn profits "at the expense of the Treasury and the taxpayer." He and other critics favor another system, known as a "Dutch auction," in which the role of the primary dealers, or middlemen, would be drastically reduced.
"They {the Treasury} are paying more than they should because of the method they have chosen to auction," which relies on the primary dealers, Friedman said in an interview. "Once they have chosen that method, the cabal is inevitable."
Similar views also are expressed privately by many market experts on Wall Street, although they are reluctant to be identified for fear that their opinions could get them in trouble with their firms.
"It's been a growing problem. There is a `good old boy' network in the government securities market" that colludes to set prices, said a senior Wall Street executive who has been following the market for more than 15 years. "I would say that it happens not with regularity, but with some degree of frequency, that certain firms, if not explicitly, implicitly agree" on how to bid in the auction, he said.
The executive added that the problem did not come as a great surprise to him. "I've always had some questions in my mind as to whether the Treasury was using the best bidding methodology, and whether the methodology that was used was being efficiently and effectively policed, and carried out ethically," he said.
Dutch Auction Experiment
The Treasury experimented with using Dutch auctions in the early 1970s, under the guidance of then-Treasury secretary George P. Shultz, who had been influenced by Friedman's views when both taught at the University of Chicago. But after William Simon, a Salomon Brothers senior partner, replaced Shultz in 1974, the experiments were halted.
When asked last week to comment, Shultz referred a reporter to a recent Wall Street Journal article by Friedman, who wrote, "For all his admirable qualities, Bill Simon was too recently a bond trader on Wall Street to welcome an experiment vigorously opposed by professional government bond dealers."
Simon said he believes the current system is "very efficient," but that he cannot recall today, 17 years after the fact, why the experiment was stopped. He said he does remember that at that time he rarely made decisions on his own and that the choice would have been the result of discussions with two key deputies, Paul A. Volcker (later to become Federal Reserve chairman) and Jack Bennett. Both Volcker and Bennett were traveling last week and were unavailable to return calls.
The issues are critical because of the market's size - $2.2 trillion in securities outstanding - and importance. The tug of supply and demand in the market sets the interest rates that influence private rates - such as those on home mortgages and bank accounts - and other interest rates around the world.
Given its importance, many observers have pointed to the irony that such a large and influential market, in the world's leading free-market economy, is relatively secretive and dominated by a small number of players.
Calls for Regulation
One such critic is Securities and Exchange Commission Chairman Richard C. Breeden, who would like to see the same rules that apply to the stock market extended to the government securities arena. He has lobbied to get more control for the SEC over the government securities market under legislation now before Congress.
That legislation would renew and amend the Government Securities Act of 1986, which created a limited regulatory structure that applied to all banks and securities firms active in the business. It established for the first time that the Treasury was the rulemaker, and it fixed sales practices and capital requirements for firms.
In recent months, the Treasury has said that existing rules and oversight are adequate. But a senior Treasury official acknowledged last week, "We're all brought short by the Salomon admissions and prepared to take a fresh look."
The 1986 law was adopted in response to the failure of several unregulated government securities dealers. One of the collapses, of E.S.M. Government Securities Inc. of Fort Lauderdale, Fla., in 1985, triggered a series of savings and loan failures in Ohio and marked the beginning of the nation's thrift industry debacle.
While the new legislation may give the SEC and Treasury more oversight powers, there is no formal move under way to change the actual auction system itself. The Treasury says that it has reviewed the process many times and considered alternatives, but says that the current method is the best because it sells the securities at the lowest cost.
Points of Controversy
There are two characteristics of the system that have aroused particular controversy. One is the fact that securities are issued at different interest rates, according to what each buyer is willing to bid. The other, which is related to the first, is that the bidding is dominated by firms that are officially designated by the Federal Reserve Board as primary dealers.
The differences in interest rates bid at an individual auction are tiny, measured in hundredths of a percentage point. But they can mean the difference between profit and loss to the dealers, who routinely trade hundreds of millions, or billions, of dollars worth of securities.
Although the bond market has not been tainted by a major collusion scandal, the suspicion has always been present that traders shared information on their bidding plans.
Critics say that a result of the current auction system is a strong incentive for dealers to collude by swapping their bidding strategies before the auction. That increases their chance of bidding about the same as everybody else and thus minimizes the possibility that they will get stuck holding securities paying relatively low interest rates.
"It's important to know what other people's opinions are," said Vernon L. Smith, an expert on auctions who teaches economics at the University of Arizona.
The differences in interest rates received by different bidders also increase the importance of the primary dealers in the auction. While anybody - even an individual - can go to a Federal Reserve Bank on auction day and submit a bid, the overwhelming majority of investors use one of the 39 primary dealers to benefit from the dealers' inside knowledge of the market.
Smith, who suspects that dealers collude under the current system, said, "All they're doing is what comes naturally. It seems to me the important thing is for the government to structure the rules to make it harder to do what comes naturally."
The principal advantage of a switch to a Dutch auction, Smith and other critics say, is that all of the securities are issued at a single interest rate. In a Dutch auction, dealers submit different bids, and the Treasury accepts the most favorable until it sells all its securities. But everyone is paid the same interest rate, which is the highest one that the Treasury agrees to pay. Since everybody gets the same rate, the theory goes, there is no reason to collude, and no incentive for investors to place bids with dealers in hope of getting the best deal.
Defenders of the existing method, including Treasury officials, argue that the government loses some revenue under a Dutch auction because some buyers who were willing to accept a lower interest rate for the securities end up getting a higher rate.
But Friedman and Smith say that various empirical studies have suggested that the Dutch auction actually raises more revenue. That's because investors tend to bid a bit higher than otherwise in order to make sure they get as many securities as they want.
In 1976, two Treasury economists found similar results favoring a Dutch auction when they did a study of the Dutch auctions that the Treasury had conducted on an experimental basis in 1973 and 1974.
The Treasury, when asked about the study, said that a 1981 memo that turned up last week revealed that one of the study's authors, Anthony J. Vignola, later cited a methodological error in the study.
Vignola, now the chief economist at Kidder, Peabody & Co., said that he does not consider the study definitive, but that he thought it represented an important first step in analyzing whether the Dutch auction was preferable.
Vignola also said, and the Treasury confirmed, that the study was not made public because of opposition from his superiors, some of whom disagreed with the conclusions.
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September 10, 1991, Associated Press / The Boston Globe, Firm involved in $1b 'joke' suspends Salomon business, by Stefan Fatsis,
NEW YORK -- The investment company involved in a $1 billion "practical joke" bond transaction with Salomon Brothers Inc. suspended Monday its Treasury bond business with the scandal-tarnished firm.
Pacific Investment Management Co. is the latest Salomon customer to halt dealings with the firm because of admissions it violated federal rules governing auctions for government bonds.
The money manager, known as Pimco, participated in an attempted "joke" a Salomon bond executive wanted to play on a retiring saleswoman. But the joke flubbed and a bid for $1 billion in government bonds was made in Pimco's name.
Separately, a Justice Department official confirmed reports the government's investigation into Salomon and the Treasury bond market appeared to be widening.
The official, speaking on condition of anonymity, said federal prosecutors were conducting civil and criminal investigations along with the Federal Reserve Board, Securities and Exchange Commission and Treasury Department.
The investigation initially was led by the Justice Department's antitrust division to examine whether traders colluded to "squeeze" the market, or control enough securities to increase profits from their sale to investors.
Now, however, the US Attorney's Office in Manhattan and the Justice Department's criminal division are involved in the case, the official said.
A published report yesterday said prosecutors were studying the possibility of charges of securities fraud, mail fraud and conspiracy against Salomon. A Salomon spokesman declined to comment on the investigations.
John Carroll, head of securities and commodities fraud unit at the US Attorney's Office, also declined to comment.
Salomon last month admitted it violated federal rules at five separate Treasury auctions since December. Top executives, including former chairman John H. Gutfreund, have resigned in an overhaul of Salomon management.
Pimco suspended Salomon from government bond dealings indefinitely but plans to continue trading with the firm in other areas, including corporate bonds, mortgage-backed securities and equities. Pimco, of Newport Beach, Calif., manages $32 billion for investors.
"We respect their decision. We hope when they look at the extraordinary steps new management has taken they'll see fit to reinstate us when the time is right," Salomon spokesman Robert F. Baker Jr. said.
Pimco has admitted it played a role in the bid. William Gross, a Pimco managing director, did not return several telephone calls seeking comment.
In addition to Pimco, at least six states and several big customers, including the World Bank, have suspended dealings with Salomon.
Salomon said in a report to Congress last week that it made an inadvertent bid for $1 billion in 30-year bonds in Pimco's name during a Feb. 7 Treasury auction.
Salomon said Paul Mozer -- the former head of Salomon's government bond unit, on whom the firm has blamed much of its wrongdoing -- arranged to have a Pimco employee submit the bogus bid for $1 billion to the Salomon saleswoman.
Mozer intended to cancel the bid, have the money management firm complain that its bid was not filled and then "blame" the retiring saleswoman.
But a clerk misread a hand-written instruction from Mozer to cancel the bid and Pacific Management ended up owning $870 million in bonds, Salomon said.
Salomon transferred the bonds to another customer's account, apparently without approval, and then bought the bonds outright. It was unclear whether any part of the incident was illegal.
Mozer, who also was accused of additional wrongdoing during other auctions, has been fired by Salomon and is a central figure in the criminal and civil investigations.
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September 10, 1991, The Boston Globe, Kicking the dickens out of US bonds, by David Warsh, Globe Staff,
To the extent that Wall Street had a New York Yankees in the 1980s, it was Salomon Brothers. In many categories, the firm was simply the best trading organization there was. If its reputation for being a little -- well, hard-driving -- grew apace, it didn't seem to matter. After all, the firm wasn't even slightly involved in the insider trading scandals. Chairman John Gutfreund liked to brag that his firm was so good it didn't need to cheat. He gloried in the sobriquet bestowed on him by breathless Business Week: "The King of Wall Street."
Until last month. Then the US Treasury Department fell on "Solly" like a ton of bricks, charging that several of its traders had flouted governmental authority by rigging some auctions for US Treasury bonds. Gutfreund, resigned in disgrace. Mega-rich, squeaky-clean investor Warren Buffett of Nebraska, who had backed Gutfreund when he needed help against raiders, took over.
Herewith a guide to help understand the subtext of the story.
To begin with, it is a reasonable hypothesis that it was that old gang, the Brady Commission, now installed at the Treasury Department, which orchestrated the scandal overall. The government investigation ostensibly began when competitors complained in May of a Salomon squeeze on an auction of 2-year notes. But the Treasury quickly seems to have seized the opportunity to bust the "primary dealers," a powerful little cartel of 39 big bond buying firms that for decades has controlled the largest, deepest market in the world.
A little background. The Federal Reserve Bank of New York, which conducts the Treasury auctions, uses the enormous market in government debt to manage the money supply, buying securities from dealers when it wants to inject new money into the system, selling securities from its portfolio when it wants to sop up reserves. The dealer banks, the only customers authorized to deal directly with the New York Fed, evolved to make this an orderly process.
But with that peculiar mix of tradition and deference that is endemic to Wall Street, the dealer banks have clung to an outmoded underwriting procedure as a way of inflating their importance -- and their profits -- even stuffing their handwritten orders into a box. The system is "right out of Dickens," says one regulator. It is also made for abuse.
Once before, the US Treasury tried to change the procedure. A series of "dutch auctions," in which all securities are sold at a single price, run by undersecretary Jack Bennett when George Schultz was Treasury Secretary in Richard Nixon's second term, saved the government money. But when former bond-trader William Simon took over the Treasury under Gerald Ford, he put an end to the experiments.
In Salomon's Paul Mozer, the Treasury has a perfect foil. The 36-year-old wunderkind, head of the goverment bond-trading desk, apparently was a closet cowboy, who routinely pushed to the limits of what was permitted -- and then beyond. After the complaints in the May auction, government regulators quickly set a trap in the aftermarket in June -- and caught not just Mozer but his superiors as well.
The press? The results of the investigation were leaked to the Wall Street Journal, which did a bang-up job of following up. This is the way things are often done in Washington these days. The controversy over the safety in the nation's nuclear weapons facilities was amplified in much the same way. And the outrage over "hubris" quickly came to dominate the situation.
It will take weeks of canny investigating to reach an opinion of who exactly among the regulators had the overall conn of the situation -- the New York Fed, the Securities and Exchange Commission and the Justice Department were involved as well. And now US Reps. John Dingell (D-Mich.) and Edward Markey (D-Mass.) are piling on, seeking to accord a larger regulatory role to the SEC (which they oversee) at the expense of the Treasury and the Fed (over which they have little control).
But the Treasury Department has directed the New York Fed to speed up its plans to computerize US auctions, and the likelihood is that the days of the primary dealers are numbered. The big problem apparently is the transition from the old system to the new -- but that is a technical problem, susceptible to solution. So deep reform is coming to the bond market. Meanwhile, the leading bully on Wall Street has been clobbered. In short, the episode is a chapter in the development of kinder, gentler, more market-oriented and more patient financial system. The administration deserves more credit than it gets.
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September 10, 1991, The Washington Post, Salomon's John Gutfreund Most Definitely Knew Better, by Allan Sloan,
It's not safe to go on vacation in August anymore. Here I was sunning myself, far away from my word processor, when the Salomon Brothers Inc. scandal blew up and Chairman John Gutfreund was forced to walk the plank. Very inconsiderate of Salomon's new chairman, Warren Buffett, to feed Gutfreund to the sharks before Labor Day.
A month of Salomon mania notwithstanding, I still don't understand how on earth Gutfreund, who correctly predicted that some of Drexel Burnham Lambert Inc.'s and Michael Milken's sleazier junk bond activities would lead to disaster, managed to destroy himself by doing some of the same self-destructive things.
You expect someone like Gutfreund to display greed, ego and a hunger for power - that's the way people like Gutfreund, a veteran securities trader, usually behave. But utter folly? That's something you don't expect, especially since Gutfreund knew better. How do I know he knew better? Because years ago, he used to criticize the same practices that he ended up condoning at Salomon.
Starting in 1984, when I wandered into the junk bond universe, sources of mine at Salomon used to tell me about Gutfreund's table-pounding denunciations of Drexel and its now-fallen junk bond king, Milken. Years before Drexel-bashing became a popular sport, Gutfreund went around screaming that Drexel and Milken were rigging the junk bond market by locking up key issuers and key buyers of junk and that the whole thing would fall apart and cause a disaster. Right on, John.
Gutfreund also used to carry on about the failure of Drexel's management to control Milken who, among other things, never disclosed in any meaningful way that he and other Drexeloids owned stakes in key Drexel customers that seemed to get very special treatment from the firm. Right again.
After Drexel blew up, Gutfreund gloated - and rightly so - about how Salomon had emerged unscathed from the junk and insider trading scandals.
Oh, well. Having accurately predicted what would happen to Drexel and Milken, Gutfreund let Salomon do some of the same things that led to the destruction of Drexel and Milken.
As we now know, Salomon tried to rig parts of the government market by controlling all the bonds - the same thing that Drexel did with junk. Salomon is trying to put most of the blame on the now-departed Paul Mozer, who ran its government-bond trading desk. But Gutfreund spent much of his time on the trading floor. Even if he didn't know exactly what Mozer was doing, he must have had a pretty good idea. If everything was Mozer's fault - which is more than a little hard to believe - why didn't Gutfreund rein him in, or fire him? Heaven knows, Gutfreund fired enough people in his time.
Even worse, in my opinion, is that Gutfreund let key Salomon employees buy into an investment fund run by one of Salomon's biggest customers without making any meaningful disclosure to Salomon customers. This is absolutely nuts. Why? Because it creates a conflict of interest.
Think of it. Some Salomon employees had a direct, personal financial stake in having this fund get the best possible deal from Salomon. They didn't have a similar stake in having the California state employee pension fund, say, or a Minneapolis savings and loan get the best possible deal. Which customer do you think the Salomon trader is likely to work harder for? The fund in which he has a direct personal financial stake, or a regular customer? You get one guess.
This, of course, is why it was wrong for Drexel to let Milken and his associates own pieces of junk bond issuers and junk bond buyers. When you dealt with Drexel, you didn't know whose interest Drexel was serving.
When Salomon rigged the market in some two-year government notes, it wasn't just fun and games in which Salomon made money at the expense of rivals such as Goldman, Sachs & Co. and Nomura Securities Co. Even if the Treasury didn't get swindled by paying too high an interest rate, Salomon cheated all its customers outside the golden circle by making those securities more expensive than they should have been - and by making securities whose prices are tied to those securities more expensive.
If you wanted to play the junk game during Drexel's glory days, you pretty much had to deal with Drexel, because the firm influenced not only the big buyers of junk bonds, but also many of the big issuers. Even if Drexel was ripping you off and you knew it, it was practically the only game in town.
Not so with Salomon. The firm doesn't control the U.S. Treasury or the major issuers of corporate L bonds. You can do business in those markets without Salomon - and customers will do business without Salomon if they think they're being cheated.
So Warren Buffett's real problem isn't placating the government. You can do that by admitting guilt, blaming everything on your predecessor and offering up a few human sacrifices, as he has done. His real problem is convincing customers that Salomon has stopped cheating them. If he can't do that, Salomon might as well go out of business.
Why did Gutfreund do the same things he condemned Drexel for doing? Beats me. Some day soon, though, some congressional committee will probably subpoena the man and haul him in front of TV cameras. If he doesn't cop out by pleading the Fifth Amendment, maybe we'll all find out. Allan Sloan is a columnist for Newsday in New York.
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September 10, 1991, The Washington Post, Firm Halts Treasury Bond Deals With Salomon, by David S. Hilzenrath,
A California investment firm involved in a $1 billion "practical joke" that went awry at Salomon Brothers Inc. said yesterday that it had decided to suspend all dealings in Treasury securities with Salomon.
Pacific Investment Management Co. compared its relationship with Salomon to "a marriage gone sour," Dow Jones News Service reported. The firm, based in Newport Beach, Calif., said that it was accepting responsibility for its part in the practical joke and was not trying "to push it off on Salomon," Dow Jones said.
Meanwhile, another Salomon client, New York-based Tudor Investment Corp., declined to comment on Salomon's account that Tudor was sent information last April that could have alerted it to irregular bond trading activity in Tudor's name.
Last week, Tudor criticized Salomon for questioning its conduct in testimony to a congressional subcommittee - and Salomon quickly offered Tudor a public apology.
The issue revolves around a bid that a Salomon trader placed on Tudor's behalf on April 25 in an auction of five-year Treasury notes. Paul W. Mozer, the Treasury bond trader who Salomon said was chiefly responsible for the violations at the firm, placed a $2.5 billion bid on behalf of Tudor and related accounts, Salomon said. Tudor has said that was $1 billion more than Tudor had ordered.
The government awarded Tudor $2.1 billion of the notes, and on the same day Salomon bought $600 million of those from Tudor at the auction price, Salomon said.
If the $1 billion over the $1.5 billion that Tudor said it ordered was considered part of Salomon's bid on behalf of itself, then Salomon would have exceeded the government's limit on how much any one firm could bid.
Salomon said that the firm sent Tudor a routine daily confirmation statement reflecting both the initial $2.1 billion purchase for Tudor and the subsequent $600 million sale to Salomon.
Tudor spokesman Clyde Ensslin yesterday said he was "not in a position to discuss" what information Tudor received from Salomon about the April 25 transactions or what it did with the information.
Tudor also said last week it conducted an internal review after Salomon's activities in the April 25 auction were reported in the press on Aug. 15. The review "revealed no irregularities or improprieties in Tudor's conduct," Tudor said in a press release.
In testimony to a House subcommittee last Wednesday, Salomon said "a question exists" as to whether Mozer had an agreement with Tudor to place the higher bid and buy back the $600 million in notes. When Tudor objected, Salomon Chairman Warren Buffett said he had "no reason to doubt Tudor's statement that there was never any preauction agreement."
Salomon has admitted using several clients' names to bid on Treasury securities without the clients' authorization.
In the Pacific Investment case, the California firm became involved in bizarre events at Salomon in February, when Mozer asked one of its employees to submit a $1 billion bond bid to a Salomon employee as a practical joke.
The plan was that Mozer would stop the bid from being submitted to the government, and the Pacific Investment employee would then complain that the bid was not filled, according to Salomon.
The joke went awry when a Salomon clerk submitted it and Pacific Investment was awarded $870 million of bonds at the auction.
Pacific Investment said yesterday that while it was cutting off its bond business with Salomon, it would continue to deal with Salomon in stocks and other securities, Dow Jones said.
In a separate development yesterday, Buffett barred the company's energy-related commodities subsidiary from doing business with the controversial firm Marc Rich & Co., industry sources told Reuter.
Marc Rich & Co. of Switzerland is owned by Marc Rich, a commodities trader who fled the United States and faces criminal charges here.
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September 11, 1991, Chicago Sun-Times, Big Bonuses Told,
A trader at the center of the Salomon Inc. government bond trading scandal was paid more than $11 million in bonuses by the firm over the past three years, documents revealed Tuesday. Meanwhile, the first legislation proposing Treasury securities market reforms in the wake of the scandal was introduced in the Senate on Tuesday. The enormous bonuses Salomon paid the former head of the government trading desk, Paul Mozer, were revealed in a letter to a House panel investigating the scandal. According to the letter from interim Salomon Chairman Warren E. Buffett, Mozer was paid bonuses of $2.85 million for 1988, $3.85 million for 1989 and $4.6 million for 1990. As a managing director, Mozer received a $150,000 annual salary before bonuses. No bonus has been was paid in 1991 for the period during which Salomon admitted violating Treasury auction rules
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September 11, 1991, The Bond Buyer, Dodd offers bill to make auction deceptions subject to securities laws' antifraud provisions. (Christopher Dodd) by Vicky Stamas,
WASHINGTON -- Firms that use false or misleading statements in connection with bids in government securities auctions would face federal fraud charges and stiff civil fines under legislation introduced yesterday by Sen. Christopher Dodd, D-Conn.
The bill, sponsored by the chairman of the Senate Banking Committee's subcommittee on securities, is Capitol Hill's latest response to revelations by Salomon Brothers that it manipulated the market for Treasury securities earlier this year.
The measure would make clear that any false or misleading statements made in connection with bids for or purchases of government securities violate the antifraud provisions of the federal securities laws.
Under tough legislation passed last year, the Securities and Exchange Commission can levy hefty fines of up to $100,000 for each securities law violation by an individual and up to $500,000 for each violation by a corporation.
According to Sen. Dodd, whose subcommittee was scheduled today to begin two days of hearings on the Salomon case and broader issues facing the market, the bill will tighten oversight of traders.
Managers of government securities firms will be alerted that they have a clear responsibility to prevent wrongdoing by supervising their employees, he said, and the New York Stock Exchange and the National Association of Securities Dealers will gain more power to police the government securities market and develop examination procedures to test for compliance with the bill.
"This will greatly increase the likelihood that violations will be uncovered," said the senator, who this summer has shepherded through the Senate several provisions amending the Government Securities Act of 1986, which expires in August.
These would reauthorize the 1986 law, authorize new sales practice rules for government securities dealers, and direct the Treasury Department, the SEC, and the Federal Reserve to closely monitor the dissemination of government securities prices and report back on the need for legislation in that area.
But Sen. Dodd said yesterday that the Salomon Brothers case, which erupted after the Senate acted, has added a "new dimension" to the debate.
He said that none of the reports issued before the news of Salomon's conduct suggested that there were any problems or gaps in the regulation of the government securities auctions.
"The Salomon revelations have forced all of us -- the regulators and the Congress -- to take a long, hard look at the adequacy of existing laws, rules, and policies to prevent and detect abuses in the auction of government securities," Sen. Dodd said. "It also has forced us to take a fresh look at whether the existing auction structure provides for the issuance of government securities at the lowest possible cost to the American taxpayer."
Rep. Edward Markey, D-Mass., chairman of the House Energy and Commerce Committee's subcommittee on telecommunications and finance, is expected to propose a similar provision as part of a package of amendments he is drafting in response to the Salomon situation and the expiration of the government securities law, including a requirement for large trader reporting.
Rep. Markey said yesterday he will ask federal regulators to comment by mid-October on the legislation, which he wants Congress to enact before adjournment this year. Sen. Dodd, meanwhile, signaled he may be willing to wait until 1992 to enact some broader reforms, in response to requests by financial regulators for 90 days to study the issues. But the provisions already cleared by the Senate and his new antifraud legislation should be enacted now, he said.
In a related development, Salomon Brothers informed Rep. Markey in a letter that Paul Mozer, the firm's former government bond trader who was fired for submitting illegal bids at several Treasury auctions, earned a bonus of $4.6 million in 1990 in addition to his annual salary of $150,000. In 1989 and 1988, Mr. Mozer was paid bonuses of $3.85 million and $2.85 million.
However, Salomon said, Mr. Mozer was not paid any bonus for the auctions that are being investigated by the government. The firm also said it will not advance legal expenses to Mr. Mozer and other top executives who have resigned in connection with the Salomon scandal, including former Chairman John Gutfreund.
The firm also said it is unable at present to determine how much it earned in profits from the four Treasury auctions in which it has admitted to bidding irregularities, beginning with a Dec. 27 sale of four-year notes. Salomon said it has assigned accountants to determine how much the firm profited and will provide the information "as soon as it can developed in a reliable fashion."
The letter from Salomon was in response to a request from Rep. Markey, who asked interim Chairman Warren Buffett to provide details of the firm's bond market dealings.
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September 11, 1991, Associated Press / The Boston Globe, Salomon paid trader extra $6.6m Senate acts to close Treasury bidding gaps, by John M. Doyle,
WASHINGTON -- A trader at the center of the Salomon Inc. government bond trading scandal was paid $6.6 million in bonuses by the firm over the last two years, documents revealed yesterday.
Meanwhile, the first legislation proposing Treasury securities market reforms in the wake of the scandal was introduced in the Senate.
The enormous bonuses Salomon paid the former head of its government trading desk, Paul Mozer, were revealed in a letter to a House panel investigating the scandal.
According to the letter from Warren E. Buffett, interim Salomon chairman, Mozer was paid bonuses of $2.85 million for 1988 and $3.85 million for 1989.
Mozer, a managing director who received a $150,000 annual salary plus bonuses, was due to get a $4.6 million bonus for 1990, but Buffet said the Salomon board last week decided not to pay it.
Buffett's information came in reply to questions posed by Rep. Edward Markey (D-Mass.), chairman of the House finance subcommittee before which Buffett testified last week.
"No mathematical formula determined the amount of Mr. Mozer's bonus at the end of the year," wrote Buffett. "Assessment of Mozer's contribution to profit, however, had an important effect on the bonus that he was likely to receive."
Salomon last month disclosed it had violated legal limits in bidding during several recent Treasury auctions, sometimes by submitting bids in the names of customers without their approval.
The revelations resulted in the ouster of the firm's management and have spawned criminal and civil investigations of Salomon, as well as a broad probe of the multitrillion-dollar Treasury bond market.
Salomon has placed most of the blame on Mozer, claiming he knowingly skirted federal laws, lied to top management about the wrongdoing and may have arranged collusive deals with customers.
Mozer was fired because of the scandal, as was his assistant, Thomas Murphy. Buffett said Salomon will not be paying Murphy any more, either.
Salomon has admitted breaking the law during Treasury securities auctions in December, February, April and May. The violations include entering bids in the names of customers without their authorization and failing to tell regulators promptly.
The reform bill, introduced by Sens. Donald Riegle (D-Mich.) and Christopher Dodd (D-Conn.) would specify that fraudulent or manipulative practices in the Treasury auctions are a securities law violation.
The change would, in effect, expand Securities and Exchange Commission authority in the $2.3 trillion government securities market -- long considered the safest but also one of the least regulated in the world.
Richard Breeden, SEC chairman who has been lobbying Congress to widen his agency's authority over government securities, last week told Markey's subcommittee that under current law, the SEC can only step in when there are allegations of fraud. Current rules, however, limit what regulators can do to detect such fraud, Breeden said.
Because Treasury securities are backed by the government, oversight is less stringent than in markets for corporate stocks and bonds to keep costs low and volume high. That, in turn, made it easier and cheaper for the government to borrow money.
The Riegle-Dodd bill would clear up some of the current fuzziness over Treasury market violations and which regulator is in charge of them.
Similar proposals are being readied in the House by Markey and his subcommittee.
Buffett, Breeden and other regulators are slated to testify before the Senate Banking Committee, which Riegle chairs, today.
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September 11, 1991, Albany Times Union, Former Salomon Trader Received $11M in Bonuses,
A trader at the center of the Salomon Inc. government bond trading scandal was paid more than $11 million in bonuses by the firm during the past three years, documents revealed Tuesday.
Meanwhile, the first legislation proposing Treasury securities market reforms in the wake of the scandal was introduced in the Senate on Tuesday.
The enormous bonuses Salomon paid the former head of the government trading desk, Paul Mozer, were revealed in a letter to a House panel investigating the scandal.
According to the letter from interim Salomon Chairman Warren E. Buffett, Mozer was paid bonuses of $2.85 million for 1988, $3.85 million for 1989 and $4.6 million for 1990. As a managing director, Mozer received a $150,000 annual salary before bonuses.
No bonus has been was paid in 1991 for the period during which Salomon admitted violating Treasury auction rules.
Buffett's information came in reply to questions posed by Rep. Edward Markey, D-Mass., chairman of the House finance subcommittee before which Buffett testified last week.
"No mathematical formula determined the amount of Mr. Mozer's bonus at the end of the year," wrote Buffett. "Assessment of Mozer's contribution to profit, however, had an important effect on the bonus that he was likely to receive."
Salomon last month disclosed it had violated legal limits in bidding during several recent Treasury auctions, sometimes by submitting bids in the names of customers without their approval.
The revelations caused the ouster of the firm's management and have spawned criminal and civil investigations of Salomon, as well as a broad probe of the multi-trillion-dollar Treasury bond market.
Salomon has placed most of the blame on Mozer, claiming he knowingly skirted federal laws, lied to top management about the wrongdoing and may have arranged collusive deals with customers.
Mozer was fired because of the scandal, as was his assistant, Thomas Murphy. Buffett said Salomon will not be paying Murphy any more either.
Salomon has admitted breaking the law during Treasury securities auctions in December, February, April and May. The violations include entering bids in the names of customers without their authorization and failing to tell regulators promptly.
The reform bill, introduced by Sens. Donald Riegle, D-Mich., and Christopher Dodd, D-Conn., would specify that fraudulent or manipulative practices in the Treasury auctions are a securities law violation.
The change would, in effect, expand Securities and Exchange Commission authority in the $2.3 trillion govrnment securities market - long considered the safest but also one of the least regulated in the world.
SEC Chairman Richard Breeden, who has been lobbying Congress to widen his agency's authority over government securities, told Markey's subcommittee last week that under current law, the SEC can only step in when there are allegations of fraud. Current rules, however, limit what regulators can do to detect such fraud, Breeden said.
Because Treasury securities are backed by the government, oversight is less stringent than in markets for corporate stocks and bonds to keep costs low and volume high. That, in turn, made it easier and cheaper for the government to borrow money.
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September 11, 1991, The Washington Post, Fannie Mae Adopts Bond Safeguards; Dodd, Riegle Sponsor Bill to Stop Phony Bids in Treasury Auctions, by David S. Hilzenrath and Stan Hinden,
The Federal National Mortgage Association (Fannie Mae) yesterday said it is adopting new safeguards following disclosures by Salomon Brothers Inc. and other securities dealers that they repeatedly misled Fannie Mae in their efforts to buy its bonds.
Fannie Mae said that any securities dealers who mislead it in a similar way in the future will be disqualified from acting as intermediaries in the sale of Fannie Mae bonds, which it sells to provide financing for home loans.
Salomon said in congressional testimony last week that its traders "had a practice" of misleading Fannie Mae and other federal agencies as to the size of its customers' orders for securities issued by the agencies.
The practice was separate from the bidding abuses that Salomon admitted in the government securities market.
The size of the orders a dealer brings to the table is one factor that Fannie Mae and other agencies may consider when they decide how to apportion their securities among bidding dealers.
"This behavior is totally unacceptable," Fannie Mae Chairman James A. Johnson said in a press release. "These activities are wrong and cannot in any way be condoned or tolerated."
Salomon remains eligible to act as a middleman in the sale of Fannie Mae bonds, from which it earns commissions, said David R. Jeffers, Fannie Mae vice president for corporate relations.
Fannie Mae is still gathering information about the deception and has the option of disciplining individual dealers by awarding them fewer securities.
Fannie Mae believed there was some "hype" on the part of dealers but did not realize the extent of the exaggeration until Salomon first disclosed its conduct last month, Jeffers said.
Other firms came forward after Salomon to admit that they misled Fannie Mae, Jeffers said.
The deception does not appear to have caused losses for Fannie Mae or any buyers of the bonds, Fannie Mae said.
Meanwhile, on Capitol Hill, the first piece of legislation in response to the Salomon affair was introduced yesterday by Sen. Christopher J. Dodd (D-Conn.), chairman of the Senate securities subcommittee, with the support of Sen. Donald W. Riegle Jr. (D-Mich.), chairman of the Senate Banking Committee.
Dodd's subcommittee will open two days of hearings on the Salomon matter today.
The bill would make it illegal to submit phony bids in the auctions of Treasury bills, notes or bonds, and would prohibit the use of false or inaccurate information in the bidding process.
"It is absolutely essential that the integrity and efficiency of the government securities market be maintained," Dodd said.
Rep. Edward J. Markey (D-Mass.), chairman of the House subcommittee on telecommunications and finance, said yesterday he also plans to seek legislation to augment the Securities and Exchange Commission's anti-fraud authority and to require firms to adopt internal procedures to prevent future episodes of wrongdoing.
Both Dodd and Markey support the adoption of sales practices that will ensure customers are not misled when they buy securities that are based on government securities but are much more risky.
In a letter to Markey yesterday, Salomon Chairman Warren Buffett disclosed that the firm's former chief government bond trader, Paul W. Mozer, earned $11.2 million in bonuses in 1988, 1989 and 1990, on top of a $150,000-a-year salary.
Mozer was fired for putting in phony bids for government securities in the names of unsuspecting customers and for buying more securities than permitted.
Salomon said the bonuses had been approved by its board's compensation committee and were based on "an assessment of Mr. Mozer's contribution to profit..."
Buffett also told Markey that he would send him copies of Salomon's internal audits of the firm's role in 45 government auctions - although Salomon has admitted to wrongdoing in only five auctions.
The effect will be to provide more detailed information about Salomon's government securities business than has been available to date.
Buffett added, "We have instructed the company's lawyers to offer to conduct a 'walk through' meeting, showing the staff how these materials were assembled, organized and used."
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September 12, 1991, American Banker, Corrigan warns against stalling bank reform. (E. Gerald Corrigan),
WASHINGTON - Using the Salomon Brothers Inc. bond bidding scandal to delay action on a banking bill "would be a mistake," E. Gerald Corrigan, president of the Federal Reserve Bank of New York, told Congress.
In testimony prepared for delivery Wednesday to the Senate Securities Subcommittee, Mr. Corrigan said, "Some might look at the Salomon episode as a reason to further delay much needed progressive banking legislation.
"That, in my view, would be a mistake, which I hope we can avoid," he said.
Mr. Corrigan also attacked compensation practices in the financial sector as excessive, singling out pay for securities traders and foreign exchange traders.
Just an Old-Fashioned Guy
"Maybe I'm too old-fashioned, but I cannot see the merit of compensation practices that yield millions of dollars per year, for example, for individual securities or foreign exchange traders," Mr. Corrigan said in testimony centering on the Salomon Brothers bidding scandal.
Salomon Brothers, as reported, has disclosed that Paul Mozer, recently deposed as head of its government bond trading desk, got bonuses in 1988, 1989, and 1990, respectively, of $2,850,000, $3,850,000, and $4,600,000.
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September 12, 1991, The Washington Post, Salomon Saga, by Hobart Rowen,
In his effort to salvage Salomon Bros. Inc., from its self-inflicted wounds, Warren E. Buffett is adding respect for his candor to his reputation for investment wizardry. But even Mr. Clean may not be able to save the once honorable firm.
Buffett, now Salomon's interim chairman, has a new directive to employees: "Lose money for the firm, and I will be understanding; lose a shred of reputation for the firm, and I will be ruthless."
Keen on sports analogies, Buffett insists that every Salomon player now hit the ball "down the middle" of an imaginary tennis court, and avoid play too close to the sidelines - the boundary between legal and illegal acts. Reportedly, he has already killed one high-profit, legal deal that was too close to the "sidelines" for his comfort.
Buffett is a breath of fresh air on Wall Street; but for Salomon, his CPR may be too late. Congressional demands for significant, visible punishment are justifiable.
Things will never be the same for Salomon - or in the market for government securities - as a consequence of the Salomon scandal, in which a handful of scoundrels at the very top played games with billions of dollars of taxpayers' money.
They were caught not because government regulators were fast off the mark, but only because the fake-bidding excesses of Salomon trading desk manager Paul Mozer were "almost like a self-destruct mechanism," Buffett told Congress.
But the onus cannot be fobbed off on Mozer alone. Salomon chairman John Gutfreund knew about Mozer's illegal activities no later than April yet failed to disclose the situation to authorities in Washington until August. For Gutfreund, there is neither sympathy nor excuses.
The Salomon saga points up a clubby, dangerous relationship between Treasury and Federal Reserve regulators and a handful of Wall Street insiders. The self-policing regulatory system that had been worked out for Salomon and other "primary dealers" in government bonds has been exposed as the equivalent of a cozy cartel. Treasury officials indicate that at least one other firm may also be charged with illegal activities.
Buffett argues that it would be wrong to punish Salomon's new management for the mistakes of the old one. But at a minimum, the authorities must consider suspending Salomon as a primary dealer in government securities - if the current system of marketing them is continued - at least until federal investigations are completed.
Key congressmen on a House investigative committee were stunned to discover the inattention given by Gutfreund and other top executives to their trading-desk subordinates. Record keeping was primitive - only oral reports were required in some cases.
"There should not be a dime spent by the firm to defend the wrongdoers. These men should be in striped suits, sweeping up Wall Street," Rep. Jim Slattery (D-Kan.) told Buffett in hearings last week.
The next day, Buffett announced that Gutfreund and his team - who had resigned after covering up the illegal bidding scheme - would get no compensation, severance pay or reimbursement for legal expenses, breaking Wall Street tradition for the tender care of downfallen executives.
Gutfreund let Mozer continue to make faked bids in May, and Mozer had the audacity to rig bids for 105 percent of Treasury notes available for competitive bidding. Result: Salomon wound up controlling $10.6 billion out of $11.3 billion, an incredible 93.8 percent. The legal limit for any dealer is 35 percent.
Rep. Edward Markey (D-Mass.), a pioneer in trying to improve regulation in all securities markets, told Treasury, Fed and Securities and Exchange officials that "the way this has been responded to is totally unacceptable."
One revelation in Buffett's statement to Congress illustrates Markey's point. When Mozer in April discovered that the Treasury was alert to one of his phony bids in the name of Mercury Asset Management Co. and had written Mercury to inquire about it, Mozer told Mercury's Charles Jackson that the bid had been "mistakenly" submitted:
"Mr. Mozer requested that Mr. Jackson not embarrass Mr. Mozer with the Treasury and the Federal Reserve by responding to the Treasury's letter. {The letter did not ask for a response.} Mr. Mozer also apparently asked Nick Ritchie, Salomon's customer contact at Mercury, not to volunteer Salomon's `error' to the Treasury," Buffett said.
Jackson did respond to the Treasury letter, but didn't mention that Salomon's bidding in Mercury's name was unauthorized. The Treasury didn't follow up. Nor did the Fed, which had a copy of the Treasury letter. Why not? Treasury and Fed officials have a lot of explaining to do.
But cracking down on Salomon and on those regulators whose heads were in the sand is only part of the necessary remedy.
Steps will be taken to tighten regulation and increase record-keeping and surveillance in the government securities market. Buffett wisely counseled Congress: "We need tough rules, tough cops and tough prosecutors."
In addition, the Treasury needs to offer a convincing response to experts who say the present flawed system of selling government securities should be replaced with another method less susceptible to fraud and collusion among a handful of favored dealers.
The Bush administration and Congress must make sure that no one will ever again distort the $2 billion Treasury securities market the way Gutfreund allowed Mozer to do.
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September 14, 1991, The Economist (US), In bondage: the Salomon scandal,
WARREN BUFFETT, the temporary chairman of embattled Salomon Brothers,is a wily old charmer. Congress,furious at the firm's flouting of the rules for bidding in the Treasury bond market, has been questioning him eagerly. And yet in the past ten days he has had first the House and then the Senate Banking Committees eating out of his hand.
Mr Buffett needs more than charm to restore confidence in Salomon. The firm's share price has tumbled 30% since it admitted on August 9th to wrongdoing in several Treasury auctions since February. It has lost customers, and faces huge fines and legal claims. Gerald Corrigan, president of the New York Fed, has confirmed that its status as a primary Treasury-bond dealer is under review. Every day seems to bring new allegations of rule violations and cover-ups by Salomon's former chief, John Gutfreund.
Mr Buffett told legislators on September 11th that, at a meeting in June with Treasury officials to discuss Salomon's alleged short squeeze on the market in May, Mr Gutfreund promised the firm's co-operation and denied knowledge of any impropriety. He also stayed mum on a fake bid in the February auction, about which he had known since April. That silence remains baffling. Then, Mr Gutfreund could probably have passed off the February fakery as a minor mistake and kept his job with no more than a reprimand.
Another baffling silence is that of Mercury Asset Management, the branch of S.G. Warburg in whose name Salomon submitted the fake February bid. When consulted by the Treasury, it did not immediately say it had not made a bid. It transpires that Paul Mozer, the disgraced Salomon bond-trader who submitted the bid, asked Mercury to cover for him. Warburgs is being summoned by the Treasury and the Federal Reserve to explain why it agreed.
This episode reinforces suspicions that collusion in the Treasury-bond market may have been widespread. Richard Breeden, chairman of the Securities and Exchange Commission (SEC), told Congress on September 11th that a "distressingly large" number of firms have been breaking the rules. Congress is considering changing the structure of auctions. And the Treasury has announced four changes to its running of auctions:
* It will require customers to verify large, winning bids prior to settlement and their receipt of the bonds. This is aimed at ensuring the authenticity of bids placed on behalf of a customer by a primary dealer.
* It will release details of its quarterly borrowing needs two days ahead of each auction, before its routine soundings about market demand for government bonds.
* It has created a joint auction-surveillance team with the Federal Reserve and the SEC.
* Along with the SEC, it Will speed up automation of auctions. This would give the Treasury access to a wider range of bidders than primary dealers. It could also improve regulation of the secondary market in government bonds.
These changes go most of the way to addressing congressional concerns about Treasury auctions. But some members of the committees that oversee the securities industry have a hidden agenda: their plans for the current round of banking-reform legislation. Edward Markey, chairman of the House Energy and Commerce subcommittee, and his full committee chairman, John Dingell, want to bar banks from the securities industry. Notions of regulatory incompetence in the Salomon scandal may give them a new weapon.
The House energy committee's version of the banking legislation, due to be taken up next week, will remove the Fed's powers to allow banks to expand their securities businesses. Instead, all banks would have to put their securities business in separate affiliates. Rather than bear that expense, banks might prefer to stick to banking.
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September 15, 1991, The Boston Globe, Wowing those clients,
You have to hand it to Idea Management of Stoneham, one of the firms charged by the Federal Trade Commission last week for preying on amateur inventors by taking fees to promote their products -- and then failing to successfully market any of them. Idea Management actually conceded to the FTC that of its 2,132 clients in the past five years, only four ever received more money from their product than they paid Idea Management in fees. If you're thinking well, at least four persons got something useful from the company, try this: the FTC responds that according to its calculations, not a single one of Idea Management's clients came out ahead. Yet, declared president Suzanne Kameese after settling with the FTC, her company's "services will continue uninterrupted and at the same high level of quality." What was that again? To the Cleaners
Finally: an investigation by state Attorney General Scott Harshbarger into a scam women have known about for years: It costs more -- usually two or three times more -- to get a woman's shirt laundered than a man's shirt, even when they're basically the same. At one Beacon Hill drycleaner's, the same shirt was brought in once by a female staffer (price quoted for laundering it: $3) and once by a male staffer (price quoted for laundering it: $1.50.) Obvious moral: Only men should take in the drycleaning. Then tie them up
Seen on a billboard along a highway between Spartanburg and Greenville, S.C.: "If you took all the economists in the world and lined them up end to end . . . it would be a good thing." Keep the change
We know bonuses are the biggest part of many executives' salaries, but check out these numbers: Paul Mozer, the former head of Salomon Brothers' government securities trading desk who brought down on the firm the biggest scandal in its history, earned $150,000 in straight salary, plus the following bonuses, approved by chairman John Gutfreund: a $2.8 million bonus in 1988, a $3.8 million bonus in "89 and a $4.6 million bonus in "90. You have to wonder what the straight salary was for. Tips?
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September 16, 1991, The Washington Post, Salomon Blamed Illegal Bid on Error; British Client Was Told Not to Respond to Letter Sent by Treasury, by David S. Hilzenrath,
S.G. Warburg Group PLC, a London-based client of Salomon Brothers Inc., said yesterday it did not alert U.S. government officials to Salomon's unauthorized use of its name in an illegal bid for Treasury securities because Salomon told it the problem was a clerical error.
Warburg said it had accepted Salomon trader Paul Mozer's explanation that Salomon had caught the mistake and that Salomon would report the error to the U.S. Treasury Department.
"No one at ... Warburg had any reason to believe or suspect that what was described by a managing director of Salomon as a clerical error was in fact part of a pattern of improper or unlawful activities or that Salomon would not, as Mozer had committed to do, itself bring the matter to the Treasury's attention," Warburg said in a statement.
Salomon's aggressive trading practices in government securities are the subject of an investigation by government regulators.
Warburg representatives met in Washington last week with officials of the Treasury, the Federal Reserve Board and the Securities and Exchange Commission, who are investigating Warburg's conduct in the matter. Details of the talks were not released.
By Salomon's account, Salomon used Warburg's name without authorization to buy $510 million in Treasury notes last December and $1.7 billion of Treasury notes last February. When those bids were combined with others, Salomon violated a 35 percent limit on the amount of securities any one firm may buy at a Treasury auction.
The February bid caught Treasury officials' attention because a Warburg affiliate had bid in the same auction on its own, presenting the appearance of a potential violation of the 35 percent rule by Warburg itself. In April, the Treasury sent Warburg officials and Mozer a letter discussing the February Warburg bids.
Mozer, who has since been fired, asked Warburg officials not to "embarrass" him by answering the Treasury's letter, Salomon said this month in a report submitted to Congress.
Believing that Salomon was addressing the matter with the Treasury Department, Warburg "did not, when it acknowledged receipt of the Treasury's letter, point out that it had not in fact submitted any bid in the February auction," Warburg said.
Warburg said it did not learn Salomon had used its name improperly in the December and February auctions until Salomon disclosed its improper bidding activity last month.
Sources familiar with both transactions said that even before the Treasury Deparment sent the April letter, Salomon had sent Warburg account statements for the months of December and February that reflected the unauthorized movement of securities through Warburg accounts. A statement showing the purchase and sale of the $510 million of notes in December was sent to a "Mr. G. Sim" at Warburg offices in London, one source said.
Warburg spokesman Simon Lewis said last week his firm had no record of having received such account statements, but he added the firm had not conducted an exhaustive search.
Another Salomon client, Quantum Fund, also was sent a February account statement that might have raised alarms about Salomon's trading practices before Salomon's attempt to essentially cornered a May securities auction, sources said.
The statement included what Salomon has described as unauthorized securities purchases totaling $2.57 billion in Quantum's name, sources said. The statement showed the securities then being sold by Quantum Fund at the same prices. The securities that were moved through Quantum's account included $870 million in bonds that Salomon said it accidentally bought from the government in a practical joke that got out of control.
Quantum declined to comment last week.
In congressional testimony, Salomon said certain clients whose names were used in unauthorized transactions were sent account statements that reflected those transactions.
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September 16, 1991, Albany Times Union, Bond Dealer Claims Salomon Misled Firm,
S.G. Warburg, a government bond dealer tangled in the Salomon Brothers Inc. bidding scandal, said Sunday that it didn't alert regulators to an improper bid because a Salomon executive blamed it on a clerical error.
Warburg said Salomon's government bond chief, Paul Mozer, convinced the firm that the bid was an honest mistake and asked Warburg to allow Salomon to work it out with Treasury officials.
Warburg officials met with U.S. Treasury investigators Thursday and Securities and Exchange Commission officials Friday trying to explain why it hadn't mentioned the irregular bid before the Salomon scandal came to light.
It wasn't until August, when Salomon disclosed the illegal bidding, that Warburg and its affiliate, Mercury Asset Management, realized that Salomon had been using its name and had never told regulators about the so-called clerical error.
The bogus bid came to light after the Treasury sent Warburg a letter explaining that bids made by Warburg and Mercury would be considered as coming from the same firm. The letter noted a $3.15 billion bid submitted by Salomon for Mercury and a $100 million bid by Warburg at February's five-year note auction.
Mozer offered his explanation after Mercury asked him about the unauthorized $3.15 billion bid, which amounted to more than a third of the notes sold by the government at the February auction.
Mercury said it acknowledged receiving the letter from Treasury, but didn't mention the curious bid because it thought Salomon was correcting the matter with the Treasury.
In what promises to be a new wrinkle on the issue of media cross-ownership, Gannett Co.'s recent purchase of five daily papers in the Washington suburbs has prompted a challenge to the company's license to operate WUSA-TV, a CBS affiliate based in Washington. The current license is up for renewal on Oct. 1.
Two groups are fighting Gannett's application to renew the license on the ground that Gannett's ownership of the five dailies violates the Federal Communications Commission's rule against joint ownership of a daily newspaper and a television station in the same community.
The rule was adopted in 1975 to prevent any one party from exerting too much control over a community's sources of information and advertising.
The challenges also argue that Gannett's ownership of USA Today, a national newspaper that sells some local advertising for the edition that appears in the Washington area, aggravates the violation of cross-ownership rules.
For six months in 1990, copies of USA Today circulated in the Washington area included a weekly real estate section prepared by the five suburban dailies, but a USA Today spokesman said the section had not appeared for a year because of the slow real estate market.
Nynex, the telephone holding company that underwent one of the largest and longest strikes in 1989, said it had reached an unusual midcontract extension of its union contracts in an effort to avoid another disruptive labor dispute.
Details of the accord, which is expected to include a wage increase, are scheduled to be announced at a news conference today.
The participants will be representatives of Nynex's New York Telephone and New England Telephone units, and the Communications Workers of America, the company's principal union, as well as the International Brotherhood of Electrical Workers, the smaller union.
Nynex and the unions declined to disclose details until the news conference.
The agreement extends to August 1995 an accord that would have expired in August next year. It covers nearly 38,000 telephone technicians, installers, operators, repair workers and others.
POUGHKEEPSIE - IBM will shut down most operations at its three mid-Hudson Valley computer factories for five days in July, officials said.
The shutdown is a cost-cutting measure, spokesmen said. The move is expected to save on energy costs and encourage the 26,400 workers at the three sites to use vacation time instead of cashing out at retirement, spokesmen told the Poughkeepsie Journal.
IBM last idled mid-Hudson plants in the 1960s, spokesmen said.
James Monahan, spokesman at IBM Poughkeepsie, said the shutdown is not related to forecasts for computer demand next year.
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September 17, 1991, The Washington Post, $12 Billion Question: Is Cornering A Treasury Market an Illegal Act?; Intent Is Key Factor in a Tricky Wall Street Issue, by Kathleen Day,
Congress may not like it.
The public may think it stinks.
But cornering the market and squeezing prices is a fact of life in the government securities market, and it's legal under most circumstances, according to experts in securities and antitrust law.
The unfolding scandal at Salomon Brothers Inc., which was the subject of congressional hearings in the last two weeks, has focused debate on one of the more complicated issues of business law: When is cornering a market - acquiring enough of a security to control its price - illegal?
In theory, said Columbia Law School professor John Coffee, the answer is relatively straightforward.
Whenever a corner involves evidence of market manipulation - artificially interfering with supply and demand to force prices up or down - that's a violation of securities fraud laws.
Or whenever a corner involves evidence that two or more parties have agreed to restrict supply, fix prices or otherwise restrain trade, that's a violation of antitrust law. It's also a violation of antitrust law for an individual or firm to attempt to corner a market unfairly - by breaking trading rules or regulations.
In reality, however, proof that one corner is legal and another not, even if they appear identical, often rests on the motivation of the Wall Street traders or investors involved, Coffee and other securities lawyers said. And proving intent can be extremely tricky, they said.
But when a firm breaks government rules or laws in the attempt to orchestrate a corner, as Salomon apparently did in the May 22 auction for $12.25 billion in two-year Treasury notes, then that can serve as evidence of a malevolent frame of mind, establishing intent, they said.
In the May 22 auction, for example, federal regulators determined in late May and early June that Salomon and three of its customers had cornered 93 percent of the auction. They also determined that, because of that concentration in the hands of a few, a price squeeze occurred when the newly issued notes were resold in the days following the auction. Buyers caught in such a squeeze must pay a premium to purchase the securities.
Federal Reserve Board governor John LaWare told a Senate committee investigating the matter in June, "While ... the extent of concentration here was not typical, it was not that unusual. It was toward the high end of concentrations in a successful auction, but it was not just an event that only happens every five years by all means, at all."
When asked if there were anything illegal in the auction, he said at the time, "I don't think so."
The Fed and the Treasury changed their viewpoint radically on Aug. 9, however, when Salomon announced that Paul W. Mozer, the Salomon managing partner in charge of the firm's government securities desk, had violated trading rules in five auctions, including the one on May 22.
Specifically, Mozer had placed a bid for a customer without authorization to obtain a higher percentage of the auctioned notes for Salomon than Treasury rules allow, Salomon has said. What regulators had thought was a legal corner suddenly became suspicious.
In a 56-page report, Salomon detailed how prior to the auction Mozer discussed with three key clients - Tiger Management Corp., Quantum Fund and Steinhardt Partners - the possibility of Salomon lending them money, possibly as much as $15 billion in total, to bid on notes in the auction.
By providing such financing, Salomon would be given the clients' two-year notes as collateral. That would give Salomon control not only over the large block of notes it bought for itself, but also, at least temporarily, over the large block of securities it bought for its customers.
That, securities lawyers said, could put the trading firm in a position to squeeze prices up in the secondary market, where newly issued notes are resold.
In fact, Salomon ended up financing only Quantum, but days after the auction it purchased Tiger's entire $1.5 billion position. The financing of Quantum and the purchase from Tiger, coupled with Salomon's own holding, gave Salomon control of 93 percent of the securities sold to dealers at the auction.
Another indication of Mozer's intent may have come when he met shortly before the auction with Tiger officials over dinner at a New York restaurant, Le Refuge. According to Salomon, he apparently told the Tiger representatives that he expected "substantial customer interest" in the May 22 auction. Tiger said the discussion did not constitute a conspiracy or agreement to control the market. Government investigators are focusing on what actually took place at this meeting, sources said.
Mozer, through his attorney, and Quantum have declined repeated requests for comment. An attorney for Steinhardt Partners said the partnership "was not a party to any arrangement to corner the government securities auction."
Distinguishing between a legal and illegal corner is especially hard in the government securities market because the 39 primary dealers have a special status that gives them special access to information about the market.
Designated by the Federal Reserve Board, primary dealers must bid at Treasury auctions. While anyone is permitted to bid at such auctions, only primary dealers may bid on behalf of customers.
Many mutual funds, pension funds and other large institutional investors elect to bid through primary dealers rather than on their own to benefit from the dealer's expertise about the market - information on what price to bid and so on.
But customers seeking advice also augment a primary dealer's intelligence about the market by providing details about what they, as large bidders, are likely to demand at any given auction. This information is so valuable to primary dealers, in fact, that some dealers say they serve customers for that reason alone, given the slim or often nonexistent profit margins they earn in the process.
There is a fine line between using such information to advise clients about the market and using it to forge illegal bidding practices to gain control in a market and set prices, securities lawyers said.
Deciding when the line is crossed "is the $64,000 question," according to one government attorney, who spoke on condition that his name not be used.
For example, investigators looking into the meeting at Le Refuge will try to determine whether Mozer was performing a duty to clients by giving them informed advice and intelligence about the market, or whether he was sending them an illegal signal that if Tiger bid it would help make a corner possible.
"Nowhere is there an established body of rules and regulations as to what is and what is not proper ethics in bidding behavior," said a senior executive at a major Wall Street investment banking firm, who also spoke on condition his name not be used. "Nowhere is there any kind of guideline as to what is communicable between people."
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September 18, 1991, Albany Times Union, Salomon Scandal Probes Spread,
Securities regulators in 33 states and the District of Columbia said Tuesday they will conduct an investigation of the Salomon Brothers bond scandal.
Federal investigators already are conducting civil and criminal investigations into Salomon's admission that it violated rules governing Treasury securities auctions, as well as the government bond market at large.
States can revoke or suspend Salomon's license to sell securities within state borders. In previous cases, states have imposed heavy fines on firms as part of settlements allowing them to keep their licenses.
"The goal of this multi-state effort will be to simplify the inquiry of the participating states and to recommend appropriate remedies when the probe is completed," New Mexico Securities Division Director Nancy Smith said.
Salomon last month admitted it made illegal bids at Treasury auctions without customers' knowledge and bypassed a federal rule preventing bidders from acquiring more than 35 percent of any government security at auction.
Meanwhile, a published report Tuesday quoted unidentified Wall Street lawyers as saying that Paul Mozer, Salomon's former government bond desk chief, has approached the government about negotiating a deal.
However, the government and Mozer's lawyer, Lee Richards, disagree over whether some of the activities in question were crimes, The New York Times reported.
Salomon has blamed much of the illegal bidding on Mozer. Salomon executives have admitted they waited several months before reporting the violations to authorities.
Richards was said to be in a meeting and did not return a telephone call for comment.
Salomon already is under scrutiny from federal investigators in New York and Washington including the Justice and Treasury departments, the Securities and Exchange Commission, the FBI and the Federal Reserve Board.
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September 20, 1991, The Boston Globe, Salomon Brothers reveals two more bid violations, by Michael K. Frisby, Globe Staff,
WASHINGTON -- Salomon Brothers last night informed congressional officials that a review of their records has disclosed two additional instances when unauthorized bids were made for government securities.
The bids, according to congressional sources, were made last year on behalf of firms unaware that Salomon was placing them.
The purchases allowed Salomon to hide their own interest in the purchases and put them in a better position of controlling sales on the secondary markets, the sources said.
Last night, Salomon Brothers relayed this information to staff members of Rep. Edward Markey's Energy Committee's subcommittee on telecommunications and finance.
Markey, a Malden Democrat, last night confirmed the new infractions, saying, "The further revelations by Salomon Brothers underscores yet again the need for tougher regulations of the government securities market that needs to be overseen by tougher cops."
Further, Markey said the incidents illustrate that tougher reforms need to be passed immediately. "Congress can't wait until next year to pass reforms," Markey insisted.
In hearings on Sept 3d, government agencies overseeing the sale of government securities had asked that Congress delay any reforms until next year.
The new revelations were found during an investigation by the brokerage firm, the Securities and Exchange Commission, the Federal Reserve Bank of New York and the US attorney's office in New York.
Salomon officials told congressional aides that Paul Mozer, who was fired for his alleged involvement in previous violations, is also believed to be responsible for the latest infractions.
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September 20, 1991, Chicago Sun-Times, Salomon tells more cheating, by Rick Gladstone,
NEW YORK Salomon Inc. today disclosed more cheating in a Treasury auction bidding scandal that has engulfed the Wall Street powerhouse, and said it was likely to find additional violations.
In a one-page statement, Salomon said it promptly reported the misconduct, which involved submission of two unauthorized customer bids for Treasury securities by the firm's government bond trading desk.
The firm said the bids did not allow the firm to exceed a 35 percent purchase limit for a single government securities auction. Salomon again blamed the violations on individuals who already have been implicated in the scandal.
Salomon last month disclosed it violated federal rules governing auctions in the $2.2 trillion market for Treasury notes, bills and bonds at five separate auctions from December, 1990, through May.
Salomon did not identify the dates of the newly reported violations, which it said were discovered after reviewing documents from government authorities that were not in Salomon's files.
"It seems to us likely that still other instances of similar behavior will be uncovered in the future through our internal review or by the investigating authorities," Salomon said. "We have provided the details of these two instances of misconduct to the investigating authorities and will continue to do so as and if additional misconduct is discovered," the firm said.
The New York Times reported today that the discoveries include another instance of illegal bidding involving the S.G. Warburg Group PLC, whose name Salomon has already said it used illegally in other bids. A Salomon spokesman declined comment.
Salomon didn't identify the customers whose names were used without permission, but said "we have no reason to believe that persons other than one or more persons from the Government Securities Desk - already implicated in misconduct - were involved."
At the center of the allegations is Paul W. Mozer, the former head of Salomon's government bond desk, who was fired after the scandal was revealed. A top associate was fired, and several top Salomon executives, including Chairman John H. Gutfreund, resigned.
Salomon in several auctions in which it admitted wrongdoing said it violated the 35 percent cap on how much a single bidder can obtain. In one auction, Salomon and its customers controlled 94 percent of the securities issued.
The scandal has shaken investor faith not only in Salomon but in the entire process for the bidding of government securities, which are used to keep the government running and finance the public debt. It also has led to a widespread government inquiry and tighter rules by the Treasury Department.
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September 21, 1991, The Washington Post; Salomon Finds More Auction Improprieties, by Kathleen Day,
Salomon Brothers Inc., the scandal-ridden Wall Street investment firm, said yesterday it has found two more unauthorized bids for customers in Treasury auctions and that it expects to find more instances of such abuse.
"It seems to us likely that still other instances of similar behavior will be uncovered ... through our internal review or by the investigating authorities," the firm said in a statement.
The disclosure follows weeks of bad news for Salomon, which last month shocked Wall Street by admitting that it had broken Treasury rules - and possibly securities and antitrust laws - in at least five Treasury auctions in the past year. It also intensifies questions about Salomon's relationship with several of its largest customers, whose names were used in the phony bids.
In the wake of Salomon's admissions last month, the Securities and Exchange Commission, the Justice Department, the Federal Reserve Board and the Treasury are conducting substantial probes to determine the extent of possible price-fixing, collusion or other wrongdoing in the multibillion-dollar government securities market.
Salomon said yesterday that it discovered the two additional cases of abuse "after receiving documentation from governmental authorities that was not in the files of Salomon."
Presumably, the government obtained the documentation through its request, by letter and by subpoena, for thousands of pages of information from Salomon and other Wall Street firms and from large investors in government securities, sources said.
Salomon, saying it was acting at the request of the Justice Department, would not identify the customers in whose name the two newly reported instances of unauthorized bids were made, or any other details of the alleged wrongdoing. A spokesman for S.G. Warburg & Co., a London-based financial giant, said he had no knowledge about whether Salomon used accounts of his firm to submit the illegal bids just found, as was suggested in yesterday's New York Times.
Last month, Salomon admitted that on several occasions it had submitted bids for customers without their permission. The purpose in some instances appeared to be to circumvent Treasury rules forbidding any single bidder from bidding for or buying more than 35 percent of the bonds sold at any auction.
Salomon said the two unauthorized bids that it disclosed yesterday did not result in the firm's exceeding that 35 percent purchase limit, but it was silent about whether the firm exceeded the 35 percent bidding limit.
Salomon said yesterday it believes the two newly disclosed abuses were the work of the same one or two Salomon partners who, it has said, orchestrated the abuses disclosed last month.
The two partners, Paul Mozer and Thomas Murphy, who ran Salomon's government securities trading desk, were fired last month. They have been unavailable for comment.
Rep. J.J. Pickle (D-Tex.), chairman of the House Ways and Means oversight subcommittee, said he expects a full accounting of Salomon's latest revelations at hearings next week. "I wish I could say that this latest admission was shocking or surprising, but in reality it was only to be expected," Pickle said in a prepared statement.________________________________________________________________
September 21, 1991, Chicago Sun-Times, Salomon confesses to more violations, by Alice Cathcart,
NEW YORK Salomon Bros., the Wall Street trading house battered by scandal, said Friday it has discovered two more instances in which its employees made unauthorized bids for U.S. Treasury securities.
The brokerage, now at the center of several government investigations over its conduct in the $2.2 trillion Treasury market, admitted last month to violating government rules by making unauthorized and excessive bids in several auctions.
Several employees have been dismissed for the improper trading and four of Salomon's top executives, including chairman John Gutfreund, were forced to resign in disgrace.
The latest disclosure, made in a brief statement by the firm, said Salomon had discovered the new violations after receiving documents from government authorities that were not in the company's files.
"It seems to us likely that still other instances of similar behavior will be uncovered in the future through our internal review or by the investigating authorities," the statement added.
Salomon did not specify in the statement when the latest violations occurred but said they were committed by the same people on the firm's government securities desk who already have been implicated in misconduct.
Paul Mozer, chief of government securities trading for Salomon, was dismissed when the scandal first came to light, as was Salomon managing director Thomas Murphy.
Salomon said neither of the two latest unauthorized bids resulted in the firm getting more than the 35 percent of any one issue permitted under Treasury rules.
Outside analysts were not surprised by the new revelations.
Stock in Salomon Inc., the parent company, closed down 25 cents at $22.50.
The stock lost $1.25 Thursday and has fallen nearly 40 percent from its pre-scandal level of $36.625 on Aug. 8.
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*September 21, 1991, The Washington Post, Salomon Finds More Auction Improprieties, by Kathleen Day,
Salomon Brothers Inc., the scandal-ridden Wall Street investment firm, said yesterday it has found two more unauthorized bids for customers in Treasury auctions and that it expects to find more instances of such abuse.
"It seems to us likely that still other instances of similar behavior will be uncovered ... through our internal review or by the investigating authorities," the firm said in a statement.
The disclosure follows weeks of bad news for Salomon, which last month shocked Wall Street by admitting that it had broken Treasury rules - and possibly securities and antitrust laws - in at least five Treasury auctions in the past year. It also intensifies questions about Salomon's relationship with several of its largest customers, whose names were used in the phony bids.
In the wake of Salomon's admissions last month, the Securities and Exchange Commission, the Justice Department, the Federal Reserve Board and the Treasury are conducting substantial probes to determine the extent of possible price-fixing, collusion or other wrongdoing in the multibillion-dollar government securities market.
Salomon said yesterday that it discovered the two additional cases of abuse "after receiving documentation from governmental authorities that was not in the files of Salomon."
Presumably, the government obtained the documentation through its request, by letter and by subpoena, for thousands of pages of information from Salomon and other Wall Street firms and from large investors in government securities, sources said.
Salomon, saying it was acting at the request of the Justice Department, would not identify the customers in whose name the two newly reported instances of unauthorized bids were made, or any other details of the alleged wrongdoing. A spokesman for S.G. Warburg & Co., a London-based financial giant, said he had no knowledge about whether Salomon used accounts of his firm to submit the illegal bids just found, as was suggested in yesterday's New York Times.
Last month, Salomon admitted that on several occasions it had submitted bids for customers without their permission. The purpose in some instances appeared to be to circumvent Treasury rules forbidding any single bidder from bidding for or buying more than 35 percent of the bonds sold at any auction.
Salomon said the two unauthorized bids that it disclosed yesterday did not result in the firm's exceeding that 35 percent purchase limit, but it was silent about whether the firm exceeded the 35 percent bidding limit.
Salomon said yesterday it believes the two newly disclosed abuses were the work of the same one or two Salomon partners who, it has said, orchestrated the abuses disclosed last month.
The two partners, Paul Mozer and Thomas Murphy, who ran Salomon's government securities trading desk, were fired last month. They have been unavailable for comment.
Rep. J.J. Pickle (D-Tex.), chairman of the House Ways and Means oversight subcommittee, said he expects a full accounting of Salomon's latest revelations at hearings next week. "I wish I could say that this latest admission was shocking or surprising, but in reality it was only to be expected," Pickle said in a prepared statement.
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September 22, 1991, The Washington Post, When Wall Street Bond Traders Make Millions: How Much Is Too Much?, by Robert J. McCartney,
Wall Street is one of the few places on earth where an employee in his thirties could receive nearly $5 million for one year's work and still feel underpaid.
For his labors buying and selling U.S. government securities for Salomon Brothers Inc. during 1990, Paul W. Mozer, 36, now at the center of a major Wall Street scandal, received a $4.6 million bonus on top of his 150,000 salary.
Just two aisles over, however, another trader, Lawrence E. Hilibrand, 32, was doing much better. He received $23 million for his success in 1990 in carrying out a complex trading strategy called bond arbitrage.
Today, a month after Salomon Brothers was rocked by its disclosure that Mozer had engaged in illegal bidding practices, the affair is being blamed in part on bitter rivalries within Salomon fueled by the competition to get enormous bonuses, according to current and former executives of the firm.
Although Salomon says Mozer's primary reason for breaking the rules was a personal vendetta with the Treasury - he has not spoken publicly on the subject after being fired last month - others suspect that he also was driven by the desire to shine more than other executives at the firm, and thus improve his chances of boosting his paycheck.
"The compensation system at Salomon Brothers was working so that, if one area on the floor worked better, it got paid more. He {Mozer} looked at Larry Hilibrand and thought, he got 23 {million}, I want to get 23," said a former executive of the firm who knows both men.
In the wake of the Salomon Brothers scandal, federal regulators, Congress and the public are questioning whether Wall Street can justify the mammoth pay packages that it customarily gives its top executives.
Some regulators and members of Congress ask whether traders such as Mozer are being compensated for skills that are all that valuable, or whether they merely benefit from a system that channels hundreds of billions of dollars of business through a few securities firms and enables people to reap big profits by taking a tiny slice from each transaction.
The current system of rewarding performance with huge amounts of money can encourage traders to take excessive risks, or to cut corners legally or ethically, these officials say.
"Maybe I'm too old-fashioned, but I cannot see the merit of compensation practices that yield millions of dollars per year, for example, for individual securities or foreign exchange traders," New York Federal Reserve Bank President E. Gerald Corrigan told a Senate committee investigating the Salomon Brothers affair.
Corrigan himself earned $231,500 last year for heading the institution that, among other things, conducts the auctions of Treasury securities where Salomon broke the rules.
While saying he was "under no illusions" that more conservative pay policies by themselves would prevent future abuses, Corrigan said the current pay system encourages people like Mozer to cross the line into wrongful behavior.
"Human nature being what it is, compensation practices that hold out the potential for millions of dollars of annual income seem to me to entail the clear danger that reasonable standards of prudence and ethics can, all too easily, be cast aside for the sake of writing that next {trade} ticket," Corrigan said.
Outside of the entertainment and sports fields, the securities industry is the only arena in American business where multimillion-dollar paychecks are routinely given to employees several rungs down the corporate ladder from the top.
About 90 Salomon Brothers employees were paid more than $1 million each in 1990, the firm's new chairman, Warren Buffett, told the Senate committee.
Mozer was at least four notches down the corporate hierarchy. His supervisor was a vice chairman - one of nine at the firm - who in turn had the president and chairman above him.
Hilibrand was even further down the ladder, but he benefited from a special pay arrangement in which his group of high-tech traders - who based their trades on results of extremely sophisticated computer analysis - received 15 percent of the profits that the group generated during the year.
The group earned about $400 million in profits for Salomon from its trading, so its members divided up $60 million, with Hilibrand getting the biggest single chunk.
In one of many fights over pay at the firm, other Salomon executives complained loudly about the special deal when they learned of it in December. One executive called the complaints "a mass uprising," but the deal went through anyway.
Buffett praised Hilibrand's work, saying that he "was the closest thing to a .400 hitter" - in baseball, an extremely good hitter - that Salomon had in 1990.
But Buffett acknowledged that some other executives received million-dollar bonuses despite doing mediocre work because the pay scale as a whole was inflated by earnings such as Hilibrand's.
"There is great talk about paying for performance there {at Salomon Brothers}. But on top of that, there was a tremendous amount of payment for nonperformance," Buffett said.
The principal talent that a trader like Mozer or Hilibrand brings to work each day is the ability to analyze the constantly changing, worldwide market in bonds, or interest-paying securities issued by governments or corporations.
In particular, that means that the trader recognizes when the myriad tugs of supply and demand create artificial, temporary differences in price among different bonds. That offers the opportunity to profit by buying the security when it is underpriced and selling it later when the price recovers.
Mozer performed that task from minute to minute, hour to hour, as he supervised 15 other traders and salesmen on the desk at Salomon Brothers that handled billions of dollars a day in trades of Treasury bonds and other U.S. government securities.
Hilibrand, who worked at one of the few serene spots in the generally frantic trading room, made investments that could take months or even years to earn a profit, and could involve simultaneous investments in markets in several countries.
Like all traders at Salomon Brothers, both Mozer and Hilibrand had to have a large tolerance for risk, because the investment house consistently bets more money in the bond market than any other firm on Wall Street. If market forces turned against these traders, and their firm suffers severe losses, their jobs could be in jeopardy.
"That place does not tolerate losses for long," a former Salomon executive said.
But the huge volume of trading at Salomon Brothers also created opportunities that allow its traders to profit just by skimming a little cream off the business, according to Wall Street executives and finance professors.
Samuel L. Hayes III, a professor of investment banking at Harvard Business School, said the large paychecks at Salomon Brothers were partly a result of "being at the right place at the right time."
"In a protected market, with a large amount of capital and the willingness to take risk that characterizes Salomon Brothers, you can play a very big role {in the market}. In a sense, that's sheer muscle," Hayes said.
But Hayes said brains also played a big role, particularly in the high-tech trading done by Hilibrand's group. By using complicated computer forecasts, he said, the firm provided a valuable service by helping clients to protect against losses on investments.
Defenders of Wall Street's pay practices point out that Salomon Brothers and other big firms also play a critical role in lending money to cover the federal budget deficit, and that very high pay levels also are found in sports and entertainment.
"Salomon is a major financier of the U.S. government," and deserves to earn a return for performing that function, said Howard A. Gabler, a codirector of G.Z. Stephens Inc., an executive search firm that specializes in the investment field. "Michael Jordan stuffs a ball in a hole and makes $16 million - what's the social justification for that?"
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September 24, 1991, The Boston Globe, Salomon working out the 'dents' Firm tells customers it will survive trading scandal, by Jolie Solomon,
NEW YORK -- Warren Buffett and other Salomon Brothers Inc. executives tried to reassure hundreds of the firm's biggest customers yesterday that it would emerge from its Treasury securities scandal as a powerful force on Wall Street.
In a meeting with some 300 customers at its headquarters here, Buffett, the firm's new chairman, and his team relied not only on statistics and legal arguments but also colorful analogies and a free lunch to get their argument across.
At one point during the meeting, which was linked by satellite to Salomon offices in Boston and around the country, chief operating officer Deryck Maughan compared the former managers of Salomon to drunk drivers, but said the firm had suffered only a "dent."
According to one person in the audience, Maughan told the crowd that the firm was like a high-performance car that had done some reckless driving and gotten "a dent," but had now acquired a "sober" driver and hoped to get its driver's license back and the dent "pulled out."
Many critics of Salomon might argue that the damage includes at least some bashed headlights and a ruptured fender. Neal Sullivan, Massachusetts' deputy secretary of state and chief of the securities division, attended the meeting in Boston and said that some in the group were a skeptical about Salomon's prospects. One attendee suggested that it would be some months before anyone will know whether Salomon would survive.
In the last month, the firm has admitted to substantial violations of Treasury securities trading rules, and there have been repeated revelations that indicate a cover-up and a pattern of wrongdoing. Big customers have abandoned Salomon and several civil and criminal investigations have been launched.
But Buffett and his two top officers took pains to suggest that the "worst is behind them," said Sullivan. Buffett suggested that the government would not file criminal charges because Salomon has cleaned up its act and is actively helping investigators. He also said Salomon would not go under because, unlike Drexel Burnham Lambert or E.F. Hutton, firms that died in other scandals, Salomon has not "circled the wagons and stonewalled."
The audience in Boston reportedly included representatives of Fidelity Investments, Massachusetts Financial Services and the Harvard University fund. They listened to the presentation through a satellite transmission and were then treated to a buffet lunch. A spokesman for Salomon said about 300 people had gathered in New York for the meeting, but refused to comment on the substance of the discussion.
However, according to audience members, Buffett said that Salomon will take an unspecified charge in the third quarter to cover expected legal expenses and possible damages, but that he sees no prospect of operating losses.
He said the firm had lost 4 percent of its customer base, but he said he expects to get many public pension funds, for example, back as clients, once the political and media attention dies down. Buffett said that the World Bank, which withdrew some business from Salomon, was planning to review the situation yesterday, and he intimated that that could be the first instance of a client returning to the fold.
Buffett also rebutted critics who have warned that Salomon, in selling off securities to raise cash, is greatly reducing its strength. He argued that the firm's balance sheet is down only from the historically high level it had reached this summer, but that it matches last year's level, retaining its position as one of the strongest on Wall Street.
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September 27, 1991, The Washington Post, Panel Told Of Treasury, Trader Clash, by David S. Hilzenrath,
The trader who allegedly orchestrated Salomon Brothers Inc.'s illegal bids for government securities clashed last year with a Treasury official who accused him of trying to "game the system," the official said yesterday.
The description of the confrontation between the Salomon trader, Paul W. Mozer, and Michael E. Basham, then deputy assistant Treasury secretary, offered a detailed picture of Mozer in action. Salomon officials have depicted him as a man driven by ego to flout the Treasury. Mozer himself has not spoken publicly since the illegal bidding at Salomon came to light last month.
Basham told a House Ways and Means subcommittee yesterday that in June 1990, Salomon bid for more than 100 percent of the notes the Treasury was offering in an $8 billion auction. Basham said Mozer was trying to "game the system" - to manipulate the process to ensure that Salomon was awarded the maximum possible share when the Treasury finished dividing the securities among competing bidders.
Basham said he called Mozer after the auction and asked him not to do it again. "I said, `Paul, quite frankly the nature of the process is designed to encourage you to bid a higher price than the next guy, not to try to game the system, and we would prefer that you not' " do it again, said Basham, who recently left the Treasury to work for the Wall Street firm of Smith Barney, Harris Upham & Co.
Mozer, who was fired as head of Salomon's government securities desk last month, did not make any promises, Basham said. Instead, he told Basham that "he hoped that no one else would find out about this," Basham testified.
Then, about a week later, Salomon again bid for more than 100 percent of the securities being offered in a government auction. Another unnamed securities dealer also bid for more than 100 percent.
The Treasury rejected both of those bids. The unnamed dealer apologized, but Mozer was not ready to take no for an answer, Basham said. Mozer threatened to have John H. Gutfreund, the Salomon chairman who resigned last month amid the scandal, go over Basham's head and call the Treasury secretary, Basham said.
At the time, the excessive bids were not illegal. But soon afterward, the Treasury adopted a policy known as the Mozer-Basham Rule that prohibited firms from bidding for more than 35 percent of the securities offered for sale in an auction. In a series of later auctions, Mozer circumvented the new rule by placing unauthorized bids in the names of Salomon customers, Salomon has reported in news releases and congressional testimony.
In other testimony yesterday, Securities and Exchange Commission Chairman Richard C. Breeden said his agency is investigating whether Salomon's improper activity in the government bond market extended to trading in foreign currencies.
"I would certainly agree that it is possible to manipulate interest rates and seek to profit from that manipulation in the foreign exchange market," Breeden said.
Deryck Maughan, Salomon chief operating officer, said he doubted "very much" that advance knowledge of the prices on longer term securities such as the ones Mozer was buying "would allow you to make a killing in the foreign exchange market."
In addition to breaking rules in Treasury auctions, Salomon has admitted that it misled government sponsored enterprises such as the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac) when placing orders for their bonds. At yesterday's hearing, an executive from Freddie Mac said that 18 of the brokerage firms that act as dealers for its bonds have reported that they exaggerated the size of their customers' orders. The inflated orders might have helped the firms trade a higher volume of bonds and earn more commissions.
Members of the committee excoriated Fannie Mae and Freddie Mac for not penalizing Salomon and for continuing to do business with it.
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September 27, 1991, Albany Times Union, Salomon Foreign Desk Probed,
WASHINGTON - Securities and Exchange Commission Chairman Richard Breeden told Congress Thursday that the agency is investigating foreign exchange trading operations at scandal- plagued Salomon Inc.
"We are looking. The answer is 'yes,'" Breeden said in response to questions from the oversight subcommittee of the House Ways and Means Committee.
The subcommittee chairman, Rep. J.J. Pickle, D-Texas, said it was investigating any possibly illegal links between the Salomon's foreign currencies desk and its government securities operation, which has been implicated in a number of Treasury auction irregularities.
Paul Mozer, a Salomon managing director who was fired after the scandal surfaced, headed both the government securities and foreign exchange desks, Salomon officials told the panel.
In other developments at the hearing, the fourth on Capitol Hill this month concerning Salomon:
*A Federal Home Loan Mortgage Corp. official said two-thirds of the firms that sell its bonds inflated customer orders;
*A Federal Reserve Board member said Salomon's activities had caused "very little, if any damage" to the government securities markets;
*Pickle threatened to subpoena top Salomon officials if they were not more forthcoming in the information supplied to Congress.
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September 27, 1991, The Washington Post, Panel Told Of Treasury, Trader Clash, by David S. Hilzenrath,
The trader who allegedly orchestrated Salomon Brothers Inc.'s illegal bids for government securities clashed last year with a Treasury official who accused him of trying to "game the system," the official said yesterday.
The description of the confrontation between the Salomon trader, Paul W. Mozer, and Michael E. Basham, then deputy assistant Treasury secretary, offered a detailed picture of Mozer in action. Salomon officials have depicted him as a man driven by ego to flout the Treasury. Mozer himself has not spoken publicly since the illegal bidding at Salomon came to light last month.
Basham told a House Ways and Means subcommittee yesterday that in June 1990, Salomon bid for more than 100 percent of the notes the Treasury was offering in an $8 billion auction. Basham said Mozer was trying to "game the system" - to manipulate the process to ensure that Salomon was awarded the maximum possible share when the Treasury finished dividing the securities among competing bidders.
Basham said he called Mozer after the auction and asked him not to do it again. "I said, 'Paul, quite frankly the nature of the process is designed to encourage you to bid a higher price than the next guy, not to try to game the system, and we would prefer that you not' " do it again, said Basham, who recently left the Treasury to work for the Wall Street firm of Smith Barney, Harris Upham & Co.
Mozer, who was fired as head of Salomon's government securities desk last month, did not make any promises, Basham said. Instead, he told Basham that "he hoped that no one else would find out about this," Basham testified.
Then, about a week later, Salomon again bid for more than 100 percent of the securities being offered in a government auction. Another unnamed securities dealer also bid for more than 100 percent.
The Treasury rejected both of those bids. The unnamed dealer apologized, but Mozer was not ready to take no for an answer, Basham said. Mozer threatened to have John H. Gutfreund, the Salomon chairman who resigned last month amid the scandal, go over Basham's head and call the Treasury secretary, Basham said.
At the time, the excessive bids were not illegal. But soon afterward, the Treasury adopted a policy known as the Mozer-Basham Rule that prohibited firms from bidding for more than 35 percent of the securities offered for sale in an auction. In a series of later auctions, Mozer circumvented the new rule by placing unauthorized bids in the names of Salomon customers, Salomon has reported in news releases and congressional testimony.
In other testimony yesterday, Securities and Exchange Commission Chairman Richard C. Breeden said his agency is investigating whether Salomon's improper activity in the government bond market extended to trading in foreign currencies.
"I would certainly agree that it is possible to manipulate interest rates and seek to profit from that manipulation in the foreign exchange market," Breeden said.
Deryck Maughan, Salomon chief operating officer, said he doubted "very much" that advance knowledge of the prices on longer term securities such as the ones Mozer was buying "would allow you to make a killing in the foreign exchange market."
In addition to breaking rules in Treasury auctions, Salomon has admitted that it misled government sponsored enterprises such as the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac) when placing orders for their bonds. At yesterday's hearing, an executive from Freddie Mac said that 18 of the brokerage firms that act as dealers for its bonds have reported that they exaggerated the size of their customers' orders. The inflated orders might have helped the firms trade a higher volume of bonds and earn more commissions.
Members of the committee excoriated Fannie Mae and Freddie Mac for not penalizing Salomon and for continuing to do business with it.
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September 30, 1991, Albany Times Union, Top Pay Issue in Salomon Bond Scandal,
Wall Street is one of the few places on earth where an employee in his 30s could receive nearly $5 million for one year's work and still feel underpaid.
For his labors buying and selling U.S. government securities for Salomon Brothers Inc. during 1990, Paul W. Mozer, 36, now at the center of a major Wall Street scandal, received a $4.6 million bonus on top of his $150,000 salary.
Just two aisles over, however, another trader, Lawrence E. Hilibrand, 32, was doing much better. He received $23 million for his success in 1990 in carrying out a complex trading strategy called bond arbitrage.
Today, a month after Salomon Brothers was rocked by its disclosure that Mozer had engaged in illegal bidding practices, the affair is being blamed in part on bitter rivalries within Salomon fueled by the competition to get enormous bonuses, according to current and former executives of the firm.
Although Salomon says Mozer's primary reason for breaking the rules was a personal vendetta with the Treasury - he has not spoken publicly on the subject after being fired last month - others suspect that he also was driven by the desire to shine more than other executives at the firm, and thus improve his chances of boosting his paycheck.
"The compensation system at Salomon Brothers was working so that, if one area on the floor worked better, it got paid more. (Mozer) looked at Larry Hilibrand and thought, he got 23 (million dollars), I want to get 23," said a former executive of the firm who knows both men.
In the wake of the Salomon Brothers scandal, federal regulators, Congress and the public are questioning whether Wall Street can justify the mammoth pay packages that it customarily gives its top executives.
Some regulators and members of Congress ask whether traders such as Mozer are being compensated for skills that are all that valuable, or whether they merely benefit from a system that channels hundreds of billions of dollars of business through a few securities firms and enables people to reap big profits by taking a tiny slice from each transaction.
The current system of rewarding performance with huge amounts of money can encourage traders to take excessive risks, or to cut corners legally or ethically, these officials say.
"Maybe I'm too old-fashioned, but I cannot see the merit of compensation practices that yield millions of dollars per year, for example, for individual securities or foreign exchange traders," New York Federal Reserve Bank President E. Gerald Corrigan told a Senate committee investigating the Salomon Brothers affair.
Corrigan himself earned $231,500 last year for heading the institution that, among other things, conducts the auctions of Treasury securities where Salomon broke the rules.
While saying he was "under no illusions" that more conservative pay policies by themselves would prevent future abuses, Corrigan said the current pay system encourages people like Mozer to cross the line into wrongful behavior.
Outside of the entertainment and sports fields, the securities industry is the only arena in American business where multimillion-dollar paychecks are routinely given to employees several rungs down the corporate ladder from the top.
Defenders of Wall Street's pay practices point out that Salomon Brothers and other big firms also play a critical role in lending money to cover the federal budget deficit, and that very high pay levels also are found in sports and entertainment.
"Salomon is a major financier of the U.S. government," and deserves to earn a return for performing that function, said Howard A. Gabler, a codirector of G.Z. Stephens Inc., an executive search firm that specializes in the investment field. "Michael Jordan stuffs a ball in a hole and makes $16 million - what's the social justification for that?"
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October 3, 1991, The Washington Post, Salomon Says Illegal Bidding Began Earlier, by Robert J. McCartney,
Salomon Brothers Inc. said today that its illegal bidding at auctions of U.S. Treasury securities began in July 1990, five months earlier than it had previously publicly acknowledged, and also said that it had made a number of "inappropriate" but legal bids in the first half of 1990.
The firm also said it appeared that it had made unauthorized bids at a total of eight auctions between July 1990 and May 1991. Until now, it had uncovered evidence of wrongdoing at only seven, although it had said that it expected to discover additional infractions as the investigation continued.
Salomon Brothers made the disclosures in a statement announcing that it had completed its internal examination of the activities of its U.S. government securities trading desk, which is at the center of the scandal that has rocked both the big investment bank and all of Wall Street.
Salomon Brothers will continue to look at whether wrongdoing also occurred in other parts of the firm, such as its foreign exchange or finance operations. But sources familiar with the inquiry stressed that there was no evidence so far of any infractions outside the government trading desk.
Although the company did not release all details of its investigation, the sources said the inquiry confirmed the firm's previously disclosed account that Paul Mozer, the former head of the government trading desk, had made the illegal bids on his own initiative because of his desire to evade Treasury rules limiting the amount of securities that one firm could buy.
That version seemed to be bolstered by the firm's account today that the first illegal bid occurred in July 1990. That was immediately after the Treasury adopted a new rule, specifically aimed at Mozer, that barred any firm from bidding for more than 35 percent of the securities to be sold at a single auction.
In addition, the firm said for the first time that the government trading desk had submitted several bids before July 1990 that "were not in violation of the rules at the time, but nonetheless were inappropriate."
In those instances the firm submitted bids for 100 percent or more of the available securities, sources said.
Mozer, who was fired in August when the affair first became public, has not commented on the firm's allegations.
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October 5, 1991, The Economist (US), Investing for fun and profit: American hedge funds,
PAUL MOZER, formerly the chief trader in government securities at Salomon Brothers, is the object of more than ordinary attention these days. All Wall Street is waiting to learn whether he agrees to tell all-and maybe more than all-to the federal investigators looking into auction-rigging in the government-bond market, to which his former employer has admitted. Few can be more interested than the powerful private investment consortiums that featured prominently in the Salomon affair.
"Hedge funds" have transformed the face of America's securities markets in recent years, yet they are not widely known. They are private investment partnerships, many with fewer than 100 partners (which allows them to escape registering with the Securities and Exchange Commission), and some with an offshore domicile (which has tax advantages). They sprang up in the 1960s as a way for rich investors to pool their money and do all sorts of things that mutual funds, and even registered investment managers, cannot ordinarily do: go long and short, hedge in derivatives markets, borrow lots of money, invest any proportion of their capital in any sort of asset.
Those with the highest profile these days (not least because they did regular business with Salomon) are Quantum Fund, Tiger Fund and Steinhardt Partners. They are the punter's punters. They bet big and they borrow big. And they are acutely uncomfortable sharing the limelight with Salomon.
A bevy of regulators wants to know whether the hedge funds plotted with Salomon to squeeze the secondary market in May two-year Treasury bonds. Salomon, acting for itself, Tiger and Quantum, bought $10.6 billion of the $113 billion of bonds available. In the when-issued market before the auction, Salomon bought $1.3 billion of the bonds for Steinhardt, which in all amassed $6 billion-worth. Few other investment managers would have the stomach or the resources to take such pOSItions.
All three funds deny any culpability in Salomon's squeeze. They say they were making a typical bet that interest rates would fall and the bonds would increase in value. They were right: the yield on them fell in secondary trading from 6.81% to 6.14%. Owners of the May two-year bonds made a profit of $11.5m for each $1 billion held.
The hedge funds were not alone in calling that particular shot. Speculators in the Chicago futures markets also took huge long positions in the May two-year Treasuries. But the hedgers were able to make bigger bets than most. The primary dealers' best customers, they can use the repurchase market to borrow large quantities of Treasuries at low interest rates and, essentially, punt without putting money down.
Though hedge funds do from time to time go bust, Quantum, Tiger and Steinhardt have outpaced the broad market averages that are the benchmarks for all investment managers. Since their inception, George Soros's Quantum (1969), Michael Steinhardt's partners (1967), and julian Robertson's Tiger (1980) have achieved compound annual returns of more than 30%. A $100,000 sum invested in Quantum when it was founded would have become $50m today. Last year the $2.5 billion fund paid out $611m to its investors.
As well as making their investors rich, they have also made their owner-founders among the wealthiest investment managers in America. They are an unusual bunch, with little but their wealth in common.
Mr Soros is a Hungarian refugee absorbed by the economies of Eastern Europe and global trends. He deals as happily in currencies, index futures and options as he does in stocks and bonds.
Mr Steinhardt, a compulsive and instinctive trader, accounted in the 1970s for more commission business for Wall Street firms than any other investment manager, and is still near the top. His investors include Jack Dreyfus, who founded the Dreyfus group of unit trusts, as well as several Salomon officials like Thomas Strauss, its former president, and William Salomon, its honorary chairman. Preferring bonds to high-multiple stocks this year, he has done less well than some money managers. Steinhardt's earnings will nonetheless be about 20% up on last year's.
Julian Robertson, the courtly North Carolinian who founded the $2.1 billion Tiger Fund, counts Tom Wolfe, author of the ultimate Wall Street novel, Bonfire of the Vanities", among his investors. Mr Robertson dismisses the funds' speculative image. "The beauty of hedge funds", he says, "is that you can buy the stocks you love, and sell short the ones you hate." They may look less beautiful if Mr Mozer decides to save his own neck as best he can.
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October 12, 1991, The Economist (US) Hanging in there: Salomon Brothers,
IF WARREN BUFFETT, its interim chairman, is Salomon's Jimmy Stewart, chief operating officer Deryck Maughan is its Daniel. He headed off to the lion's den this week to face the hundreds of bankers, central bankers and finance ministers gathered in Bangkok for the annual meetings of the IMF and World Bank. These are people whose credit and custom Salomon needs if it is to survive in any sort of shape until American authorities rule on the wrongdoing in government-bond auctions to which its former bosses admitted in August.
For Salomon, the priorities are clear. its new bosses are busier managing relations with the government, the banks and the clients than managing the firm itself. Salomon's internal investigation has been completed, throwing up only one further example of apparent rule-breaking. With its third-quarter results at the end of October, Salomon will announce the sum it intends to put away against possible fines and civil damages. outsiders speculate that this may be around $250m, but the firm itself can do no more than guess what is appropriate.
Salomon's balance sheet has been trimmed by more than a quarter, to around $110 billion. The mix of assets has been changed so that more are now liquid and cheaper to fund. With about $11 billion in equity and long-term debt to fall back on, Salomon now need not fear a financing crisis in the near term, says Mr Maughan.
As for its clients, according to Salomon, most have proved loyal. Even some of the large institutions that felt forced to break links have provided discreet help behind the scenes. Without the need to provide against penalties, Salomon's profits for 1991, like those in the first half, would have been the highest in the firm's history, it says.
What next? Salomon's new team wants to refocus the business, to price and allocate internal capital more systematically, and to recreate a sense of committed partnership. All that must remain a dream until federal investigators pronounce on Salomon's fate. And that could prove a lengthy process. Their interest has long since broadened to include the rest of the Treasury-bond market's primary dealers and multi-billion-dollar "hedge funds". Salomon is unlikely to be let out of the pillory until the possibility of broader collusion has been ruled out.
Lower-profile investigations into another government market, meanwhile, are also turning up some dirt. The bonds of government-sponsored enterprises like those providing mortgage credit are sold through dealer syndicates. Freddie Mac, one of the "agencies", has found that 18 of its 25 dealers (which include various big banks and securities firms as well as Salomon) have been lying about customers' orders, inflating them to get more bonds to sell.
Offenders are escaping lightly, however-whether because there is safety in numbers or because (as dealers claim) the agency knew about the fiddle all along. Freddie Mac has set a fine equal to one-fifth of commissions earned this year and last. Sallie Mae, which supports student loans, is content with getting its offending dealers to promise to be good. The far-bigger Fannie Mae has yet to decide what to do. The SEC is also looking into the market. Quite rightly, it will probably be a lot tougher-no matter how many firms it has to discipline.
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October 22, 1991, Associated Press / Albany Times Union, Buffett Keeping Salomon Reins For Now, by John M. Doyle.
Salomon Inc. Chairman Warren Buffett told state-level securities regulators Monday that he will remain at the helm until federal investigators complete their probe of the scandal-plagued firm.
Buffett also said two months of cleaning house at Salomon has turned up no new evidence of wrongdoing.
The plain-spoken Omaha multibillionaire, who took over Salomon's top position in the aftermath of a government bond trading scandal, said an in-house probe has uncovered no additional securities laws violations, although federal investigators still are looking.
"We have not found a widening of bad behavior. We have looked and looked and looked," Buffett said in speech to the North American Association of Securities Administrators.
He added: "We have not found anything that seems pervasive."
Buffett also said he would stay on as chairman "until I feel I am no longer needed," which he believed would not be until federal regulators conclude their investigations.
Buffett said Salomon expects "significant monetary costs" as a result of the scandal. He did not give a loss figure but said it would be reported in third quarter earnings.
In August, Salomon admitted it made illegal bids at Treasury Department auctions without customers' knowledge and bypassed a federal rule preventing bidders from acquiring more than 35 percent of any government security at auction.
The auctions are the main way the governmen finances the budget deficit and are critical to the smooth functioning of the U.S. economy.
Then-Salomon Chairman John H. Gutfreund also disclosed that he and other top executives were aware of the wrongdoing and waited months to tell regulators.
Buffett told his 700 listeners Monday that he still has no explanation why top Salomon management didn't report the wrongdoing.
"It just doesn't make any sense," Buffett said repeatedly.
Gutfreund and three top executives resigned from Salomon Aug. 17 and the next day Buffett, who holds a 14 percent stake in Salomon, took over as chairman.
NASAA, representing state-level securities regulators from all 50 states plus several Canadian provinces, is holding its annual fall conference in San Diego through Thursday.
Several states have ceased doing business with Salomon and others are suing the Wall Street investment house.
More than 30 states are conducting a joint investigation of Salomon following this past summer's disclosures.
The Securities and Exchange Commission, the Justice Department and the FBI also are investigating Salomon.
As he has before, Buffett said he welcomed the probe by law enforcement agencies and pledged to cooperate.
Buffett also continued to lay most of the blame for the scandal at the feet of Paul Mozer, the former head of Salomon's goverment securities trading desk who was later fired.
Buffett characterized Mozer's activities as "motivated by a desire to best the U.S. Treasury" because his alleged illegal dealings would not have earned him any more money, would not have significantly increased his annual bonus.
Buffett acknowledged that the scandal has hurt Salomon, costing it business, prestige and a lot of money in legal fees.
"I'm going to be the American Bar Association's 'Man of the Year,'" said Buffett, 61. Asked what his worst day had been, Buffett joked that he hoped it had already occured in the first two months of his tenure.
He also said Salomon's fate as a primary dealer, a key player in the Treasury Department's securities auctions, was still in the hands of officials a the Federal Reserve Bank in New York, which runs the auctions.
However, Buffett said: "We have no reluctance to make ammends for the past misconduct of Salomon employees but we don't think anything that would cripple the operation really would be in the best interests of regulators or in society's interest."
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October 25, 1991, The Washington Post, Salomon Says Illicit Trading Netted $5 Million, by Robert J. McCartney,
Salomon Brothers Inc. said today that it earned less than $5 million in extra profits from its improper bidding at eight U.S. Treasury auctions, which it described as a relatively small amount.
But the big Wall Street company also said that its total profits at the most controversial auction, in May, were unusually high at more than $16 million. It said it did not yet know enough to answer the critical question of whether it had illegally conspired with other firms at that auction to create the artificial shortage of securities that led to the big profit.
In a separate development, Salomon Brothers Chairman Warren Buffett said an undetermined number of top executives at the company may leave in early 1992, after collecting their year-end bonuses, because they are unhappy with the strict adherence to the rules that he has demanded since he became chairman in August as a result of the scandal.
"I think some people may find they don't want to play in the kind of atmosphere I'm trying to create," Buffett said in answering questions after a luncheon speech here to big institutional investors.
Salomon Brothers' announcement of its calculation of total profits earned from illicit trading was an important step in the process of trying to put the scandal behind it. The total will influence both the size of any penalties imposed by the government and the firm's total liability in 38 lawsuits filed against it as a result of its wrongdoing.
The company said it reported its calculations to the Securities and Exchange Commission, the Treasury Department, the Justice Department and the New York Federal Reserve Bank.
The company said a generous estimate of its total profits reaped from improper bidding in eight auctions between July 1990 and May 1991 was $3.3 million to $4.6 million.
"Even a penny is too much, but I think this total is less than people outside the firm had expected," said attorney Frederick Schwarz Jr., an outside counsel for Salomon. The company's net income over the period in which the improper bidding occurred totaled $515 million.
Schwarz also said the figures showed that the employee whom Salomon has blamed for the scandal - its former chief U.S. government securities trader, Paul Mozer - was motivated by something other than a desire for profit. The company has portrayed Mozer's wrongdoing as a result of his obsession with evading rules adopted by the Treasury to restrain his aggressive bidding.
"We can't psychoanalyze him, but it doesn't look like profit was his motive," said Schwarz, who is a partner at the New York firm of Cravath, Swaine & Moore.
But a senior Wall Street executive familiar with the auctions challenged Salomon's interpretation. He said Mozer had hoped to make extra money from the wrongful bidding, regardless of whether he succeeded. "You don't commit that kind of money only out of ego. You do it to make money, but there's no guarantee it's always going to be profitable," the executive said.
At the most controversial auction, the one in May for two-year Treasury notes, Salomon said it earned a total profit of $16.7 million to $18.4 million. About $3 million of that profit was a result of the illicit bidding, it said.
It appears that the illicit bidding helped Mozer to create a squeeze, or artificial shortage, of securities that yielded the big earnings. It is not clear whether there was illegal collusion as well, the company said. "That's a subject to be dealt with after all the facts are in," Schwarz said.
In the other seven auctions in question, Salomon said the total of illicit and legitimate profits was relatively low - less than the average gross profits of 11 other auctions that it examined for comparison.
Buffett's comments about a possible exodus of top executives addressed an issue that is central to Salomon's future: whether Wall Street rivals will woo away its most important asset, its talent, at a time when the firm is laboring with the stigma caused by the scandal.
In a recent, welcome bit of positive news for the firm, Citicorp and J.P. Morgan & Co. agreed to provide Salomon Brothers with a $2 billion line of credit that it needs to help support its trading activities.
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October 30, 1991, Albany Times Union, Salomon's Profits Increase Despite Legal Troubles,
Salomon Inc. said Tuesday it set aside $200 million to pay for troubles stemming from its bond market wrongdoing, but the firm recorded a surprising increase in third-quarter profits after slashing compensation.
The developments were announced in an unusual two-page newspaper advertisement by interim Chairman Warren Buffett, who renewed a pledge to clean up the investment firm and put a lid on astronomical payouts.
"Employees producing mediocre returns for owners should expect their pay to reflect this shortfall," Buffett said in a report to shareholders. "In the past that has neither been the expectation at Salomon nor the practice."
In response to the announcement, Salomon's stock soared $2.25 a share, or 8.6 percent, to $28.375 in heavy New York Stock Exchange trading. Salomon was the third most-active stock, with 3.05 million shares changing hands.
The stock price gain continued a recovery from a low of $20.75 after the scandal broke in August at the firm's Salomon Brothers Inc. brokerage unit.
The money to cover fines and litigation had been expected to wipe out Salomon's quarterly profits. But the firm avoided a loss by reducing a pool for year-end bonuses by $110 million as part of a revamped pay structure.
For the three months ended Sept. 30, Salomon said profits rose 7.6 percent to $85 million, or 60 cents per share, from $79 million, or 55 cents per share, a year earlier. Total revenue dropped to $2.42 billion from $2.57 billion due to a 35 percent drop in trading activity.
Profits at the Salomon Brothers unit more than tripled because of favorable bond market conditions, to $194 million from $60 million, Buffett said. Salomon's Phibro Energy unit made just $10 million, down from $369 million.
After considering tax effects, the $200 million charge and $110 million gain for lower compensation reduced profits by $75 million, Buffett said.
The profit gain was small compared to huge increases posted by other brokerages that have enjoyed a revival in stock market activity and corporate securities underwriting from a dismal 1990.
But analysts said the report wasn't a good indicator of Salomon's status because the firm had wide discretion over how much it allocated to pay for the scandal and cut compensation. Also, the scandal's final impact is unclear.
"The problems that make this an unusual quarter are not resolved," said John Keefe, an analyst with Lipper Analytical Securities Corp.
But the report gave Buffett, the respected Nebraska multibillionaire investor who owns 14 percent of Salomon, another opportunity to temper the scandal's fallout with tough talk about the firm's future.
"We have the prospect of correcting certain weaknesses at Salomon Brothers that were likely to remain unaddressed absent a change in management," Buffett said.
"I believe that we can earn ... superior returns playing aggressively in the center of the court, without resorting to close-to-the-line acrobatics," he said. "Good profits are simply not inconsistent with good behavior."
Buffett again maintained the wrongdoing was confined to a few individuals. "I believe that we had an extremely serious problem, but not a pervasive one," he said.
Salomon has blamed the former head of its government-bond trading desk, Paul Mozer, for violating government rules at Treasury auctions. The firm faces several criminal and civil investigations, as well as 38 lawsuits.
Last week, Salomon said it made no more than $19.7 million from eight auctions in which it submitted illegal bids, including a maximum $4.6 million directly from the bids. If the government agrees with the estimates, Salomon's legal exposure could be far less than initially envisioned.
Buffett said the money for fines and litigation was a preliminary amount that could change. But he said the firm's $4 billion equity base "virtually insures that they will not be crippling."
The chairman attacked past Salomon management for an "irrational" pay system in which compensation increased sharply regardless of performance. In 1990, 106 Salomon Brothers employees made more than $1 million, despite unspectacular results.
Buffett said in 1991 and beyond top-paid employees would get much of their compensation in Salomon stock. He admitted the scheme would cause some executives to quit, but that "would not necessarily be bad."
"In the end we must have people to match our principles, not the reverse," he said.
Buffett also said Salomon would continue reducing assets. Facing credit problems, Salomon has sold more than $50 billion in assets to raise money since the scandal, reducing total assets to $97 billion at the quarter's end.
In the first nine months of the year, Salomon earned $536 million, or $4.31 per share, on revenue of $7.62 million. That compares with $318 million, or $2.32 per share, on revenue of $7.02 billion in the first nine months of 1990.
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November 20, 1991, Chicago Sun-Times, Salomon reportedly fires 140 employees,
Salomon Bros., reshaping its business following a bond-trading scandal, has fired 140 employees, including 10 high-ranking managing directors, sources close to the firm said Tuesday. The dismissals came in the brokerage firm's stock and investment banking divisions, with the banking unit taking the heaviest hit. The firm also slashed its equities staff, leading some employees to conclude that Salomon will focus even more on the business that enmeshed the firm in scandal: bond trading. Sources said the investment banking division suffered about 100 dismissals and U.S. equities had lost about 30. The parent of the New York-based brokerage,Salomon Inc., employs about 8,900.
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December 3, 1991, Associated Press / The Boston Globe, Salomon, World Bank resume ties, by John M. Doyle,
WASHINGTON -- Salomon Brothers Inc., in a sign of recovery from a major bond-trading scandal, yesterday said that it has resumed business with the World Bank after a three-month ban.
The World Bank suspended all business dealings with Salomon in August after the firm revealed it violated Treasury Department auction rules on numerous occasions.
Salomon said it made illegal bids at Treasury auctions without customers' knowledge and bypassed a federal rule preventing bidders from acquiring more than 35 percent of any government security at auction.
Several federal financial regulators are investigating Salomon and the loosely regulated $2.3 trillion market in government bonds, notes and bills.
The Treasury, Securities and Exchange Commission, and Federal Reserve are due to report their findings to Congress later this month. The Justice Department also has launched civil and criminal probes.
Salomon issued a brief statement announcing the resumption of business with the World Bank. Sheldon Rappaport, a spokesman for the Washington-based international bank, declined to comment.
A resumption of dealings between Salomon and the bank, which is one of the the world's biggest issuers of notes and bonds, would be a big plus for the Salomon Inc. unit.
The end of Salomon's exile suggests the World Bank believes the firm will be allowed by the government to retain its status as a primary dealer in Treasury issues. It also shows that some Salomon clients approve of the changes made at the firm under interim chairman Warren Buffett.
Buffett has cut ties to old management, slashed bonuses and dismissed scores of investment bankers and stock traders. He also created a new executive management committee headed by chief operating officer Deryck Maughan.
The International Bank for Reconstruction and Development, known as the World Bank, is owned by the major industrial countries and lends money to developing nations. It is among the world's largest borrowers of US dollars.
Salomon had handled a number of major deals for the bank, including serving as lead underwriter for a $2 billion bond issue in September 1990 and a $1.5 billion issue in September 1989.
But it was barred in September from a huge offering of dollar-denominated bonds because of the World Bank's suspension. It has also been unable to trade with the bank, which has a $20 billion fixed-income portfolio.
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December 3, 1991, The Washington Post, World Bank Ends Ban On Salomon,
Salomon Brothers Inc., in a sign of recovery from a major bond-trading scandal, said yesterday that it has resumed business with the World Bank after a three-month ban.
The World Bank suspended all business dealings with Salomon in August after the firm revealed it violated Treasury Department auction rules on numerous occasions.
Salomon said it made illegal bids at Treasury auctions without customers' knowledge and bypassed a federal rule preventing bidders from acquiring more than 35 percent of any government security at auction.
Salomon issued a brief statement announcing the resumption of business with the World Bank. A spokesman for the Washington-based international bank declined to comment.
A resumption of dealings between Salomon and the bank, which is one of the the world's biggest issuers of notes and bonds, could be a big plus for the Salomon Inc. unit.
The end of Salomon's exile suggests the World Bank believes the firm will be allowed by the government to retain its status as a primary dealer in Treasury issues. It also shows that some Salomon clients approve of the changes made at the firm under interim chairman Warren E. Buffett.
Buffett has cut ties to old management, slashed bonuses and dismissed scores of investment bankers and stock traders. He also created an executive management committee headed by chief operating officer Deryck Maughan.
Several federal financial regulators are investigating Salomon and the loosely regulated $2.3 trillion market in government bonds, notes and bills.
The Treasury, Securities and Exchange Commission, and Federal Reserve are due to report their findings to Congress later this month.
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December 20, 1991, The Bergen County Record, Salomon Vice President to Resign,
NEW YORK -- The former head of investment banking at Salomon Bros. Inc. will resign at the end of the year, the company said Thursday. The departure of Jay F. Higgins, a vice chairman who worked for Salomon for 22 years, was expected after he was left off a top management committee created by
Salomon last month to run the company. Salomon's interim chairman, Warren Buffett, has radically overhauled the brokerage since it admitted in August to widespread wrongdoing in the government-bond market. Higgins founded Salomon's mergers and acquisitions department in 1978 and was named head of corporate finance in 1986. He was made a vice chairman and named to Salomon's executive committee in 1988. There had been speculation that Higgins would leave Salomon since last December, when he was replaced as investment-banking head by Deryck Maughan, now Salomon's chief operating officer, and Leo Higdon.
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January 21, 1992, Chicago Tribune / Dow Jones News Service,Fed Acts To Limit Primary Dealers In Treasury Auctions,
WASHINGTON — The Federal Reserve has decided to recast its primary dealer system in a way that will downgrade the importance and prestige of primary dealers, according to the draft of a joint agency report on the government securities market.
Prepared by the Treasury, Fed and Securities and Exchange Commission, the draft report said that "it has become both feasible and appropriate for the Federal Reserve to amend its dealer selection criteria to provide for a more open system of trading relationships." That, presumably, will lead over time to an increase in the number of such dealers.
The draft report said the Federal Reserve Bank of New York will discontinue its dealer surveillance activities related to primary dealers even as it steps up its market surveillance activities.
The draft said: "One feature of the amended criteria is that existing as well as new primary dealers will no longer be required to maintain a 1 percent share of the total customer activity reported by all primary dealers in the aggregate."
The document said that "further expansion in the number of primary dealers will be feasible" following automation of Treasury auctions, which is expected to be done by early next year. There are 38 primary dealers.
Some market participants knowledgeable in the ways of the New York Fed have been predicting privately that there would be modest changes to reduce the importance of being a primary dealer and that the Fed wants to cut its "moral hazard risk" by making it clear that being designated a primary dealer doesn't carry special approval from a creditworthiness point of view.
The proposed change to an automated, open-auction system may lessen Treasury's reliance on primary dealers to distribute Treasury securities, the draft said.
The draft document also noted that auction changes announced by the Treasury Oct. 25 eliminated other distinctions favoring primary dealers.
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January 23, 1992, The Washington Post, U.S. to Propose Tough Penalties for Salomon; Federal Probe Nearing Finish, Sources Say, by Robert J. McCartney and Brett D. Fromson,
The government plans to seek stiff sanctions, including a large fine, against Salomon Brothers Inc. for its illegal bidding at U.S. Treasury auctions, according to sources familiar with the case.
The government is nearing the end of its investigation of the affair and the penalties are likely to be significant even though Salomon Brothers calculated that it earned less than $5 million in profits from the improper bids, the sources said.
One source familiar with the investigation said the authorities have doubts about Salomon's estimates and would be foolish to accept them at face value. The source said that in any case the government also will consider much more than Salomon's profits in setting the penalty. An important factor will be a calculation of the risks that the company's actions posed for the entire $2 trillion government bond market, the source said.
A spokesman for Salomon said the company was "confident" of the accuracy of its calculations. The company has already taken a $200 million charge against its profits in anticipation of all fines, penalties and other costs related to the affair.
It is unclear how the timing of a settlement with the company might affect other, related legal inquiries in the case. Several individuals implicated in the wrongdoing - especially Paul Mozer, the bond trader who Salomon said submitted false bids at Treasury auctions from July 1990 through May 1991 - are expected to seek legal settlements of their own.
One crucial question is whether the government will require Salomon Brothers to plead guilty to one or more felonies as part of the price of settling the case, sources said.
The company admitted last August that a senior bond trader used the names of customers without their knowledge to bid for Treasury securities, and the firm as a whole may be held liable for his actions. But Salomon Brothers hopes that its extensive cooperation with the government since it disclosed the wrongdoing, and its replacement of the top executives who failed to halt the abuses, will lead the authorities to stop short of seeking a felony charge against it, sources said.
While the government certainly will give Salomon credit for its cooperation, authorities view the wrongdoing as very serious and believe it potentially threatened the nation's largest securities market, sources said.
Salomon Brothers fears that it might be put out of business altogether if it pleaded guilty to a felony, both because its lenders might cut it off from financing and because some clients such as state pension funds might stop doing business with it, sources said.
"We don't believe that anyone in government has any desire to see us go out of business. We believe that whatever the outcome may be with the government, it will be something that we will survive," Salomon Brothers Chairman Warren E. Buffett said.
There are other risks as well. Salomon Brothers President Deryck Maughan warned Congress last September that harsh punishment of Salomon could threaten the health of the financial system.
Investigators from the Securities and Exchange Commission and the Manhattan U.S. Attorney's office are still taking testimony from witnesses and have not reached the stage where they can approach Salomon Brothers with a proposed settlement.
But a source familiar with the investigation said it was close to conclusion and that a settlement with the company might be reached as early as April. Salomon Brothers is eager to put the affair behind it and would be very pleased if that timetable could be met.
Once the government proposes a settlement, Salomon Brothers will be under considerable pressure to accept it, according to lawyers and other experts. The firm has essentially bet its future on its cooperation with the government and it could lose that good will if it chose to fight.
"Salomon will have to settle. They cannot afford to litigate against the federal government," said a former senior SEC official.
The government's doubts over Salomon's calculation of the profits it made from the illegal bidding could affect the penalties the company faces. The profit estimates not only will influence the amount of any fine, but also will affect the host of investor lawsuits that have been filed so far.
In October, shortly before Salomon released its estimates, the government put the firm's profits from the May auction of two-year notes at more than $30 million, sources said. The firm's estimate was between $16.7 million and $18.4 million, which Salomon said did not result from illegal bidding.
If the government determines that the profit numbers are significantly higher than Salomon stated, then it could undercut the good will built up with government investigators.
Many on Wall Street have also questioned Salomon's profit estimates. "Those numbers didn't sound like enough money to me," said a former senior Salomon Brothers executive. He was particularly suspicious about the company's data, because it suggested that Salomon made less money in auctions where it had cornered the market than when it hadn't.
Salomon stands by its numbers. "We are confident of our numbers and our analysis, and we are aware of no critique of the report furnished to the government," a Salomon spokesman said.
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March 26, 1992, The Washington Post, Salomon's Ex-Chief Asking $14 Million; Other Ousted Officials File Severance Claims, by Robert J. McCartney,
Former Salomon Brothers Inc. chairman John H. Gutfreund, who resigned in disgrace last August amid a major U.S. Treasury bond auction scandal, has asked the company for more than $14 million in back pay, severance benefits and rights to stock, the company said today.
Three other former top executives, all of whom also were forced to quit in the scandal, have made "comparable" claims, the Wall Street firm said. Former president Thomas W. Strauss has asked for cash and stock now worth a total of about $15 million, it said.
The company already has paid Gutfreund $1.14 million for his work last year. His demands on top of that include claims for $4.5 million of severance pay and a $2 million bonus for 1991. In that year, the company nearly collapsed when it was revealed that Gutfreund and other top executives had waited four months to inform authorities of illegal bidding by Salomon at Treasury auctions.
Gutfreund's lawyer issued a statement saying that most of his claims involved money that he had earned in 1991 and prior years, but that had not yet been paid to him. "An appropriate severance payment would reflect Mr. Gutfreund's contributions to Salomon Brothers over a 38-year career," the statement said.
Strauss said through a spokesman that the claims were "based on contractual and other commitments made by the company."
Salomon said it was not yet clear whether Gutfreund and the other former executives had a right to all the money. A legal battle was possible, as the firm suggested it might assert claims of its own against the four.
In a related development, Warren E. Buffett, who replaced Gutfreund as chairman, said in Salomon's annual report that the securities firm's parent company, Salomon Inc., planned to build up extra financial strength because of the risks of "major shocks" in both the securities and energy industries. In line with this new policy, the Salomon Brothers subsidiary paid a $1 billion dividend to the parent at the end of last year, he said.
Buffett also said the firm's current No. 2 executive, Deryck C. Maughan, would eventually succeed him as head of Salomon Brothers, but not as chairman of the parent company.
Instead, Buffett said he would recommend hiring another executive - possibly on a part-time basis - to serve as chairman and chief executive of the parent company. That executive would oversee both of the parent companies' subsidiaries, the oil and commodities trading company Phibro Energy Inc., as well as the securities company Salomon Brothers. In the past, the CEO of Salomon Brothers has also been CEO of the parent.
Buffett, a prominent investor who owns 14 percent of the parent company, reaffirmed that he would step down only after Salomon has settled its dealings with government regulators arising from last year's scandal. The Securities and Exchange Commission is expected to levy a hefty fine on the firm, possibly by early summer, and the company may face other sanctions.
The Treasury auction scandal erupted when Salomon admitted that its former top U.S. bond trader, Paul Mozer, repeatedly had submitted false bids at Treasury auctions to help win a larger share of the securities being sold. Gutfreund, Strauss and two other top executives were forced to quit in August because they had known of at least one such illegal bid by Mozer since April, but had failed to report it.
Salomon disclosed estimates of Gutfreund's and Strauss's claims in proxy materials sent out to shareholders in advance of the company's annual meeting. The two had not made "definitive" claims, it said, and might ask for even more.
In addition to requesting $4.5 million in severance and a $2 million bonus for 1991, Gutfreund asked for $343,497 under a special bonus plan, stock options with a current value of $5.6 million, and Salomon shares currently worth $1.4 million.
He also asked for an unspecified amount under another bonus plan, which could total an additional several million dollars.
Buffett fulfilled an earlier pledge to accept a salary of $1 a year from Salomon, according to the proxy. But Buffett's Salomon stock earned him $26.3 million in dividends during the year, and has risen in value by $10.6 million since he took over.
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April 21, 1992, The Bond Buyer, Salomon bond clerk said to have been offered immunity in federal probe. (Salomon Brothers Inc., Henry Epstein, Treasury market trading fraud investigation) by Charles Gasparino,
Henry Epstein, the Salomon Brothers Inc. bond clerk suspended in the wake of the company's Treasury market scandal last year, has been offered immunity from criminal prosecution pending his complete cooperation with federal investigators, a source close to the investigation said yesterday.
The source, who spoke on the condition of anonymity, said the U.S. attorney's office for the Southern District of New York recently sent the immunity documents to Mr. Epstein, who is expected to accept the agreement early this week.
Mr. Epstein's lawyer, Michael Shaw, an attorney with Stillman, Friedman & Shaw in New York, said he had no comment on the matter. Officials at the Justice Department also refused to comment.
Despite the Justice Department's immunity plan, Mr. Epstein faces possible civil charges from the Securities and Exchange Commission. An SEC official refused to comment on the investigation.
The immunity offer is the first such offer the government has made since it began investigating Salomon Brothers' primary dealer unit and other Treasury dealer firms in August 1991.
Sources said they did not know of the status of the government's investigation of Paul W. Mozer and Thomas F. Murphy, former senior officials of Salomon's primary dealer unit, who were fired in the wake of the scandal.
Mr. Mozer's lawyer, well-known criminal attorney Stanley Arkin, a partner at Chadbourne & Parke, did not return telephone calls. Mr. Murphy could not be reached for comment.
The status of note trade Christopher F. Fitzmaurice, who was suspended by the firm in reaction to the scandal, could not be determined. Mr. Fitzmaurice's attorney, Andrew M. Lawler, did not return telephone calls.
The source said Mr. Fitzmaurice met with the U.S. attorney's office two weeks ago.
The Salomon trading scandal forced several high-level resignations at the firm, including that of John Gutfreund as chairman and chief executive, and caused the government to significantly alter the way Treasury securities are sold and traded.
The investigation of Salomon and other firms by the SEC and the Justice Department is continuing. The U.S. attorney's office recently interviewed several current employees of Salomon's primary dealer unit, the source said.
Mr. Epstein, who was suspended in August, remains a key witness in the government's investigation of Salomon Brothers's primary dealer unit, its customers, and possibly other firms.
Mr. Epstein, for example, provided government investigators with information about Salomon Brothers auction bidding activities going back to a December 1990 four-year note auction, the source said.
Mr. Epstein placed auction bids on the orders of Mr. Mozer. Government investigators also questioned Mr. Epstein about Mr. Mozer's relationship with other primary dealers, certain hedge funds that purchase government securities, brokers of Treasury securities, and the overall conduct of traders and salesmen in Salomon's primary dealer unit.
The source said Mr. Epstein will ask Salomon Brothers to reinstate him as a full-time employee. A Salomon Brothers spokeswoman declined to comment on the matter.
The immunity offer is an indication that "the information he [Epstein] provided is presumably valuable," said Harvey Pitt, an attorney with Fried, Frank, Harris, Shriver & Jacobson and an expert in securities law. "If immunity is granted, they have a real interest in his testimony."
Both the SEC and the Justice Department have interviewed Mr. Epstein extensively as part of their investigation of Mr. Mozer and other Salomon employees for attempting to corner the Treasury market on several occasions.
An independent Salomon Brothers investigation concluded that the primary dealer unit, largely under Mr. Mozer's direction, violated Treasury bidding rules on eight occasions, dating back several years.
Specifically, the rules prohibit any one firm from purchasing any more than 35% of an auction in its own name. Mr. Mozer and possibly other Salomon officials allegedly violated the 35% rule by submitting fake orders through the unauthorized use of customer names, according to Salomon's internal probe. By obtaining the large amount of auctioned securities, Salomon Brothers was apparently able to corner the market on several occasions, "squeezing" rival firms who needed the securities to cover short positions.
The "squeeze" largely occurred in the repo market, where traders at other firms were forced to lend money at low or no interest expense to Salomon Brothers in exchange for the securities needed to cover short positions.
During the May 22 auction of two-year notes, Salomon later admitted to controlling more than 80% of the issue.
The Justice Department is investigating whether Salomon violated criminal statutes and antitrust laws by colluding with other firms to gain an unfair advantage in the Treasury market, the source said.
The SEC, which has the power to bar individuals from the securities markets and levy fines through civil proceedings, is largely concerned with the bidding violations, sources said.
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May 21, 1992, The Washington Post, Salomon, .S. Settle Bond Case; Wall Street Brokerage To Pay $290 Million, by Robert J. McCartney and David S. Hilzenrath,
Salomon Brothers Inc. agreed yesterday to pay $290 million in fines and other penalties to settle government civil complaints in the biggest scandal ever in the giant U.S. Treasury securities market.
The big Wall Street firm viewed the settlement with what a spokesman called "quiet relief" because it escaped being charged with a crime, which might have driven it out of business.
The settlement caps a 10-month investigation of Salomon, which disclosed last August that its chief government bond trader, Paul Mozer, had repeatedly submitted false bids at U.S. Treasury auctions, where the government sells tens of billions of dollars of bonds each year to finance the federal budget deficit.
The disclosure led to the resignations of Salomon's chairman, John Gutfreund, and three other top executives. It also triggered a series of congressional hearings and a major regulatory review of the $2 trillion Treasury bond market.
Mozer, who was fired by Salomon, and other individuals and firms directly involved in the scandal remain under investigation, officials said.
The scandal aroused concern on Wall Street, in Congress and within the Bush administration because it damaged the reputation of the market in government debt, which heavily influences interest rates, the stock market and the value of the dollar.
In announcing the settlement, however, Securities and Exchange Commission Chairman Richard Breeden said the investigation "did not substantiate that wrongdoing was a common, everyday occurrence" in the market for Treasury securities.
Breeden also said that Salomon had engaged in "serious wrongdoing," but that the misconduct had been confined to "a fairly limited part of the firm" and involved only a small number of employees.
Otto G. Obermaier, U.S. attorney for the southern district of New York, said that while Salomon clearly had committed securities crimes, it would not serve "the ends of justice" to bring criminal charges because the firm had done such a good job of investigating its own wrongdoing and taking steps to make sure such offenses never happened again.
Salomon's cooperation was "virtually unprecedented," and the monetary fine and penalties were large enough to serve as an adequate deterrent, he said, adding that "$290 million is enough to say 'ouch.'"
In the settlement, made public at simultaneous press conferences in Washington and New York, the government confirmed for the first time that it believed that one or more unidentified firms had conspired with Salomon to artificially drive up the price of certain Treasury notes last summer. It also disclosed that Salomon had engaged in a series of sham trades in Treasury securities at the end of 1986 to create the false appearance of $168 million of losses for tax purposes.
The settlement resolved complaints by the SEC, the Justice Department's antitrust division and its U.S. Attorney's Office for the southern district of New York. It included modest sanctions by the Federal Reserve Board and Treasury Department, which will be lifted on Aug. 3.
Reaction to the settlement was favorable both on Capitol Hill and in the stock market. Rep. Edward J. Markey (D-Mass.), chairman of the House telecommunications and finance subcommittee of the Energy and Commerce Committee, called the outcome "just and equitable."
Both Markey and Energy and Commerce Committee Chairman John Dingell (D-Mich.) also said the scandal underlined the need for reforms in the government securities market, such as tougher standards for record-keeping, reporting of bond ownership, and sales regulation.
The stock market, responding principally to the absence of a criminal charge, sent Salomon shares up 9 percent. They rose $2.87 1/2 to close at $33 1/2.
The $290 million included $190 million in fines and forfeitures, plus creation of a $100 million fund to compensate Salomon Brothers' victims, who are suing it in about 50 separate actions.
Salomon, which had already set aside $200 million to deal with the case, announced that it was taking an additional charge against earnings of $185 million in the second quarter as a result of the settlement. The size of the charge suggested that the firm's total legal expenses in the case could be as much as $95 million.
While the cost has been hefty, the key issue for Salomon had been whether it would be charged with a crime. Insiders at the firm, and many outside observers, believed it would have gone out of business if it had been indicted on a felony count because many customers would have refused to do business with it anymore.
As a result, the firm's strategy has been full disclosure and complete cooperation, with the goal of winning the government's mercy, ever since prominent investor Warren E. Buffett took over as chairman when Gutfreund resigned in disgrace. Buffett, who also is chairman and principal owner of Berkshire Hathaway Inc., which owns a $700 million stake in Salomon, wryly noted that Salomon is happy principally because the affair now is largely behind it.
"All's well that ends," he told associates.
At his press conference, Breeden noted that one of Salomon's biggest missteps in the affair had been the failure of Gutfreund and other top executives to notify authorities immediately when they learned in April 1991 that Mozer had submitted a false bid at a February Treasury auction.
In submitting false bids from July 1990 until May 1991, Mozer generally was seeking to obtain more government securities for Salomon than the firm otherwise would get.
Sometimes that enabled Mozer to make more money for the firm, although Salomon has said he was largely driven by a personal feud with a Treasury official who had sought to restrain his aggressive bidding.
Gutfreund, in his first public comment on the affair since his resignation, noted that Salomon had disclosed most of the wrongdoing while he was still chairman. "I take some comfort in the fact that no significant acts of misconduct were found other than those that we and our counsel uncovered and announced last summer," he said in a statement issued by his lawyer, Aaron Marcu.
But Gutfreund did not address the question that led to his departure: why he and others neglected to inform the authorities of the first instance of Mozer's wrongdoing when they learned of it.
No criminal investigation of Gutfreund is underway, said sources familiar with the investigation. But he could face SEC regulatory charges, particularly an allegation that he failed to adequately supervise Mozer.
The disclosure of Salomon's alleged 1986 tax violation was unusual because it occurred more than three years before the activities by Mozer that triggered the scandal. Breeden said unidentified witnesses told investigators of the transactions. They were designed to help Salomon get tax benefits earlier than it was legally entitled to them, sources said.
The SEC also alleged in the complaint that a false bid was submitted on Salomon's behalf at an August 1989 Treasury bill auction. The Dow Jones News Service quoted sources identifying Daiwa Securities America Inc. as the primary dealer that submitted a $3 billion bid for Salomon. The SEC and a spokesman for Daiwa declined comment on the matter.
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May 21, 1992, Albany Times Union, Salomon Inc. to Pay $290M To Settle Case,
Capping a 10-month investigation, the government announced Wednesday that Salomon Inc. will pay $290 million but avoid criminal prosecution to resolve charges of widespread fraud in the Treasury bond market.
The settlement is the second-largest ever for wrongdoing on Wall Street behind the $650 million paid by now-defunct Drexel Burnham Lambert Inc. in the 1980s trading scandals.
In August, Salomon admitted repeated illegal and unethical behavior in government securities auctions - including unauthorized orders in customers' names and a $1 billion bid in a botched practical joke. Its top executives acknowledged concealing the illegalities for months.
The settlement with the Securities and Exchange Commission and Justice Department includes $190 million in fines and forfeitures related to cheating in Treasury auctions, in which the government sells bills, notes and bonds to the public.
Also, a $100 million fund will be established by Salomon to compensate victims who lost money as a result of the wrongdoing.
The penalties far exceed Salomon's estimate of a maximum $4.6 million in profits from illegal securities bidding. That reflects regulators' strong belief that the violations undermined the credibility of the financial system.
"Salomon's pattern of submitting false bids created a risk to the integrity of the government securities market, which is a market on which the federal government and ultimately all federal taxpayers depend," SEC Chairman Richard C. Breeden said in Washington.
The SEC, which polices the financial markets, said Salomon had submitted or caused the submission of 10 false bids totaling $15.5 billion in nine Treasury auctions between August 1989 and May 1991.
Salomon was accused of violating anti-fraud and record-keeping provisions of federal securities laws. But the Justice Department decided against criminal charges against Salomon or its Salomon Brothers Inc. brokerage unit, where the wrongdoing occurred.
Otto Obermaier, the Manhattan U.S. attorney, said Salomon was spared criminal indictment because it had cooperated extensively in the investigation and restructured management to prevent future misconduct.
"We did enough looking to satisfy us that $290 million was enough to say 'ouch,'" Obermaier told a news conference.
But he said investigations were continuing into unidentified individuals involved in the scandal. Those under investigation include Paul Mozer, the former head of Salomon's government bond trading desk, whom the firm has blamed for the illegal bidding.
Obermaier would not comment on whether former Salomon chairman John H. Gutfreund, who resigned after the scandal broke, also was under investigation.
As part of the settlement, Salomon Brothers will be suspended from trading with the Federal Reserve Bank of New York for two months starting June 1. Also, the Treasury Department said that on Aug. 3 it will lift sanctions imposed on Salomon last August, allowing the firm to resume submitting bids for customers.
The $190 million penalty includes asset forfeitures stemming from charges that Salomon and unidentified others conspired in June and July to control the market in May 1993 Treasury notes.
The Justice Department said the alleged conspiracy sought to raise prices of the securities by controlling the supply. Salomon last year admitted to controlling 94 percent of the notes in that auction.
Breeden said the government probe also uncovered a scheme in which Salomon underpaid income taxes in 1986 by engaging in sham transactions in Treasury securities that created the appearance of $160 million in trading losses. The settlement does not include the back taxes owed, which Salomon must pay.
Investors responded favorably to news the firm finally had resolved its case, sending Salomon stock up $2.875 to $33.50. The stock tumbled as low as $20.75 after the scandal.
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May 21, 1992, Chicago Sun-Times, Salomon settles, will pay $290 million, by Stefan Fatsis,
NEW YORK Capping a 10-month investigation, the government announced Wednesday that Salomon Inc. will pay $290 million but avoid criminal prosecution to resolve charges of widespread fraud in the Treasury bond market.
The settlement is the second-largest ever for wrongdoing on Wall Street behind the $650 million paid by now-defunct Drexel Burnham Lambert in the 1980s trading scandals.
Last August, Salomon admitted repeated illegal and unethical behavior in government securities auctions - including unauthorized orders in customers' names and a $1 billion bid in a botched practical joke. Its top executives acknowledged concealing the illegalities for months.
The settlement with the Securities and Exchange Commission and Justice Department includes $190 million in fines and forfeitures related to cheating in Treasury auctions, in which the government sells bills, notes and bonds to the public.
Also, a $100 million fund will be established by Salomon to compensate victims who lost money as a result of the wrongdoing.
The penalties far exceed Salomon's estimate of a maximum $4.6 million in profits from illegal securities bidding. That reflects regulators' strong belief that the violations undermined the credibility of the financial system.
"Salomon's pattern of submitting false bids created a risk to the integrity of the government securities market, which is a market on which the federal government and ultimately all federal taxpayers depend," SEC Chairman Richard C. Breeden said in Washington.
The SEC, which polices the financial markets, said Salomon had submitted or caused the submission of 10 false bids totaling $15.5 billion in nine Treasury auctions between August, 1989, and May, 1991.
Salomon was accused of violating anti-fraud and record-keeping provisions of federal securities laws. But the Justice Department decided against criminal charges against Salomon or its Salomon Brothers brokerage unit, where the wrongdoing occurred.
Otto Obermaier, the Manhattan U.S. attorney, said Salomon was spared criminal indictment because it had cooperated extensively in the investigation and restructured management to prevent future misconduct.
"We did enough looking to satisfy us that $290 million was enough to say `Ouch,' " Obermaier told a news conference.
But he said investigations were continuing into unidentified individuals involved in the scandal. Those under investigation include Paul Mozer, the former head of Salomon's government bond trading desk, whom the firm has blamed for the illegal bidding.
As part of the settlement, Salomon Brothers will be suspended from trading with the Federal Reserve Bank of New York for two months starting June 1. Also, the Treasury Department said that on Aug. 3 it will lift sanctions imposed on Salomon last August, allowing the firm to resume submitting bids for customers.
The $190 million penalty includes asset forfeitures stemming from charges that Salomon and unidentified others conspired last June and July to control the market in May, 1993, Treasury notes.
The Justice Department said the alleged conspiracy sought to raise prices of the securities by controlling the supply.
Breeden said the government probe also uncovered a scheme in which Salomon underpaid income taxes in 1986 by engaging in sham transactions in Treasury securities that created the appearance of $160 million in trading losses. The settlement does not include the back taxes owed, which Salomon must pay.
Salomon's interim chairman, Warren E. Buffett, the billionaire investor who took over after the scandal, said Salomon would take an additional $185 million charge against second-quarter earnings to pay for the settlement.
Salomon last fall set aside $200 million to cover costs associated with the scandal, but said this month it would need additional money for legal fees, penalties and lawsuits.
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December 3, 1992, Associated Press / Albany Times Union, SEC Accuses 2 of Making Fake Treasury Bids,
Federal regulators on Wednesday accused two former Salomon Inc. executives of submitting false Treasury auction bids and other securities law violations in the bond scandal at the firm.
The allegations against Paul Mozer and Thomas Murphy, both former managing directors of Salomon Brothers Inc., the firm's brokerage unit, were the first against Salomon executives in the scandal that shocked Wall Street last year.
The Securities and Exchange Commission accused Mozer and Murphy of submitting false bids in auctions of government bonds used to finance the national debt. Mozer also was accused of insider trading and helping Salomon engineer $168 million in phony trading losses to avoid taxes.
Mozer was in charge of government securities trading at Salomon Brothers and Murphy was his assistant.
Both were fired in the wake of the August 1991 scandal that prompted a shakeup of Salomon management and numerous probes by regulators and Congress.
Salomon admitted numerous violations of the auction rules, including making bids in customers' names without their knowledge and bypassing federal limits that prevent bidders from acquiring more than 35 percent of any government security offering in an auction.
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December 3, 1992, The Washington Post, Two Former Salomon Officials Sued by SEC; Agency Seeks Bond Trading Scandal Penalties, by David S. Hilzenrath,
The government yesterday sued former Salomon Brothers Inc. managing directors Paul W. Mozer and Thomas F. Murphy, accusing them of responsibility in the securities trading scandal that shook Wall Street and the Treasury Department last year.
The Securities and Exchange Commission alleged that Mozer and Murphy submitted false bids in a series of auctions for Treasury securities between 1989 and 1991 in an effort to circumvent the rules.
The SEC called for unspecified monetary penalties against Mozer and Murphy, and it sought to ban Mozer from serving as an officer or director of any publicly held company.
Sources said the SEC will announce settlements soon - perhaps as early as today - of administrative actions against former Salomon Brothers chairman John Gutfreund and two other top executives who left the firm following disclosure of the bidding violations. Under the settlements, the three former executives will neither admit nor deny the SEC's complaint against them, but each will pay monetary penalties, sources said.
In the lawsuit filed yesterday in U.S. District Court in Manhattan, the SEC also charged that Mozer had violated insider trading rules by selling 46,000 shares of Salomon Brothers stock three days before Salomon Brothers first disclosed improprieties in its bidding for securities issued by the government to finance the national debt.
Stanley S. Arkin, Mozer's attorney, said, "We will resist these charges to the extent we can."
Arkin said Mozer acknowledges responsibility for two unauthorized bids in a Feb. 21, 1991 auction, which he termed "administrative violations." But "everything else is unjustified and factually baseless," Arkin said.
"Mr. Murphy denies that he violated the securities laws and intends to vigorously contest the allegations made against him," said Eugene Goldman, his attorney.
Salomon Brothers, a major global financial house based in New York, settled civil complaints by the government last May by agreeing to pay $290 million in fines and penalties.
The SEC is still pursuing its investigation "as to other individuals and other firms," said William R. McLucas, director of the SEC's enforcement division.
According to sources, the SEC in an administrative complaint will accuse Gutfreund, former Salomon president Thomas W. Strauss and former vice chairman John W. Meriwether of failing to supervise Mozer and failing to report his alleged misconduct to the government until several months after they first learned of it in early 1991.
"The issue is they didn't act fast enough to follow up on what they learned," one source said.
But the SEC will make "no suggestion" that the three participated in "affirmative wrongdoing," the source said.
Mozer was allowed to continue in his job after senior Salomon executives learned that the bidding rules were violated, according to the firm.
As part of the settlement, Gutfreund agreed that he would not again serve as chairman or chief executive of a securities firm unless the SEC grants him permission, another source said. Gutfreund, whose participation in the securities business will not otherwise be restricted, has accepted the largest monetary penalty, sources said. Strauss and Meriwether will be suspended from the securities business temporarily, sources said.
Lawyers for the three declined to comment.
Salomon Brothers itself has portrayed Mozer, who ran its government securities trading desk, as a rogue employee and ringleader in efforts to manipulate the Treasury auctions. He and Murphy are the first individuals the government has acted against in the investigation.
The SEC alleged that Mozer was responsible for eight false bids totaling $13.5 billion and involving seven Treasury auctions - not including the time he allegedly submitted a false bid when a practical joke on a retiring colleague went awry.
Murphy, who worked under Mozer, was involved in three false bids, the SEC alleged.
Apart from those alleged manipulations, the SEC alleged that Mozer arranged trades in 1986 intended "to create fictitious trading losses for tax purposes."
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December 3, 1992, Chicago Sun-Times, Salomon Execs Accused,
Federal regulators on Wednesday accused two former Salomon Inc. executives of submitting false Treasury auction bids and other securities law violations in the bond scandal at the firm. The allegations against Paul Mozer and Thomas Murphy, both former managing directors of Salomon Brothers Inc., the firm's brokerage unit, were the first against Salomon executives in the scandal that shocked Wall Street last year.
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December 4, 1992, Associated Press / Albany Times Union, Ex-Salomon Boss Agrees to Penalty,
Former Salomon Inc. Chairman John H. Gutfreund will pay a $100,000 fine and never again run a Wall Street brokerage firm to settle charges from last year's government bond scandal, officials said Thursday.
Gutfreund and two other former top Salomon officials consented - without admitting wrongdoing - to suspensions and fines as a result of allegations by the Securities and Exchange Commission that they failed to adequately supervise the firm's brokerage unit, which has admitted placing phony bids in Treasury bond auctions.
The SEC accused the three in an administrative proceeding of being asleep at the switch in supervising Paul Mozer, former head of Salomon's government bond trading desk, and then doing too little too late when they learned of his alleged wrongdoing in April 1991.
On Wednesday, the SEC accused Mozer and his top assistant in a civil lawsuit of submitting more than $13.5 billion in false bids at Treasury auctions between August 1989 and May 1991. Both Mozer and his former aide, Thomas Murphy, are contesting the SEC charges.
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December 4, 1992, The Bond Buyer, Gutfreund agrees to pay $100,000 SEC. (John H. Gutfreund, Securities and Exchange Commission) by Stephen A. Davies,
WASHINGTON - John Gutfreund, former chairman and chief executive officer at Salomon Brothers, has agreed to pay a $100,000 fine to settle charges in connection with illegal trading in the government bond market, the Securities and Exchange Commission announced yesterday,
Gutfreund will also be barred for life from acting as chairman or chief executive officer of any brokerage firm or investment company as part of the settlement, the agency said.
Former Salomon President Thomas Strauss, who was also charged in the case agreed to pay a $75,000 fine and to be suspended from associating with any securities firm for six months. Former Vice Chairman John Meriwether agreed to pay a $75,000 fine and to stay out of the securities business for three months.
The settlement came one day after the commission sued two former managing directors at Salomon, Paul Mozer and Thomas Murphy, for submitting false bids totaling over $15 billion in the government bond market from 1989 to 1991.
The SEC said Gutfreund did not participate in the false bids, but that he and Strauss and Meriwether failed to investigate promptly after learning in April 1991 from the firm's counsel of two false customer bids submitted by Mozer at a three-year note auction. The false bids of $3.15 billion each. along with one made by Salomon on its own account, enabled the firm to capture over $5.1 billion of a three-year note sale totaling $9 billion.
The officers also delayed reporting the violation to government authorities, which was followed by other auction rule violations, the SEC said yesterday in announcing the settlement.
"This has been, and continues to be, a very sad case," SEC Chairman Richard Breeden said yesterday in a speech to the Securities Industry Association in Boca Raton, Fla. "A very large and successful securities firm was nearly pushed out of existence because of serious wrongdoing by two senior members of the firm."
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December 4, 1992, The Washington Post, Ex-Officers At Salomon To Pay Fines; Gutfreund, 2 Others Settle With SEC, by David S. Hilzenrath and Brett D. Fromson,
Former Salomon Brothers Inc. chairman John H. Gutfreund and two other former top Salomon executives have agreed to pay a total of $225,000 in penalties to settle government charges that they committed "a serious breach of their supervisory obligations" in the scandal that rocked the market for U.S. government securities last year.
After learning that one of their senior traders had committed an apparent "criminal act," Gutfreund, former Salomon president Thomas W. Strauss and former vice chairman John W. Meriwether took no action for months while the trader remained on the job and continued to violate securities laws, the Securities and Exchange Commission said in a statement of its findings released yesterday.
In agreeing to the settlement, the three former executives neither admitted nor denied the SEC's findings. All three were forced to resign from the firm last year when the violations were disclosed.
Gutfreund, 63, who built Salomon into a global financial powerhouse and became a prominent Manhattan social figure, has agreed to be barred from serving as chairman or chief executive of a securities firm, the SEC said. He will pay a $100,000 fine, the maximum civil penalty the SEC can impose per violation and the first fine ever imposed for a failure to supervise.
Strauss accepted a $75,000 penalty and a six-month suspension from the securities business, while Meriwether agreed to a $50,000 penalty and a three-month suspension.
SEC Chairman Richard C. Breeden, who announced the settlements at a meeting of securities professionals in Florida, called Gutfreund's conduct "truly shocking."
"Faced with wrongdoing, it is not sufficient for the senior management of a firm to turn their heads and allow the conduct to reoccur," Breeden said.
Gutfreund issued a written statement accepting responsibility but claiming a measure of vindication.
"As the firm's chief executive, I held myself ultimately accountable, and I accept the consequences," Gutfreund said. "I look forward to going back to work," he said.
Gutfreund added that the SEC "has found that neither I nor my colleagues at the firm condoned" what he called "the inexplicable misconduct" of senior bond trader Paul W. Mozer. "When we realized we had been deceived by the man responsible, we investigated, reported the facts to the government and the public, and fired the wrongdoers," he said.
But the SEC report cast the facts in a different light.
In April 1991, it said, Salomon's general counsel told the three top executives that Mozer's submission of a false bid at a U.S. Treasury auction appeared criminal and should be reported to the government. "However, for a period of months, none of the executives took action to investigate the matter or to discipline or impose limitations on Mozer," it said.
The firm began investigating the matter only after government officials began asking questions about Mozer's bid, the SEC said, and Salomon did not disclose that violation and others until August 1991.
According to the SEC report, Gutfreund, Strauss, Meriwether and General Counsel Donald M. Feuerstein each said someone else was responsible for investigating Mozer's conduct and restraining him. Their collective failure "caused unnecessary risks to the integrity" of the government securities market, the SEC said.
The revelation that Salomon had manipulated Treasury auctions prompted a sweeping review of the way the government sells securities to finance the national debt. Some changes were adopted, but a major set of reform proposals was defeated in Congress.
Salomon Brothers settled an SEC complaint in May by agreeing to pay $290 million. Mozer and one of his subordinates, Thomas F. Murphy, are contesting an SEC lawsuit filed Tuesday.
Some observers said the SEC action was mild punishment compared with the loss the three executives suffered when they left Salomon in disgrace.
"I think the message to Wall Street was delivered {previously} - if a CEO on Wall Street learns of serious criminal activity at his firm and does nothing, he cannot survive ... This SEC action is simply adding insult to injury," said Columbia University law professor John C. Coffee Jr.
Rep. Edward J. Markey (D-Mass.), chairman of the House subcommittee on telecommunications and finance, said that the relative lightness of the penalties showed that the SEC needs greater powers to enforce the securities laws.
The fines were not seen as great burdens for the three top executives. Gutfreund's cash compensation for 1990 and 1991 totaled $3.5 million. He has been trying to collect back pay, severance benefits and stock options from Salomon that are valued at more than $19 million. Strauss has made a similar claim.
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December 19, 1992, The Buffalo News, Ex-Salomon Trader to Plead Guilty,
The former chief of Salomon Inc.'s government bond trading desk has agreed to plead guilty to two felony counts to settle criminal charges linked to his role in last year's Treasury auction scandal, sources said Friday.
Sources knowledgeable of the case said the settlement involving Paul Mozer is due to be announced around Jan. 7.
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January 6, 1993, The Bond Buyer, Salomon reinstates Treasury trader suspended after short-squeeze scandal. (Salomon Brothers Inc., Christopher Fitzmaurice) by Charles Gasparino,
Salomon Brothers Inc. announced yesterday that it will reinstate bond trader Christopher Fitzmaurice, who was suspended in the wake of the firm's 1991 government bond scandal.
The firm said Fitzmaurice, who traded five-year Treasury notes at the time of his suspension, had "cooperated fully with all authorities" and that he "was neither charged with any wrongdoing, nor did the authorities' reports refer to any of his conduct as being part of the misconduct of others."
Robert Baker, Salomon's spokesman, said Fitzmaurice will join the firm's government trading operations sometime this week.
Fitzmaurice was suspended by the company, a unit of Salomon Inc.. after the firm disclosed in August 1991 that its government bond trading desk, under the leadership of Paul W. Mozer, had violated Treasury auction bidding rules dating back several years.
The company, in response, fired Mozer, a managing director, as well as his second in command, Managing Director Thomas F. Murphy.
The scandal's impact also forced the resignation of several top executives of the firm, including John H. Gutfreund, the former chairman and chief executive officer; John W. Meriwether, a former vice chairman; and Thomas W. Strauss, Salomon's former president and chief operating officer.
On Monday. Salomon announced that it had settled compensation agreements with Meriwether and Strauss.
Henry Epstein, a clerk on the government desk, was also suspended. Sources close to the company say that Salomon has asked Epstein to resign with one month of salary. Baker would not comment on Epstein's current employment status.
In a telephone interview, Fitzmaurice would not elaborate on what role he will now play at the firm, which has undergone a dramatic overhaul since his suspension. "Obviously, I look forward to going back. I'm excited," he said. "But I have no comment. I'm trying to reestablish my career."
The scandal sparked wide-ranging investigations by the Securities and Exchange Commission and the U.S. Justice Department into the $3 trillion Treasury securities market.
In December, the SEC announced in a civil suit that it was charging Mozer and Murphy with several securities law violations. The Justice Department has not revealed its findings.
Mozer's lawyer, Stanley Arkin, did not return telephone calls. Elkan Abramowitz, Murphy's lawyer, said his client is innocent of the charges and "hopes to be vindicated."
Details of the Salomon Treasury market scandal emerged after market players reported a short-squeeze in the May 1991 two-year notes.
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January 6, 1993, The Buffalo News, Salomon to Pay $4 Million For Trading Claims,
Salomon Inc. has agreed to pay $4 million to resolve claims by regulators in 39 states and the District of Columbia stemming from its 1991 Treasury bond scandal, officials said today.
Salomon will pay $2 million into a new nationwide trust fund to be supervised by state securities regulators, and the remaining $2 million will be split among the local governments, with each receiving $50,000.
The settlement is based on information in Salomon's agreement last May to pay $290 million to resolve Securities and Exchange Commission charges for submitting false bids in Treasury securities auctions between 1989 and 1991.
Several top Salomon executives resigned in the scandal. The firm was overhauled but did not face criminal charges.
The states not involved in the Salomon settlement are Alaska, Arizona, California, Connecticut, Florida, Idaho, Ohio, New York, Rhode Island, Virginia and Wisconsin. Those states may settle individually with Salomon.
On Tuesday Salomon reinstated a government bond trader who was suspended with pay 17 months ago during the firm's Treasury bond scandal.
The trader, Christopher Fitzmaurice, was suspended on Aug. 9, 1991, along with the head of government bond trading, Paul Mozer; a top aide, Thomas Murphy; and a clerk, Henry Epstein.
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January 7, 1993, The Buffalo News, Key Salomon Exec to Plead Guilty,
Paul Mozer, a central figure in the Salomon Brothers Inc. Treasury bond scandal, today filed court papers that set the stage for his guilty plea to two criminal charges of making false statements to the government.
At an arraignment in Manhattan, Mozer attorney Stanley Arkin told federal District Court Judge Leonard Bernikow that his client "pleads not guilty for the purposes of this proceeding."
But a hearing was set for Monday, at which time Mozer is expected to formally enter his guilty plea.
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January 8, 1993, The Washington Post, Former Salomon Trader Will Plead Guilty in Bond Scandal; Mozer to Pay $500,000 on 2 Felony Counts, by Jay Mathews,
Paul W. Mozer, the former Salomon Brothers Inc. executive who was at the center of the Treasury securities market's biggest scandal, revealed today he has agreed to plead guilty to two felony counts of making false statements to the government and to pay $500,000.
Mozer, 37, a short, bespectacled man in a dark gray suit, entered a not guilty plea before a U.S. magistrate as a formality this morning, but his attorney, Stanley S. Arkin, filed papers and issued a statement saying Mozer would plead guilty at a Monday hearing under terms negotiated with federal prosecutors.
The plea bargain, described in a letter to Arkin from U.S. Attorney Otto G. Obermaier, reduces the "offense level" of Mozer's crimes, making it unlikely he will serve the maximum five years for each count. Arkin has attempted to prevent any jail time and said today he hoped for a "humane and just sentence."
Arkin ridiculed the federal charges, also filed today, as overkill against unauthorized Treasury auction bids that "produced no loss to the government or Salomon's customers nor ... any gain for Mr. Mozer or Salomon."
He said a publicity campaign by Salomon and its new chairman, Warren E. Buffett, portraying Mozer as a rogue employee made it "inevitable that the prosecutorial appetite would be sated only by serving up of a scapegoat and that Mr. Mozer was the chosen morsel."
Salomon, a global financial house based here, fired Mozer and Mozer's top aide, Thomas Murphy, and paid $290 million in fines and penalties to settle Securities and Exchange Commission charges. The firm's chairman at the time of the unauthorized bids, John Gutfreund, and three other top executives resigned. Gutfreund and two others were disciplined by the SEC, but Mozer is the only person to have had criminal charges filed against him.
Mozer is accused of submitting false bids for two Salomon clients, Quantum Fund and Warburg Asset Management, at a Feb. 21, 1991, auction of five-year U.S. Treasury notes. Using the clients' names without their permission allowed Mozer to purchase $5.1 billion in notes, about 57 percent of the securities at that auction, in violation of a Treasury procedure limiting any single buyer to 35 percent.
Arkin said Mozer, then a managing director in charge of Salomon's government trading desk, violated the procedure as "an administrative convenience" because the firm "needed some additional bonds" and had kept his job after telling superiors what he had done. Arkin said similar violations by other firms had brought no criminal penalties. Mozer not only did not profit, Arkin said, but "forfeited over $6 million to Salomon because of his actions."
Salomon officials have speculated Mozer broke the rules to settle a score with a Treasury official who had tried to restrain Mozer's aggressive bidding.
The SEC, in a separate and still unresolved case, has accused Mozer of arranging improper trades in 1986 to create fictitious losses for tax purposes and violating insider trading rules by selling 46,000 shares of Salomon stock three days before the firm disclosed the scandal. It said he also submitted a false bid as part of a clumsy practical joke on a retiring colleague.
In the plea agreement, Mozer promised to put $500,000 - the equivalent of the probable maximum fine for the two counts - in a government escrow account to pay SEC fines or civil claims, with the remainder going to the Treasury. Stanley M. Grossman, an attorney representing investors claiming losses from the unauthorized bids, said the amount was "grossly inadequate" relief for losses he said might be in "the hundreds of millions of dollars."
Assistant U.S. attorney John W. Auchincloss II said the plea bargain does not preclude criminal antitrust charges, but Hays Gorey Jr., a trial attorney working on the case for the antitrust division of the Justice Department, declined to comment.
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January 12, 1993, Associated Press / Albany Times Union, Bond Trader's Plea Deal Collapses,by Rob Wells,
A delicate plea bargain between federal prosecutors and former Salomon Bros. bond trader Paul Mozer was crushed in federal court Monday when attorneys couldn't agree on the scope of the document.
Mozer had agreed to plead guilty to two counts of making false statements to the government concerning unauthorized bids he directed at a Feb. 21, 1991, Treasury bond auction. Under that deal, he faced a maximum 10 years in prison and agreed to pay $500,000 into a special government fund.
However, Mozer wasn't expected to serve the maximum term based on his cooperation with government investigators. His future is in question because he now faces the risk of indictment and conviction on more serious charges.
The deal collapsed when Mozer's attorney, Stanley Arkin, continued to express his reservations about an important but technical aspect of the plea deal during a hearing in U.S. District Court in Manhattan. Arkin contended that the plea would bar the U.S. Justice Department from bringing antitrust charges against Mozer.
Arkin said his belief is based on discussions with members of the U.S. attorney's office, on behalf of the Justice Department, during the complicated plea negotiations.
Assistant U.S. Attorney Laurie Brecher disagreed.
"There have been no such representations made by this office," she said. Brecher said the U.S. attorney's office now intends to proceed with an indictment. The office also plans to nullify a criminal "information" it filed Thursday against Mozer. An information is a document similar to an indictment that specified the allegations underpinning the plea.
U.S. District Judge Robert Patterson Jr. said he would not accept the plea without both sides coming to "a meeting of the minds."
"I don't like to take a plea from any defendant unless he knows where he stands," Patterson said.
"It is fairly clear that this agreement does not embody the understanding of the parties, at least in your mind," Patterson said, referring to Arkin.
Arkin, however, contended that his position is supported by the language contained within the plea agreement. Arkin said he intends to file court papers later this week asking the court to enforce the deal.
Brecher said the agreement isn't binding on any other branch of the government except the U.S. attorney's office in Manhattan. The Justice Department is investigating Mozer on possible antitrust violations but has yet to file charges.
Patterson said he could not accept the plea because of the dispute.
Mozer, 36, did not speak at the hearing and sat quietly while Arkin argued the case. Salomon Brothers fired Mozer as head of the brokerage's government bond trading desk in August 1991 after the firm admitted to improper bidding at several Treasury bond auctions between 1989 and 1991.
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January 12, 1993, The Buffalo News, Plea Agreement Collapses for Salomon Bond Trader,
A delicate plea bargain between federal prosecutors and former Salomon Brothers bond trader Paul Mozer was crushed in federal court Monday when attorneys couldn't agree on the scope of the document.
Mozer had agreed to plead guilty to two counts of making false statements to the government concerning unauthorized bids he directed at a Feb. 21, 1991, Treasury bond auction. Under that deal, he faced a maximum 10 years in prison and agreed to pay $500,000 into a special government fund.
However, Mozer wasn't expected to serve the maximum term based on his cooperation with government investigators. His future now is in question because he now faces the risk of indictment and conviction on more serious charges.
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January 12, 1993, The Bond Buyer, Federal judge rejects Mozer plea agreement. (Paul Mozer) by Charles Gasparino, Charles,
A U.S. district judge yesterday refused to accept a plea agreement hammered out between federal prosecutors and Paul Mozer, the former chief trader for government bonds at Salomon Brothers Inc.
Under the agreement with the U.S attorney's office in New York, Mozer would have pleaded guilty to two felony counts of lying to Treasury officials about his role in the August 1991 Salomon Treasury market scandal.
The agreement was designed to help prevent Mozer, who Salomon officials say was responsible for submitting false bids during several Treasury market auctions, from going to jail, his attorney said.
But U.S. District Judge Robert Patterson Jr. said he could not accept the plea agreement because several issues remained unresolved in the government's case against Mozer.
Patterson said, for example, that Mozer could still face a criminal indictment for antitrust violations by the Justice Department's antitrust division. Mozer also faces a civil suit brought by the Securities and Exchange Commission.
Mozer's attorney, Stanley Arkin, said that despite the judge's ruling, the agreement is still valid. "The plea agreement is completely enforceable," he said.
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January 12, 1993, The Washington Post, Mozer's Plea Agreement Collapses; Judge in Bond-Trading Case Says Too Many Issues Left Unresolved, by Jay Mathews,
An agreement for a guilty plea by Paul W. Mozer, the alleged instigator of the Treasury securities market's biggest scandal, collapsed today and prosecutors said they would seek an indictment of the former Salomon Brothers Inc. executive.
Mozer's attorney, Stanley S. Arkin, and assistant U.S. attorney Laurie E. Brecher disagreed, sometimes vehemently, in court today over the meaning of a plea bargain announced Thursday that would have forced Mozer to accept two felony counts and pay $500,000.
After an hour-long court session in the morning and another hour in the afternoon, U.S. District Judge Robert Patterson Jr., who has been supervising several aspects of the Salomon scandal, said there were too many unresolved issues and he could not accept the plea bargain.
The agreement broke down over Arkin's objections to language in the charges filed by federal prosecutors Thursday. The charges said Mozer, Salomon's former head of government bond trading, covered up by "trick, scheme and device" his February 1991 purchase of Treasury notes using clients' names without their permission. He also objected to Brecher's insistence that the plea bargain did not shield Mozer from potential federal antitrust charges.
Arkin said federal attorneys had promised him Mozer would not be tried on antitrust charges. He threatened to call those attorneys to testify. He said he wanted Patterson to accept the plea bargain but allow him to argue it precluded other charges. Mozer, Arkin said, "won't plead to anything that smells of mail fraud or stock fraud."
Brecher said she knew of no promises to Mozer not covered in U.S. Attorney Otto G. Obermaier's letter to Arkin outlining the plea agreement. It required Mozer to plead guilty to two counts of making false statements to the government and put $500,000 in a government escrow account to pay Securities and Exchange Commission fines or settle civil claims, with the remainder going to the Treasury.
"We simply have no agreement and can pursue an indictment," Brecher said. Arkin said he would file papers by Wednesday arguing that the agreement should be put in force, but Brecher said the differences were too great to support the plea bargain.
The plea bargain reduced the "offense level" of the two felonies, making it unlikely Mozer would receive the maximum prison sentence of five years on each count. Arkin had sought an agreement that would rule out jail time. Mozer faces civil SEC charges as well as possible antitrust criminal prosecution.
Arkin has accused the government of using Mozer as a scapegoat while being lenient with his former superiors at Salomon. Mozer violated trading procedures as "an administrative convenience" and did not profit from the bond purchases, Arkin said.
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January 13, 1993, Chicago Sun-Times, Ex-Salomon Bros. Exec Charged With Fraud,
NEW YORK Former Salomon Bros. Managing Director Paul Mozer, a central figure in the Treasury market scandal that engulfed the investment firm, was indicted Tuesday on securities fraud charges, according to court papers.
The indictment comes one day after a plea agreement between Mozer and prosecutors fell apart.
Mozer, who ran Salomon's government trading desk, was charged by a federal grand jury with securities fraud, two counts of false statements and one count of false books and records.
The indictment claimed Mozer ran a scheme designed to enable Salomon to buy Treasury notes "greatly in excess" of 35 percent of the total auctioned - the limit set by Treasury rules - by submitting false bids.
When it auctions bonds, notes and bills, the Treasury limits the amount any firm may purchase so one firm cannot corner the market and drive up the price as the securities are resold to investors.
The court papers charged that Mozer ran the scheme to obtain unlawful profits for Salomon and, indirectly, for himself.
Mozer's plea deal collapsed Monday in a dispute between his lawyer and prosecutors over proposed language and the question of whether the pact would protect the former trader from prosecution by other federal agencies.
Mozer had agreed in writing with the U.S. Attorney's office in Manhattan last week to plead guilty to two counts of lying to the government in connection with a Treasury auction.
But his lawyer, Stanley Arkin, objected to language that implied Mozer was involved in a conspiracy and possibly committed mail or wire fraud.
A Salomon representative had no comment on the indictment.
Salomon has admitted it purchased more securities than a single firm is allowed to have in order to corner the market in that and other cases.
The scandal echoed throughout Wall Street and brought a $290 million payment by the firm to settle the case.
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January 13, 1993, The Washington Post, Mozer Is Indicted on Four Felony Counts, by Jay Mathews,
A federal grand jury today indicted Paul W. Mozer, the alleged instigator of the Treasury security market's biggest scandal, on four felony counts after his attorney's complaints killed a plea bargain that would have involved only two counts.
The grand jury charged Mozer, 37, the former head of the Salomon Brothers Inc. government bond trading desk, with the two counts of making false statements to the government included in the plea bargain, and added one count of securities fraud and one count of keeping false books and records.
The two original counts carry a maximum prison sentence of five years each, which would have been significantly reduced under the plea bargain. The two new counts carry a maximum prison sentence of 10 years each.
The indictment charges Mozer with violating federal competitive bidding rules and then concealing his offense in connection with a Feb. 21, 1991, auction of U.S. Treasury notes. Mozer's attorney, Stanley S. Arkin, has admitted that his client submitted bids in the name of two Salomon clients without their permission, but has described the offense as an "administrative convenience" that hurt no one and did not merit a criminal penalty.
Salomon, a global financial house based here, fired Mozer and Mozer's top aide after the scandal became public and paid $290 million in fines and penalties to settle Securities and Exchange Commission charges. Three top Salomon executives who left the firm were disciplined by the SEC but Mozer is the only person involved in the case to have been indicted.
In a statement released today, Arkin said the indictment is "outrageous conduct by the government and we will address it in court." A federal judge declined Monday to accept a plea bargain Arkin negotiated with the government after Arkin complained that prosecutors were not keeping a promise to shield Mozer from possible antitrust charges.
The indictment charges that Mozer submitted the false bids "for the purpose of obtaining unlawful profits for Salomon and, indirectly, the defendant." The court has not resolved a strenuous debate over how much was lost by whom during the scandal, which included false bids at other auctions not mentioned in the indictment. Salomon officials have denied profiting from the February 1991 false bids.
Under the indictment, Mozer is liable for fines of up to $2.5 million or twice any amount illegally gained in the transaction, whichever is more. Under the plea bargain, he had promised to put $500,000 in a government escrow account to pay SEC fines or settle civil claims, with the remainder going to the Treasury.
Salomon officials have suggested that Mozer made the false bids to retaliate against a Treasury official who had complained about his aggressive trading. Arkin said he did it as a favor to other Salomon executives who needed more notes.
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January 13, 1993, The Buffalo News, Mozer Indicted in Bond Scandal,
Former Salomon Brothers bond trader Paul Mozer was indicted Tuesday on securities fraud and related offenses, a day after the collapse of a plea agreement that involved less serious charges.
Mozer, 37, was the head of the brokerage's government bond trading desk until August 1991. The firm had admitted to improper bidding at several Treasury bond auctions between 1989 and 1991.
John Auchincloss, an assistant U.S. Attorney in Manhattan, said a federal grand jury indicted Mozer on one count of securities fraud, two counts of false statements and one count of causing a broker-dealer to keep false booking records.
Mozer is accused of "falsely and fraudulently" identifying Warburg Asset Management, a Salomon customer, as the bidder for $3.15 billion in five-year Treasury notes on Feb. 21, 1991, when Salomon was the true bidder.
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January 13, 1993, Associated Press / Albany Times Union, Trader Indicted on New Charges,
NEW YORK - Former Salomon Brothers bond trader Paul Mozer was indicted Tuesday on securities fraud and related offenses, a day after the collapse of a plea agreement that involved less serious charges.
Mozer, 37, was the head of the brokerage's government bond trading desk until August 1991. The firm had admitted to improper bidding at several Treasury bond auctions between 1989 and 1991.
John Auchincloss, an assistant U.S. Attorney in Manhattan, said a federal grand jury indicted Mozer with one count of securities fraud, two counts of false statements and one count of causing a broker-dealer to keep false booking records.
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February 2, 1993, The Washington Post, Digest,
T-bill rates were mixed. The Treasury auctioned three-month bills at an average discount rate of 2.97 percent, down from 2.98 percent last week, and six-month bills at an average of 3.10 percent, up from 3.09 percent. The actual return to investors will be 3.04 percent for three-month bills, and 3.19 percent for six-month bills. Separately, the Fed said the average yield for one-year Treasury bills fell to 3.41 percent last week from 3.47 percent the previous week.
Construction spending rose 6.2 percent in 1992, the largest increase in six years, the government said. But spending remained unchanged in December after three monthly increases, and the October and November increases were revised downward substantially.
The Treasury estimated that it will need to borrow $67 billion in the January-March quarter.
Former Salomon Brothers bond trader Paul Mozer tried to resurrect a plea agreement stemming from the investment firm's Treasury bond scandal, but a federal judge indicated he may reject the deal once more.
General Dynamics will receive $1.4 billion in contracts from Belgium, the Netherlands, Norway and Denmark for upgrades on the countries' F-16 Falcon aircraft.
Mobil acquired a 10 percent interest in Qatar Liquefied Gas Co. and the associated offshore development contract in the second agreement in two months by the two companies to develop natural gas reserves off Qatar.
Student Loan Marketing Association (Sallie Mae) is negotiating to buy land in Reston to build an office complex for employees who now work in six rented facilities in Herndon. Sallie Mae reiterated that its headquarters will remain in the District.
GM named to its board Louis W. Sullivan, president of the Morehouse School of Medicine and former secretary of the Department of Health and Human Services, and John H. Bryan, chairman and CEO of Sara Lee.
WorldCorp of Herndon announced the formation of a fourth operating business, WorldGames. It is the exclusive worldwide licensee of technology developed by US Order for applications in parimutuel betting, lotteries and other gaming operations.
Ford will invest $400 million to convert its St. Louis assembly plant to produce Explorer vans.
IBM sued Japan's Kyocera Corp. in Tokyo for $150 million in damages for alleged infringement of a copyright on basic software built into personal computers.
Dell Computer said it has been cleared by federal regulators in a foreign exchange-trading investigation and that it would not be required to restate earnings for fiscal 1992 and 1993. As a result, it will able to go forward with a planned 4 million-share stock offering.
Sears said it is re-evaluating plans to force the closure of all 2,000 of its independently owned catalog stores. Instead, it may opt to keep as many as 25 percent of them open, not as catalog stores but as retail outlets.
Humana said the IRS approved its split into two companies through a tax-free stock spinoff.
Blockbuster said earnings rose 55 percent in the fourth quarter and 52 percent for the year.
Macy's said it earned $147.7 million in December, the first profit the retailer has reported since filing for Chapter 11 bankruptcy protection a year ago.
Japan's unemployment rate in 1992 climbed for the first time in six years. The government said the unadjusted unemployment rate rose on average to 2.2 percent in calendar 1992 from 2.1 percent a year earlier.
Paul Bilzerian was ordered by a federal judge to pay back $33 million in profits from takeover attempts involving Cluett, Peabody and Hammermill Paper.
Theodore Cooper, Upjohn's chairman and CEO, has been diagnosed with a bone marrow tumor but is responding well to treatment, Upjohn said.
Mel Levine, who served in the House as a Democrat representing California from 1983 to 1993, has joined the law firm of Gibson, Dunn & Crutcher as a partner.
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May 18, 1993, The Boston Globe, Those May '93 notes reach real maturity, by David Warsh, Globe Staff,
It was just about two years ago that the most famous auction in Treasury Department history was held -- May 22 to be exact. Salomon Brothers wound up owning $10.6 billion of the $11.3 billion of the May 1993 notes, and the ensuing squeeze cost its competitors tens of millions of dollars. It also nearly cost the most powerful investment house on Wall Street its very existence.
All that summer a scandal oozed delicately behind the scenes. When Salomon's chairman John Gutfreund retreated to his Nantucket summer house in August 1991 after a week of tough negotiations with federal regulators, he knew that the New York Times would run a front-page story the next day detailing Salomon's problems for having apparently cornered the market. It didn't matter, he thought. Nobody reads the paper on Saturday, anyway. His wife told her friends, "John says it's like getting a traffic ticket."
That it wasn't is owed mainly to a mild-mannered business school professor from Brookline named Robert Glauber, who as a deputy treasury secretary oversaw federal borrowings. It was Glauber whom Gutfreund had tried to fool about the events of May in June 1991, arguing that the squeeze wasn't really a squeeze at all. (A later reconstruction showed a yield curve in the weeks after the auction that looked for all the world like the Big Dipper.)
And it was Glauber, along with Federal Reserve Bank of New York president Gerald Corrigan and Securities and Exchange Commission chairman Richard Breeden who decisively clobbered Salomon, beginning with quietly sourced newspaper stories in August. (No thanks here to Federal Reserve System governor John LaWare, who told the papers: "I don't think that anyone involved in it was significantly damaged by it.")
The result today is that Gutfreund is out of the securities business; Warren Buffett is in as a kind of caretaker of the damaged Salomon; and it is US Rep. Ed Markey from Malden with whom Salomon (and all the other big dealers in US government securities) must negotiate over the rules that govern their markets. The New York Fed's Corrigan is going off to private life to make some money, and Karen Horn, once a lowly staff economist for the Bank of Boston, president for a time of the Federal Reserve Bank of Cleveland, is among the leading candidates to succeed him in that powerful position.
These details (except the last) are just a few among many to be gleaned from Martin Mayer's latest book, "Nightmare on Wall Street: Salomon Brothers and the Corruption of the Market," just published by Simon and Schuster. It is perhaps one of the two best candidates for summer reading for those who follow the financial community.
Along with Kathleen Day's "S&L Hell: The People and the Politics Behind the $1 Trillion Savings and Loan Scandal," it is strong testimony of the remarkable power of a savvy reporter to construct a narrative and bring coherence to remarkably complicated events.
Mayer, whose first book about Wall Street dates back for more than 20 years, has just gone on getting better and better as a combination of investigative journalist and moral philosopher of the marketplace. His newest volume has all his trademark virtues: an ear for the good quotation, a willingness to follow good stories where they lead (former Salomon partner Michael Bloomberg's mutation into a titan of financial news hasn't been better told than here), and inexhaustable patience in explaining how market mechanisms actually work.
Mayer does a good job of getting the motives for the Salomon corner in context. He shows how Paul Mozer, the chief government securities trader for the financial powerhouse, was seeking to settle a score with rapacious hedge funds -- led by the likes of George Soros, Bruce Kovner, Michael Steinhardt, Julian Robertson and Paul Tudor Jones -- that had been taking advantage of government interest rate policies to play the bond markets almost risk free. Salomon got caught for treating government regulation cavalierly, and was justly punished -- but the buccaneering that had tipped them into misbehavior went largely unnoticed. And now the behavior has spread to the international currency markets.
Indeed, when you think about it, the clever attempt to play the angles of obscure government guarantees that lay at the deepest level beneath the Salomon scandal are not so very different from the more transparent and familiar attempts to use government insurance programs to finance heads-I-win-tails-you-lose behavior that are described in Day's crisp account of "S&L Hell." She covered the story for the Washington Post. She makes it abundantly clear the variety of ways in which caution was thrown to the winds by regulators, politicians and lenders.
Should it surprise us that once the government makes it virtually impossible to fail, that crooks (of both the self-conscious and unconscious variety) arrive in droves, just as surely on Main Street as on Wall Street? Perhaps not. But as Day's account makes clear, it did surprise us, shareholders, regulators and legislators alike -- over and over again. I don't know about the economics of it, but "Nightmare on Wall Street" and "S&L Hell" make me proud to be an alumni of the reporters' trade.
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July 18, 1993, The Washington Post, Book Review, Cleaning Up the Junk, by Stan Hinden,
NIGHTMARE ON WALL STREET: Salomon Brothers and the Corruption of the Marketplace, by Martin Mayer (Simon & Schuster) 272 pp. $23
IF WALL STREET had a Hall of Shame, junk-bond king Michael Milken and arbitrageur Ivan Boesky would be the focus of dramatic exhibits on market manipulation.
But those displays would pale besides the awesome diorama that would be devoted to Salomon Brothers, its former chairman John Gutfreund and the firm's role in manipulating the $2.2-trillion U.S. government bond market.
For, as one of Martin Mayer's Wall Street sources observed, Milken was just playing games with corporations. Salomon was playing games with the U.S. government - and with the bond auctions that the Treasury Department relies upon to finance the operations of our government.
An experienced investigative reporter, Mayer has produced a detailed, informative but uneven and sometimes hard-to-follow narrative on the 1991 scandal that nearly devastated Salomon Brothers, one of Wall Street's most powerful trading and investment banking firms.
What happened, it was alleged, was that Salomon's 36-year-old chief bond trader, Paul Mozer, put in fake bids and tried to corner the market in Treasury securities and, to cover it up, gave orders to falsify Salomon's books. Salomon eventually admitted to breaking bidding rules in Treasury auctions nine times and paid $290 million in fines. Mozer's case is pending.
Gutfreund learned about the Mozer episodes but failed to report them until the investigators closed in. Indeed, at one point, Gutfreund tried to convince a Treasury official that nothing improper had happened.
As the scandal became public, Gutfreund and several associates were forced out of Salomon, and the reins of the firm were handed to billionaire investor Warren Buffett, who had invested $700 million in the firm several years earlier. Known as "Mr. Clean," Buffett was able to save Salomon by promising Congress and federal and state regulators he would clean house and tell all.
Mayer takes the reader through the history of the 83-year-old firm. By the time the bond scandal broke, Salomon had become a global giant, with $4 billion in capital and major operations in London and Tokyo. In 1986, Mayer reports, Salomon Brothers had more than 500 officers who made more than $500,000 a year.
Salomon's reputation for arrogance and excess was skewered in two books: Liar's Poker, by former Salomon employee Michael Lewis, and Bonfire of the Vanities, a novel by Tom Wolfe that forever branded Salomon traders as "Masters of the Universe."
Mayer argues persuasively that "Management didn't tell the authorities about Mozer's misbehavior because it didn't want to tell the authorities, not because people were forgetful."
"In the 1980s," Mayer writes, "too much of America lost the fear of shame that used to police behavior; in the 1980s, it became fashionable to respect people for putting up with shame - provided they were paid well to do so."
Mayer blames government regulators, too: "Salomon did cheat and disgracefully, but a lot of the blame for what happened rested with the government agencies that failed to supervise this market at precisely the time when it most needed supervision," he writes.
The Treasury Department and the Federal Reserve, Mayer contends, not only failed to prevent bond auction violations but did not take vigorous action after the scandal. "Unfortunately, after the first burst of fear and loathing of Salomon," he writes, "neither the Fed nor the Treasury was willing to take significant steps to clean up the government securities markets."
The pertinent word here is "significant," because the Treasury and the Fed did, indeed, change many of the auction rules and began computerizing the auctions. Mayer apparently does not consider them to be "significant," nor does he offer much analysis of whether they will work.
Few journalists understand Wall Street and the financial markets better than Mayer. And his explanations of Wall Street's complicated strategies are useful, although they may be difficult for many readers to comprehend.
WHAT IS ultimately disappointing about Mayer's book is that it doesn't tell us nearly as much as we would like to know about what happened inside Salomon during those final hours before it all came crashing down.
Perhaps it was just too soon to get people to talk. As Mayer was writing the book, the principals in the scandal were still up to their eyebrows in lawyers and regulators, trials and lawsuits.
The Nightmare on Wall Street was all too real, but the full story has yet to be told.
Stan Hinden is a financial columnist at The Washington Post.
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July 29, 1993, Albany Times Union, Judge Reinstates Trader's Plea Deal,
NEW YORK -- A judge on Wednesday reinstated a plea agreement for former Salomon Brothers bond trader Paul Mozer, saying the deal had been unfairly withdrawn by prosecutors "irked by the defendant's independent and uncooperative attitude."
U.S. District Judge Pierre N. Leval said Mozer can plead guilty to two counts of making false statements to the Federal Reserve Board in a prosecution that stemmed from Salomon's illegal bidding at Treasury bond auctions. The agreement allows Mozer, 38, to pay a $500,000 fine and possibly serve prison time.
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July 29, 1993, The Bond Buyer, Deficit reduction talk prompts welcome Treasury market lift. (Treasury Market) (Column) by William Pesek,
Good news on the deficit reduction package being tossed around congress helped the Treasury market end yesterday's session on a strong note.
The 30-year bond was the star performer on the yield curve, finishing the session up 13/32, to yield 6.64%.
Speculation about deficit reduction preoccupied the market yesterday. The market came under selling pressure on concerns that some Democrats might withdraw support for the budget plan.
But reports that President Clinton is considering an executive order to control entitlement spending growth gave the market a much-needed lift. The control would probably involve little more than notification of Congress when outlays exceed limits, but the fact that Clinton is focusing on the entitlement problem was encouraging to the market.
The long bond, which had been down as much as 11/32, managed to finish the day in positive territory on the news.
Strong demand for the second round of the Treasury's monthly note auctions this week was also supportive to the market. Sixteen billion dollars in five-year notes was awarded at 5.25%. The bid cover was a respectable 2.77 and non-competitive bids were relatively strong at $635 million.
"The budget news and the auction results helped us end strong after declines this morning," said Marilyn Schaja, money market economist at Donaldson, Lufkin & Jenrette Securities Corp.
In overseas trading, the intermediate and long sectors of the curve came under selling pressure in Asia and London on concerns about the passage of Clinton's budget.
That weakness carried over into the New York trading session and was exacerbated by an attempt by market participants to build a concession into the five-year note ahead of the auction.
A 3.8% increase in durable goods orders for June added further selling pressure. Most analysts were looking for an increase in the neighborhood of 1.0%.
David Wyss, chief financial economist at DRI/McGraw Hill, said a swing in the volatile transportation component was behind much of the rise in orders. But overall, "the data confirm our opinion that we'll get slightly more strength in the second quarter of the year," Wyss said.
One head trader agreed that the durable goods report, coupled with other recent signs of economic growth, supported the view that the U.S. economy continues to expand, and he said those indicators will weigh on the minds of market participants as the market approaches the quarterly refunding.
"With more supply on the way, the economy improving, and inflation picking up, the market is paying closer attention to every piece of data that comes out," said Tony Crescenzi, head fixed-income trader at Miller, Tabak, Hirsch & Co.
The market still has a few hurdles to clear this week before participants can get a firm grasp on overall market fundamentals.
One is today's preliminary report on gross domestic product for the second quarter, which will provide the market with its first comprehensive look at economic activity in the first half the year. Of particular interest will be the fixed weight deflator contained within the overall release, as the market is especially sensitive to signs of upward price pressure these days.
Analysts polled by The Bond Buyer generally expect a 2.2% increase on overall GDP and 2.8% rise in the deflator.
"The market will take a close look at GDP and then at the employment report next week to see where it's headed," said Jim Winder, money market economist at Merrill Lynch Capital Markets.
Initial claims may also attract some interest, with most economists forecasting an increase of 25,000 claims, after last week's increase of 24,000. But economists cautioned that the number is likely to be skewed higher by floods in the Midwest and the General Motors plant shutdown, and thus will not provide the market with a clear view of activity in the employment sector.
Supply is likely to once again move to the forefront next week ahead of the Treasury's quarterly refunding announcement.
In other news, a federal judge ruled yesterday that former Salomon Brothers trader Paul Mozer, who was indicted for his role in the 1991 Treasury securities bidding scandal, can plead guilty to lesser charges.
According to court papers released today, U.S. District Judge Pierre Leval ruled that Mozer must be allowed to plead guilty to the terms of the original plea agreement that contained two counts of making false statements.
A spokesman for the firm refused to comment on the ruling.
In the cash markets, the 4 1/8% two-year note was quoted late yesterday Up 2/32 at 100.02-100.03 to yield 4.20%; the 5 1/8% five-year note ended up 5/32 at 99.21 -99.23 to yield 5.18%; the 6 1/4% 10-year note was Up 5/32 at 102.21-102.23 to yield 5.87%; and the 7 1/8% 30-year bond was up 13/32 at 106.02-106.04 to yield 6.64%.
In when-issued trading, the five-year note -- to be auctioned Wednesday -- was quoted at 99.12.
The three-month Treasury bill was down two basis points at 3.09%; the six-month bill was down two basis points at 3.24%; and the year bill was down one basis point at 3.46%.
Treasury Market Yields
Prev. Prev.
Tuesday Week Month
3-Month Bill 3.13 3.12 3.06
6-Month Bill 3.31 3.27 3.20
1-Year Bill 3.58 3.48 3.43
2-Year Note 4.20 4.12 3.99
3-Year Note 4.46 4.45 4.31
5-Year Note 5.18 5.16 5.03
7-Year Note 5.51 5.50 5.42
10-Year Note 5.87 5.83 5.77
30-Year Bond 6.64 6.65 6.67
Source: Cantor, Fitzgerald/Telerate
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December 6, 1993, The Bond Buyer, SEC zeroing in on firms failing to catch lawbreakers, by Vicky Stamas,
The clock is ticking in Washington.
So said Securities and Exchange Commission member J. Carter Beese Jr. Thursday in a speech before the Securities Industry Association where he put Wall Street on notice that regulators are cracking down on officials at firms that inadequately police brokers and look the other way when they smell a violation of federal securities laws.
It's called "failure to supervise," the SEC has been bringing a lot of these cases lately, the most celebrated of which was its blowout of top brass at Salomon Brothers Inc. for failing to adequately rein in false bidding by Paul Mozer in U.S. Treasury securities auctions.
Judging from Beese's speech, which had broad endorsement from other commissioners, the SEC is going to be bringing a lot more of these cases.
Interestingly enough, the municipal securities market got kudos along these lines from Beese, who lauded the 17 major securities firms who have "stopped the practice of pay to play" as part of a crackdown on political contributions.
"This |gang of 17' firms is sending a message that the toughest laws and the strictest regulations could never send - that we are here to serve the public, and that the public interest is not for sale," Beese said.
But political contributions aside. Beese said that the SEC, along wide self-regulatory groups like the National Association of Securities Dealers, must seek increased sanctions against brokers who commit abuses of sale practice, suitability, and other standards - and against their supervisors.
So what's this "failure to supervise" business all about? A review of the basics may be in order here, with help from SEC commissioner Mary Schapiro, who recently outlined the area in a speech before the NASD. According to Schapiro, such cases are without question among the toughest cases that the commission handles
She said the agency is authorized to bring failure to supervise cases under Section 15(B)(4)(E) and 15(b)(6) of the Securities Exchange Act, which requires the agency to find that a firm or individual "failed reasonably to supervise, with a view to preventing violations ... another person who commits such a violation."
The statute includes an "affirmative defense" that provides that no person may be charged with failure to supervise as long as he or she "reasonably discharged the duties and obligations incumbent upon him by reason of his firm's procedures," and had no reasonable basis for believing that those procedures were not being followed.
But distinguishing between who is and who isn't a supervisor is difficult for the SEC because organizational charts often do not reflect the real lines of authority at securities shops.
Schapiro pointed to the SEC's reversal in 1989 of an administration law judge's finding that a branch manager's assistant failed to reasonably supervise a salesperson.
The assistant was responsible for identifying sales practice problems, but he had only a very limited authority to take corrective action.
Nevertheless, as grave problems with the broker continued, and the branch manager failed to respond effectively, the assistant reported the matter to the firm's director of surveillance, Schapiro said.
After reviewing the case, the commission concluded that "a supervisory employee with even limited authority must ... go beyond his limited authority to contact the firm's national headquarters concerning a rogue broker's activities." In the view of the SEC, the assistant branch manager fulfilled that requirement, Schapiro said.
The facts of the case demonstrate the grayness of the failure to supervise area. They also show that officials at firms will only be on solid ground with regulators if they refuse to look the other way when there is evidence of wrongdoing.
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December 15, 1993, The Buffalo News, Salomon Trader Given Four Months,
Former Salomon Brothers Inc. trader Paul Mozer will spend four months in prison for lying to regulators about illegal bids he authorized in the 1991 Treasury auction scandal.
U.S. District Judge Pierre N. Leval, sentencing Mozer Tuesday, rejected a defense request for probation, citing the seriousness of the offense.
Mozer pleaded guilty in October to two counts of making false statements to Federal Reserve Bank investigators concerning two illegal bids he authorized for $6 billion of 5-year Treasury notes on Feb. 21, 1991. The bids were $2 billion above Salomon's permitted share in the auction.
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December 30, 1993, Chicago Sun-Times, Ex-Salomon Trader Fined, Banned,
NEW YORK Federal regulators fined an ex-Salomon Brothers trader $300,000 and banned him from future Treasury auctions today, the harshest punishment yet against an individual in the brokerage's bond cheating scandal.
The action by the Securities and Exchange Commission against Thomas Murphy settles administrative charges he faced as a result of the 1991 scandal, in which Salomon flouted government rules in Treasury auctions, a critical operation for financing the national debt and making the economy run smoothly.
The Murphy punishment comes less than a month after a federal judge in Manhattan sentenced Murphy's old boss, Paul Mozer, to four months in prison for lying to regulators about illegal bids he authorized for Treasury bonds. The SEC still has civil charges pending against Mozer.
The SEC had charged Murphy, a former managing director and head government bond trader at Salomon, with submitting false customer bids for Treasuries in three auctions. It also charged that Murphy caused Salomon to keep false books and records in connection with the trades.
In addition to the fine and banishment, the SEC order barred Murphy from employment in the securities industry for two years.
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December 31, 1993, Chicago Sun-Times, Nation / Business In Brief,
EX-SALOMON TRADER FINED NEW YORK - Federal regulators fined an ex-Salomon Brothers trader $300,000 and banned him from future Treasury auctions Thursday, the harshest punishment yet against an individual in the brokerage's bond cheating scandal. The action by the Securities and Exchange Commission against Thomas Murphy settles administrative charges he faced as a result of the 1991 scandal, in which Salomon flouted government rules in Treasury auctions, a critical operation for financing the national debt and making the economy run smoothly. The Murphy punishment comes less than a month after a federal judge in Manhattan sentenced Murphy's old boss, Paul Mozer, to four months in prison for lying to regulators about illegal bids he authorized for Treasury bonds.
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January 3, 1994, The Bond Buyer, SEC fines, bars trader formerly with Salomon for alleged bid rigging. (Thomas Murphy) by Stephen A. Davies,
WASHINGTON - Former Salomon Brothers government bond trader Thomas Murphy has agreed to pay a $300,000 civil fine and stay out of the securities business for two years in a settlement with the Securities and Exchange Commission on charges of rigging bids in three Treasury debt auctions during 1990.
The SEC announced the terms of the settlement of Thursday after it was filed in U.S. District Court for the Southern District f New York. Under the agreement, Murphy neither denied nor admitted guilt, and pledged to cooperate on ongoing federal litigation against former Salomon bond trader Paul Mozer. Murphy was a managing director and head trader at Salomon before he was fired when the company's false bidding activities came to light.
SEC officials charged Murphy with submitting false customer bids of $1 billion each in a five-year Treasury note auction on Aug. 29, 1990, and a four-year note auction on Dec. 27, 1990. He was also charged with a false bid of $1 billion in a two-year note auction on Dec. 26, 1990. In each case, Murphy was said to have made the bids without customer approval.
Under the settlement, Murphy is permanently barred from biding at Treasury debt auctions.
He is also barred from associating with any broker, dealer, underwriter, investment company, or investment adviser for two year. He may then reapply to work in the securities business in a nonsupervisory, nonproprietary job. After five years, Murphy may reapply to work in a proprietary or supervisory position.
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April 1, 1994, Futures (Cedar Falls, IA). Meriwether Hedges Bets, by Miriam Bensman,
David Mullins resigned his post as vice chairman of the Federal Reserve in early February to sign on as partner at Long-Term Capital Management. No doubt the former Fed mandarin brings a powerful understanding of financial markets, but he also brings a valuable respectability to a group dominated by alumni of Salomon Brothers' renowned bond and derivatives trading desks.
Pete Peterson's former role in the Nixon Cabinet did wonders for the glamour of The Blackstone Group. Similar glamour might aid Long-Term Capital's bold effort to raise $2.5 billion for its first fund. Failure to meet a 81 billion minimum caused the firm to delay the start of trading one month, until early March.
But market sources said the key obstacles to Merrill Lynch's efforts to line up institutional investors were the fund's $10 million investment minimum and steep fees that virtually guarantee partners make money even if clients don't. The firm would collect 2% of funds under management, plus 25% of each customer's profits. Officials at the firm declined to comment.
Former Salomon Vice Chairman John Meriwether established the Greenwich, Conn.-based firm in September, planning to replicate Salomon's fabled bond arbitrage desk -- without the huge overhead of a full-service firm. In some years, Salomon's bond traders generated most of the firm's profits, but they nearly brought down the firm in 1991, when chief Treasury trader Paul Mozer was implicated for manipulating Treasury auctions.
Salomon forced Meriwether to resign, and the Securities and Exchange Commission (SEC) suspended him from the industry for three months and fined him $50,000 for failing to supervise Mozer sufficiently. Meriwether neither admitted nor denied wrongdoing.
At Long-Term Capital, Meriwether has a chance to test a theory that often divided Salomon officials: Did the trading desk's fat profits derive mostly from trading brilliance or from its unparalleled view of customer flows from atop the biggest bond brokerage and dealing house?
Meriwether reassembled much of the talent. Besides Mullins, his new partners include Lawrence Hilibrand, dubbed the $23 million man because of the bonus he received for his trading prowess in 1990; Eric Rosenfeld, who had replaced Mozer as head of Treasuries; and Myron Scholes, co-author of the Black-Scholes option model and architect of Salomon's triple-A swap subsidiary.
He also set up an alternative source of market-flow information, establishing close ties with several non-U.S. banks. Will it be enough?
One thing is sure: If it meets its $2.5 billion target, and operates on the 100-to-1 leverage likely for a bond arb, Long-Term Capital will be well positioned to do the kind of market-moving trades Meriwether was famous for at Salomon -- and that Federal Reserve officials announced in late February they plan to investigate.
If so, bank regulators watching hedge funds' aggressive trading practices may soon find themselves toe-to-toe not just with Meriwether, but with Mullins, their former superior.
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April 24, 1994, The Independent, Phantom Profits on Wall Street, by Larry Black,
THERE are some troubling parallels in the mercurial careers of Joseph Jett, the Kidder Peabody treasuries trader, and Paul Mozer, the Salomon Brothers treasuries trader.
Both men, at 36, rose to become head of the government securities desks at their firms from relatively humble origins. Both were also intensely competitive, bristling whenever their judgement was challenged. Mr Jett would literally roar at subordinates who displeased him, while Mr Mozer once told a deputy assistant US Treasury secretary he was going to have him sacked.
And in the tough, post- 1980s regulatory climate on Wall Street, both men wound up being accused of engineering schemes that cost their employers hundreds of millions of dollars.
Mr Jett was dismissed last week after allegedly booking some $350m-worth of illusory profits. He has yet to tell his side of the story - apparently because his bank accounts have been frozen and he has been unable to retain a lawyer.
Mr Mozer, for his part, recently pleaded guilty to criminal charges of lying to regulators about his 1990 attempt to corner the market in US Treasury securities. He is to go on trial in June on separate charges filed by the US Securities and Exchange Commission.
The fact that both scandals have implicated young professionals is no coincidence, securities enforcement officials say. A Master's degree in business administration has become indispensable for taking on the hi-tech markets where big money is being made.
Derivative debt instruments such as the Treasury "strips" Mr Jett allegedly manipulated - the interest-paying portion of a bond that has temporarily been divorced from its principal - represent ripe ground for a clever and opportunistic trader. Not only regulators have trouble monitoring these markets; George Soros, the best-known hedge fund manager, conceded last week that not even he understands some of the more arcane products.
US regulators say the complexity of the bond market is leading to a rash of new frauds. "Hi-tech and computers make it easier to move money, easier to hide it, easier to steal it," says James Dudine, a former enforcement chief with the US Federal Deposit Insurance Corporation.
What stands out about both the Kidder and Salomon episodes, however, is that they involved relatively straight- forward deception. In both cases, a lack of supervision would have been a key factor in allowing such schemes to work.
The alleged scheme at Kidder exploited a shortcoming of the company's computer accounting system, which carries the value of "forward" trades - agreements to sell a security at a future date - at their eventual sale price. Typically, this is higher than current value. The difference between the prices, which normally narrows as the sale date approaches, is treated by the system as a profit - essentially ignoring the cost of carrying the strip in the meantime.
The "profit" would normally disappear once the security was sold. But by "rolling over" the trade - in this case, allegedly re-selling the strip to a non-existent buyer - the system maintained a profit on the account.
But as was the case with the Salomon ploy - which involved overbidding at US Treasury auctions to ensure Salomon controlled a huge share of the issue - the Kidder scheme was curiously flawed. To keep reporting profits, one would be condemned to keep rolling over the same trades with ever-longer maturities and for ever-bigger amounts.
Sooner or later, the game would have to come to an end, according to bond traders from rival firms. "The mystery," said a compliance officer at another Wall Street firm, "is that in neither case did anyone seem to have prepared for that eventuality."
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July 15, 1994, The Independent, Business and City in Brief: Mozer settles,
Paul Mozer, former head of Salomon's government securities trading, agreed to pay $1.1m to settle the Securities and Exchange Commission's civil charges related to a treasury bond bidding scandal. He has also agreed to be permanently barred from associating with any broker, dealer, municipal securities dealer or investment adviser.
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July 15, 1994, The Buffalo News, Ex-Salomon Trader Fined, Barred,
The man at the center of the Salomon Brothers bond bidding scandal, Paul Mozer, was barred from the securities industry for life and fined $1.1 million under a settlement of civil charges, the Securities and Exchange Commission said Thursday.
Mozer, who ran Salomon's powerful bond trading desk, was charged with authorizing eight false bids totaling $13.5 billion in seven Treasury auctions between August 1989 and May 1991. The bids were an attempt to corner the market for certain bonds.
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July 15, 1994, Post-Tribune (IN), Salomon Scandal Figure Barred From Securities,
SALOMON SCANDAL FIGURE BARRED FROM SECURITIES
WASHINGTON - The man at the center of the Salomon Brothers bond bidding scandal, Paul Mozer, was barred from the securities industry for life and fined $1.1 million under a settlement of civil charges, regulators said.
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July 15, 1994, Albany Times Union, Salomon trader agrees to fine, by Betsy Feldstein,
Salomon trader agrees to fine - WASHINGTON A former top trader at Salomon Brothers Inc. has agreed to pay a $1.1 million fine and accepted a permanent ban from the securities industry for his role in a 1991 Treasury bond auction scandal, the Securities and Exchange Commission announced Thursday. - Paul Mozer, the former head of Salomon's government securities trading, already has served four months in jail on criminal charges stemming from the scandal. He agreed to the fine and ban in settling a civil lawsuit filed by the commission. - Mozer neither admitted nor denied wrongdoing in the settlement, which was approved on Wednesday by the U.S. District Court in Manhattan. - Mozer's lawyer, Stanley Arkin, was traveling Thursday and did not return telephone calls to his office for comment.
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November 23, 1994, The Bond Buyer, Basham replaces recently retired Williams at First Fidelity. (Michael E. Basham, Alexander S. Williams, First Fidelity Securities Group) by Joyce Hanson,
Veteran municipal market executive Alexander S. Williams retired last week as head of trading and banking at First Fidelity Securities Group in Newark, N.J.
Michael E. Basham, a former debt official at the U.S. Treasury Department and managing director at Smith Barney Inc., replaced Williams effective Monday, a firm spokesman said. Williams ended his tenure with the regional bond firm last Friday. Williams could not be reached for comment.
The spokesman said Basham, like Williams, will hold the title of executive vice president. In his new role, Basham will serve as manager of First Fidelity's capital markets group. Williams served as manager of the securities group.
Williams, who joined the firm in 1970, worked in a variety of Treasury market and investment banking positions. Williams also worked at the firm of Drexel, Hardman, Ripley Inc. in New York City as a vice president in charge of national municipal bond trading.
Basham, who also could not be reached for comment, resigned from Smith Barney several months ago, a spokesman for the firm said. Basham joined Smith Barney in August 1991.
Previously, Basham worked in the U.S. Treasury Department as assistant secretary for federal finance. He served as an adviser to former Treasury Secretary Nicholas Brady in formulating the government's debt management policy.
In that role, Basham also worked as a liaison between the Treasury and government securities dealers. In 1990, Basham clashed with former Salomon Brothers trader Paul W. Mozer, who allegedly orchestrated the firm's illegal bids of Treasury securities.
Afterward, the Treasury adopted the so-called Mozer-Basham role, prohibiting firms from acquiring more than 35% of any Treasury offering sold at auction.
Market sources have speculated that First Fidelity may see more top-level public finance executives leave the finn.
'There is a major house cleaning going on at First Fidelity;' said a source with knowledge of New Jersey public finance.
In response to the speculation, company spokesman Paul Levine said, "As a matter of policy, we don't comment on minors. The only personnel rumors we respond to as policy are retirements and new hires."
Among senior managers nationwide, First Fidelity Securities Group has ranked 391h in 1994, with 62 issues totaling $558 million for a market share of 0.4%, according to Securities Data Co. For all of 1993, the firm ranked 361h, with 100 issues totaling $974.5 million for a market share of 0.3%.
For New Jersey bond sales so far in 1994, First Fidelity Securities Group ranked third among senior managers for competitive sales and fourth for negotiated sales.
So far this year, First Fidelity was senior manager on 17 negotiated New Jersey issues totaling $152.8 million and 38 competitive issues totaling $350.1 million.
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September 28, 1995, The Boston Globe, Scandals beg question: Who is minding the store?, by Steven Syre, Globe Staff,
In the 1980s, Wall Street became notorious as a place where rogues could makes millions seemingly overnight. These days the rogues are those losing hundreds of millions -- seemingly without their employers knowing what they were up to.
The latest example: Daiwa Bank Ltd. executive Toshihide Iguchi, who Tuesday was charged with hiding bond trading losses of $1.1 billion built up over a decade in an effort to cover a relatively modest $200,000 loss. Operating in New York, thousands of miles from his bank's home office, Iguchi was caught only after he wrote a confession letter to Daiwa's president.
Before Iguchi came Nicholas Leeson, a brash trader for London's Barings Bank who was operating a half a world away in Singapore when his high-risk strategy in Japanese markets went sour. Leeson guessed wrongly when he doubled his bets, creating a crippling $1.4 billion loss for the British bank. He fled Singapore in February and was arrested in Germany the next month.
Joseph Jett's problem wasn't bad trades. It was trades that never happened, according to his employer, Kidder Peabody. Jett allegedly maneuvered around Kidder's internal controls to credit himself with $350 million in profits from fictious trades worth $9 million in commissions. He steadfastly denies any wrongdoing.
The charges against Jett, Leeson and now Iguchi have made them the most recognizable faces on a '90s market phenomena, the rogue trader. Other lesser known names, including Yukihusa Fujita of Showa Shell Seklyu, Howard Rubin of Merrill Lynch and Paul Mozer of Salomon Brothers, are also alleged to have stepped over the line in the course of trading.
But their backgrounds, apparent motivations and reactions to staggering losses have all been dramatically different. Their cases, and others like them, consistently say more about the institutions left to manage the losses rather than the rogues themselves.
Those institutions that get in trouble tend to be in moderate-growth businesses and highly focused on driving profits by leveraging their capital, according to consultants, academics and others.
"The phenomena is probably more prevalant because of the scope and scale of parties involved," said Brad Warner, who runs Bank of Boston Corp.'s treasury department. "The reality is these markets can be very brutal."
And in most cases their actions suggest a company looking away from early signs of trouble, or at least an improbable degree of gullibility.
In many of the cases "you have to ask yourself how it could go on for so long without people looking the other way," said William Saubert of Arthur D. Little, who runs the consulting company's financial institutions practice.
But many large trading organizations are built with inadequate resources to protect themselves against the damage some traders can do, accounting firms say.
"It's a little bit like building a car with a 24-cylinder engine and no breaks," said Richard Breeden, former chairman of the US Securities and Exchange Commission who now runs the worldwide financial services practice at Coopers & Lybrand.
"Your building high-power organizations to deal in risks and it's not always the case that companies have invested equally in having an adequate-sized, independent and highly sophisticated control network," he said. "When a trader gets in trouble, whether he's American, Japanese or British, the instinct is to double bets and double them again is as old as human history."
In at least two cases, at Barings and Daiwa, the traders also managed their back offices, a practice that is not allowed in most companies because it creates the opportunity to manipulate settlement reports.
But supervision of aggressive trading has become a taller order in recent years, even when auditors and others have all information available.
The increasing complexity of derivative investments used by traders sometimes makes it more difficult to access the degree of leverage, and risk, involved with a particular position.
And some senior executives simply don't understand what their traders are doing.
"You've got management that doesn't know as much as the people they are managing," said Richard Schechter, managing director of Aesop Systems L.P. of Chicago, which develops software for trading risk management.
"There is this saving-face factor at the management level," he said.
And there is no reason to ask questions when traders are making money. Managers overtaken by the complexity of trades made by their company are rarely in a position to scrutinize if the position makes money.
"When market participants win, very often people will have the attitude that it doesn't matter why they succeeded. Don't mess with success," said Andrew Lo, a finance professor at the Sloan School of Management at the Massachusetts Institute of Technology.
"A lot of the problems that have come about are due to the fact that there isn't enough financial technology in large organizations. I don't mean computers, I mean a true understanding of quantitative models that comprise financial engineering.
"The problems you see are not so much the evils of derivatives but that senior management does not understand the intricacies of these products," he said.
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October 5, 1998, AP Online, Does John Meriwether still have the Midas touch?, by Dennise Lavoie,
STAMFORD, Conn. (AP) -- For David Ellis, a young trader with the ink barely dry on his MBA, there was a moment one afternoon in July 1983 that captured the essence of John Meriwether.
Meriwether, then a general partner at Salomon Brothers, was already a legendary bond trader on Wall Street and revered by Salomon trainees such as Ellis.
"After the market closed one day, one of us asked him if he believed in efficient markets, and his answer was, "I MAKE them efficient."
"It epitomized him," said Ellis.
Finding market inefficiencies and pouncing on them is what made Meriwether a star trader at Salomon and later the wonder boy at Long-Term Capital Management LP, a wildly successful hedge fund he founded in the tony town of Greenwich in 1994.
Meriwether's brilliant reputation took a sudden hit when Long-Term Capital nearly collapsed, requiring a $3.6 billion rescue from a consortium of banks and brokerage houses hastily assembled by the Federal Reserve Bank of New York.
Now, Wall Street is wondering whether this genius trader with the Midas touch can recover and rise again as a major player.
Some analysts believe Meriwether's reputation will probably only suffer short-term damage. Investors are well aware of the inherent high-risk nature of hedge funds, which are largely unregulated funds for the wealthy.
"I don't think he's tarnished as a trader; I think he's tarnished as a superhero," said Stephen Buser, a finance professor at Ohio State University.
"He has a stellar reputation as a trader. He doesn't have a crystal ball," he said.
Meriwether, 51, a notoriously private man who rarely speaks to the media, declined through a spokesman to be interviewed for this article.
Until its bailout, Meriwether and his fund were seen as something of a sure thing for rich investors. Meriwether's star-studded team at Long-Term Capital include Nobel economic laureates Robert Merton and Myron Scholes; former Federal Reserve Board vice chairman David Mullins Jr. and several arbitrage veterans from Salomon Brothers.
Some analysts predicted investors will be very forgiving of Meriwether and Long-Term Capital, which is now under the control of the bailout consortium. They cited problems even Meriwether and his brilliant partners couldn't have predicted, particularly the Russian bond market and the defaulting of ruble currency hedges by Russian banks.
"If a driver gets hit by a meteor while he's driving, you don't take away his driver's license," said Rene Stulz, editor of The Journal of Finance.
But others think it could be difficult for Meriwether to restore the confidence of investors and to attract capital the way he once did.
At the time of the bailout, Meriwether's firm had about $2.2 billion in capital from investors, but it had borrowed money from financial institutions to buy securities worth more than $90 billion. Fund managers then used those securities as collateral to make speculative bets representing $1.25 trillion.
"Certainly, since he's the head of (the fund), as Truman said, the buck stops there. It's definitely a setback for him," said Joseph F. Sinkey, a finance professor at the University of Georgia.
Some predict he and at least some of his partners will leave Long-Term Capital within a year to start another hedge fund. Others predict Meriwether will end up as a shining star at Goldman Sachs or another big brokerage house.
"He's talented, and talented people attract money," said David Mauer, a finance professor at Southern Methodist University.
This is not the first time Meriwether has had to reinvent himself. He left Salomon Brothers after being tainted by the 1991 bond bid-rigging scheme, one of the biggest scandals ever to hit Wall Street.
In 1991, Paul Mozer, a trader under Meriwether's supervision, submitted a false bid on U.S. Treasury notes. Although Meriwether told his bosses about the violations, they were not reported to the Treasury until months later. The scandal forced the resignations of Salomon's chairman, John Gutfreund, and president, Thomas Strauss.
Meriwether also resigned and later agreed to a three-month suspension and $50,000 fine in a settlement with the Securities and Exchange Commission in which he did not admit or deny negligence as a supervisor.
Analysts do not consider Long-Term Capital's problems a scandal, but instead simply a disaster caused by an overleveraged firm whose luck ran out.
"They are a hedge fund and they were supposed to take risks. Sometimes those risks don't work out. The only unusual thing here is that the Fed stepped in," said Stulz.
New York Fed officials feared that if Long-Term Capital collapsed, commercial banks and investment houses it borrowed from would have faced huge losses. They also worried that the fund's collapse would lead to a selloff that could devalue stocks and leave banks unable to extend credit.
Ellis, now a professor at Babson College, is one of many young traders who idolized Meriwether. He said he thinks Meriwether will re-establish himself, but probably not at Long-Term Capital.
"He's a trader par excellence," he said. "I think he'll pick himself up and dust himself off."
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April 1, 2000, Personnel Psychology, The leadership Moment: Nine True Stories of Triumph and Disaster and Their Lessons for Us All, by Richard Blackburn,
Michael Useem. The Leadership Moment: Nine live Stories of Triumph and Disaster and Their Lessons for Us All. New York: Times Business (Random House), 1998, 329 pages, $25.00.
Reviewed by Richard Blackburn, Associate Professor, Kenan-Flagler Business School, University of North Carolina, Chapel Hill, NC.
Consider the following situations. What actions would you take in each and, more important, why would you choose those actions?
Scenario #1. Your firm, a publicly owned organization, has invented a drug that would virtually eliminate an insidious illness afflicting millions of people each year. Development costs for the drug have been substantial, but those who would most benefit from the drug are among the poorest people in the world. Would you make the drug available to those who need it at no cost, forgoing any opportunity to recoup the development costs, although realizing that shareholders expect real returns on R&D investments?
Scenario #2. You receive reports that one of your subordinates has violated federal bond trading regulations. The offenses seem minor, and you believe that a stern reprimand should prevent further violations. Would you inform federal authorities about these violations, even though such revelations could result in harsh penalties for your firm? Or would you remain silent, knowing your firm reaps millions of dollars in profits from trading in government bonds?
These episodes reflect what Michael Useem calls "leadership moments." Examining these "moments" in depth allows those in or those aspiring to leadership positions to learn much about leaders and leading. The moments described above are two of the nine moments that Useem presents in his book by the same name. Scenario #1 highlights the difficult choice that Roy Vagelos had to make in the late 1980s about a new drug his organization, Merck & Company, had developed to cure river blindness in Africa. Vagelos opted to provide the drug without charge in the belief that he was doing the right thing-individually, organizationally, and communally.
Scenario #2 illustrates the situation in which John Gutfreund found himself in the early 1990s as the Chairman and CEO of Salomon, Inc. Government bond trader Paul Mozer had violated several Treasury bond purchasing regulations to inflate the percentage of bonds that Salomon purchased at a bond auction. Gutfreund's failure to take timely action against Mozer and to inform the Treasury Department of these infractions, resulted in Gutfreund losing his job at Salomon and nearly destroying Salomon and several other financial institutions. In this case, inaction from one in a leadership position created serious repercussions for the leader and his organization.
Arguing persuasively that the sharing of vivid leadership stories "can direct and inform our actions," Useem combines masterful story telling with insightful analysis to offer the reader opportunities to think about leadership under the gun. Nine moments are presented in separate chapters in the book. In addition to the two moments described above, we are also introduced to the following leaders and their leadership moments: Wagner Dodge, forest fire jump team leader, who lost 13 of his team members when they were overrun by fire in the Mann Gulch fire in 1949. Eugene Kranz, flight director for Apollo 13, who led the successful efforts of a large NASA team to return a crippled spacecraft and three astronauts to earth in 1970. Arlene Blum, leader of an allwomen climbing expedition to Annapurna in 1978 during which four of her teammates reached the peak, while two died in the attempt. Joshua Lawrence Chamberlain, a Union commander, whose troops played a key role in defending Little Round Top during the Battle of Gettysburg in 1863. Clifton Wharton, CEO of TIAA-CREF, who turned a hide-bound, bureaucratic, nonresponsive financial organization into a customer-friendly, adaptable, and flexible provider of financial products during the late 1980s. Nancy Barry, president and CEO of Women's World Banking, who left a powerful position at the World Bank to lead and grow a fledging institution offering microloans throughout the developing world in the early 1990s. Alfredo Cristiani, president of El Salvador, and the man most responsible for bringing the warring factions in a decades-long civil war to the negotiating table and arriving at a settlement acceptable to all parties in the early 1990s. As one might surmise from this lineup, Useem has provided the reader with a variety of leadership moments in a variety of leadership contexts. While discussing each moment, Useem distills several "leadership implications" from his analysis. Some forty of these leadership implications are summarized in "A Leader's Guide" following the book's final integrative chapter. In this final chapter, the author also identifies that particular leadership principle he derives from each story. Leadership principles drawn from the nine leadership moments include:
Useem summarizes his analysis of the nine leadership moments by noting that "[the single most important lesson from these moments is the overwhelming significance of vision and action."
In general, there is little to argue with his set or any one of his principles. On the other hand, the admonition to always "move fast" may create problems if fast movement eliminates reasoned thought. "Remaining steadfast" in the face of overwhelming odds or in the pursuit of a wrong-headed vision may be leader-like, but may also result in failed leadership efforts. In fact, strict adherence to these nine principles might create additional leadership moments. An appreciation of the leadership context would seem to be imperative.
This collection of leadership stories provides a compelling way to think about issues of leadership and to appreciate those moments when leaders must make decisions that can have monumental effects on the lives of few or many. Of particular delight in Useem's book is his ability to engage the reader in the stories told. I often found myself more interested in the stories than in the analyses. In addition, I learned much about several different leadership contexts: fighting forest fires, climbing mountains, or trading in government bonds, for example.
I have only minor quibbles with the resulting volume. The quality of the few pictures in the book is not particularly good. Black-and-white photos of climbing areas on Annapurna or the terrain in Mann's Gulch, for example, are so small and without referent that it is difficult to tell what is being illustrated. Although Useem found leadership stories that allowed a diverse set of leaders to be highlighted, few of his readers may be able to identify successfully with these leadership contexts. Perhaps an "heroic" leadership moment from middle management or from a context considered more "mundane" might have been a useful addition to the existing line-up. Finally, although proponents of heroic theories of leadership would find support for their position in these pages, in some of the stories the culture or context greatly influenced the leader's judgement. The actions taken (or not) Ray Vagelos and John Gutfreund seem to have been as much a function of their corporate cultures as their own leadership propensities. Some comment to that effect would have been welcomed where appropriate.
These are minor quibbles, and on the whole I believe Useem's collection of leadership stories to be well worth the investment of time. I have already found myself making reference to some of these leadership moments in leadership classes that I have been teaching. Although some of these "moments" took months or years to evolve, taking a shorter moment to read Useem's book should greatly benefit both current and aspiring leaders.
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November 16, 2011, Reuters Hedgeworld, U.S. SEC Targets Low-Level Bankers, Spares Top Execs
WASHINGTON (Reuters) - The U.S. government is not taking advantage of an enforcement tool that could potentially hold top Wall Street figures accountable for their role in the recent financial crisis, despite its prior success.
Broker-dealers, investment advisers, and others regulated by the U.S. Securities and Exchange Commission are required to supervise their representatives. If a trader engages in misconduct, the SEC can sue the management with "failure to supervise."
But in some of the biggest cases the SEC has brought in recent months - against units of JPMorgan, Goldman Sachs, and Citigroup - the agency has sued only low-level bankers.
Public anger following the U.S. government bailout of major banks in 2008 is fueling such disparate movements as Occupy Wall Street and the Tea Party, but government lawyers say they are bringing cases based on the evidence they have. Some experts argue the agency could be doing more.
"There is an affirmative obligation of supervisors to supervise their subordinates, but not a hint of that here," Duke University law professor James Cox said, referring to the SEC's recent cases against broker-dealer units of the top banks. "What I see as a method of operation is big entity fines, but not holding any responsible person responsible, thereby robbing enforcement of substantial deterrent effects."
An SEC spokesman declined to comment on its enforcement strategy.
The banks in question have paid between(JP Morgan) and(Goldman) since last summer to settle charges that they misled investors on complicated mortgage bond deals. Citigroup agreed to paylast month to settle similar allegations.
Bankers at the three institutions, the SEC said, hid the fact that they structured the deal to bet against it themselves or on behalf of clients who planned to do so.
A failure-to-supervise claim may have been challenging to bring in these mortgage cases. If the manager's actions, for example, didn't violate any of the firm's policies, it could be a tough case to make. In some of the deals at issue, it was the policies themselves that were at fault.
But the SEC has used the tool in the past to go after some of the most iconic figures on Wall Street.
When the SEC sued Salomon Brothers in 1992 over illegal bidding in Treasury auctions, for example, it didn't stop with the trader, Paul Mozer. It charged three members of the firm's top management with "failure to supervise" the trader: Salomon's chief executive, John Gutfreund, a vice-chairman and a president.
The SEC extracted from Mr. Gutfreund an agreement never to run a securities firm again, while the others agreed to brief suspensions from Wall Street. All paid fines of $50,000 to $100,000.
Such sanctions could be more difficult today, when companies often demand implicit agreement from the SEC to leave senior management alone in exchange for settling.
"Generally, I think there is a desire by most companies to try to not have their employees be on the firing line," said former Republican SEC commissioner Paul Atkins.
Companies also seek to settle, while individuals will fight back, making the cases more difficult and time-consuming to bring. The SEC brought its case against Mr. Gutfreund for knowing about the misconduct but failing to alert authorities. Whether higher-ups knew about the conduct at issue in the mortgage cases is unclear.
Defenders of the SEC say the agency is sensitive to public pressure to hold Wall Street responsible and is doing everything it can to bring those cases.
If the actions against JP Morgan and Citigroup had been brought several years ago, the SEC likely wouldn't have charged any individuals, even lower-level ones, said one securities lawyer, who declined to be named.
"They are looking for these cases, they are just not finding the evidence to support them," the lawyer said.
But other securities experts say failure-to-supervise cases are important to pursue due to the reputational impact they have, and the related deterrent effect.
"Maybe the facts weren't there, but I find that hard to believe," Mr. Cox said.
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