Wednesday, February 27, 2013

Bacon-Whipple Wannabes

October 11, 1987, New York Times, Life After Salomon Brothers, by William Glaberson,
May 12, 1988, New York Times, Salomon International Chooses President, by Daniel F. Cuff,
August 19, 1991, Los Angeles Times, U.S. Punishes Salomon, Rescinds Harsh Penalty, by Scot J. Paltrow,
September 27, 1991, Reuters, More Bad News for Salomon,
October 21, 1991, New York Times, Bank Sues Salomon and Travelers, by Alison Leigh Cowan,
November 7, 1991, Los Angeles Times, Salomon's Shopkorn Resigns,
December 20, 1991, New York Times, Another Top Manager Is Leaving Salomon, by Kurt Eichenwald,
December 27, 1991, Associated Press, Major Clients Returning to Humbled Salomon Bros: Scandal: Five months after admitting widespread Treasury bond cheating, some defectors give the reformed firm another chance. But Wall Street isn't sure.
January 17, 1992, New York Times, A Departure At Salomon,
March 26, 1992, Los Angeles Times, Big Money on Wall Street : Executives Reap Rich Rewards as Securities Industry Logs a Record Year, by Linda Grant,
March 29, 1992, New York Times, Buffett Plans a Salomon Exit,
May 7, 1992, Los Angeles Times, Scandal Drops Salomon Profits 30% : Earnings: The decline is blamed on customer unease over the continuing Treasury bond investigations, by Linda Grant,
May 7, 1992, New York Times, A Less Aggressive Salomon Sees Its Profits Decline 30%, by Seth Faison Jr,
May 28, 1992, New York Times, New Leader at the New Salomon, by Seth Faison Jr,
May 28, 1992, Los Angeles Times, Maughan Tapped to Lead Scandalized Salomon Bros, by Linda Grant,
June 4, 1992, Los Angeles Times, Ex-L.A. Lawyer Takes Buffett's Salomon Posts, by Linda Grant,
June 4, 1992, New York Times, Company News; A Surprise In Chairman At Salomon, by Seth Faison,
December 15, 1993, New York Times, Bond Scandal Figure Gets 4 Months, Fine, by Scot J. Paltrow,
August 28, 1994, BusinessWeek, The Man Who's Filling Meriwether's Loafers At Solly,
June 24, 1995, Los Angeles Times / Associated Press, Salomon's Trading Chief Resigns Post: Wall Street: Dennis Keegan's leaving marks the highest-level departure yet at the troubled investment bank,
July 6, 1995, New York Times, 34-Year Veteran Quits Salomon, by Peter Truell,
July 12, 1995, New York Times, Salomon Says It Will Report Another Loss, by Peter Truell,
July 28, 1995, New York Times, Salomon Displays High-Risk Heritage, by Pravin Banker,
January 24, 1996, New York Times, Salomon Earnings Declined From 3d Quarter to the 4th, by Stephanie Strom,
April 24, 1996, New York Times, Company Reports;Salomon's Earnings Soared In First-Quarter Rebound, by Peter Truell,
July 27, 1997, New York Times, How to Succeed in the Business News Business, by William C. Taylor,
September 24, 1997, The Cincinnati Post / Associated Press, Travelers to Buy Salomon For $9B,
September 25, 1997, The Economist, Salomon succumbs at last,
September 25, 1997, Chicago Sun-Times, Travelers agrees to purchase Salomon, by Andrew Fraser,
September 25, 1997, Chicago Tribune, Travelers To Collect Salomon For $9 Billion, by Merrill Goozner,
September 25, 1997, Wall Street Journal, Travelers to Buy Salomon In $9 Billion Stock Swap, by Michael Siconolfi, Anita Raghavan and Leslie Scismi,
September 25, 1997, Los Angeles Times, Travelers to Buy Salomon Bros. for $9 Billion,
December 25, 1997, Bloomberg / The Spokesman Review, Travelers' Deal Could Backfire; Salomon Purchase Garners Mixed Reviews on Wall Street,
January 6, 1998, Los Angeles Times, S. Koreans, Bankers Meet in New York, by Thomas S. Mulligan,
June 1, 1998, CNN Money, Travelers buys $1.58B stake in Japan's Nikko,
June 10, 1998, Los Angeles Times, Exec Who Helped Save Salomon Rejoins L.A. Firm, by Thomas S. Mulligan,
November 2, 1998, Los Angeles Times / Bloomberg Business News, Weill's Expected Successor to Leave Citigroup,
November 10, 1998, New York Times, Confusion Seen in a Departure at Citigroup, by Peter Truell,
December 27, 1998, Los Angeles Times, The BIZ QUIZ, by James F. Peltz,
May 23, 2001, New York Times, The Markets: Market Place; Citigroup will drop the Salomon name from its brokerage and banking units, by Patrick McGeehan,
August 12, 2001, New York Times, Private Sector; From King of Wall Street To Sultan of Supplements,
January 23, 2002, Los Angeles Times / Bloomberg News, CSFB Settles IPO Kickback Charges; SEC Says Investigation Continues,
January 27, 2002, New York Times, Update / Lewis Ranieri; A Mortgage Man Charts New Seas, by Riva D. Atlas,
March 10, 2002, New York Times, Private Sector; A Quiet Banker in a Big Shadow, by Lynnley Browning,
June 12, 2002, Reuters, Citigroup Reorganizes to Boost Global Focus,
June 12, 2002, New York Times, Shifts at Citigroup Renew Speculation on Succession; 4 Executives Are Given Expanded Duties, by Riva D. Atlas,
June 16, 2002, New York Times, Private Sector; A Knight Moves Up at Citigroup, by Riva D. Atlas,
June 29, 2002, New York Times, Turmoil at WorldCom: The Bankers; Salomon Brothers May Face WorldCom Shareholder Suits, by Andrew Toss Sorkin,
July 15, 2002, New York Times, Citigroup's Chairman Urges More Insulation of Analysts, by Patrick McGeehan,
October 28, 2002, New York Times, Sorting Out the Leadership Puzzle at Citigroup, by Riva D. Atlas,
November 23, 2002, Reuters, Probes Get Citigroup to Rethink Structure,
September 21, 2003, New York Times, Business People; A Blast From the Past, by Micheline Maynard;
February 23, 2004, Los Angeles Times / Reuters, Citigroup to Acquire Bank in S. Korea,
October 15, 2004, New York Times, Citigroup Has Record Gain; Bank of America Up 29%, by Timothy L. O’Brien,
September 23, 2010, New York Times, Gay Marriage Gets Boost From Wall Street, by Peter Lattman,
December 14, 2011, States News Service, Testimony on MF Global, Inc. - Federal Reserve Bank of New York,


October 11, 1987, New York Times, Life After Salomon Brothers, by William Glaberson,

ONE day this summer, Lewis S. Ranieri had one of the best jobs on Wall Street. The next, at the instigation of Salomon Brothers' chairman John H. Gutfreund, Mr. Ranieri was out; out as vice-chairman of the powerful company and out of Salomon Brothers altogether. The 40-year-old Mr. Ranieri went home with millions of dollars and a reputation as a brilliant competitor that he earned in 21 years as Salomon's rising star. He was suddenly, as one of his old colleagues at Salomon put it, ''outside the sandbox'' in which he had spent his entire professional life.

Some on Wall Street said the Ranieri episode was a classic power struggle. Others saw it as a sign that the changing financial business no longer had room for restless innovators. But whatever it meant to others, to Lew Ranieri it meant he had to figure out what to do with the rest of his life.

Mr. Ranieri's wealth assures that he will never have to confront the fears that preoccupy most people who lose their jobs. But, as he and a fast-growing group of other former Salomon stars have discovered, life after Salomon - or after being key members of any powerful and prestigious institution - can present its own challenges.

Many of the Salomon alumni seem driven to discover how much of their success was theirs alone - and how much had come because of the extraordinary organization where they made their names. And they are not likely to be the last to face that issue: Last week, Salomon was awash in rumors that new high-level dismissals were in the offing, part of a broad reorganization that is already underway.

While Mr. Ranieri was planning his future over the last several weeks, many of his old partners talked about their experiences - sometimes-painful, sometimes rewarding - of trying to find new places for themselves in a world where being an ex-anything does not mean much. Now, they are all outside the same sandbox. But until Salomon Brothers merged with the publicly owned Phibro Corporation in 1981, they were Mr. Ranieri's partners, part of a privileged collection of 62 men who had worked their way to the summit of the country's largest privately owned investment bank. The Phibro deal made the already-rich men even richer: Every member of Salomon Brothers "Class of '81" received an average of $7.8 million for his partnership shares.

But in the six years since the merger, almost half of the 62 have found their way - or have been pushed - out the door of the firm they propelled into Wall Street's top tier. A few retired with their millions. But most are working hard, proving what most people believe, but few have the luxury of testing: People work to give their lives meaning, not only to feed their families.

Salomon was, in the years when the members of the Class of '81 were climbing its ladder, a tough place to work. But people believed it was going somewhere. With a lean, aggressive style, it transformed itself in a matter of years from a modest bond house with limited corporate ties into a Wall Street powerhouse.

SALOMON'S big stakes, its Spartan style, the sharp elbows one fended off inside the firm, and the heady victories against its adversaries may have intensified the pressures on those who later tried to make it on the outside. They had seen themselves not just as part of an institution but as part of the best house on the Street.

"Salomon was home," said Robert F. Dall, a member of the Class of '81. "When I saw that name 'Salomon' in a tombstone ad in the newspaper, that was my name," said Michael R. Bloomberg, another member.

Mr. Bloomberg, 45, drives himself harder these days, if possible, than he did in his intense years at the firm. The name on the door now really is his: Bloomberg Inc. When he was winning in Salomon's bruising internal wars in the mid-70's, he occupied one of its prestigious seats: chief of the equity trading desk. He also designed a sophisticated computerized trading system that many Salomon traders believed gave them an edge.

By the time of the Phibro deal, he acknowledges, he was no longer winning. Except for Mr. Gutfreund, he says, he was not getting along with most other Salomon top managers. He had lost a power struggle and his coveted post in the trading room. In 1981, he left, and the day after he cleaned out his desk, he started putting together a new business. It has become hugely successful.

"There are cycles," he said. "Are you a winner or a loser? It depends on what part of the cycle it is." Clearly he likes this part of the cycle better.

Mr. Bloomberg saw a need among institutional investors that he thought he could fill: He supplies detailed information on securities trading through his own analytical computer network. He has applied himself to the task with the fierceness that made him a Wall Street headliner.

The relentlessly energetic businessman, who is just beginning to look a bit older than the bright-eyed Harvard Business School graduate he was when he started at Salomon, is up every morning at 5. He is in his New York office from 7 A.M. to 7 P.M. and his last call before he turns in each night is to his computer room. The company has 2,500 computer terminals on traders' desks all over the world. Mr. Bloomberg says he has access to all the capital he needs. And he may need plenty. "Do I want to put a terminal on everybody's desk?" he asked. "Sure."

To get to where he is now, Mr. Bloomberg had to deal with the details - big and small - that are usually handled by someone else in a big company. He needed an office and chose a space on Park Avenue, then had it designed with side-by-side desks to look like the Salomon trading room. He needed a major Wall Street firm as a partner to get access to its information base. He found Merrill Lynch and gave it a 30 percent stake.

The unfamiliar minutia of commerce were accompanied by flashes of uncertainty. "Anybody who is successful has a little bit of an inferiority complex, or power mania or something," he said. "You are always worrying. That's the thing that keeps you going." The other day his cheerful tone broke when he spoke about a friend whose business had failed. If things hadn't worked out, he said, that could have been me.

At first, some ex-partners said, it was liberating being free of all the pressure. "Remember that television program 'The Millionaire,' when someone rings your bell and gives you a million dollars and you can do whatever you want with it?" asked Kenneth Lipper, one of the select 62 who has since left the firm. "Figuratively, that's what happened here. Everyone is blessed with the opportunity of free will here. The question is: What do you do with your free will?"

MANY traveled and increased the time they spent on favored charities. Some served on the boards of schools they had attended, or wished they had. Mr. Lipper worked two years as Mayor Koch's Deputy Mayor and then ran unsuccessfully for City Council president. After the defeat, he went on a three-month archeological dig in Israel. Robert P. Quinn, another Salomon alumnus, enrolled in wine-making, music and French classes before he realized they could not hold his interest. Next, he spent $500,000 running for - and losing, but not by much - a Congressional seat.

At first, the freedom was intoxicating, said Jon W. Rotenstreich, who decided to leave in 1983. But rapidly, he said, the fun turned to panic. "After two months out, you are at a dinner party and people ask 'What do you do?' and you are tempted to say 'I was a very important partner at Salomon Brothers.'"

Mr. Rotenstreich, now 44, was another of the ambitious young men who helped make Salomon. The son of a furniture merchant in Birmingham, Ala., he was, like many of his peers, very young, just 29 years old, when he made it into the partnership. And, like many of the others of his generation at Salomon, he had a sharp, wandering mind and a strong personality that sometimes met head on with other strong personalities.

Salomon was, in the early 70's, a place where comers like Mr. Rotenstreich thrived on the intense intramural competition somehow managed by the firm's top partner, William R. Salomon. Under "Billy's" leadership, Mr. Rotenstreich developed the concepts for several new securities and helped engineer one of Salomon's major breakthroughs into the ranks once limited to a handful of old-line firms, the underwriting of a debt offering for International Business Machines in 1979.

The problem with some of Salomon's impatient geniuses, though, was that they had a tendency to get impatient. Mr. Rotenstreich started to feel itchy in 1983. ''I looked forward and I said, 'What's going to happen in the next 10 years? Am I just going to do a thousand and one transactions?' Once you've done a transaction, once you've done a corporate financing, it's only repetition.''

Mr. Rotenstreich, like many of his old partners, learned quickly that his ''free will'' had been shaped uncannily by life at Salomon. Regardless of whatever else was important to each, a Salomon partner's life was business - 24 hours a day, seven days a week.

He had intended to enjoy his freedom for six months, Mr. Rotenstreich said, but after five months, he accepted an offer to become corporate treasurer of I.B.M. He found out during the time he was between jobs, he said, that he was still the same man who had moved so fast through the ranks at the hottest firm on the Street. Being rich and free had only increased his ambition.

"You don't play this game for other people," he said. "You play this game for yourself. The fact that you have been given more resources is every reason to go on and do more. It doesn't end." After nearly three years at I.B.M., he left to become president of the Torchmark Corporation, an insurance and financial services company with $4 billion in assets. Over the years, even before the merger, many of the Salomon names Wall Street knew best disappeared. William E. Simon left in 1972 to become Deputy Secretary and then Secretary of the Treasury, and later built a huge financial empire. James D. Wolfensohn, who put Salomon in the spotlight as Chrysler's adviser, left after the buyout and now runs his own successful financial consulting firm.

Jay H. Perry and Richard G. Rosenthal, feuding geniuses who did as much as anyone to build the firm, also left. Mr. Perry, who put Salomon on the map as a trader of huge blocks of stock for institutional investors, never made it into the Class of '81. He lost his struggle with Mr. Rosenthal, was banished to the Dallas office and resigned in 1978. After stays at two other securities houses, he died of leukemia in 1985.

Mr. Rosenthal, a high school dropout with a genius for making money in arbitrage, was one of the firm's leaders at the time of the buyout.

But the next year, he left. He dabbled in business and had health problems. He died on a drizzly, foggy day last April, when the twin-engine plane he was piloting slammed into a house in Pleasantville, N.Y. He was 45.

The experts say successful executives often have trouble adjusting when they find themselves out of a job, even when they quit. James A. Wilson, a business professor at the University of Pittsburgh and a psychologist, says he has seen many people who have fulfilled the American dream. Many, he said, slip into depression when forced to build a new career. Years of intensity, single-minded commitment to clear goals, and reinforcement from others who share the same passions often leave people unprepared for anything other than the types of jobs that gave them success, Mr. Wilson said.

In the highly specialized, clubby world of Wall Street, the anguish of withdrawal can be especially intense. "If you've got a great athlete who gets hurt and can't play, it's misery," said Stephen A. Schwarzman, a former Lehman Brothers partner who is friendly with many of his old Salomon competitors. "And it's not the money: He wants to play ball.'' Mr. Schwarzman had his own experience with dislocation when he left Lehman after it was sold to Shearson/American Express in 1984.

Jay L. Lassner, 52, who ran Salomon's money-market desk, said he realized quickly that he needed something meaningful to fill his days after he left the firm. The enjoyable part of being able to do anything he wanted, he found, was not taking advantage of it - just knowing he could if he wanted. After 31 years at Salomon, he is in his third year of law school at Hofstra University and plans to practice securities law.

EVEN many ex-partners who no longer have ties to any institution remain bound tightly to their pasts. Stanley Arkin, 52, a securities trader who was given early retirement at the time of the merger, said he felt that the wealth he accumulated made it impossible for him to work energetically anywhere else. "There would never be another Salomon Brothers for me on Wall Street," he said. "It was a divorce for me: You're away from your family, you lose your children."

Still, he goes almost everyday to a small Manhattan office and trades for his own account. One recent day the market dived and he took a bath, he said. Leaning across the desk, he pushed a button on the Quotron machine. "I'm still a trader at heart," he said, with some loneliness in his voice.

Robert Dall sits in a small glass-walled office at Drexel Burnham Lambert, where he is a senior vice president in the mortgage department. Mr. Dall, 53, knew both happiness and despair at Salomon. In 1977, he initiated what would become a $550 billion new market for Wall Street. His innovation would become at once his greatest accomplishment - and his undoing.

Mr. Dall had the idea of marketing a new security backed by residential mortgages. It was a classic financial invention that caught on almost immediately. Soon, he was heading Salomon's new mortgage-backed securities department. He selected as his deputy Lewis Ranieri, then 30 years old and recognized as a Salomon man of extraordinary shrewdness.

Mr. Dall is not bitter about what happened next. But he says it began a very difficult period in his life. Slowly, he noticed that key clients and Salomon partners were conferring with Mr. Ranieri, not with him. From his office he could see all the activity while he slipped out of the information loop. Mr. Dall was, as Mr. Ranieri and others would be in time, forced out of a key post he cared very much about.

But Mr. Dall's fall was not formalized for many months. He would have liked a graceful way out, he said, but did not quarrel with the decision to have Mr. Ranieri bypass him. Mr. Dall was in poor health. Mr. Ranieri, he knew, had unique skills that could take the department further than he could. He felt the rise of his friend and deputy - and his own defeat - were inevitable results of the market that Salomon so worshipped making known its will. "If I didn't believe in the capitalist system, I could never accept what happened," Mr. Dall said. "But I do believe in it: The fittest moved ahead." Exactly three years after the Phibro merger, as soon as the terms of the deal allowed him to go to work for another major firm, Mr. Dall left Salomon. "I won financially," he said, "and I think I lost as far as the point in the ladder I got to."

He went to Morgan Stanley for a time, then tried retirement for nine months. Then, at 52, he returned to the work he enjoyed. At Drexel, he says, he is happy advising on mortgage deals and making sales calls to many of the people he has called on throughout his career. He is still competitive, but he is realistic: "I don't have any delusions, I'm not going to be president of Drexel."

Those who were asked to leave had other complicated feelings to deal with. "It was quite emotional," said Robert A. Bernhard, a corporate-finance partner who was informed he would not be "coming along" after the Phibro merger. For him, Salomon had meant a new kind of freedom.

He is the great-grandson of Meyer Lehman, one of the founding Lehman Brothers, where Mr. Bernhard had worked as a young man. The Salomon meritocracy, Mr. Bernhard said, "was really the first experience I had had without being saddled with being a Lehman. When I was at Lehman Brothers, it was always, 'Well, what do you expect, he's a Lehman,' when I did well or badly." It was especially defeating to be dismissed after shaking off that heritige, he said. The disappointment was not eased by the fact that the decision was made by Mr. Gutfreund, once a close friend who had been married to a cousin of Mr. Bernhard's wife.

With his "Our Crowd" roots and family fortune, Mr. Bernhard had never needed to work for a living. But whatever it was that had kept him going all those years moved him again, at the age of 53. Immediately after he left Salomon in 1981, he opened his own firm in New York, Bernhard & Associates, and went looking for investment-banking deals.

For the first few years, he said, one prospect after another fell through. "But somehow or other, I had to prove to myself that I could go on in business," he said. At the beginning, he was focused on proving to "them" that they had made the wrong decision, he remembered. As a result, he said, he sometimes pursued overly ambitious plans. Then, when he began to look forward, instead of back, he said, and to scale back his ambitions, things began to fall into place.

Today Bernhard & Associates has four partners, manages more than $100 million and makes periodic investments in mature companies that are in special situations. It is now breaking even and the profits on some of its investments have been substantial. But, he said, he wouldn't object if a big investment-banking client walked in the door of his office tomorrow morning. "We are still," he said, "waiting for deals."

Each ex-partner found his own answers to the questions all faced after they left Salomon. But most are, in one way or another, still looking for that next big deal. They are looking because, in their Salomon years, the deals helped them know who they were and where they belonged. It is what they know how to do.

Some will rediscover the thrill they knew as part of the group that built Solly. Some will never get there again. They don't know that yet or, perhaps, don't want to. "Most people," said Mr. Dall, "are not willing to accept that they're not going to win." With that, the inventor of the mortgage-backed security, a Salomon man, shook hands and went back to work at someone else's firm, in someone else's mortgage department.

May 12, 1988, New York Times, Salomon International Chooses President, by Daniel F. Cuff,

Salomon Brothers International Ltd., the London arm of the investment banking house, said yesterday that James L. Massey, a senior Salomon executive from New York, had been named president and chief executive to succeed Miles A. Slater, whose resignation was announced. The move continued the flux among Salomon's senior executives, several of whom left earlier this year. Thomas W. Strauss, president of Salomon Brothers Inc., said from London that the London business, in which some 750 are employed, "needed the strongest management team, and Massey was the obvious...

August 19, 1991, Los Angeles Times, U.S. Punishes Salomon, Rescinds Harsh Penalty, by Scot J. Paltrow,

NEW YORK — The government on Sunday punished Salomon Bros. by curtailing the Wall Street giant's right to bid on Treasury bonds and notes, but it rescinded a much harsher penalty just hours after announcing it.

The Treasury first completely barred Salomon from Treasury auctions, an unprecedented and potentially devastating ban for a firm which routinely makes billion-dollar bids for Treasury securities.
But the Treasury backed down after billionaire investor Warren E. Buffett, named Sunday as Salomon's interim chairman and chief executive, urgently phoned Treasury Secretary Nicholas F. Brady.

The Treasury then said it would let Salomon continue bidding on securities for the firm's own account. But it suspended Salomon's right to bid on behalf of customers.

The government actions were 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.

But Buffett described their failure to alert regulators promptly after learning 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.

According to Buffett, he managed to reverse the stiffer ban on Salomon by telling Brady the firm would suffer badly, and by giving assurances that stringent new controls on the firm's securities trading would be imposed.

But despite the partial and possibly temporary reprieve granted by the Treasury on Sunday, Buffett faces a daunting task 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.

Salomon has long been known for its freewheeling style, and the 44-year-old Meriwether, a ferociously competitive trader, personified the firm's aggressive corporate culture. Buffett acknowledged that one of his main jobs will be changing that culture, which he said contributed to the wrongdoing, at times encouraging traders to tread perilously close to the bounds of legal behavior.

Buffett added that he would emphasize "moral" as well as legal behavior, and vowed to fire anyone who did not get the message.

He also said he had read "Liar's Poker," Michael Lewis' irreverent account of his stint as a Salomon bond salesman. The book portrayed the firm as bent on making money even if it meant seriously harming its own customers. Said Buffett: "I just want to make sure there isn't a second edition."

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 Salomon 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.

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.

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..

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. 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.


To finance the national debt, the government borrows money from the public by issuing bonds, notes and bills. Forty brokerages are allowed to buy the securities wholesale from the government at auctions. Those firms can turn around and sell the securities for a profit in the secondary market. Salomon Bros., the brokerage of Salomon Inc., bought more than its 35% limit of U.S. Treasury securities. By doing so, Salomon could control enough of the market to charge high prices when reselling the securities. The firm bought more than its share by submitting bids under customers' names without their authorization.

September 27, 1991, Reuters, More Bad News for Salomon,

WASHINGTON — Salomon Bros. Inc. got more bad news Thursday when the Securities and Exchange Commission revealed that it is looking into whether the brokerage manipulated the foreign currency market.

Salomon is under investigation by the SEC, the Justice Department and the New York district attorney for submitting phony bids at U.S. Treasury Department auctions of government debt and driving up prices for its own benefit.

SEC Chairman Richard C. Breeden told a House Ways and Means subcommittee the investigation into Salomon's foreign exchange operations centers on allegations that the company sought to make a killing in trading currencies by trying to corner the market in certain government securities through its phony bids.

The scandal has shaken Wall Street, raised questions about the ability of the once-mighty Salomon to survive and prompted a wholesale review of the way the government sells more than $1 trillion in debt per year.

Deryck Maughan, who became Salomon Bros.' chief operating officer last month as the company sought to clean house after the scandal, told the panel that he doubted that the phony bids could have been used to manipulate the currency market.

Maughan maintained that the dollar tends to react to general movements in U.S. interest rates and not to changes in yields on any one specific government security.

Robert Denham, Salomon's chief legal council, said the company is carrying out an internal investigation of a possible link between its bond and currency operations.

October 21, 1991, New York Times, Bank Sues Salomon and Travelers, by Alison Leigh Cowan,

A Philadelphia savings bank has accused Salomon Brothers Inc., the Travelers Corporation and some top executives at both of colluding to deprive the bank of money it is owed by four real estate partnerships.

The dispute involves real estate partnerships that had attracted investments from more than 200 of Salomon's most prominent current and former employees and comes as the Wall Street firm is struggling mightily to rebound from its admission that it behaved unlawfully in several recent Treasury auctions. Secret Negotiations

The Meritor Savings Bank in Philadelphia, in a little-noticed lawsuit filed in June in Philadelphia County Common Pleas Court, contended that the Salomon group was secretly negotiating to release Travelers and its Prospect Company investment unit from obligations that would insure that the partnerships' loans to Meritor are repaid.

Meritor charges that in return, the Salomon group was negotiating to receive payments that could help reduce adverse tax consequences it now faces.

To satisfy Meritor when the deal was struck in the mid-1980's, Salomon arranged for Prospect, which had a financial stake in the projects, to cover any shortfalls should the rental properties the four partnerships invested in fail to generate enough income to pay their debts. Travelers, the big insurance company, had issued a so-called comfort letter advising Meritor that its policy was to make sure its subsidiaries fulfilled their obligations.

Nonetheless, the Meritor loans, which totaled $59 million, went into default last April.

"In essence," the complaint says, "Traveler, Prospect and Salomon Brothers intend to abandon their obligations and commitments to Meritor in order to minimize their own losses, while leaving the investment partnerships without sufficient funds to satisfy their obligations to Meritor." No Comment

Spokesmen for Travelers and Salomon said over the weekend that it was their companies' policies not to discuss pending litigation.

According to partnership documents filed with the New York County Clerk's office in Manhattan in 1984, at least 216 former and current Salomon employees would have been participants in the real estate deals. They include many of Salomon's top officials at the time, including John H. Gutfreund, Thomas W. Strauss, John G. Meriwether, Paul W. Mozer, and Donald M. Feuerstein, all of whom left the firm shortly after the Treasury market scandals in August.

Other investors were Henry Kaufman, Salomon's former chief economist, and Lewis S. Ranieri, the father of its mortgage-backed operation, who was immortalized in the best-selling book, "Liar's Poker."

Many Properties Purchased

The partnerships were used to buy office buildings in Tampa, Fla.; Denver and San Antonio, as well as an apartment complex in Irving, Tex., long before problems in the real estate market and tax-law changes in 1986 made such deals unattractive.

The partnerships were but a few of the many investment vehicles in real estate and in oil and gas that Salomon often offered its wealthier employees.

"They were good investments," M. Jack Perkin, a former Salomon managing director who quit in 1988, said yesterday. He helped select the properties and remains an investor in the deals. "Back in the early 1980's, there was a lot of syndication going on, and this was another vehicle for key employees to invest in," he said. Defaults and an Injunction

For some time, the properties have not been generating enough income to pay the partnerships' debts, including the $59 million in Meritor loans. Prospect was thought to have been making up the difference up until April, when the loans defaulted.

Meritor, a savings institution rebounding from financial difficulties in the 1980's, in July had disclosed $59 million in new problem loans, a 13 percent increase to its nonperforming assets.

But the savings bank did not disclose the identity of the borrower or the nature of the problem, even though it had already won a temporary injunction from the Common Pleas Court.

The June 5 injunction bars the defendants from "entering into any agreement or understanding with one another" that would violate the partnerships' agreements to Meritor and prohibits the partnerships from making any distributions to the defendants. Earnings Due Today

Meritor investors who learned of the lawsuit last week were told the bank would disclose more information about the loans today when it reports its third-quarter earnings.

"I just think it's interesting that Travelers is running full-page ads saying you can rely on us, and they're just walking away from an obligation," said Gary E. Hindes, the chairman of the Delaware Bay Company, a Meritor stockholder.Mr. Hindes said he was disappointed that the Salomon partnerships might have been slow to pursue Travelers for the money.

November 7, 1991, Los Angeles Times, Salomon's Shopkorn Resigns,

Salomon's Shopkorn Resigns: Salomon Bros. said Stanley B. Shopkorn, one of Wall Street's most powerful traders, has resigned as head of the firm's stock division, effective at year-end. He had held the post since 1982. The resignation marks another major break with Salomon's past engineered by interim Chairman Warren E. Buffett, the Omaha investment guru who took over in August after the firm admitted repeated violations of Treasury market rules. While no reason was given for Shopkorn's departure, a published report said he was to be excluded from the new executive committee appointed by Salomon's chief operating officer, Deryck C. Maughan.

December 20, 1991, New York Times,Another Top Manager Is Leaving Salomon, by Kurt Eichenwald,

The stream of departures continued at Salomon Brothers yesterday, as the firm announced that Jay F. Higgins, a vice chairman and one of the only remaining members of Salomon's prior senior management, would resign at the end of the year.

The departure of Mr. Higgins, who founded the firm's mergers and acquisitions department and served as the head of investment banking, had been expected. But his decision marks the highest-level defection since November, when Stanley B. Shopkorn, the head of the equities division and one of Salomon's most aggressive traders, said he would leave at the end of the year.

Salomon has been struggling to keep its executives since the Treasuries market scandal began to unfold in August. Since then, virtually all of the firm's former management, including John H. Gutfreund, the chairman, were either asked to resign or chose to leave as the changes at the firm made their future roles less certain.

Rumors of Mr. Higgins's departure began to circulate last month after the announcement of a large management shake-up. Deryck C. Maughan, who was named chief operating officer in August, recast the firm's management structure, eliminating the executive committee that had run the firm and replacing it with his own new committee of managers. Mr. Higgins, who was named to the executive committee during Mr. Gutfreund's tenure, was not appointed to the new committee.

In an interview Mr. Higgins, 47 years old, said he had long planned to leave, even before the Treasuries market scandal began to rock the firm. "I have been thinking for a while that I would be doing something else in 1992," Mr. Higgins said, adding that he had no specific plans. "I wish these guys nothing but the best. They are doing a difficult job, and I think they are doing a spectacular job."

Salomon executives have been wary of possible departures after the end of the year, when executives will have their bonuses and all participants in a three-year, $120 million deferred compensation plan will receive their share of the pool.

Mr. Higgins has played an important role in the firm since the Treasuries market scandal began to unfold. After the World Bank, the bluest of Salomon's blue-chip clients, suspended business with the firm, Mr. Higgins maintained contact with the bank and worked aggressively at preserving the firm's relationship with the international lending agency, as well as at regaining its business.

Mr. Higgins joined the firm's corporate finance department in 1969, after receiving his undergraduate degree from Princeton University and his master's degree in business administration from the University of Chicago. In 1978, he founded the mergers and acquisitions department, and he was named a general partner one year later. In 1986, he was named the head of corporate finance, and and he became head of investment banking in 1987. He assumed his latest job in 1988.

December 27, 1991, Associated Press, Major Clients Returning to Humbled Salomon Bros: Scandal: Five months after admitting widespread Treasury bond cheating, some defectors give the reformed firm another chance. But Wall Street isn't sure.

NEW YORK — Salomon Brothers Inc. is regaining big clients who defected after the firm's Treasury bond scandal, but the effects of a corporate makeover under chairman Warren Buffett are still playing out on Wall Street.

In the nearly five months since it admitted widespread wrongdoing in the government bond market, Salomon has laid off scores of executives, slashed employee bonuses, restructured management and refocused business lines.

Salomon's stock price has rebounded, a flood of negative publicity has diminished and major investors such as the World Bank and California's large pension fund have restored relations with the firm.

But some Wall Street executives believe the death of the old Salomon--a brash, adventuresome risk-taker--and its replacement by a leaner, more cautious firm means Salomon could lack the tools to remain a Wall Street power.

"They've gained some confidence in the last months with clients coming back," Gary Goldstein, president of the Whitney Group, an executive search firm, said Thursday. "But I don't think it's enough to overcome the concerns at the firm that most people have about what's going to happen in the next couple years."

For starters, Salomon in early 1992 is expected to receive its punishment for submitting unauthorized bids for Treasury securities at least eight times. The firm also admitted exceeding limits on securities purchases at a single auction. Salomon is cooperating with federal investigators.

Salomon has set aside $200 million to pay settlements, fines and other costs of the scandal, and the announcement of penalties once again will bathe the firm in bad publicity. Former Salomon executives who resigned in disgrace also are expected to face criminal and civil charges.

Despite the imminent penalties, Buffett, the multibillionaire Nebraska investor, has worked to reform Salomon's internal operations and distance it from old leaders, especially former chairman John Gutfreund.

A new management committee shunned executives close to the old regime, including the longtime head of equities, Stanley Shopkorn. The appointment of 22 new managing directors--a senior post--underscored a focus on Salomon's bond business.

The two main targets of the realignment have been stocks and investment banking. Salomon has laid off about 140 bankers, stock traders and analysts in recent weeks, mostly because of poor profitability at the departments.

Salomon officials concede the loss of senior executives could hurt the firm's relationship with clients. In addition, the scandal has reduced its effectiveness in underwriting corporate stocks and bonds, a major business.

Before the scandal, Salomon was No. 3 among Wall Street firms in underwriting. Since then it has fallen to No. 7. This month, Salomon has garnered a measly 1.6% of the underwriting market.

"The bankers I've talked to are concerned they are not going to have enough products, capital or tools to compete as effectively with some big firms," Goldstein said.

But Salomon spokesman Robert Baker denied the firm is focusing on its core bond business. He said Salomon hoped to overcome the loss of senior banking executives--which could hurt the firm's stature and deal-generating capacity--with its reputation and talent, and by treating customers well.

"We have an obligation to ourselves and to our clients to do our business profitably," he said.

Buffett's performance has instilled some confidence. Salomon's stock has rebounded from a low of $21.75 in late September to $28.87 1/2 at Thursday's close on the New York Stock Exchange. The stock remains more than 20% below pre-scandal levels above $36.

Buffett has pledged to change Salomon's corporate culture. He removed $110 million from the year-end bonus pool and reformed Salomon's pay structure. Average bonuses dropped 25%.

It's still unclear whether such changes will reduce the firm's effectiveness.

"We do have some concerns," said DeWitt Bowman, chief investment officer for California's Public Employees' Retirement System, which lifted a ban on Salomon's government bond business last week. "(Any time) you go through a change of a climate . . . you wonder what it's going to do to the organization,"

"Time will tell," he said. "There certainly is some potential for it to change. Salomon . . . did some things quite well. We certainly hope they retain those abilities."

Changes in auditing and operational structure of the government bond unit persuaded the California fund, known as CalPERS, which has assets of about $65 billion, to rescind its ban.

But Salomon also lobbied CalPERS, the biggest and most influential state pension fund. Buffett appeared before its board, and he and new Salomon chief operating officer Deryck Maughan repeatedly spoke with top CalPERS executives.

Before it lifted the ban, CalPERS received assurances from the Securities and Exchange Commission there were no reasons not to.

Massachusetts' employee and teacher pension fund resumed doing business with Salomon in all areas except government securities.

January 17, 1992, New York Times, A Departure At Salomon,
Thomas H. Hanley, one of Wall Street's leading bank stock analysts, said yesterday that he had left Salomon Brothers to join one of its top competitors, the First Boston Corporation.

The move came as the new Salomon Brothers management, led by Deryck Maughan, is cutting its research and trading in corporate stocks, a part of the company where profits were weak. Mr. Hanley, who is 47 years old, spent 24 years at Salomon.

"I have seen in the last six months a steady de-emphasis on the equity business at Salomon Brothers," Mr. Hanley said. "In the next three to five years, the banking industry is going to be raising immense amounts of capital," he added, saying that he would benefit by working at a firm that is strong in the selling and trading of stocks, including those of banks.

Mr. Hanley said he had been talking about a new job at First Boston for more than four months. But his departure from Salomon did not come until after a meeting yesterday morning with Salomon Brothers officials who had heard of his talks with First Boston.Following standard procedure on Wall Street, Mr. Hanley left immediately for First Boston, where he will be joined by at least one banking analyst, Phillip Carter, who worked for him at Salomon.

March 26, 1992, Los Angeles Times, Big Money on Wall Street : Executives Reap Rich Rewards as Securities Industry Logs a Record Year, by Linda Grant,

NEW YORK — Wall Street executives are cashing in on the most profitable year ever for investment banks and brokerage houses as low interest rates, a surging stock market and record underwritings of new stock and bond issues make the securities industry a shining exception in an otherwise dreary economic firmament.

Proxy statements filed recently by securities firms disclose that pay for 1991 is up for top executives of big public firms.

For the Record

Los Angeles Times Friday March 27, 1992 Home Edition Business Part D Page 2 Column 3 Financial Desk

Howard Clark Jr.: In Thursday's editions, the person identified in a photograph as Shearson Lehman Chairman Howard Clark Jr. was actually Howard L. Clark, former chairman of American Express Co. Howard Clark Jr.'s picture appears above.
PHOTO: Howard Clark Jr.

Merrill Lynch & Co. officers have reaped the richest rewards to date. Chairman William A. Schreyer was awarded a total 1991 package worth $16.8 million. Cash and bonuses totaled $5.8 million, and Schreyer collected options on 300,000 shares priced at $21.375, which can be exercised in equal amounts over four years. Since Merrill's stock closed at $58.175 on Wednesday, Schreyer's options have a face value of about $11 million.

Merrill President Daniel P. Tully wasn't far behind, with cash compensation of $4.9 million and stock options with a face value of $9.4 million for a total of $14.3 million. Eleven other Merrill officers earned an average of $5.2 million each including options. The outsize pay reflected Merrill's most profitable year ever, when the nation's biggest brokerage earned $696 million.

"Wall Street is an eat-what-you-shoot environment," says Brooks T. Chamberlin, managing director of the executive-search firm Korn/Ferry International. He points out that investment banking and brokerage are cyclical businesses that pay well during good years but offer no guarantee of the future. Most Wall Streeters earn relatively small salaries and depend on fluctuating bonuses for the lion's share of their income.

A painful recession in the late 1980s wiped out one of every five Wall Street jobs. Those who were left clung to their entitlements. A 1990 study by Vincent Perro in the New York office of human-resources consultants Sibson & Co. showed that in the late 1980s, when Wall Street's results drooped, the firms funneled an ever-larger percentage of distributable funds to their employees as pay rather than to their shareholders as profits.

It hasn't taken a sustained recovery to break out the champagne. Bear Stearns Cos. Chairman Alan (Ace) Greenberg, whose firm's fiscal year ended last June 30, earned $5.3 million, a 26% increase over the previous year. Howard Clark Jr., chairman of the American Express unit Shearson Lehman Bros., was paid $2.8 million, double his 1990 figure. And Frank Zarb, chairman of Primerica's subsidiary Smith Barney, Harris Upham, made $2.3 million, a 44% increase.

Noticeably absent from the celebrants was Warren E. Buffett, interim chairman of Salomon Bros., a subsidiary of Salomon Inc. Buffett accepted only $1 in compensation for his emergency takeover of the embattled firm last August after federal regulatory officials forced former Chairman John Gutfreund to resign in the wake of a Treasury auction scandal. President Deryck Maughan, who took over in August, earned $2 million in 1991 salary and bonus plus $3.3 million from deferred-compensation plans.

[A dollar a year in salary will always be a public relations stunt. Does anyone doubt that Warren Buffett knew exactly what he was doing at every stage of the game?]

Big firms such as PaineWebber Group, Morgan Stanley Group and Sears, Roebuck's unit Dean, Witter, Reynolds haven't yet disclosed executive pay. Their proxy statements are expected next week.

Korn/Ferry's Chamberlin says Wall Street's rank-and-file professionals--such as bond traders, corporate-finance generalists, merger-and-acquisitions specialists and institutional-bond salesmen--saw increases in 1991 of about 20% to 25% in their paychecks.

The Wall Street boom shows no sign of abating. IDD Information Services reports that total underwriting fees earned by securities firms in the first quarter of 1992 already equal the previous quarterly record of $1.6 billion established a year ago. With one week of transactions yet to be completed, this quarter promises to set a new record.
During all of 1991, Wall Street firms raked in $4.61 billion in underwriting fees, the highest figure since 1986.

Record 1991 profits for securities firms. . . Pretax profits for New York Stock Exchange members rebounded from a 1990 loss, due in part to a strong market, demand for new stock and bond issues and the Federal Reserve Board's cutting of the discount rate.

Pretax Profits (figures in billions of dollars)
1981: 2.1
1982: 3.0&
1983: 3.8
1984: 1.6
1985: 4.1
1986: 5.5
1987: 1.1
1988: 2.5
1989: 1.8
1990: -0.2
1991*: 5.8 * Estimate

Merril Lynch, William Schreyer, 1991 pay: $16.8 million,* 1990 pay: $3.9 million,

Bear Stearns, Alan Greenberg, 1991 pay: $5.3 million,** 1990 pay: $4.2 million,

Smith Barney, Harris Upham, Frank Zarb, 1991 pay: $2.3 million, 1990 pay: $1.6 million,

Shearson Lehman Bros., Howard Clark Jr., 1991 pay: $2.8 million, 1990 pay: $1.4 million,

*Includes the face value of stock options to be vested over four years:

**For fiscal year ended June 30, 1991

Note: Paine Webber Group, Morgan Stanley Group and Dean Witter Reynolds inc. Proxies are due out next week. Sources: Company proxies

March 29, 1992, New York Times, Buffett Plans a Salomon Exit,

Mr. Buffett has been chairman and chief executive of Salomon Inc. since the firm's former leadership was ousted in the wake of the scandal involving bids at Treasury auctions. The embarrassments keep cropping up. Last week, for instance, it came out that the top two executives at the time of the investment firm's transgressions claim they are owed about $24 million in back pay, bonuses and severance. And it developed that the company is paying $1,000 a day to put up Mr. Buffett's hand-picked second-in-command, Deryck Maughan, and his family in a Manhattan residential hotel. . . . As Another Gaffe Surfaces In the meantime, there is one more Salomon embarrassment to look into, one apparently caused by bumbling rather than venality. On Wednesday, the Dow Jones industrial average dropped an estimated 16 points in the last five minutes of trading. Reason? A Salomon clerk apparently made a mistake, instructing a computer to sell 11 million shares, rather than $11 million worth, of various stocks. Fortunately, some of the sales were not executed, and Salomon said it would repair the damage to the owner of the shares through other trades. But many on Wall Street said the incident showed the market's vulnerability to errors in this era of instantaneous trades by computer.

May 7, 1992, Los Angeles Times, Scandal Drops Salomon Profits 30% : Earnings: The decline is blamed on customer unease over the continuing Treasury bond investigations, by Linda Grant,

NEW YORK — Salomon Inc.'s first-quarter earnings dropped 30% because of customer uneasiness over government investigations into the Treasury bond scandal at its Salomon Bros. unit, the firm said in a statement to shareholders at its annual meeting Wednesday.

The announcement also said the Wall Street firm will need to add an unspecified amount to the $200-million reserve set up to cover fines, legal fees and other costs associated with the wrongdoing. Actual amounts eventually required, the firm warned, "may differ materially from the established reserve."

Interim Chairman Warren E. Buffett, in an answer to shareholder questions, said that certain "other matters" have arisen in the course of the government investigations that "could involve other firms and may be broader than (just the) Treasury matter." He did not explain.

But he added: "We believe we have disclosed what is material to the company." Buffett said he cannot predict when the investigations will be complete, and he declined to answer further questions regarding Salomon's legal problems.

Buffett also told shareholders that the company does not plan to spin off its Phibro Energy unit, as has been frequently speculated. And he reiterated that the board will consider naming a permanent successor as chairman and chief executive upon resolution of the government investigation into Salomon's bidding activities in U.S. Treasury auctions.

Salomon earned $190 million on revenue of $1.9 billion for the quarter ended March 31, compared to $273 million on revenue of $2.7 billion in the first quarter of 1991. Per-share earnings were $1.51, or $1.41 fully diluted, compared to $2.30, or $2.06 fully diluted, the previous year.

The firm blamed customers' reluctance to grant new-issue underwriting and investment-banking assignments, plus a pretax loss of $30 million in the firm's Phibro Energy unit for the lower earnings. Salomon said that securities trading and debt underwritings for the quarter were "highly satisfactory."

Buffett was peppered with testy questions from shareholders unhappy that the board of directors, which he joined in 1987, had not engaged in closer oversight of the firm's previous management. Regarding high pay for certain investment bankers, which has been a controversial matter at the firm, Buffett told shareholders that big earners will henceforth receive 50% of their pay in stock that they must hold for five years.

Deryck C. Maughan, chief executive of Salomon Bros., said employees now own 11% of the firm's stock, and the target is 30%.

He said the firm's trading and investment activities had fully recovered from the scandal. But corporations are reluctant to hire Salomon as a lead manager on underwritings that may take 60 to 80 days to complete, fearing serious charges could be rendered by the government during that period.

In a related matter, a House panel is set to vote today on broad legislation to toughen regulation of the government securities market in the wake of the Salomon Bros. scandal.

A bill being pushed by Rep. Edward J. Markey (D-Mass.) would give the Securities and Exchange Commission more power to police the $3.7-trillion government bond market.

May 7, 1992, New York Times, A Less Aggressive Salomon Sees Its Profits Decline 30%, by Seth Faison Jr,

Amid a flurry of reminders that Salomon Inc. has yet to emerge fully from the fallout caused by last year's Treasury auction scandal, the company reported yesterday that its first-quarter profits were down 30 percent from the period last year.

The profit decline reflected the retreat by Salomon Brothers, the company's investment banking unit, from the trading prowess it demonstrated a year ago, before the scandal broke. But the profits also marked a turnaround from the $29 million that Salomon lost in the quarter that ended Dec. 31.

For the first quarter, ended March 31, the company said it earned $190 million, or $1.51 a share, down from $273 million, or $2.30 a share, a year earlier.

Salomon Brothers had a pretax profit of $374 million, down 26 percent from $503 million in 1991's first quarter, while the company's oil subsidiary, Phibro Energy, lost $30 million as oil prices remained sluggish. Salomon's total assets grew to $103 billion.

Analysts said the main cause of the earnings decline was the less aggressive posture toward trading that Salomon has taken since Warren E. Buffett took over as interim chairman in August and began stressing stability over volatility. Since the scandal, Salomon has retained its role as a primary dealer at Treasury auctions, but has been banned from trading on behalf of customers.
"It's not so surprising that revenues were down somewhat," said Perrin Long, a securities analyst at the First of Michigan Corporation in Detroit. "This is the new Salomon, not the old Salomon with its trading strength."

Robert E. Denham, Salomon's general counsel, told shareholders at the company's annual meeting yesterday that legal and other costs related to the scandal would require more than the $200 million set aside in a reserve last fall. Mr. Denham said it was too early, before an investigation by the Securities and Exchange Commission was completed, to say how much more would be needed. Investigation Going Slowly

The S.E.C. recently reported to Congress that its investigation of Salomon had been slowed because of record-keeping so shoddy that in many cases it was indecipherable. The commission is examining trading records and securities allocations to determine the extent to which Federal regulations covering bond sales were violated.

"I think it's a sign," Mr. Long said, referring to the S.E.C. and Salomon, "that this is not going to be as simple as both sides may have hoped."

On another front, Salomon said that Phibro Energy's $116 million investment in an oil development project in Russia was troubled by unfavorable taxes, pipeline tariffs and unpaid bills from various Russian entities.

"If these problems cannot be resolved satisfactorily, Phibro may very well be unable to recover its investment," Salomon said in a statement.

Phibro's chairman, Andrew Hall, told shareholders yesterday that the company would need to invest an additional $150 million in refinery improvements this year.

In yet another problem, disclosed yesterday, Salomon has been named as one of seven defendants in a $36 million suit that was filed by a New Jersey-based investment bank. The suit charges racketeering offenses related to the Treasury auction scandal.

Mr. Long noted that Salomon's stock price, which closed at $32.25, down 75 cents on the New York Stock Exchange yesterday, was among the best performing of the major brokerage stocks so far this year. Mr. Buffett's Message

Salomon's interim chairman, Mr. Buffett, reiterated to the gathering of shareholders that he would not leave the firm until the investigation had been resolved. He announced in March that he would step down both as chairman of Salomon Inc., and as chief executive of Salomon Brothers, once the investigation was over.

Mr. Buffett provided details of the company's compensation plans, saying that individual divisions in the firm's investment banking unit had been informed of the profit level each must achieve in order to earn bonuses for its members. Individuals within each unit, he said, will be paid for performance, and they have not yet been informed of their individual bonuses.

Mr. Buffett also said that under a proposed stock plan, top employees would receive a portion of their bonuses in company shares. The plan is intended to give employees a vested interest in improving the company's stock price.

Salomon said it wanted to increase the number of shares available for employee awards to 30 million from the 10 million that have already been allocated under the plan.

May 28, 1992, New York Times, New Leader at the New Salomon, by Seth Faison Jr,

Salomon Brothers named Deryck C. Maughan chairman and chief executive yesterday, replacing Warren E. Buffett in a move to solidify leadership following the firm's settlement of Government charges over last year's Treasury auction scandal.

Mr. Maughan, 44 years old, has run the day-to-day business at Salomon Brothers as chief operating officer since the firm's executive board was upended in August after news of the scandal emerged. In a settlement last week, Salomon agreed to pay $290 million in fines and penalties, but avoided criminal charges.

Mr. Buffett, who announced Mr. Maughan's promotion, did not take a second expected step and relinquish his posts as interim chairman and chief executive of Salomon Inc., the investment bank's parent company. Mr. Buffett said last week that a successor for those jobs would be appointed soon. 'The Settlement Is Behind Us'

Mr. Maughan said yesterday that he planned no major change in direction as Salomon tries to re-establish itself as a Wall Street leader. Mr. Buffett is expected to remain a large Salomon shareholder and continue dispensing occasional advice.

"More responsible, equally aggressive," Mr. Maughan said of his plans for Salomon. "We will commit capital freely and willingly. I'd also like us to be more client-friendly. What's most important is that the settlement is behind us." A Short Job Interview

In a statement, Mr. Buffett praised Mr. Maughan's grace under pressure during the last nine months, and said he had no regrets about selecting Mr. Maughan last year from a dozen potential leaders at Salomon.

"It was a battlefield promotion," Mr. Buffett said, "made because of my intuition that he would be able to guide Salomon Brothers through the crisis it was facing. Working seven days a week, quite often 18 hours a day, he personified the integrity and professionalism of the firm."

When he was put in charge last summer, Mr. Maughan, who is British, had only recently returned from running Salomon's Tokyo office for five years to become co-head of investment banking in New York. He said he had never met Mr. Buffett before last Aug. 16, the day the investor arrived from Omaha to replace the former chairman, John H. Gutfreund.

Mr. Buffett, who interviewed Mr. Maughan for the job for only 10 minutes the following day, told a reporter earlier this year that Mr. Maughan was the first person he had hired who took the job without asking what it paid. He added that almost all the competitors for the job had recommended that it go to Mr. Maughan.

When Mr. Maughan faced reporters on Aug. 18, only moments after he was told he would become chief operating officer, he was asked if he was surprised by the appointment.

"I'm not an American, and I am not a trader," he replied. "I am as astonished as my questioner."

Mr. Maughan, who has described himself as a workaholic, began his career in London as an assistant to Britain's permanent treasury under secretary, and spent four years at Goldman, Sachs in London before moving to New York to join Salomon's fixed-income division in 1983.

His living arrangements in a hotel on Manhattan's East Side, which have cost Salomon $1,000 a day since last July, raised eyebrows at the firm when they were disclosed in a proxy statement in March. Mr. Buffett told shareholders last month that it was a temporary arrangement that would conclude by June 30.

"I'm not going to tell you my new address," was all Mr. Maughan would say on the issue yesterday.

May 28, 1992, Los Angeles Times, Maughan Tapped to Lead Scandalized Salomon Bros, by Linda Grant,

Maughan's promotion, which takes effect immediately, paves the way for Buffett to leave Salomon. Buffett's principal remaining task is to find someone to replace him as chief executive of the holding company.

Said Buffett: "Deryck assumed the job at a time when Salomon's regulators were understandably outraged and its staff was dismayed. Working seven days a week, quite often 18 hours a day, he personified the integrity and professionalism of the firm."

The move, which was expected, follows a settlement of fraud allegations last week with several government agencies, including the Treasury and Justice departments, the Federal Reserve Board and the Securities and Exchange Commission. Salomon agreed to pay fines and penalties of $290 million to settle charges that the firm submitted billions of dollars in fraudulent bids in Treasury auctions used to finance public debt.

Buffett's announcement credited Maughan's "grace and goodwill" as "integral to our settlement with the government."

"I'm on a real high," Maughan said. "I'm pleased about the promotion because it reflects Warren's confidence in the firm. . . . We're in a good position to move forward now, doing what we do best: serving clients and committing capital."

Maughan, 44-year-old son of a British coal miner, was thrown into the breach last August only months after returning to New York as co-head of investment banking from an assignment in Japan, where he built the Salomon office into a moneymaking showcase.

In an emergency session the day after former Chief Executive John H. Gutfreund and several other executives resigned, 12 Salomon officers met with Buffett to begin picking up the pieces of the shattered firm.

Buffett invited them one by one into a nearby room, where he asked: "Who should run the firm?" Ten out of the 12 answered, "Deryck Maughan."

The tall, soft-spoken Maughan served for 10 years as a British Treasury official before he was recruited to investment banking in London by Wall Street's Goldman Sachs in 1979. He later moved to Salomon. When tapped as chief operating officer, he immediately reorganized and downsized the firm.

Said Buffett: "Rather than freeze the firm in the headlights until the investigations were over, Deryck almost immediately began looking at how to improve the firm. Some of the operational changes he put in place have already had a favorable influence on profits."

His most controversial changes were laying off a sizable percentage of Salomon's equity traders and investment bankers and slashing bonuses.

Salomon's profit has suffered for the past two quarters as investment banking and underwriting clients awaited the conclusion of the government's case against the firm before resuming business ties.

June 4, 1992, Los Angeles Times, Ex-L.A. Lawyer Takes Buffett's Salomon Posts, by Linda Grant,

NEW YORK — Salomon Inc. on Wednesday named former Los Angeles attorney Robert E. Denham chairman and chief executive, replacing Warren E. Buffett, who stepped in to lead the firm last summer after a scandal threatened its survival.

Denham, 46, was managing partner of the Los Angeles law firm of Munger, Tolles & Olson last August when Buffett recruited him to be general counsel of Salomon, whose Salomon Bros. investment-banking subsidiary had admitted fraud in its government-securities trading unit.

In his 10 months as chief legal officer at the crisis-ridden firm, Denham directed the overhaul of Salomon's compliance systems. He also led the negotiations that settled all charges with various government agencies, including the Treasury Department, Federal Reserve Bank, Justice Department and Securities and Exchange Commission.

The settlement, announced two weeks ago, was widely viewed as a victory for Buffett and Denham because no criminal charges were lodged, and Salomon was allowed to retain its prized status as a "primary dealer" of government securities. Salomon agreed to pay $290 million in fines and penalties for cheating during auctions of Treasury securities in order to capture an undue share of the lucrative business.

Denham has long been a legal adviser to Buffett on matters concerning Berkshire Hathaway, the Omaha holding company of which Buffett is chairman and chief executive.

Los Angeles businessman and lawyer Charles Munger, a founder of the firm that bears his name, is vice chairman of Berkshire and a director of Salomon.

In Wednesday's announcement, Buffett said: "Bob was my sole recommendation for the job. He fits perfectly the criteria of 'owner-oriented and business-wise' that I set forth earlier. Additionally, he comes to the post with extensive knowledge of our two major businesses but with no ties to either."

Salomon is also parent of Phibro Energy, an oil-refining and trading subsidiary.

The choice of Denham, which came after a Salomon board meeting, is effective immediately. By late afternoon, Buffett had left in his private jet for Omaha, leaving Denham in charge.

Buffett retains the title of chairman of the Executive Committee. He has been a director since 1987, when Berkshire invested $700 million in Salomon.

Last week, Buffett named Deryck C. Maughan as his successor as chairman and chief executive of Salomon Bros. Maughan was tapped to run the firm as chief operating officer the day after Buffett took over.

While Denham's duties are expected to require his full-time attention in the beginning, the announcement said that over the longer term the position of chairman is expected to be part-time. Denham plans to rejoin Munger, Tolles at some future date.

Denham's duties at Salomon will be to evaluate the performance of its subsidiaries, set compensation of key managers and oversee compensation policies. He will also establish controls to ensure that the businesses operate legally and without "undue risk, and allocate the capital generated by the two subsidiaries," Salomon said.

With Denham's appointment, it is clear that Deryck Maughan will bear full responsibility for Salomon's operations.

Salomon's stock rose after Denham's appointment was announced, ending the day up 75 cents at $33 a share on the New York Stock Exchange.

Separately, Treasury Secretary Nicholas F. Brady said Wednesday that despite the Salomon Bros. scandal, the system for selling the bonds that finance the government and $3.5 trillion in national debt needs little improvement.

He said a joint study by regulators found that "the Treasury market does work--and works well--but that changes can be made to improve it."

Bio: Robert E. Denham

Named chairman and chief executive of Salomon Inc., replacing Warren E. Buffett, interim chairman and chief executive.

Age: 46

Born: Dallas. Raised in Abilene, Tex.

Education: Received BA in government from the University of Texas in 1966, where he graduated Phi Beta Kappa and magna cum laude; received master's in government from Harvard University in 1968. Graduated from Harvard Law School in 1971 magna cum laude.

Family: Wife Carolyn is associate vice president for academic programs at California State Polytechnic University, Pomona, where she is also professor of educational research and statistics. For the past 10 months, she has commuted to New York to see her husband. With this appointment, she will move there. His two children are Jeffrey Hunter, 21, and Laura Maria, 15.

Resume: Immediately after graduation from Harvard, Denham joined the L.A. law firm of Munger, Tolles & Olson, where he was managing partner from 1985 to August, 1991. He joined Salomon Inc. as general counsel August, 1991.

Business philosophy: "Long term, our challenge is to institutionalize in Salomon an enhanced commitment that the firm exists to serve society and customers instead of the other way around."

Quote: "We wanted to understand what the violations (at Salomon Bros.) were, give information to investigative authorities to help them understand what happened, and obtain a resolution that was appropriate. That is the right way to deal with regulation and the public. We wanted to leave people in a position to carry on a firm that we think can be a valuable resource to the economy and to clients."

June 4, 1992, New York Times, Company News; A Surprise In Chairman At Salomon, by Seth Faison,

In recent months, Warren E. Buffett has dropped various hints about the kind of person he would select to replace him as chairman of Salomon Inc.: an experienced businessman, a knowledgeable investor, a seasoned Wall Street person. He chose none of the above.

Yesterday Salomon named Robert E. Denham, its general counsel, who came to Wall Street to join Salomon only nine months ago. Mr. Buffett had called on the 46-year-old career lawyer to sort out the legal mess left behind after the disclosure of the company's role in a Treasury auction scandal.

Mr. Denham helped guide Salomon through a long investigation, which ended last month with a $290 million settlement.

Before last year, Mr. Denham spent 20 years as a lawyer with Munger, Tolles & Olson in Los Angeles, where he specialized in securities law and corporate acquisitions. Among his principal clients were the Pacific Stock Exchange and Berkshire Hathaway Inc., Mr. Buffett's investment company.

"It's a surprise to virtually everyone," said Deryck C. Maughan, who last week was named chairman and chief executive of the company's investment banking subsidiary, Salomon Brothers Inc. "It was a classic Warren Buffett move. Everybody's predicting one thing, and he thinks in a new way."

Wall Street executives, who could not remember the last time a lawyer was named to head a leading brokerage, said Mr. Buffett was less interested in surprising conventional wisdom than in finding someone he could trust to run Salomon the way he intended.

Mr. Buffett, who invested $700 million in Salomon in 1987, will remain chairman of the executive committee on the company's board.

Speculation about whom Mr. Buffett would choose was rife on Wall Street before yesterday's announcement, and some executives expected the winner to be John J. Byrne, the chief executive of the Fund American Companies. Buffett Ties Cited

Friends and associates of Mr. Denham cited his unusual intelligence, competence and integrity, but some acknowledged that his personal relationship with Mr. Buffett was most critical to his selection.

"Warren Buffett has to have confidence in whoever takes this position," said Robert E. Wycoff, the president and chief operating officer of ARCO, who has known Mr. Denham as a friend and neighbor in Los Angeles for several years. "I think that's really the issue here."

Mr. Denham declined to be interviewed yesterday, and a statement released by Salomon did not include any comments from him. Instead, it listed the primary responsibilities Mr. Buffett expects him to take up: evaluating the performance at Salomon's two subsidiaries, Salomon Brothers and Phibro Energy Inc., and their executives; setting their compensation; insuring the legality and prudence of their operations, and allocating the capital they produce. New General Counsel Due

Mr. Denham will also guide a new general counsel, to be appointed soon, the Salomon statement said, adding that while his immediate duties would require his full time, it would gradually become a part-time position. He will eventually return to his old law firm in Los Angeles, while remaining Salomon Inc.'s chairman.

Mr. Denham is unlikely, Mr. Maughan said, to alter the style or priorities that Mr. Buffett established over the nine months that he served as interim chairman. Asked about Mr. Denham's lack of business and Wall Street experience, Mr. Maughan said the new structure at Salomon was set up so that Mr. Denham would not have daily responsibilities at Salomon Brothers, which fall to Mr. Maughan.

"This is not the structure we had under John Gutfreund," Mr. Maughan said, referring to Salomon Inc.'s previous chairman, who was also Salomon Brothers' chairman, and a physical presence on the firm's bond-trading floor. "Bob is not going to sit there and trade treasury bonds."

Mr. Gutfreund, who resigned when the full nature of the scandal emerged, seemed to personify the aggressive, sometimes bullying attitude that inspired fear and respect on Wall Street. In contrast, acquaintances described Mr. Denham's best attributes as those that are sooner used for an administrator than a leader.

"He's one of the most intense and intelligent listeners I've ever worked with," said Ronald L. Olson, a senior partner at Munger, Tolles & Olson, who worked with Mr. Denham for more than 10 years. "He has a quiet competence. He's not a loud, massive personality type."

Roderick M. Hills taught Mr. Denham as a visiting professor at the Harvard Law School in 1970 before becoming chairman of the Securities and Exchange Commission under President Gerald R. Ford. He remembered Mr. Denham as the sharpest student in the law school.
Mr. Hills said he had persuaded his student to join the Los Angeles law firm that later became Munger, Tolles & Olson, where he excelled, assuming a position equivalent to managing partner in 1985.

"I don't think he was interested in Wall Street per se," Mr. Hills said, referring to Mr. Denham's move to Salomon last year. "I think it was more that he enjoys the challenge of doing something new."

In Salomon's statement, Mr. Buffett said Mr. Denham fitted perfectly the "owner-oriented and business-wise" criterion that was set forth in Salomon's annual report in March.

"He comes to the post with extensive knowledge of our two major businesses but with no ties to either," Mr. Buffett said in the statement. "I have known Bob for 18 years and seen him perform with distinction in every job he has undertaken."

December 15, 1993, New York Times, Bond Scandal Figure Gets 4 Months, Fine, by Scot J. Paltrow,

NEW YORK — A federal judge Tuesday sentenced the key figure in the 1991 Salomon Bros. Treasury bond scandal to four months in prison and a $30,000 fine.

U.S. District Judge Pierre N. Leval in Manhattan directed Paul W. Mozer, 38, the former head of Salomon's government bond trading desk, to begin serving the sentence in a minimum security prison Jan. 18.

The scandal shook the staid world of government securities trading and for a time seemed to threaten the continued existence of Salomon, one of Wall Street's most powerful trading firms. It brought down the firm's chairman and chief executive, John H. Gutfreund, and other top executives, who were forced to resign. The firm was saved only after Warren E. Buffett, a major shareholder and one of America's most highly regarded investors, agreed to step in temporarily as chairman.

Mozer pleaded guilty in October to two counts related to placing billions of dollars in bids for Treasury bonds in the names of Salomon customers who had never asked for the bonds. The false bids enabled Salomon to illegally circumvent a rule forbidding any firm from acquiring more than 35% of the bonds offered in a government auction. The investigation touched off by the disclosures ultimately involved many large Wall Street firms.

The judge rejected a claim by Mozer's lawyer, Stanley Arkin, that Mozer's illegal actions had resulted from two "spur of the moment" decisions. Leval described Mozer's misdeeds as "willful, knowing, intentional, premeditated, planned and quite elaborately executed violations of the rules."

The judge said Mozer deserved credit for cooperating with the government investigators. But he said some prison time was warranted to set an example. "Deterrence of others is an extremely important factor," Leval said.

Probation officials, in a report to the judge, said they had not been able to determine whether anyone had actually lost money as a result of Mozer's actions.

August 28, 1994, BusinessWeek, The Man Who's Filling Meriwether's Loafers At Solly,

There's no question it was a big blow. The departure from Salomon Brothers Inc. of John W. Meriwether in 1991 and his team of bond arbitrageurs in 1993 left a deep hole in the trading bench. Salomon has tried to shrug off the loss. But cracks in the firm's performance are becoming more and more apparent. Earnings from Salomon's proprietary trading group, which trades for the firm's own account, have been lackluster for 1993 and the first half of 1994. A lot of people inside and outside Salomon are asking an important question: Can the firm be as profitable as it was without the "arb boys"?

The firm believes it can. "The impact of their departure is ultimately unknowable," Salomon responded in a written statement. "Losing good people is never a plus; however, we have a good team in place."

SLOW SAG. A centerpiece of the firm's post-Meriwether strategy is Dennis J. Keegan, a Kansan who wears a Dennis the Menace grin every day and a bow tie every Friday. Keegan, who was promoted to head of Salomon's risk-management committee and co-head of the fixed-income department on Aug. 10, is a talented bond trader and a protege of Meriwether. Last October, he replaced Larry E. Hilibrand, who is now working for Meriwether, as head of Salomon's bond arbitrage group. "I'm sorry they left," Keegan says. "I still think we'll make a lot of money."

There's not a lot of evidence of that so far. After making more than $1 billion pretax in 1991 and 1992, the proprietary trading group--which was run by Meriwether and his associates--has lagged. Pretax proprietary profits slumped to $416 million in 1993--low compared with the rest of the Street--and just $93 million in the first half of 1994. "I'm beginning to suspect that their loss of traders may have had more of an impact than I originally thought," says Michael Flanagan, an analyst with Lipper Analytical Securities Inc.

Reducing Salomon's dependence on volatile proprietary trading is the main reason the firm is trying hard to remake itself. Salomon Brothers Chief Executive Deryck C. Maughan is bolstering customer businesses like investment banking and underwriting. But in 1994's first half, customer businesses generated $464 million in pretax losses because the firm got caught with too many bonds that plummeted in value when rates rose.

In hindsight, some Wall Streeters believe Salomon made a huge blunder in allowing Meriwether and his followers to walk away in December, 1993. Salomon, still a bond-trading house at heart, was left without an experienced bond trader at the top. Says one former Salomon insider: "The benefit of having a John Meriwether or a John Gutfreund running the place is they can know when there's a problem. They can look a trader in the eye and tell."

The firm sees Keegan as the person to fill that role. CEO Maughan is considered a skilled manager, but he's not a trader. Keegan got his bachelor's degree and MBA from the University of California at Los Angeles and then spent four years in the army as a tank platoon commander in Germany. He joined Salomon in 1980, spent three years trading foreign exchange, and moved to London in 1983. By 1988, with Meriwether's backing, Keegan set up a London-based bond-arbitrage business with Stephen J.D. Posford, a polished, well-connected Brit whom Meriwether hired. By 1992, Keegan and Posford had become co-CEOs of the London office.

The two men turned around Salomon Brothers' London office, which had been moribund for years. From 1989 to 1993, the unit had record profits, accounting for more than a third of the firm's worldwide earnings in 1992 and 1993.

Now, Keegan and his former mentor are competitors. Keegan and Meriwether do precisely the same type of trading, which relies on mathematical models to find mispricings in the bond markets. The Salomon bond-arbitrage group still numbers around 40 people and includes some PhDs from Massachusetts Institute of Technology. "We are looking at the same mispricings," acknowledges Keegan.

But he and Meriwether are still friends. In early 1994, Keegan and some of his Salomon traders shared a game of liar's poker at Meriwether's Long Term Capital offices in Greenwich. They didn't talk business. "It's not as hard as you think because you're mutually happy not to discuss business," explains Keegan.

What did Keegan learn from Meriwether? "How to ask the right questions and always to hire people who are smarter than you are." Salomon Brothers hopes Keegan will do both.Leah Nathans Spiro in New York

June 24, 1995, Los Angeles Times / Associated Press, Salomon's Trading Chief Resigns Post: Wall Street: Dennis Keegan's leaving marks the highest-level departure yet at the troubled investment bank,

NEW YORK — The powerful head of trading at Salomon Bros. Inc. resigned Friday in the most senior-level departure yet to recently hit the defection-plagued investment bank.

In the unexpected shake-up, Salomon said it replaced Dennis J. Keegan, 42, with Shigeru Myojin, 45, a legendary Salomon bond trader who decided to forgo retirement to fill the opening as head of proprietary trading.

While top Salomon management was said to be disappointed with Keegan's departure, they saw Myojin's decision against retirement as a victory amid the recent defections, a source close to the firm said on condition of anonymity.

[We're never told why Keegan left the firm. If he was so "powerful" meant his proprietary trading department was profitable, and he wouldn't have been one of the 70 percent of directors threatened with pay cuts---a plan already aborted by this point anyway. Salomon had had its "first-ever annual loss of $399 million last year," according to this article, but was Keegan a factor---one way or another? With top management planting anonymous expressions of disappointed at his departure, I'm left confused.

But the following paragraph answers the question. At the time of the scandal in 2004, when Japan forced Salomon's private banking business to leave the country for unethical practices (charges which led Deryck Maughan to resign the company) no journalist mentioned that published nine years before was the fact that enormous, disproportional profits were being generated by a single bond trader there named Myojin. The press just barely alluded to a cause of Salomon's downfall being allegations of involvement in criminal money laundering---let alone signs it had been going on for at least a decade. For Myojin to stay his retirement, move to London, and attempt to replicate proprietary trading profits seems far-fetched, even for a miracle bond trader.]

Myojin has been a high-flying Salomon bond trader based in Tokyo who in some years earned as much as half of Salomon Bros.' total pretax profits. Earlier this year, he said he planned to retire in the fall.

Myojin, who was chairman of Salomon's Asia unit, becomes Salomon's vice chairman and will run proprietary trading, in which Salomon plays the markets with its own money for potential profit, out of London instead of New York.

Salomon Inc., parent of the Salomon Bros. investment bank, one of Wall Street's biggest bond traders, has been shaken by huge losses and a controversial pay plan that triggered the resignations of some of its most talented investment bankers, traders and other staff.

The pay plan potentially would have sharply cut bonuses for top-earning professionals. But Salomon scrapped the plan earlier this month following the defections that included investment banking chief Richard J. Barrett and director of research Martin L. Leibowitz.

Salomon said through a spokesman that Keegan resigned for personal reasons, but the firm declined to elaborate. His employment plans were not clear and a telephone message left with his office was not returned. Observers said he was respected and liked by many of his co-workers.

Salomon apparently has begun to recuperate from a first-ever annual loss of $399 million last year. [1944] Profit rose 23% in the first quarter of 1995 as strong results in proprietary trading offset losses in investing services for clients.

"Dennis has made a very important contribution to our business, both in London and as head of proprietary trading," Salomon Chairman and Chief Executive Deryck C. Maughan said in a brief statement.

Still, Salomon has come under pressure from stockholders for its unusually heavy reliance on proprietary trading, which has led to big losses as well as huge profits in the past. Salomon's second-quarter earnings report is due out next month.

Salomon's biggest stockholder is Berkshire Hathaway Inc., the Omaha firm largely owned by multibillionaire investor Warren Buffett.

July 6, 1995, New York Times, 34-Year Veteran Quits Salomon, by Peter Truell,

Salomon Brothers continues to lose top executives. William A. McIntosh, a managing director and a member of the brokerage firm's executive committee until April, said yesterday that he would leave. His decision, after 34 years at Salomon, is a measure of the continuing dissatisfaction among some of the firm's top executives.

Mr. McIntosh, 56, declined to comment on the reasons for his resignation, but colleagues said he had been stripped of much of his power in a reshuffle earlier this year when he was replaced as head of the firm's fixed-income business. He has no new job, but has told colleagues that he intended to work elsewhere.

There had also been increasing friction between Mr. McIntosh and Deryck C. Maughan, Salomon's chairman and chief executive, present and former colleagues said. Known for his direct approach, Mr. McIntosh had even suggested to Mr. Maughan that he should consider resigning for the good of the firm.

Mr. Maughan's stewardship of the brokerage firm has become increasingly controversial, as it has had after-tax losses of almost $400 million in 1994, a recent exodus of as many as 30 managing directors, and a now-abandoned pay plan that sharply cut compensation for many of the managing directors.

Through a company spokesman, Mr. Maughan said: "Bill McIntosh made a great contribution to the firm over a long career. However, we think that the right thing for the fixed-income business is to have John Haseltine run it."

In the April shuffle, Mr. McIntosh, who had headed Salomon's fixed-income department, was replaced by John L. Haseltine. As part of that makeover, Mr. Maughan also disbanded the firm's 13-member executive committee and replaced it with a five-member management committee. Mr. McIntosh was not included.

Although stripped of much of his operating authority, Mr. McIntosh remained widely respected and popular within Salomon, carrying a moral authority and a reputation for candor with the firm's top officers. At the height of the Treasury auction scandal of 1991 -- regulators have accused Salomon of submitting false bids -- Mr. McIntosh told the then-chairman, John Gutfreund, at a meeting with colleagues that he should resign for the good of the firm. Mr. Gutfreund later did so.

July 12, 1995, New York Times, Salomon Says It Will Report Another Loss, by Peter Truell,

Does the bad news ever stop? Salomon Inc. unexpectedly warned yesterday that it would report a loss of approximately $65 million in the second quarter because of reversals in trading for its own account and at its Phibro commodity business.

The loss, at an investment firm already shaken by defections of more than 30 managing directors in the last few months, put a question mark over the survival of the company's top management -- in particular, Deryck C. Maughan, chairman and chief executive of Salomon Brothers Inc., the company's brokerage unit.

"Deryck Maughan's regime is failing," said Peter A. Russ, a securities-industry analyst with Shelby Cullom Davis & Company. "He said he should be judged by the results of 1994 and 1995, and he's failing. He's got a mutiny on his hands."

Wall Street also took a grim view of Salomon's sudden announcement. Salomon's shares plunged $3.625, or almost 9 percent, to close at $37.25 yesterday. And the Standard & Poor's Corporation said it might lower its rating for Salomon Brothers' own bond issues, thereby threatening to increase the firm's borrowing costs. The new loss raises questions about Salomon's ability to sustain profitability, the rating agency said.

The latest surprises follow a loss of almost $400 million that Salomon reported for 1994. And they come amid the talent drain in Salomon's brokerage unit, where managing directors have quit in protest against an austerity pay plan that the company recently abandoned.

Robert E. Denham, chairman of Salomon Inc., tried to put a brave face on yesterday's disappointing news.

"I am very encouraged by the very substantial improvement in the client-related businesses of Salomon Brothers, even though the overall results of Salomon Inc. are disappointing," he said in the company's short statement.

But Mr. Russ said: "Anyone who thinks this is encouraging has lost all perspective. I really do think it's time for new management."

He also questioned whether Mr. Denham should remain in his job. Mr. Denham is a protege of Warren E. Buffett, the billionaire investor and chief executive of Berkshire Hathaway Inc., who holds more than 20 percent of Salomon's common stock.

A company spokesman said Salomon had no current plans to change its top management.

Final results for the second quarter will be announced on July 25, the company said. Once it realized the scale of its second-quarter loss, Salomon decided to put out a special announcement, a company spokesman said. That, he explained, was particularly because market analysts had expected Salomon to post good results for the quarter.

In its announcement, Salomon said its brokerage unit, Salomon Brothers, "was profitable for the quarter," thanks to "a strong performance" in its client-related businesses, where revenue "more than doubled from the first calendar quarter" of $225 million.

But losses in trading for the firm's own account, known as proprietary trading, "largely offset" those gains, and the losses in the holding company's Phibro division "contributed significantly to the overall Salomon Inc. loss," the statement said. Salomon noted that results from proprietary trading and the Phibro division sometimes "show significant quarter-to-quarter volatility and should be viewed over longer time periods."

In the way that Salomon is losing money, the latest quarter's expected results represent something of a mirror image of its performance last year, when the client businesses of Salomon Brothers' posted huge losses of $636 million, pushing the brokerage firm's overall loss for the year to $963 million. Only good profits at Phibro and allowances for taxes pushed the company's loss for the year down to $399 million after taxes.

"It does appear that once one sector recovers, another blows up," said Joan S. Solotar, a securities-industry analyst at Donaldson, Lufkin & Jenrette, a Wall Street brokerage firm. "Again! Very disappointing," she said in characterizing her reaction to the new losses.

Salomon did not comment on the cause of the proprietary-trading losses. "The rumor is that they lost it in the U.S. bond market," Ms. Solotar said. Some news-agency reports, however, suggested that these losses occurred in the mortgage-backed bond market.

Proprietary trading has in the past generated huge profits for Salomon, totaling more than $3 billion in the three years after 1990. But if traders bet wrong, trading for the firm's account can quickly produce heavy losses. Analysts speculated that the losses at Phibro occurred mainly in its oil trading. Oil prices fell unexpectedly in the second quarter, cutting into traders' profits.

Dennis J. Keegan, the head of proprietary trading business, recently resigned from Salomon Brothers. But a Salomon spokesman said yesterday that Mr. Keegan's departure was not related to the poor performance in proprietary trading.

July 28, 1995, New York Times, Salomon Displays High-Risk Heritage, by Pravin Banker,

NEW YORK— Once again Salomon Brothers is in crisis. Four years ago it was the bid- rigging scandal at Treasury auctions, which for a bond house is a disaster. Enter Warren Buffett, whose solution was the quick fix of cleaning out top management, paying a sizable fine and closing the book.

After a string of losing quarters - $60 million dropped in the latest one this year - Wall Street and the media now say the problem is supposed to be Mr. Buffett's squeaky-clean chief executive, Deryck Maughan, who was hand-picked by Salomon's biggest stockholder because he was in the Tokyo office when things went wrong in New York.

What's wrong with Salomon? A public company theoretically answerable to its shareholders, it remains a collection of fiefdoms haunted to this day by the ghost of John Gutfreund, a high-stakes gambler who populated his casino in the 1980s with dealers who had the stomach to bet big. If their gambles paid off, the dealers got rich. If they didn't, Salomon would eat the loss.

We all yearned for a job at Salomon. Who wouldn't? Turkeys were paid a mere $1 million, the stars more than twenty times that. Traders could walk away with $25 million in a single year, even when the firm as a whole was losing money.

Of course, it wasn't always like that. During the partnership days of the 1970s, partners had to reinvest their earnings in the company, leaving them asset-rich and cash poor but devoted to the firm. One day a Salomon team called on Dean Phypers, IBM's chief financial officer, because Big Blue was planning a $1 billion bond issue, a staggering sum at the time. IBM was committed to Morgan Stanley as the syndicate manager to sell the bonds.

"No matter who you choose in a deal this size, two heads are better than one," Mr. Gutfreund told IBM, in a calculated gamble. He knew Morgan Stanley would never share the lead and the huge fees that went with it. Sure enough, it withdrew, and Salomon was in. Donald Regan of Merrill Lynch jumped at the chance to share the lead.

But this run at profitable fee business turned into a diversion. The company was dragged deeper and deeper into the world of high-stakes poker, be it bonds, currencies or commodities. Blue-chip clients like IBM were dropped in favor of hedge funds, currency and commodity funds, and high-net-worth gamblers from Hong Kong to Monterrey.

Meanwhile, the world changed. No longer does a Salomon or even a George Soros hold sway over the markets. The Federal Reserve's policy of offering easy money at only 3 percent during the first part of the decade shifted billions from low-yielding bank deposits to mutual funds. Through their proxies at fund companies such as Fidelity, Alliance, or Vanguard, Ma and Pa now rule from Main Street.

Can anyone deny that Jeff Vinik, manager of almost $50 billion at Fidelity's Magellan Fund and champion of high- tech investing, holds the future of the stock market in his hands? Or that the big funds' plunge into Mexico last year helped buoy that country as quickly as their retreat sank it - and the emerging markets with it. Submerged under massive fund liquidations, Wall Street lost big, and Salomon was no exception.

What should Deryck Maughan have done? He could have swept out the high- rollers and put the firm's capital into more stable businesses, turning it into an enterprise with a franchise and diverse products to offer. That was the legacy of Richard Jenrette at Donaldson, Lufkin & Jenrette, which has a high-yield business with larger profit margins and a niche in merchant banking that helps carry the firm through market reverses.

Salomon has no such reservoir. The easy money it earned borrowing at 3 percent to buy bonds paying 6 percent is gone. That leaves the alternative of making big bets for big capital gains to cover the costs of all those brilliant, expensive traders who shone in friendly markets. With money costing 6 percent and Treasuries paying less, markets are less friendly.

Markets now are governed by perception, not logic. Watch carefully (they didn't): Logic says that two-year Treasury notes should yield about half a point more than overnight interest rates, so borrowing to buy them should be a good living. Unfortunately, fund managers thought otherwise, bet on a recession with rapidly declining interest rates and raced ahead of the Fed to buy Treasuries of all durations. As bond prices rose, yields fell, stimulating the economy.

That pulled the yield on two-year Treasuries below the cost of borrowing before the Fed rode to the rescue last month and lowered rates. Many a professional was squeezed. For Salomon, whose very life depends on a large book full of big bets on Treasuries, it was another prescription for disaster.

Charles Munger, Buffett's No. 2, characterized Salomon's business as a casino of traders that makes money for the firm using its own capital and a restaurant that services clients. That was after the first-quarter loss. After the second-quarter loss, the roles were reversed, leaving everyone perplexed. Mr. Maughan repositioned his top traders and seems to be staking everything on a one big bet to recoup his losses in the third quarter.

But time is running out. Salomon's current bond rating is BBB-plus, the minimum investment grade, and Standard & Poor's is reconsidering even that. A downgrade of one notch would be bad, and two could dry up the river of money on which a trading firm must float.

When credit evaporated for the junk- bond firm Drexel Burnham Lambert at the start of the decade, Citicorp declined to lead a rescue when it learned that the Fed did not consider Drexel essential to the financial system.

In 1991, the Fed thought differently about Salomon and saw its possible failure as a systemic risk because it was essential to the smooth operation of the Treasury bond market. Now, it seems Salomon is just another firm, a purely commercial risk that is the responsibility of its shareholders and creditors.

There are three options: selling Salomon to a big foreign bank eager for a Wall Street beachhead, replacing Mr. Maughan with a famous financial icon to restore confidence or rebuilding Salomon with replacements from within. But much more could be at stake than a loss to the shareholders.

So soon after the collapse of Barings in London, there could be a domino effect, with lenders turning more conservative and curtailing lines of credit all around.

PRAVIN BANKER is president of his own investment banking firm in New York and formerly headed IBM's international treasury operations.

January 24, 1996, New York Times, Salomon Earnings Declined From 3d Quarter to the 4th, by Stephanie Strom,

Salomon Inc., the parent of Salomon Brothers, the beleaguered investment bank, reported a steep decline in profits yesterday from the third to the fourth quarter of last year.

Investors responded to the decline, largely attributable to the investment bank, by sending the parent company's stock down 87.5 cents, or 2.3 percent, to close at $36.625.

Salomon's stock declined even though the company's earnings of $168 million, or $1.42 a share, in the fourth quarter reversed a loss of $157 million in the corresponding period of 1994.

But analysts and investors consider quarter-to-quarter changes a better gauge of a securities firm's performance, because markets can change dramatically from year to year.

The slide in earnings, from $268 million in the third quarter, also renewed speculation about how much longer Deryck C. Maughan will continue as chairman and chief executive of Salomon Brothers. "I've spoken to at least 18 investors about Salomon," said Perrin H. Long Jr., a securities industry analyst at Brown Brothers Harriman & Company, "and at least half of them have asked, 'What about Deryck Maughan?' "

Mr. Long and other analysts said the quarter-to-quarter slide in Salomon's results was not surprising in and of itself. The fourth quarter is typically the slowest period for Wall Street firms, and Merrill Lynch and Morgan Stanley also reported slight declines in profits from the third to the fourth quarters.

Also, many analysts noted that trying to predict Salomon's earnings was akin to playing a game of craps. The company's fortunes rely heavily on Salomon Brothers' trading for its own account, or proprietary trading, which is volatile.

Guy Moszkowski, a securities industry analyst at Sanford C. Bernstein & Company, noted that the firm's trading strategies might not play out for a year or more but that the value of the inventory it held as part of those strategies was marked up or down to reflect the actual market value every quarter, which amplified the company's earnings swings. "No matter how big the earnings surprise, either positive or negative, I'm never surprised," he said. "Because Salomon's earnings are always a surprise, they should never come as a surprise to anyone."

Nonetheless, the magnitude of Salomon's drop in profits -- 37.3 percent from the third to the fourth quarter -- caused concern among investors, analysts said.

Much of the swing came from a 48.3 percent drop in revenue from fixed-income sales and trading, the bulk of Salomon Brothers' business.

Operating profits at Salomon Brothers plunged 45.7 percent from the third to the fourth quarter, to $207 million from $381 million.

Phibro, Salomon's commodities-trading business, continued a yearlong downward spiral. Its operating profits declined 17.7 percent, to $56 million in the fourth quarter from $68 million in the third. Phibro USA, the company's oil-refining and marketing business, continued to suffer from competition, pushing operating losses to $32 million from $9 million in the previous quarter.

Separately, Dean Witter, Discover & Company, which operates the Dean Witter Reynolds brokerage firm and the Discover credit card business, said yesterday that profits in the fourth quarter had jumped about 27 percent, to $178.1 million, or $1.01 a share, from $140 million, or 81 cents a share, in the corresponding period of 1994. Because much of Dean Witter's earnings involve the consumer business of credit cards, analysts focus on the company's year-to-year comparisons.

Dean Witter's securities business, which accounted for 65 percent of earnings in the fourth quarter, had a 31 percent increase in profits, thanks largely to investors' strong appetite for stocks and mutual funds. Profits from the credit card business rose 20 percent.

"Dean Witter is probably the most underappreciated of all the firms in the securities business," said Samuel G. Liss, a securities industry analyst at CS First Boston. "Their secret is a recurring revenue stream that covers 82 percent of their fixed costs, and no one else is anywhere near that kind of coverage."

April 24, 1996, New York Times, Company Reports;Salomon's Earnings Soared In First-Quarter Rebound, by Peter Truell,

Salomon Inc., recovering from a difficult 1995, said yesterday that its first-quarter earnings more than tripled, to $276 million, from $81 million in the first quarter of last year, thanks to robust securities trading and investment banking revenues.

Salomon, the parent of one of the largest United States securities firms, Salomon Brothers, and of Phibro, a commodity trading company, reported earnings of $2.44 a share, far exceeding both analysts' expectations for about $1 a share, as well as the 59 cents a share it reported for last year's first quarter. In the fourth quarter of 1995, Salomon reported net income of $168 million, or $1.32 a share.

They had a pretty good first quarter," Alison A. Deans, an analyst at Smith Barney Inc., said. "Their earnings volatility is more a function of their mix of businesses," she said, adding that about half of Salomon's equity capital is devoted to trading for its own account, a notoriously volatile business.

And, as analysts have stressed, this was a great quarter for securities firms, which reported banner earnings. "Expectations were pretty high, and as each firm reported its results, it has exceeded expectations, so the expectations kept rising. And Salomon beat even those," Raphael Soifer, an analyst at Brown Brothers Harriman, said.
Salomon's leaders were happy, even relieved, by the company's improved performance, a change from 1995, when defections and poor results dogged the brokerage unit.

"The first quarter's results are based on the outstanding performance of our securities and commodities businesses," Robert E. Denham, chairman and chief executive of Salomon Inc., said. "Our balance of customer businesses and proprietary risk-taking is producing solid results."

Deryck C. Maughan, chairman and chief executive of Salomon Brothers, called the results "excellent" and said the firm's objective "is to build underwriting and advisory revenues and to maintain effective control of our trading risk."

At Salomon Brothers, pretax income increased more than sixfold, to $368 million, from $60 million in last year's first quarter. The only significant blot on the report was the decline in revenues from stock sales and trading revenues, after allowing for interest expense, to $64 million, from $152 million a year earlier. In a discussion with analysts yesterday, Jerome H. Bailey, Salomon's chief financial officer, cited losses on long-term equity arbitrage positions in Japan.

But investment banking did particularly well, with revenues rising 53 percent, to $181 million in the first quarter from a quarterly average of $118 million in 1995.

Phibro reported pretax income of $145 million in the first quarter, compared with $123 million in the period a year earlier, and reflecting the favorable commodity markets.

Salomon Inc.'s return on equity jumped to 26 percent in the first quarter, compared with 7 percent a year earlier. Salomon shares, which have risen in recent weeks, climbed 50 cents to close at $41.25.

Discussing the share price, Ms. Deans said that "near term, they may be due for a bit of a bounce, but I can't see it getting higher than the mid-40's." She said that while she was encouraged by Salomon's management of expenses, she "still wouldn't put them anywhere near the league of the Morgan Stanley's and Merrill Lynch's of the world.

July 27, 1997, New York Times, How to Succeed in the Business News Business, by William C. Taylor,

Michael Bloomberg's autobiography shares the secret of his success: come in early, stay late

Media moguls are hard to like. Rupert Murdoch may be a visionary, but would you want to work for him? Ted Turner may be a risk taker, but aren't you glad he didn't take over CBS? So it's an achievement that Michael Bloomberg has written an instructive and engaging autobiography.

To be sure, Bloomberg doesn't have the Main Street name recognition of Murdoch and Turner. But on Wall Street, where his operation began, he is a legend. More than 75,000 investment bankers, bond traders and money managers pay him $1,100 a month to receive news reports, market data and securities prices. Bloomberg Information Television broadcasts 24-hour news channels in North and South America, Europe and Asia. Add radio, magazines, books and a Web service and you have an empire with 3,000 employees and annual revenues of $1 billion.

It wasn't always this way. Bloomberg's career has unfolded in two 15-year segments. In 1966, fresh out of Harvard Business School, he signed on with Salomon Brothers at an annual salary of $9,000. Within a few years, he established himself as a rising star, first as a high-powered equity salesman, then as a computer whiz. In 1981, Salomon sold out to a little-known commodities firm called Phibro, and Bloomberg walked out the door (actually, he was kicked out) with a severance check of $10 million. That bittersweet experience convinced him he should start his own company. He created an information service that still has no real competition. The company gobbled up $4 million of its founder's severance check before it became self-sustaining. Today, Forbes magazine puts his personal fortune at $1 billion.

How did he do it? Bloomberg's account serves up a little swagger and big-picture theorizing. But what "Bloomberg by Bloomberg" (written "with invaluable help from Matthew Winkler," the editor in chief of Bloomberg News) also offers -- and what gives the book its charm -- is insights on business, success and leadership that would be easy to dismiss as simple-minded if they weren't so tough-minded, and if Bloomberg himself didn't seem so genuine.

How did he rise so fast at Salomon Brothers? "I came in every morning at 7 A.M., getting there before everyone else except Billy Salomon. When he needed to borrow a match or talk sports, I was the only other person in the trading room, so he talked to me." He'd also stay later than everyone except John Gutfreund, the managing partner, so when Gutfreund "needed someone to make an after-hours call to the biggest clients, or someone to listen to his complaints about those who'd already gone home, I was the someone."

Why won't Bloomberg attend going-away parties for his employees? "Why should I? I don't wish them ill, but I can't exactly wish them well either. I wouldn't mean it. We're dependent on one another -- and when someone departs, those of us who stay are hurt. . . . We have a loyalty to us. Leave, and you're them."

Did success ruin his marriage? ''Over the years, we had gradually drifted apart. We developed different interests, and as our daughters became more independent, the differences became more apparent. . . . Business is a very important part of my life; she almost never came to visit my office. Nothing went wrong per se. We just developed separate lives.''

Lots of entrepreneurs make money. Lots of entrepreneurs who make money write books. Few of those books make you glad they did. This one does.

William C. Taylor is a founding editor of Fast Company magazine.

September 24, 1997, The Cincinnati Post / Associated Press, Travelers to Buy Salomon For $9B,

NEW YORK -- Smith Barney parent Travelers Group will buy Salomon Inc. in a deal valued at over $9 billion that will bring together two of Wall Street's most powerful investment firms.
The deal is the latest in a wave of buyouts rearranging the financial services landscape as brokers, banks, insurers and other asset managers combine forces to compete more effectively.

Travelers said today that it will merge Salomon with its Smith Barney Holdings Inc. brokerage division to create Salomon Smith Barney. The companies said there would be job cuts, but Salomon spokesman Robert Baker said it was too soon to determine how many would lose their jobs.

''Merging Smith Barney and Salomon Brothers accomplishes in a short time what it would have taken either of us a considerable time to build,'' said James Dimon, chief executive of Smith Barney.

For Travelers and Salomon, the deal combines Salomon strength in investment banking and bond trading with the large client base that comes with Smith Barney's retail brokerage business.

Dimon and Deryck C. Maughan, chairman and CEO of its Salomon Brothers investment arm, will serve as co-chief executives of the new Salomon Smith Barney investment division. Robert E. Denham, chairman and chief executive of Salomon Inc., said he would resign after the sale closes.

Sanford I. Weill, Travelers' chairman and chief executive, said the deal will substantially strengthen Travelers' profits and Salomon Smith Barney will be in the top tier of global securities and investment banking firms.

The latest deals are examples of Wall Street firms' desire to grow stronger in all facets of the securities business - from retail brokerages to big-money investment banking. Companies that specialize in one area or another are building up areas where they are weak or buying firms that can bring them the strength overnight.

September 25, 1997, The Economist, Salomon succumbs at last,

Sanford Weill of Travelers has built an empire buying companies on the cheap. But Warren Buffett has driven a hard bargain

SO THE rumour-mongers got it right—third time around. Late last week Wall Street was abuzz with chatter that Travelers Group, a big financial-services conglomerate, was planning to swoop on Bankers Trust. This sent Bankers' shares skywards. Then came more far-fetched whispers that it was to be J.P. Morgan at the altar. It was neither. On September 24th, Travelers put the gossips out of their misery by confirming that it was to buy Salomon Inc, the owner of Salomon Brothers, one of the Street's best-known investment banks, in a deal worth more than $9 billion.

The all-stock deal will merge Salomon Brothers into Travelers' securities arm, Smith Barney. The resulting entity, for the moment to be called Salomon Smith Barney, will be a giant: America's second-largest investment bank, after Morgan Stanley Dean Witter, and part of the world's seventh-largest financial group (seechart). For Sanford Weill, Travelers' go-getting chairman, this caps a series of acquisitions that have built a financial empire with interests ranging from life insurance to stockbroking. Salomon is Mr Weill's most audacious deal yet. But this time he may be biting off more than he can chew.

The deal has obvious attractions. In one stroke, the firms have been propelled from investment banking's second division (in Salomon's case) and third division (in Smith Barney's) to its highest rank. The two banks also claim to make a neat fit. Salomon, traditionally a bond house, makes much of its money trading on its own behalf. It has lately beefed up share underwriting and mergers-and-acquisitions advising, but remains behind bigger rivals such as Goldman Sachs and Merrill Lynch. The union with Smith Barney, which has thousands of brokerage offices across America, allows Salomon to diversify further into brokerage and asset management, which are much less volatile than its core trading business.
The deal also ends years of speculation about Salomon. The bank has never fully recovered from a scandal in the American government bond market in 1991, in which a senior trader was caught submitting false bids at auction. To keep the company afloat, financier Warren Buffett's Berkshire Hathaway bought a large stake. Ever since the bank lost a packet in 1994's plummeting bond markets, Salomon has been seen as vulnerable to predators. Questions about what Mr Buffett intended to do with his shares added to the uncertainty. In January, Salomon struck an alliance with Fidelity Investments, the world's biggest mutual-fund group, in what some Salomon insiders believed to be a prelude to a takeover by Fidelity. Both firms say this alliance will continue.

Smith Barney has much to gain. It acquires a world-class fixed-income business. It also becomes a global firm. Salomon has invested heavily in bolstering its presence overseas, building furiously in London, Frankfurt and, further east, in Moscow. The bank's London roster has grown from 800 to almost 1,400 since 1992. Instead of being trampled by bigger rivals in the rush to create global investment banks, Smith Barney has a chance to do some trampling itself.
Find a partner

The takeover continues a wave of consolidation that has swept Wall Street this year. Since the $10 billion merger in February between Morgan Stanley and Dean Witter, Discover, seven securities firms have been snapped up, mainly by American and European commercial banks. Mr Weill's strike will put further pressure on all but the biggest independent securities firms to find partners.

At first glance, the tab for Salomon looks modest at twice the book value of its assets, a common yardstick. By comparison, Merrill Lynch trades at 3.4 times book and Morgan Stanley at 2.9. But factor in the volatility of Salomon's earnings, caused by swings in the markets it trades in, and the price looks steeper. Salomon's net profit of $617m last year followed a lacklustre $457m in 1995 and an embarrassing $400m loss in 1994. No wonder its shares have historically traded at a discount to its closest rivals. No doubt some Travelers shareholders will have winced at the price, given Mr Weill's reputation for buying on the cheap.

Certainly, few Salomon shareholders are likely to grumble. Perhaps happiest of all will be Mr Buffett, the Nebraskan billionaire and investment guru who stepped in to save, and for a time run, Salomon after the 1991 scandal. But with Salomon, Mr Buffett's famous investing acumen failed him. He has been looking for an exit for some time. The deal with Travelers provides him with a reasonably dignified and profitable way out. When, on the day of the deal, Mr Buffett spoke of Mr Weill's “genius” at managing acquisitions, his relief was palpable.

There are, however, several reasons to think that Mr Weill might not pull it off so elegantly this time. One is Salomon's huge proprietary trading operation. This, in effect, is a glorified hedge fund. If Mr Weill leaves that business alone, it will increase the volatility of Travelers' earnings. If he tries to rein it in, valued clients may flee. “Companies choose Salomon because it has a great feel for the market,” says Raphael Soifer, an analyst with Brown Brothers Harriman, an investment bank. “That comes from its being in the thick of things.”

A second hurdle is culture. Salomon's aggressive traders have little in common with Smith Barney's less dazzling (and far less well-paid) brokers. Salomon's new parent will have to tread carefully to avoid defections, especially within the close-knit group of gifted but touchy proprietary traders who bet billions of the bank's own money.A third reason to be sceptical is history. Mr Weill's acquisitions in retail financial services have gone smoothly. But the only securities firm to have successfully combined large retail and wholesale businesses under one roof is Merrill Lynch, which took the best part of two decades to get it right. Mr Weill must now do the same, only far more quickly. He has his work cut out.

September 25, 1997, Chicago Sun-Times, Travelers agrees to purchase Salomon, by Andrew Fraser,

NEW YORK Travelers Group agreed Tuesday to buy Salomon Inc. for $9.3 billion, moving closer to its goal of becoming a financial supermarket handling everything from health insurance to retirement plans.

The acquisition by the owner of the Smith Barney brokerage would create the third-biggest securities firm after the recently formed Morgan Stanley Dean Witter Discover & Co. and Wall Street mainstay Merrill Lynch & Co.

It raises the stakes in the consolidation game being played out across the financial services industry as relaxed regulations and global competition cause an urgent rearranging of the landscape. Travelers said it will merge Salomon with Smith Barney. The new company, Salomon Smith Barney Holdings Inc., will be among the few firms in the industry to be prominent in investment banking and retail brokerage services. But beyond making Salomon and Smith Barney a more powerful force in the securities business, the deal solidifies Travelers advantage as the one firm able to offer a multitude of financial services to individuals and corporate clients.

"This is the beginning of the creation of the financial supermarket of the future, which is why it is so cutting edge. Nobody is in a position to do this," said Linda Chase, a financial services analyst at Towers Perrin, a New York-based business consulting firm. Several firms had tried with great disappointment in the 1980s to create so-called "financial supermarkets." American Express attempted it with Shearson. Sears tried it with Dean Witter and Allstate insurance. Both American Express and Sears have retreated to their mainstay businesses. However, analysts said the timing is right for Travelers to successfully offer diversified financial services such as banking, insurance and investment services. Regulations are more relaxed and individuals are now looking for ways to find those services at one place, Chase said. And, analysts said, if there is one executive who can make such a company work it's Sanford Weill, the chairman of Travelers. He has had a good track record of cobbling together various financial services businesses under the Travelers umbrella. Weill "understands better what the future will bring than a vast majority of the people he is in competition with," said Robert Bernhard of McFarland Dewey & Co., a New York investment bank, and a former Salomon partner.

September 25, 1997, Chicago Tribune, Travelers To Collect Salomon For $9 Billion, by Merrill Goozner,

NEW YORK — The trend of more consumer and investor money being consolidated in fewer financial powerhouses surged forward in breathtaking fashion Wednesday when Travelers Group Inc. agreed to acquire Salomon Brothers in a $9 billion stock swap.

Wall Street's latest mega-merger reflects the high-stakes scramble by the biggest players in the financial arena to position themselves for the coming era of free-for-all competition.

Financial deregulation already on the books and under consideration in Washington is encouraging banks, investment advisers, brokerages and insurance firms to vie for each other's business.

The winners in the game will be able to control the nation's savings pool and serve its major corporations. Only those firms that can provide a full range of services will thrive, analysts say.

That's why Wednesday's merger took no one by surprise. It had been rumored for weeks that Sanford I. Weill, the financial wizard behind Travelers' push past American Express to become the nation's pre-eminent financial services company, was seeking an investment banking partner to round out the services provided by the firm's Smith Barney brokerage unit.

Salomon, an investment banking firm that specializes in bond trading by its own brokers and overseas dealings, was a vulnerable target. It was a stand-alone firm with limited capital that had to be bailed out by financier Warren Buffett in 1991 when it was nearly swamped by a bond trading scandal. Profits had been sliding in recent quarters.

This year's flurry of mergers began with a little-noticed ruling by the Federal Reserve Board in December that more than doubled the percentage of bank revenues that could come from non-bank services to 25 percent.

It was the latest chip in the wall erected in 1933 by the Glass-Steagall Act to restrict banks from risky side businesses like selling stocks. The act was passed to prevent a repeat of the financial markets' collapse in the late 1920s that led to the Great Depression.

In the wake of that December ruling, a flurry of merger activity has ensued, including:

- Morgan Stanley merged with Dean Witter in a deal worth more than $10 billion.

- NationsBank Corp. announced a $1.2 billion takeover of Montgomery Securities.

- First Union Corp. agreed to buy Wheat First Butcher Singer Inc. for more than $470 million in stock.

- Fleet Financial Group announced the purchase of discount broker Quick & Reilly Group Inc. for $1.6 billion.

Robert Korajczyk, a finance professor at Northwestern University's J.L. Kellogg Graduate School of Management, said many of the recent mergers represent attempts by firms to become more full-service financial providers.

He said because the financial services industry is so globally competitive, consumers should not yet be wary of the long-term implications of this year's rapid consolidations.

"If it keeps steamrolling, it could become a problem," he said. "But at this point, I don't see it as a problem. . . ."

Some industry observers noted, however, that there's more to come.

Newly arising competition from the bank-brokerage deals is putting pressure on the traditional brokerages to figure out ways to fend off the competition," said Jeffrey Gordon, a professor of merger law at Columbia Law School. "Companies that in the past would never have merged for cultural reasons now find themselves getting together."

The clash of cultures that is evident in the Travelers-Salomon merger is reminiscent of the Dean Witter-Morgan Stanley combination announced in February. Both mergers will put together well-known names from the retail brokerage field with blue-chip investment banking firms. Yet the executives involved expressed confidence that merging will make both sides stronger.

"The complementary business strengths of these two organizations . . . will create a financially powerful and formidable competitor in virtually every facet of the securities business, in any region of the world," Weill said in a statement.

Had the two firms been combined at the end of 1996, the mega-firm would have been first in the nation in municipal underwriting, second in U.S. debt underwriting, third in U.S. equity underwriting and fourth in domestic mergers and acquisitions. The combined firms will have 10,400 brokers in 438 domestic retail offices with more than $538 billion in assets in 5 million customer accounts.

For the time being at least, chief executive duties will be shared between James Dimon of Travelers and Deryck C. Maughan of Salomon. Weill will remain as chairman, with Salomon Chairman Robert Denham leaving for "other opportunities."

Wall Street had already done most of its cheering in anticipation of the move.

Salomon Brothers stock closed up another $4.75 a share Wednesday at $76.25. The stock had surged $4.44 Tuesday as rumors swept the market that a deal was imminent.

Travelers shares slipped $2.62 a share, to $69.44, but had climbed markedly in recent weeks as investors bet Weill was closing in on another deal. Most analysts contacted Wednesday pointed to the "valuable currency" Weill was using to make the deal: 1.13 shares of his own company's stock for each share of Salomon stock.

The deal got its most important blessing from Buffett, of Berkshire Hathaway Inc., who owns about 18 percent of Salomon's stock. On paper, his holding company made $147 million in profits Wednesday alone; the $1 billion investment is now worth $1.6 billion.

There will be some losers in the back office operations of the two firms, though how many remains unclear. After predicting that combining the firms will push earnings up by 10 percent, Weill confirmed Travelers will take a one-time restructuring charge of $400 million to $500 million for severance and other costs.

September 25, 1997, Wall Street Journal, Travelers to Buy Salomon In $9 Billion Stock Swap, by Michael Siconolfi, Anita Raghavan and Leslie Scismi,

NEW YORK -- A few years back, Travelers Group Inc. TRV +1.00% Chairman Sanford I. Weill vowed to Wall Street investment bankers that he never would buy Salomon Brothers Inc. According to the bankers, Mr. Weill told them that Salomon was no more than a risky investment fund that bet the ranch on big trades.

Wednesday, Mr. Weill changed his tune. In a move that shook Wall Street, Travelers, along with its Smith Barney Inc. brokerage unit, agreed to acquire Salomon Brothers' parent, Salomon Inc., SB -2.54% in a stock swap valued at about $9 billion. The combined unit, called Salomon Smith Barney Holdings Inc., would be part of a financial-services juggernaut whose stock-market value of $55 billion would eclipse giants Merrill Lynch & Co. and Morgan Stanley, Dean Witter Discover & Co.

Some on Wall Street praised Mr. Weill for making yet another opportunistic deal -- his trademark. "This is certainly not a case where Sandy Weill is guilty of paying high prices," said Roy Smith, a New York University professor and a Goldman, Sachs & Co. limited partner. Added Stephen Treadway, a former Smith Barney executive and now chairman of Pimco Advisors LP's retail mutual funds: "This may be a good value in this marketplace because his currency is Travelers stock -- not cash." Travelers stock has soared more than tenfold since 1986, more than four times that of the broader-market averages.

Shares of Travelers fell 87.5 cents to $76.125 in New York Stock Exchange composite trading Thursday. Salomon's shares shed 12.5 cents to close at $76.125.

The bold deal is fraught with risks. Mr. Weill, known for gobbling up distressed Wall Street firms at bargain-basement prices, is buying Salomon in the seventh year of the bull market. Salomon, long known as Wall Street's most daring trading firm, has lost big chunks of money in a hurry. In the short run, there could be cultural clashes as aggressive Salomon traders are faced with Smith Barney's more conservative mentality. Salomon and Travelers executives said the acquisition is likely to result in job losses for at least 1,500 bankers, traders, analysts and back-office workers; the actual layoffs could be lower because of attrition.

The story of why Mr. Weill shifted gears to buy Salomon says much about his grand dream of creating the world's largest financial-services firm, as well as the swiftly changing sands of Wall Street, which is undergoing its biggest consolidation ever. The goal, according to people on Wall Street, is for Mr. Weill to control Salomon's riskier businesses and to beef up its international cache and investment-banking prowess.

For years, Mr. Weill has awaited the day when he could cobble together a Wall Street firm that would top giant Merrill Lynch. Yet despite a powerful brokerage force of 10,400 catering to individual investors, the nation's second-largest behind Merrill, Smith Barney has three big problem areas: nearly no international presence, a weak bond business and a relatively feeble investment bank catering to institutions. Salomon helps provide all three. "In one fell swoop, Smith Barney will have more equity capital than Merrill Lynch," the 64-year-old Mr. Weill said. "That makes me happy."

Merrill executives shrug off the comparison. Merrill Chairman David Komansky said that deal will give the merged firm a shot at joining Wall Street's ultra elite. But Mr. Komansky added: "I wouldn't say at this point in time they're there. It's a long way between the starting line and the finish line."

With merger mania sweeping Wall Street this year, Mr. Weill faced a big risk if he waited for a market tumble to make an acquisition. Already, Morgan Stanley & Co. merged with Dean Witter, Discover & Co. to leapfrog ahead of Smith Barney as a Wall Street powerhouse. The betting inside Smith Barney was that the bull market could last a while longer. Smith Barney executives expressed concern that another big merger -- say between Chase Manhattan Corp. and Merrill -- could relegate the firm to asecond-tier player.

Unlike other brokerage-firm mergers this year, the Smith Barney-Salomon deal was driven by how much Mr. Weill can cut costs. That is nothing new for him: After buying Shearson Lehman Brothers Inc.'s brokerage operations in 1993, the newly merged firm slashed 1,500 jobs. Over the years, Mr. Weill has cut out perks, ranging from newspaper subscriptions to employee benefits, in a drive to pare expenses.

Salomon will bear the brunt of the cuts, particularly in overlapping areas such as stock, research and trade processing. Wednesday, Salomon Brothers Chief Executive Deryck Maughan -- who will serve as a Travelers vice chairman and co-chief executive of the newly married firm with Smith Barney Chairman James Dimon -- rankled Salomon employees when he told them severance formulas already had been worked out for those who will be let go.

Mr. Weill said Mr. Maughan initiated the merger talks in an Aug. 14 call, with the two meeting during the last two weeks of August. On the Thursday before Labor Day, Mr. Weill spoke to Warren Buffett -- Salomon's biggest shareholder and former chairman -- "about how he would feel about something like this, and he was very encouraging." On the Sunday after Labor Day, instead of going to the U.S. Open tennis finals, Messrs. Weill and Maughan went up to a house near the Westchester County, N.Y., airport that Travelers uses as a retreat and worked all day on the deal.

"I think it was the smoothest coming-together of a big company that I've ever been involved in," Mr. Weill said.

But before doing the deal, Mr. Weill needed to be convinced he could swallow Salomon's risky trading area. Wall Street traders said Salomon's stock-trading operations had losses of more than $100 million in an arbitrage transaction when British Telecommunications PLC and MCI Communications Corp. MCIC 0.00% recently renegotiated the terms of their merger deal. Wednesday, Mr. Maughan strenuously denied that the decision to sell out had anything to do with the firm's BT-MCI trading.

Mr. Weill's concerns were so great that Salomon's proprietary-trading chief Shigeru Myojin was flown in from London during the talks to make a presentation to Mr. Weill about Salomon's risk-arbitrage businesses and to make him more comfortable about the firm's risk profile.

Though Mr. Weill is expected to try to rein in Salomon's risky trading, observers say he won't eliminate it. "Obviously, Sandy thought this through -- they're not going to take out that element of Salomon's profit, or they wouldn't make money," said Richard Barrett, former Salomon investment-banking chief now heading UBS Securities' financial-institutions investment banking.

For his part, Mr. Weill said: "I think it's fair to say before we knew anything, we were very nervous, and went from being nervous to appreciating what they do."

In some ways, Salomon was a fallback for Mr. Weill. He had long expressed an interest in Goldman Sachs, one of Wall Street's premier investment banks. But Goldman senior executives wouldn't bite, according to people familiar with the situation. Mr. Weill made an informal overture to Bankers Trust New York Corp., BT -0.22% according to others familiar with the situation. But the overture didn't go far, allowing Bankers Trust to issue a statement saying the two hadn't held talks after its stock surged last week. Wednesday, Mr. Weill declined to comment on Bankers Trust. In addition, Travelers had expressed interest in J.P. Morgan JPM -0.21% & Co.

Smith Barney boasts $156 billion in assets under management. It has come a long way since 1988, when it lacked clout, focus -- and profits. The $1 billion Shearson purchase made it an instant brokerage giant. Its return on equity recently has topped most of its rivals, showing how size and tough cost controls can succeed on Wall Street. During the past two years, the firm slashed its fixed operating costs by more than $100 million.

Smith Barney also has strong stock-trading operations and clout in municipal bonds. It remains the top market maker in small stocks; on average, the firm accounts for between 10% and 15% of the daily volume in the Nasdaq Stock Market. But the firm's efforts to build up investment banking have been frustrating. Smith Barney ranked No. 10 among Wall Street underwriters in 1996, the same as in 1995.

By contrast, Salomon has earned a reputation as a smart and aggressive bond-trading house. Its specialty is proprietary trading -- trading for the house account, using the firm's own money. Salomon's bond-arbitrage group generated a whopping pretax profit of more than $750 million in 1996, according to people familiar with the firm.

Salomon has tried to diversify its earnings, but it hasn't come easily. Sales and trading, mostly in bonds, represented more than three-quarters of Salomon's 1996 revenue and nearly all its profit. Its stock trading has been a big disappointment. Salomon's mortgage-backed-bond department, after suffering debilitating losses in 1994, has rebounded strongly.

The firm has made strides in some other areas. Salomon has beefed up its stock investment-banking operations. It now does business in more than 20 countries, compared with five a decade ago. Yet it lacks the punch to reach any major global aspirations without hooking up with a merger partner, according to a 1997 report by Moody's Investors Service Inc.

In the past, Mr. Maughan brushed aside suggestions that Salomon needed a merger partner to succeed. Sitting in his office earlier this year next to a pillow that reads: "Don't Confuse Brains With a Bull Market," Mr. Maughan boasted that Salomon already trades $250 billion in securities a day among 3,500 clients. Wednesday, talking over the firm's "squawk box" to employees, Mr. Maughan pointed out, "This provides us with the scale so that we can compete with Merrill and Morgan."

Recently, Salomon scrambled to design a "new" firm with a broader emphasis on investment banking. One way is by looking for novel ways to distribute its stock offerings. In an unusual move, Salomon forged an alliance this year with mutual-fund giant Fidelity Investments that allows Fidelity's brokerage arm to market Salomon stock offerings. Now, it isn't clear whether that alliance will continue.

More broadly, Salomon never has fully recovered from a near-crippling 1991 scandal in the Treasury-bond market. Three top Salomon officials, including Salomon Brothers Chairman John Gutfreund, were forced to resign after the firm disclosed having made a series of improper bids at several Treasury-note auctions. After nearly imploding in the aftermath of the scandal, Salomon has clawed its way back, with the help of the bull market.

Yet Salomon remains held back by a simple fact: The firm still lives and dies primarily by trading. This has left it far more vulnerable to declining markets or trading missteps. And powerful traders have resisted efforts to rein in their pay even as the firm's costs have mounted in recent years. In 1995, for instance, a radical pay plan backfired, triggering dozens of defections in its customer operations and a fractured culture.

Despite some recent efforts to cut compensation costs, Salomon still doles out some of the fattest paychecks on Wall Street to its trading stars. Andrew Fisher, a mortgage-backed-bond trader, retired in 1997 from Salomon at age 39 after receiving a 1996 bonus of $25 million. Smith Barney hasn't offered any guaranteed contracts to keep Salomon traders. But a Smith Barney executive said: "If we do a good job, we'll still pay people for performance, and pay them an awful lot of money."

The acquisition of Salomon is likely to turn the competition for Mr. Weill's successor into something of a horse race between the co-CEOs. Mr. Dimon, 41, who is widely credited by analysts for helping build Travelers into a financial powerhouse from a hodgepodge of insurance and consumer-finance businesses, has long been regarded as the heir apparent. But Mr. Weill's relationship with Mr. Dimon was frayed earlier this year when Jessica Bibliowicz, Mr. Weill's daughter, quit the firm after repeated clashes with Mr. Dimon. Mr. Dimon says: "My job is to do the right thing for this company -- it's not to maintain my position at all costs."

Mr. Maughan, 49, has known Mr. Weill for years, having served on various boards together, including the Carnegie Hall board, and the two socialize frequently.

This isn't the first time Mr. Weill has tried to buy an investment-banking presence. In 1993, he made an embarrassing gaffe by overpaying about two dozen former Morgan Stanley investment bankers who didn't bring in much business. Nearly all the hires have since left.

Though Mr. Weill hasn't had luck with investment bankers, he has learned from the experience, some Wall Street executives say. Gerard Smith, a former Salomon banker now at UBS Securities, believes the deal stands the best chance of succeeding if Mr. Weill lets "Salomon be Salomon and graft onto it the important pieces of Smith Barney."

September 25, 1997, Los Angeles Times, Travelers to Buy Salomon Bros. for $9 Billion,

NEW YORK — Travelers Group, bidding to become the world's premier financial-services conglomerate, said Wednesday that it would buy investment-banking powerhouse Salomon Brothers for more than $9 billion in stock.

Salomon will be folded into Travelers' huge brokerage unit, Smith Barney Inc., to form the nation's second-largest securities firm, behind recently merged Morgan Stanley, Dean Witter, Discover & Co. but ahead of Merrill Lynch & Co.

But Travelers, led by the wily Wall Street veteran Sanford I. "Sandy" Weill, 64, is much more than just a securities firm. Over the last decade, Weill has assembled a one-stop financial supermarket that also offers life and property-casualty insurance, credit cards, consumer loans and mutual funds.

Wednesday's deal marries Smith Barney's U.S. sales force of 10,000-plus brokers with Salomon's international bond-trading, securities underwriting and investment advisory businesses. "This is about giving Travelers a global franchise," said analyst Richard K. Strauss at Goldman Sachs & Co.

The merger is part of the consolidation wave sweeping the securities industry. This year alone, there have been at least half a dozen $1-billion deals involving securities firms, capped by the Morgan Stanley-Dean Witter blockbuster announced last February and valued at $10.5 billion.

Such consolidation has been going on for years, but the intense competition for securities firms has stepped up in recent months because of the emergence of commercial banks as buyers. The dismantling of Depression-era barriers separating commercial banks from brokerages has touched off what one observer called a "feeding frenzy among the banks."

Recent deals have included Fleet Financial Group's $1.5-billion acquisition of discount broker Quick & Reilly Group Inc.; NationsBank Corp.'s $1.2-billion purchase of San Francisco-based investment bank Montgomery Securities, and Bankers Trust New York Corp.'s $2-billion takeover of the Baltimore brokerage firm Alex Brown Inc.

In a statement Wednesday, Weill said the deal would "substantially strengthen Travelers Group's earnings stream and capital base, catapulting Salomon Smith Barney into the top tier of global securities and investment banking firms."

Travelers also operates Travelers Life & Annuity, Primerica Financial Services, Travelers Property Casualty Corp. and Commercial Credit Co. It does not own a commercial bank, though its name recently surfaced as a rumored buyer for Bankers Trust.

Salomon's stock leaped $4.75 Wednesday to an all-time high of $76.25 on the New York Stock Exchange. The stock gained $4.44 on Tuesday as rumors of a deal swept Wall Street. The two-day surge added nearly 14% to the shares' value.

Travelers, meanwhile, was off $2.63 Wednesday, closing at $69.44 on the NYSE.

Travelers will issue 1.13 shares of its stock for each share of Salomon Inc. stock. At Wednesday's closing price for Travelers shares, the indicated price for Salomon holders was $78.46 per share.

That price is equal to--in Wall Street parlance--13 times Salomon's estimated 1997 earnings per share. That would appear to be a bargain at a time when most blue-chip companies, including Travelers, are trading at 20 times earnings per share or more.

Salomon's reputation was indelibly scarred by a 1991 scandal in which its traders allegedly rigged the auction market in U.S. Treasury securities by secretly cornering supplies of certain issues.

Although criminal charges were never filed, the firm's chief executive, John H. Gutfreund, was forced to resign, and Salomon paid penalties of $290 million to settle federal civil charges.

Rudderless and financially crippled, Salomon was rescued by billionaire investor Warren E. Buffett, who had earlier bought a major stake in the firm. Buffett installed new top management and helped steer the company out of trouble.

But Buffett, reportedly disenchanted with the firm, earlier this year signaled that it was for sale by saying that his 18% Salomon stake was "not a core holding."

"Solly had to do something," said Stephen Willard, a Washington securities lawyer and former executive of CS First Boston. "They never really regained their position after the Treasury-bond scandals."

Analysts said one of the risks in Wednesday's deal is whether Salomon's risk-taking, individualistic culture can successfully be integrated with the more buttoned-down style of a retail outfit such as Smith Barney.

After all, it was Salomon's aggressive bond traders, with their eight-figure bonuses, who were the collective model for Sherman McCoy, the ethically-challenged antihero of Tom Wolfe's satiric novel "Bonfire of the Vanities."

Smith Barney, meanwhile, reacted to 1980s excesses with the finger-wagging ad slogan: "We make money the old fashioned way. We earn it."

"If the acquirer were almost anybody else, you'd worry whether they could pull it off," said Roy Smith, finance professor at New York University's Stern School of Business and a former general partner of Goldman Sachs.

But Wall Street regards Weill as a wizard for his ability to combine disparate financial services businesses into a profitable and smooth-running entity.

Over the last five years, Travelers' stock price has multiplied almost sevenfold, with very few dips along the way. "Nobody else has his track record," Smith said.

Indeed, otherwise sure-footed firms such as General Electric Co., American Express Co. and Sears Roebuck & Co. all stumbled painfully when they tried to diversify into the securities business, through Kidder Peabody, Shearson Lehman Brothers and Dean Witter Discover, respectively.

"They didn't know the business, and for them it was only a sideline," Smith said. "Sandy knows this business."

Which is not to say that Weill has never faltered. An earlier attempt to inject more of a deal-making culture into Smith Barney blew up in his face.

Robert Greenhill, a mergers-and-acquisitions whiz whom Weill recruited from Morgan Stanley to be Smith Barney's chairman, stirred dissension in the ranks and finally resigned in early 1996, taking with him a golden parachute that reportedly topped $20 million.

Buffett, who never actually sold his 18% stake, gave Weill a vote of confidence Wednesday, saying in a statement: "Over several decades, Sandy has demonstrated genius in creating huge value for his shareholders by skillfully blending and managing acquisitions in the financial services industry. In my view, Salomon will be no exception."

A person who has worked closely with Buffett said of his Salomon investment: "It isn't a home run, but it's a stand-up double."

Travelers said it expects a restructuring charge to lower its profits by $400 million to $500 million when the transaction is complete. Part of that money will go for severance payments, the firm said in its statement.

Salomon gave no details Wednesday about how it would achieve cost savings from a restructuring, but some think the firm's legendary bond-trading operation could be a casualty.

Michael Lewis, who turned a stint as a Salomon bond salesman into the scathing and funny 1989 bestseller "Liar's Poker," observed Wednesday that the larger and more diverse a securities firm grows, the harder it is to support a maverick operation like a trading desk.

Said Lewis: "People at the firm look at a trader and say, 'He's betting our future. If he gets it wrong, we go down the tubes. If he gets it right, he gets $25 million.' "

Another view was offered by a Salomon insider who disputed Lewis' portrayal of the traders as reckless gamblers.

"This money isn't being produced by cowboys," he said. "It's being produced by chess-playing PhDs from MIT."

Besides, he went on, the trading operation is a "cash cow" that steadily produces the bulk of Salomon's profits. "If Sandy Weill didn't like the proprietary trading business, he wouldn't be buying."

James Dimon, chairman and chief executive of Smith Barney, and Deryck C. Maughan, chairman and chief executive of Salomon Brothers' investment arm, will serve as co-chief executives of the new Salomon Smith Barney division. Robert E. Denham, chairman and chief executive of Salomon Inc., Salomon Brothers' parent company, said he would resign after the sale closes.

The buyout, expected to be completed by the end of this year, has been approved by the board of directors of both companies but is subject to federal regulatory approval.

* Times wire services contributed to this story.

December 25, 1997, Bloomberg / The Spokesman Review, Travelers' Deal Could Backfire; Salomon Purchase Garners Mixed Reviews on Wall Street,

Travelers Group Inc.'s purchase of Salomon Inc. was hailed as a triumph for Chairman Sanford I. Weill when it was announced in September. Now it's drawing mixed reviews on Wall Street.

Eight of nine analysts polled by IBES International Inc. have pared fourth-quarter earnings estimates for Travelers, which completed the $9.3 billion purchase last month. Analysts cut forecasts more than 13 cents a share on average, or about 20 percent, to 60 cents.

The lower profit forecasts followed Travelers' disclosure last month that Salomon, the biggest trader in the global bond market, lost $60 million in October's financial tumult.

Travelers, which already said it will shut down Salomon's equity risk arbitrage, will likely clamp down on other money-losing activities, said Richard Strauss, an analyst at Goldman Sachs & Co. "We're going to see a much more risk-averse Salomon," he said.

Travelers' decision to buy Salomon and combine it with its Smith Barney Inc. brokerage unit was a shock to many on Wall Street because the companies are so different.

Salomon, an investment bank that worked mainly with institutions, traditionally made most of its profits using borrowed money to bet in the bond market. Smith Barney, by contrast, concentrated on less-risky businesses such as providing brokerage services to individual and institutional investors.

Travelers made the announcement that it was shutting down Salomon's New York-based equity risk arbitrage operations last month, after the unit lost about $100 million betting on British Telecommunications Plc's bid for MCI Communications Corp.

"We're going to see them do a lot of restructuring in the fourth quarter," said Strauss.

January 6, 1998, Los Angeles Times, S. Koreans, Bankers Meet in New York, by Thomas S. Mulligan,

South Korean government officials had their first face-to-face meeting with international lenders here Monday on what was described as a three-pronged plan for protecting the Koreans against defaulting on loans at least through March. Chung In Yong, a former ambassador advising the incoming government of President-elect Kim Dae Jung, heard a range of proposals for managing the country's crushing short-term debt and raising $10 billion or more in new capital.

"It is very encouraging," Chung told reporters after a four-hour meeting at the Wall Street headquarters of J.P. Morgan & Co., one of the big New York banks taking a lead role in the restructuring talks.

He said the lenders had presented him with "a menu of options" but he declined to provide details.

Under one proposal presented to Chung, about $20 billion worth of loans to South Korean banks that fall due in the next few months would be swapped for a similar amount of longer-term debt to be backed by the South Korean government, according to a banker familiar with the talks.

After the J.P. Morgan meeting, Chung headed to Washington to meet with officials of the U.S. Treasury and Federal Reserve and the International Monetary Fund. He is expected to return to New York later this week for more talks with private bankers.

The South Korean economy, the world's 11th largest, has been wracked by a string of corporate and bank failures. While the economy was one of the world's fastest growing over the last decade, much of the growth was fueled by heavy borrowing by businesses and banks.

Now with the economy slowing and the country's currency, the won, plunging, it has grown harder for companies and the government to pay back the loans, usually made in dollars.

Representatives of the world's largest banks and brokerage houses have been meeting in New York for the last two weeks to try to ease the crisis and protect their own interests in the estimated $157 billion that South Korean banks and industrial firms have borrowed from Japanese, European and U.S. banks.

What is emerging from the discussions seems to be a three-step approach, one banker said.

Step one, largely accomplished in a flurry of meetings before New Year's Day, involved "rolling over" or pushing back the due dates of about $15 billion in loans that came due at the end of December.

Step two--really a part of the rollover process--involves extending $20 billion or more of loans due this month and in February and March. The swap for government-backed loans is one of several ways of accomplishing this goal.

The third step would be to raise a large amount of new investment, possibly through a sale of South Korean government-backed bonds. The size of the bond issue, its maturity date and even whether the government would agree to guarantee it, all are in doubt.

These steps would be in addition to the record, $60-billion financial rescue plan led by the International Monetary Fund and the leading industrialized nations.
Deryck Maughan, co-chairman of Salomon Smith Barney Inc., told Bloomberg News on Monday that he expects a bond sale to be a major part of the final restructuring package.

Maughan, whose investment bank--along with Goldman, Sachs & Co.--is advising the South Korean government on raising capital, also said he believes the worst of South Korea's crisis is over.

William Rhodes, a vice chairman of Citicorp involved in the talks, led bankers who negotiated debt restructuring pacts for Argentina, Brazil, Mexico, Peru and Uruguay in the 1980s.

J.P. Morgan's team at the talks included Ernest Stern, who worked for 23 years at the World Bank, bankers said.

In Seoul on Monday, on the first full day of trading in 1998, stocks soared and interest rates fell sharply, although the won slumped. The stock market surged on remarks by U.S. financier George Soros that he was considering a "quite substantial" investment in South Korea.

But the won slumped while currencies of Thailand, Indonesia and the Philippines plunged to all-time lows against the dollar.

The Korean won was trading at 1,791 to the dollar at midday today. The main Korean stock index was off marginally, to 396.01.

June 1, 1998, CNN Money, Travelers buys $1.58B stake in Japan's Nikko,

NEW YORK (CNNfn) - U.S. financial services giant Travelers Group Inc. announced Monday a $1.58 billion investment in Nikko Securities Co. Ltd., Japan's third-largest brokerage.

Travelers, fresh off a $70 billion deal for CitiCorp in April, will take a 25 percent equity stake in the Japanese firm through its Salomon Smith Barney investment banking unit.

The two companies will also form a new investment banking firm in Japan, 51 percent owned by Nikko and 49 percent owned by Travelers to be set up in January next year.

The purchase is the third multibillion-dollar equity deal spearheaded by Sanford I. Weill, Travelers chairman, and marks one of the largest investments ever by a U.S. company in a Japanese financial services firm.

In the deal, Travelers becomes the largest stakeholder in Nikko and will hold a seat on its board. Nikko will gain a stake in Travelers, but its size was not disclosed.

A continued slump in the Japanese economy, a dollar-yen ratio at its highest levels in seven years and recent financial-sector deregulation in Japan provide a backdrop for the deal.

Travelers is not the first big U.S. financial firm to seek opportunities in Japan after a series of market woes struck Asia late last year. Merrill Lynch earlier this year began buying branches of recently-defunct Yamachi Securities Inc., Japan's No. 4 brokerage.

Shares of Travelers (TRV), which are included in the Dow Jones Industrial Average, closed Friday down 3/8 at 61-1/4.

In Tokyo Monday, Nikko shares (8603.T) rose 46 yen, or 10.55 percent, to 482 yen.

June 10, 1998, Los Angeles Times, Exec Who Helped Save Salomon Rejoins L.A. Firm, by Thomas S. Mulligan,

Law: Buffett associate Robert E. Denham, who led scandal-ridden brokerage back from crisis, returns to Munger, Tolles,

NEW YORK — Robert E. Denham, the lawyer tapped by billionaire investor Warren E. Buffett to help right Salomon Bros. after a devastating 1991 scandal, has returned to the Los Angeles law firm of Munger, Tolles & Olson.

After a year as Salomon's chief counsel, Denham succeeded Buffett in 1992 as chairman and chief executive, a job he held until Salomon's $9-billion acquisition last year by Travelers Group Inc.--a transaction Denham helped to engineer. Travelers merged the investment-banking firm into its existing brokerage to create Salomon Smith Barney.

Denham, 52, who had been managing partner--equivalent to chief executive--of Munger, Tolles before his stint at Salomon, said that his practice as a partner will focus on merger-and-acquisition advice, corporate governance issues and crisis management.

Salomon gave the West Texas native plenty of experience in the latter category.

When Buffett, Salomon's largest shareholder, called on Denham in August 1991, the firm was reeling from allegations that its traders had rigged the auction market in certain U.S. Treasury securities.

With the exploding scandal threatening Salomon's survival, Buffett, Denham and the rest of the firm's new management team undertook a rescue operation that is cited in business schools as a model of crisis intervention.

Decisively and, most of all, quickly, Salomon swept out the miscreants, apologized to customers and Congress, slashed executive bonuses and instituted rigorous new controls to prevent a recurrence.

"When a good company hits a rock, the task of getting it off the rock is critical," Denham said in an interview Tuesday. "Jobs and lives and shareholders' wealth are tied up in succeeding. It's a high-energy, high-pressure job where time has value."

In Salomon's case, "getting the job done in nine months instead of a year and a half probably made the difference between the company living and dying," he added.

"Lawyers sell judgment," Munger, Tolles partner Ronald L. Olson said in a statement Tuesday, adding, "Few corporate lawyers do it better than Bob Denham."

Denham will continue to serve as Buffett's principal lawyer, a role he played previously at Munger, Tolles. He joined the firm in 1971, fresh out of Harvard Law School, recruited by one of his law professors, Roderick Hills.

Hills and his wife, former U.S. trade representative Carla Anderson Hills, and Charles T. Munger, Buffett's business partner and longtime friend, were among the seven lawyers who founded the firm in 1962. Munger is no longer a partner at the firm that bears his name, but he maintains his office there.

For the moment, Denham is working from New York, but by July 15 he will be settled at Munger, Tolles' headquarters at 355 S. Grand Ave. His home will be in Pasadena, where his wife Carolyn recently was named president of Pacific Oaks College & Children's School.

November 2, 1998, Los Angeles Times / Bloomberg Business News, Weill's Expected Successor to Leave Citigroup,

Citigroup said James Dimon, the chief assistant to Co-Chairman Sanford Weill for more than 15 years and his expected successor to one day lead the world's largest financial company, will leave.

Deryck Maughan, co-chief executive of Citigroup's Salomon Smith Barney Inc. brokerage unit, will become vice chairman of the company, which was formed last month after the $37.4-billion merger of Travelers Group and Citicorp. Michael Carpenter and Victor Menezes were named co-chief executives, the company said in a prepared statement.

Jack Morris, a spokesman for Citigroup, told the Associated Press that Dimon's departure was agreed upon mutually.

Dimon, 42, was president of Citigroup and chairman and co-chief executive of Salomon Smith Barney. The company quoted Dimon as saying: "I know that Citigroup is well poised for growth, so this is a perfect time for me to leave and regenerate with some new opportunities."

Citicorp and Travelers said in May that Dimon would be president of the merged companies, with Citigroup Co-Chairman John Reed saying then he was "very much in favor" of choosing Dimon as president.

Dimon won't be leaving Citigroup empty-handed. He realized $36.8 million in 1997 by exercising options on 2.4 million shares, according Travelers' proxy statement filed with the Securities and Exchange Commission.

His compensation, exclusive of gains from exercising options, more than doubled to $23.1 million from $10.1 million in 1996. That package included a $4.6-million bonus, $2.2 million of restricted stock, the same $650,000 salary as the previous year, and options to buy 2.7 million shares valued at the time at $15.6 million.

Citigroup also said it's integrating the operations of its Salomon Smith Barney subsidiary, a unit of Travelers, and the corporate banking activities of Citibank "to form the world's strongest combined global investment and corporate bank."

Maughan will oversee this integration and the company's activities in Japan, Citigroup said.

Carpenter will be primarily responsible for Salomon Smith Barney's private client, investment banking and capital markets units, the firm said.

Menezes will oversee the firm's global customer relationships and emerging markets businesses, in addition to transaction banking, which includes cash management, trade products and worldwide securities services.

In their new roles, Maughan, Menezes and Carpenter will report to Weill and Reed.

November 10, 1998, New York Times, Confusion Seen in a Departure at Citigroup, by Peter Truell,

Michael A. Carpenter, Citigroup Inc.'s new co-head of investment and commercial banking, spent days last week convincing Steven D. Black, 46, to remain as a vice chairman of Salomon Smith Barney, the firm's investment bank unit, and head of its global equity business, according to Citigroup executives who spoke on condition of anonymity.

Then, Sanford I. Weill, Citigroup's co-chairman and co-chief executive, last Friday afternoon abruptly told Mr. Black that he should resign, these same executives said.

The circumstances of Mr. Black's departure -- after 24 years at Smith Barney -- point to continued disarray in the executive suite at Salomon Smith Barney, which was created by the 1997 merger of Salomon and Smith Barney. Salomon executives who refused to be identified by name said yesterday that Mr. Weill's sudden reversal of Mr. Carpenter's approach to Mr. Black raised questions about Mr. Carpenter's own authority at Citigroup, which was itself created by the merger earlier this year of Citibank and Travelers Group Inc., the parent of Salomon Smith Barney.

Neither Citicorp nor Mr. Black would comment on his departure, although John Morris, Citigroup's senior spokesman, confirmed that Mr. Black was leaving and said, "We wish him well."

The departure of Mr. Black, a vice chairman and a former chief operating officer at Salomon Smith Barney, comes a week after the ouster of the Citigroup president, James Dimon, who was effectively replaced by Mr. Carpenter and Victor J. Menezes.


December 27, 1998, Los Angeles Times, The BIZ QUIZ, by James F. Peltz,

Talk about a roller-coaster ride. From the volatility in stocks to the historic action in mergers, 1998 was a year to remember in business. See if you can answer these questions about stories that made headlines:

1: Drug giant American Home Products Corp. had planned a $35-billion mega-merger with what company, until their talks collapsed? a) Pfizer Inc. b) Ciena Corp. c) Monsanto Co. d) Merck & Co. *** 2: In one of the largest securities-related settlements ever, Merrill Lynch & Co.


May 23, 2001, New York Times, The Markets: Market Place; Citigroup will drop the Salomon name from its brokerage and banking units, by Patrick McGeehan,

SALOMON, a name once equated with swaggering bond traders but later tarnished by a Treasury bond-trading scandal, will soon disappear from Wall Street. Citigroup Inc., the conglomeration of the former Salomon Brothers investment bank and several other financial-services companies, told its employees yesterday that it planned to rename its corporate banking and brokerage operations early next year.

In an internal memorandum, Sanford I. Weill, Citigroup's chairman and chief executive, said the Citigroup name or some variant of it would be put on almost all of its businesses.

"There are advantages to having a more unified brand," wrote Mr. Weill, who engineered a series of mergers and acquisitions that led to the creation of Citigroup, the nation's largest financial company. He explained that the company had chosen to use the Citigroup brand more broadly after surveying customers and finding that many of them were already referring generically to the company's units as Citigroup.

The investment bank created by the merger of Salomon Brothers and Smith Barney in late 1997 and now called Salomon Smith Barney will be known as the Citigroup Corporate and Investment Bank. That change would have been unthinkable a decade ago when Salomon was one of the most respected firms on Wall Street.

Founded in 1910 by Arthur, Percy and Herbert Salomon, the firm was one of the first primary dealers of United States government bonds and grew to become the biggest force in the domestic bond business. During the market boom of the 1980's, Salomon's top traders, self-appointed "masters of the universe," took the biggest risks and reaped the biggest rewards on Wall Street. Among its alumni are John W. Meriwether, who ran Long-Term Capital Management, the hedge fund that is now defunct, and Michael Bloomberg, the founder and chairman of Bloomberg L.P.

"It was an aggressive culture but it was being aggressive on behalf of your customers," said Robert Denham, who was chief executive of Salomon's parent before Mr. Weill's company acquired it. "It was aggressive performance within the rules to achieve results."

But not always. Salomon's fortunes began to wane in 1991, when the firm was entangled in scandal that brought down its chief executive, John H. Gutfreund.

One of its managing directors, Paul W. Mozer, went to prison after submitting false bids in Treasury bond auctions. Mr. Gutfreund resigned and was later fined $100,000. Warren E. Buffett, who had rescued the firm from a potential takeover by investing $700 million, stepped in and ran the firm briefly before turning it over to Mr. Denham.

Salomon Brothers retained its independence until late 1997 when Mr. Weill, then chairman of Travelers Group, bought the firm for $9.2 billion, merged it with Smith Barney and started dismantling the proprietary bond trading group that had set Salomon apart. Of about 7,000 employees of Salomon at the time of the merger, only about half remain with Citigroup, a spokeswoman said.

"I have mixed feelings: wistfulness and a sense of relief that it's finally been done,'' said Michael Holland, a longtime Salomon executive who now runs his own money management firm. "The old partnership was truly sui generis. But the firm kind of ended its real existence the day the government bond scandal hit John Gutfreund's office."

In a brief interview yesterday, Mr. Gutfreund said he saw the change as evidence of "a different era, the age of abstractions as names." Asked if he thought the firm's investment bankers might bristle at the switch, he said, ''Not as long as they're paid; they're mercenaries."

Salomon Brothers will join a long list of names on Wall Street's discard pile. That list includes Shearson; E. F. Hutton; Kidder Peabody; and Drexel Burnham Lambert and will soon include Dean Witter.

But in some instances, Citigroup is bucking the trend and retaining established brand names on some its subsidiaries, including its Travelers and Primerica insurance units. The company's brokerage business will drop the Salomon name it added three years ago and revert to being simply Smith Barney. The Salomon name will live on only in the company's mutual fund business, which manages funds under the Salomon and Smith Barney brands.

"I've got some sentimental attachment to the Salomon name," Mr. Denham said. "But the Salomon business has changed dramatically with the integration with Citi's business. I'm certainly not going to question Sandy Weill's brand strategy."

August 12, 2001, New York Times, Private Sector; From King of Wall Street To Sultan of Supplements,

Ten years have passed since a Treasury bond trading scandal tainted the house of Salomon Brothers and brought down its tough-willed chairman, John H. Gutfreund. Salomon ultimately did not survive independently -- it is now part of Citigroup, which plans to scrap the Salomon name altogether next year. But Mr. Gutfreund, once known as the "King of Wall Street" for his gutsy trading instincts, survived, albeit less regally, as a financial adviser and venture capital investor. Last week, he got a job as the next chairman of a business that is as about as far removed from the Treasury bond trading pits as you can get: Nutrition21, a dietary supplements company that sells "Lite Bites" fat-fighting remedies and other food ingredients. Mr. Gutfreund, 70, had served on the board since February 2000. He succeeds Robert E. Flynn, former chief executive of the NutraSweet Company. Nutrition21 said in a statement that Mr. Gutfreund "brings an enormous wealth of knowledge and expertise," citing his years running Salomon but making no mention of the scandal in August 1991. Mr. Gutfreund did not return telephone messages. His office said he was traveling.

January 23, 2002, Los Angeles Times / Bloomberg News, CSFB Settles IPO Kickback Charges; SEC Says Investigation Continues,

WASHINGTON — Federal securities regulators formally announced Tuesday the settlement of one part of a probe into alleged manipulation of initial public stock offerings in the late 1990s. But officials stressed that the investigation continues on other fronts.

As reported in The Times on Saturday, brokerage Credit Suisse First Boston agreed to pay $100million to settle charges that it allotted sought-after shares of IPOs in exchange for investor kickbacks in the form of higher commissions.

The securities firm, which made $718 million underwriting technology IPOs in 1999 and 2000, will pay a $30-million fine and disgorge $70million in profit to resolve charges of "abusive IPO allocation practices," the Securities and Exchange Commission said.

Demands for higher commissions were pervasive and encouraged by some senior executives at the unit of Swiss bank Credit Suisse Group, the agency said.

The SEC and the National Assn. of Securities Dealers alleged that CSFB illegally profited on skyrocketing IPOs by charging commissions of as much as $3.15 a share, compared with a typical rate of 6 cents.

The SEC continues to investigate at least nine firms, including Morgan Stanley and J.P. Morgan Chase & Co., in connection with IPO underwriting practices. The settlement by CSFB may not end the prospect of SEC action against individuals at the firm.

"While I do not wish to comment on any individuals, I will say that our investigation is continuing," said Stephen Cutler, the SEC's director of enforcement.

The SEC didn't accuse CSFB of fraud, instead charging it with violating federal record-keeping requirements.

CSFB neither admitted nor denied wrongdoing.

"We are very pleased that our firm has reached a full resolution of this matter with regulatory authorities," CSFB Chief Executive John Mack said. "We are strongly committed to upholding the highest standards of conduct."

The $30-million fine is the second-highest after Salomon Bros.' $120-million fine in 1992 for submitting bogus bids at Treasury bond auctions.

The SEC also is probing whether firms, including Morgan Stanley, Goldman Sachs Group, FleetBoston Financial's Robertson Stephens unit and J.P. Morgan, received pledges from customers to purchase more stock after IPOs began trading. Although that inquiry has a different set of facts, CSFB's agreement may presage a settlement by other firms, legal experts said.

CSFB agreed to change its methods of allocating IPO stock and its supervisory practices. The firm also agreed to hire an independent consultant to review its new policies after a year and to adopt the consultant's recommendations.

CSFB and three dozen other firms still face more than 1,000 class-action lawsuits filed by investors who were saddled with losses after shares of companies such as VA Linux Systems Inc., Red Hat Inc. and Akamai Technologies Inc. plunged. But the firm's legal position in these suits is strengthened by its avoidance of SEC fraud charges, analysts said.

The payments from the settlement with regulators will go to the SEC and the NASD, not to investors who claim they lost money investing in technology companies.

"There's no impact. The money isn't intended to go to the class members," said Melvyn Weiss, the lead lawyer in a class-action lawsuit against CSFB and the other investment banks. He said he will press ahead with his case.

January 27, 2002, New York Times, Update / Lewis Ranieri; A Mortgage Man Charts New Seas, by Riva D. Atlas,

THESE days, everyone in finance and many people on Main Street know what a mortgage-backed security is. It was Lewis Ranieri, as a trader at Salomon Brothers in the 1980's, who famously worked to develop the American market for these mortgage packages, which are resold as securities by Fannie Mae and many banks and make mortgages cheaper for homeowners.

But the financier, now 55, left that arena long ago. He is out on his own, an investor in the health care, technology, boating and financial services industries.

Mr. Ranieri, who grew up in Bayside, Queens, started in 1968 working the night shift in the mailroom at Salomon Brothers, then rose to become the head of its mortgage bond group. In 1987, he was abruptly fired by Salomon's chairman, John H. Gutfreund, but quickly built a second successful career, starting his own investment firm, Hyperion Partners, in Uniondale, N.Y. Two years ago, he and his partners made a fortune when they sold Bank United, a Texas savings institution he had acquired in the savings-and-loan crisis of the late 1980's, to Washington Mutual for $1.5 billion.

Since then, Mr. Ranieri has largely dropped out of the public eye, but he said the other day that he had been quite busy. "Only some of the stuff we own happens to be public," he said. He acquired American Marine Holdings, which builds high-performance boats and fishing boats, in the late 1980's, and he is increasingly fascinated by health care, particularly companies that use technology to shift medical treatments like dialysis to the home from the hospital. He is an investor in a large home health care company in Britain, which he declined to name, and has been making smaller investments in this area in the United States.

Mr. Ranieri said he hoped to pick up some bargains among companies hurt by the economic downturn. While he would not name names, he said he was looking at credit card and mortgage companies, as well as "some areas of the technology and telecommunications world that you wouldn't normally associate with me."

He raised millions for Rick Lazio's unsuccessful campaign for United States Senator from New York in 2000, in part because he wanted to support a candidate from Long Island, where he lives and works. He joined the board of Computer Associates, also based on Long Island, for much the same reason and, he said, because he was genuinely interested in technology. "People associate me with mortgages," he said, "but I've been a techie all my life."

March 10, 2002, New York Times, Private Sector; A Quiet Banker in a Big Shadow, by Lynnley Browning,

WE likes snowboarding at his weekend house in Vermont and listening to Elvis Presley songs. An aging yuppie? A bankrupt dot-com mogul? Try Robert B. Willumstad, the new No. 2 executive at Citigroup.

Mr. Willumstad, a senior Citigroup manager for 15 years, suddenly became president of the company in January, filling a position that had been vacant since 1998 and prompting speculation that he may be the heir to Sanford I. Weill, Citigroup's chairman and chief executive. If he is -- Mr. Weill has sought to dampen such talk -- it will signal a huge change in the culture of Citigroup, which Mr. Weill has shaped in his own hard-driving image.

In an industry full of posturing and fist-pounding, Mr. Willumstad, 56, is soft-spoken and reserved. Unlike many colleagues, who are Ivy League-educated and larger than life, he grew up in modest circumstances and is little known outside the industry.

"I've never seen him lose his temper," said Jamie Dimon, chairman and chief executive of Bank One in Chicago, who held Mr. Willumstad's new post before Mr. Weill dismissed him in 1998. "He's not brash; he's thoughtful and measured."

Mr. Willumstad remains chairman and chief executive of Citigroup's consumer group, which includes the global banking, credit card and e-commerce units, positions he held before his promotion. Under his management, the group showed a 20 percent increase in profit last quarter, to $2 billion, accounting for nearly half of Citigroup's profit of $3.9 billion during that period. As president, he now also oversees Citigroup's financial and human resources departments, both previously handled by Mr. Weill.

Citigroup declined to make Mr. Willumstad or Mr. Weill available for an interview.

Mr. Willumstad's sudden ascent has raised eyebrows. Michael Mayo, an analyst who covers banking for Prudential Securities, did not even place Mr. Willumstad on his list of top Citigroup executives two years ago. ''He's not a strong personality -- he has none of the Sandy Weill pizazz -- and he doesn't wear his power on his sleeve,'' Mr. Mayo said. Other contenders for the No. 2 job, he said, had included Jay Fishman, the former Citigroup chief operating officer, who left abruptly last October to head the St. Paul Companies, a Minnesota insurer, and Victor Menezes, head of Citigroup's emerging-markets unit.

One Citigroup board member who spoke on condition of anonymity agreed that "there was some surprise" among some other directors at Mr. Willumstad's promotion, adding: "He's not the most visible person in the company. He was kind of a sleeper, unobtrusive."

In his new role, Mr. Willumstad is responsible for knitting together the sprawling Citigroup, which includes the Travelers Group insurance unit; Primerica Financial Services, the insurer and money management firm; and Salomon Smith Barney, the investment bank and brokerage firm. He is also in charge of strategy, particularly on the Internet and expansion in Europe, according to a second board member.

At a recent retreat in the Bahamas for Citigroup's inner circle, known as the Management Committee, he introduced a formal process to track how strategic recommendations made at such meetings are put into effect, the second board member said. The process is working, this director said, no small feat for a company that has 120 million customers in more than 100 countries and employs 268,000 people worldwide.

That Mr. Willumstad would come up with such a system is typical, said Robert Lipp, chairman and chief executive of Travelers Property Casualty, a part of Travelers. Mr. Willumstad "is systematic and quiet and likable, not a bombastic leader,'' said Mr. Lipp, who has known and worked with him for more than three decades. "There's a certain softness to his style."

That trait prompts some people in the industry to doubt that Mr. Willumstad will succeed Mr. Weill. One consultant to the financial services industry, who spoke on condition of anonymity, said Mr. Willumstad, fiercely loyal to Mr. Weill, was promoted simply because Mr. Weill was under pressure to fill the post. "I do not believe for a minute that he's going to take over," said the consultant, who has worked with Citigroup executives. ''He doesn't have that hard Citi edge to him -- he's too nice a guy."

The consultant cited Mr. Willumstad's response to an underling who waited too long to point out a potential credit problem at a Citigroup unit. "His reaction was, 'Don't do that ever again -- but I understand why you did it.'"

Mr. Willumstad, whose paternal grandparents emigrated from Norway, grew up in an apartment in a former Norwegian enclave of Bay Ridge, Brooklyn. His father, Arne, was at times a machinist, a union leader and a tavern owner. His mother, Eleanor, stayed home with "Bobby" and his siblings, Laura and Phillip. (The brother died several decades ago in a car accident.)

The family later moved to Elmont, N.Y., on Long Island, where Mr. Willumstad played basketball at Sewanhaka High School. He attended Nassau Community College, Queens College and Adelphi University, all in New York, but did not get a degree.

He married young, has two adult daughters and lives in New York and Huntington, N.Y., on Long Island. His wife, Carol, used to run an ice-cream and gift shop on Long Island. Known for a quiet sense of humor, he donned an Elvis wig and flashy outfit at his 55th birthday party. He is on the board of Habitat for Humanity and recently hung drywall at a Habitat house -- a skill he said he learned in his youth, according to Paul Leonard, chairman of Habitat for Humanity.

Mr. Willumstad joined Chemical Bank, now part of J. P. Morgan Chase, as a systems analyst in 1967, and rose through the operations, retail banking and computer systems divisions. In 1987, he joined Commercial Credit, then a consumer finance company that became part of Citigroup. He was running Travelers Group Consumer Finance Services when Travelers and Citibank merged in 1998. He became head of Citigroup's global lending unit, rising in December 2000 to oversee the global consumer business.

"In the last year or two, almost without noticing it, we found him in charge of half the company," said one of the directors.

Henry McVey, a banking analyst at Morgan Stanley, called Mr. Willumstad a "quiet giant."

"Wall Street is full of very strong personalities who are very vocal," Mr. McVey said. "He has a much more balanced approach."

June 12, 2002, Reuters, Citigroup Reorganizes to Boost Global Focus,

Citigroup Inc. said it is reshuffling top management to centralize global responsibility, but the latest changes left Wall Street wondering who would take over as head of the No. 1 U.S. financial services company.

Citigroup, which runs banking, brokerage and insurance operations in 100 countries, named emerging markets head Victor Menezes a senior vice chairman in charge of ties with top customers and regulators.

Menezes, seen as a possible successor to Chairman and Chief Executive Sanford Weill, also would head acquisitions and lead recruiting efforts outside the U.S.

Deryck Maughan would run a new regionally focused unit called Citigroup International to oversee foreign business.

The changes come as Wall Street analyzes Citigroup's not infrequent management announcements for clues about an heir to Weill.

June 12, 2002, New York Times, Shifts at Citigroup Renew Speculation on Succession; 4 Executives Are Given Expanded Duties, by Riva D. Atlas,

Citigroup broadened the responsibilities of four of its top executives yesterday, generating new speculation about who will succeed Sanford I. Weill as chairman and chief executive.

The company said each of the four would expand his supervision of international businesses. The most notable shift involved Deryck C. Maughan, 54, who has overseen the bank's acquisitions as well as its Internet businesses. He will now coordinate its international businesses -- a return to the kind of prominent position he last held four years ago.

The announcement also brings new responsibilities for Robert B. Willumstad, president of Citigroup and head of its consumer bank; Michael A. Carpenter, head of the investment bank and corporate loan group; and Thomas W. Jones, who runs asset management.

All of the executives are more than a decade younger than Mr. Weill, 69, who has kept Wall Street guessing about a successor since November 1998, when Jamie Dimon left Citigroup. Mr. Dimon, the longtime right-hand man to Mr. Weill, was regarded as his heir apparent. While Mr. Dimon and Sir Deryck, who was knighted in January, served as co-chief executives of Salomon Smith Barney, Mr. Dimon also held the title of Citigroup president.

Mounting tensions with Mr. Weill sent Mr. Dimon away, and he is now chief executive of the Bank One Corporation. After he left, Sir Deryck remained at Citigroup but was replaced as head of the investment bank.

Speculation about an eventual successor to Mr. Weill has recently centered on Mr. Willumstad, who was appointed to the long-vacant slot of president in January.

Now, Sir Deryck appears to be in the running as well. ''Most investor discussions to date haven't included Deryck," said Henry McVey, who follows brokerage firm stocks for Morgan Stanley. "His elevation today indicates he is in the hunt.''

Sir Deryck, the former chief executive of Salomon Brothers, sold that company to the Travelers Group, a predecessor to Citigroup, in 1997. He knew Mr. Weill not only from financial circles, but also from their work on the board of Carnegie Hall.

A tall Englishman known for his reserve and charm, Sir Deryck made his name in Japan for Salomon. Colleagues say that while he is ambitious and intelligent, he has been careful not to clash with Mr. Weill, who does not suffer challenges to his authority.

Mr. Weill said in an interview yesterday that Sir Deryck is ''a terrific team player."

Sir Deryck's international experience and contacts have made him increasingly helpful the last few years to Mr. Weill, who has made a series of foreign acquisitions since Citigroup was created in 1998 by the merger of Travelers and Citicorp.

These deals include an investment in Nikko Securities of Japan in 1998; the acquisition of the investment banking division of Schroders in 2000; and Mexico's second-largest bank, Grupo Financiero Banamex-Accival, for $12.5 billion last year.

Along with reviewing potential acquisitions for Citigroup, Sir Deryck has most recently been overseeing the Internet businesses and serving as chairman of Citigroup Japan.

A native of Consett in Northern England, Sir Deryck began his career as an adviser on economics and finance for the British Treasury, and ran Salomon's Tokyo office from 1986 to 1991.

''Deryck did a good job for us running our Tokyo branch,'' said John Gutfreund, former chief executive of Salomon. "He is a Brit, and they tend to travel better than Americans." Mr. Gutfreund was forced to step down as head of Salomon in 1991, amid charges that the firm tried to manipulate the government bond market. He was replaced by Sir Deryck, supported by Warren E. Buffett, a large investor who stepped in to rescue Salomon.

Some Salomon executives were unhappy that the sale of their firm to Travelers diminished the importance of Salomon's trading business, which Mr. Weill dislikes because of its unpredictable profits.

The investment bank's fortunes eventually rose, though, after the merger of Travelers and Citicorp as the bankers were able to offer loans to their corporate clients. Profits also became less volatile with the addition of Citicorp's consumer banking business, which tends to do well when corporate banking is in a slump, as it has been the last two years.

"It's kind of hard to gripe about a guy who one way or another steered Salomon into a merger that has worked so well," a former Salomon trader said of Sir Deryck.

"Just as Deryck is the ultimate survivor, Citigroup is emerging through this ugly period as a survivor," said Michael Holland, president of Holland & Company, a money management firm, and a former Salomon executive. Mr. Holland has been buying Citigroup stock in recent weeks.

While Sir Deryck's future at Citigroup looks brighter, analysts and other executives said that any of the four men with enhanced responsibilities could end up succeeding Mr. Weill.

"I don't think he's tipped his hand," said P. Clarke Murphy, a managing director at Russell Reynolds Associates, the executive search firm, of Sir Deryck's latest executive shifts. ''He has aligned the businesses with greater clarity. But everyone has to keep running just as hard.''

Robert E. Rubin, the former Treasury secretary and chairman of Citigroup's executive committee, was not a focus of yesterday's announcement. Mr. Rubin, the onetime co-chairman of Goldman Sachs, serves as a crucial adviser and roving ambassador to Mr. Weill, but has repeatedly said he is not interested in succeeding him.

The latest announcements reinforce Mr. Weill's global ambitions. Citigroup's businesses outside North America account for close to 30 percent of the bank's earnings before special charges.

Mr. Weill hopes that under Sir Deryck's direction the company will be able to export what has worked so well in the United States. ''We weren't using our abilities that have been so successful in North America to penetrate other markets,'' Mr. Weill said of the new roles.

The management changes will give the executives in charge of Citigroup's asset management, consumer banking and corporate banking businesses the mandate to oversee those businesses worldwide, including the emerging markets. Previously, the emerging markets business had been the responsibility of Victor Menezes.

Citigroup's announcement means that Mr. Menezes, another executive who had been considered in the running for the top job at Citigroup, will no longer have a business line reporting to him. He will focus on ''managing our relationships with many of our important customers and with government regulators,'' the company said in a statement.

Another notable shift is an expanded role for Mr. Willumstad, Citigroup's president, who runs the consumer bank. Mr. Willumstad will take on responsibility for operations in Mexico and Puerto Rico, a nod to the growing economic ties between the United States and Mexico. This reflects Citigroup's desire to pursue consumer banking for Hispanic Americans, after the Banamex acquisition, Mr. Weill said.

Investors should not read too much into the announcement, Mr. Weill said. ''We've got a lot of terrific senior people,'' he said. ''They will be judged on how they work together. Hopefully, the board will see fit down the road for one of these people to run Citigroup."

June 16, 2002, Private Sector; A Knight Moves Up at Citigroup, by Riva D. Atlas,

WHEN Sanford I. Weill, the chief executive of Citigroup, broadened the list of his possible successors last week, his promotion of Sir Deryck C. Maughan was the biggest surprise.

The elevation of Sir Deryck to chief executive of Citigroup's international division was portrayed by Mr. Weill and other Citigroup executives as a reward for his fine work. But for some time, Sir Deryck hardly appeared to be Mr. Weill's favorite son.

A British-born banker known for his reserve, political skill and well-cut suits, Sir Deryk had been marginalized by Mr. Weill. Four years ago, Salomon Smith Barney, the Citigroup investment banking division that Sir Deryck helped run, reported a $325 million net loss for the third quarter, largely because of turmoil in financial markets after Russia's financial meltdown.

Mr. Weill quickly replaced Sir Deryck and his co-chief executive at Salomon, Jamie Dimon. Mr. Dimon was forced out, but Sir Deryck stayed, taking on a less visible role as a vice chairman advising on corporate strategy. At the time, his prospects at the firm were considered slim.

["You will always be my friend---you know too much!"]

Mr. Weill, 69, has given no indication that he is about to retire, and there are several executives who could succeed him. In the field are Robert B. Willumstad, the president of Citigroup and head of its consumer bank; Michael A. Carpenter, the head of the investment bank and corporate loan group; and Thomas W. Jones, who runs asset management. But Sir Deryck, 54, is now also perceived to be a candidate.

"He has gradually gained influence with Sandy over the last few years," said one senior Wall Street executive who knows both men.

Both Mr. Weill and Sir Deryck declined to be interviewed. But in remarks after Sir Deryck's promotion last Tuesday, Mr. Weill praised him, showing no signs of whatever tensions might have existed before. "Deryck has done a terrific job for us," Mr. Weill said. "He is a terrific team player."

Sir Deryck, a native of Consett, a coal mining town in northern England, began his career as an adviser on economics and finance for the British Treasury; he ran Salomon's Tokyo office from 1986 to 1991.

[Not to be indiscreet, but what about the big swinging dick? Curious minds want to know!]

Handsome and 6-foot-3, Sir Deryck, who was knighted by Queen Elizabeth II in January for his contributions to British business and commercial interests in the United States, joined Mr. Weill in March [2002] on a list of the best-dressed businessmen published by Avenue magazine, a New York publication about the city's wealthy.

Mr. Weill got to know Sir Deryck in the early 1990's. Soon after Sir Deryck was named as chief executive of Salomon Brothers, Mr. Weill called to introduce himself and asked Sir Deryck to join the board of Carnegie Hall, of which Mr. Weill is chairman.

Because Sir Deryck has had a low-profile role at the company for the last four years, his ascent within Citigroup has surprised many executives who know him. Some people viewed him as a cigar-store Indian," said one Wall Street executive.

But Sir Deryck's success at a hodgepodge of responsibilities he has assumed over the last few years brought him back into Mr. Weill's favor. He has been running Citigroup's Internet strategies, overseeing a team that handles mergers for Citigroup and acting as chairman of the firm's fast-growing business in Japan.

Wall Street executives say Sir Deryck has proved a quiet ally to Mr. Weill, who built Citigroup into the nation's biggest financial services conglomerate.

"Deryck has done nothing but a good job," said Jeffrey B. Lane, the chief executive of Neuberger Berman, the money management firm, and a former vice chairman at the Travelers Group, a predecessor to Citigroup. "At some point, performance has its own rewards."

Sir Deryck first became a Wall Street personality because of backing from another powerful financier, Warren E. Buffett. In 1991, Mr. Buffett chose him, then little known outside the firm, to run Salomon after the firm's survival was threatened by an internal scheme to manipulate the market for United States Treasury securities.

Mr. Buffett, whose company had a large investment in Salomon, had stepped in as interim chief executive after Salomon's chief executive, John H. Gutfreund, resigned. Mr. Buffett needed to hire someone quickly to run Salomon day to day. "It was the luckiest decision I ever made," Mr. Buffett said.

Buffett knew him two days and interviewed him for ten minutes--that's over $70,000,000 per minute.

Sir Deryck was a good choice, said one former Salomon executive, because he had just returned to New York after five years in Japan and was untainted by the Treasury scandal. Sir Deryck's reserve and charm were also rare at Salomon, famous for unpolished, irreverent traders.

Mr. Buffett said Sir Deryck was good at soothing angry regulators, including the Federal Reserve, as well as nervous customers. "He went down into the foxhole with me and in the end he came through under the most extreme conditions," Mr. Buffett said, adding that Salomon's balance sheet was shrinking by $1 billion a day at that time.

Although Sir Deryck got Salomon past the crisis, he had mixed success taming the firm's volatile trading profits. In 1994, the firm lost $963 million, before taxes, and he changed Salomon's compensation plan, cutting some executives salaries with Mr. Buffett's blessing. The move alienated some of the firm's top bankers and traders. The next year, Sir Deryck was the subject of an unflattering cover article in New York magazine titled "The Crash of a Wall Street Superhero."

In 1997, Sir Deryck sold Salomon to Mr. Weill, who coveted the cachet of Salomon's name. But after the losses the next year, Sir Deryck's prospects looked dim.

Even if he was unable to manage Salomon's unruly trading business, Sir Deryck has excelled at the behind-the-scenes assignments Mr. Weill has handed him. Two years ago, Mr. Weill asked him to manage Citigroup's Internet strategy, which had been consuming hundreds of millions in cash with little in tangible results. Sir Deryck reduced the division's costs to less than $100 million a year from $550 million and increased the number of consumers using Citigroup's services online to 18 million as of the end of May from 3 million, according to the company.

As manager of a team overseeing Citigroup's acquisitions, Sir Deryck's talents became increasingly useful as the company ventured overseas. These deals include an investment in Nikko Securities of Japan in 1998 that has proved highly successful, and two acquisitions: the investment banking division of Schroders, in 2000, and Mexico's second-largest bank, Grupo Financiero Banamex-Accival, for $12.5 billion last year.

Mr. Weill's acquisition of Salomon also looks like a better deal. The investment bank has gained market share, particularly after the merger of Travelers and Citicorp allowed Salomon bankers to offer loans to corporate clients. The division's profits also became less volatile with the addition of Citicorp's consumer banking business, which typically does well when corporate banking is in a slump, as it has been the last two years.

Some executives who know Sir Deryck say that avoiding the limelight is probably the right strategy at Citigroup. "You can't stay that long working for Sandy unless you are a member of the team," Mr. Lane said. "Sandy is a big believer in the team concept."
So is the mafia!

Sir Deryck is no novice, said Michael F. Holland, the president of Holland & Company, a money management firm, and a former Salomon executive. "He keeps a profile appropriate to his next success."

June 29, 2002, New York Times, Turmoil at WorldCom: The Bankers; Salomon Brothers May Face WorldCom Shareholder Suits, by Andrew Toss Sorkin,

For nearly a decade, the Salomon Smith Barney unit of Citigroup has stood in the shadows behind WorldCom's meteoric rise. Salomon's bankers have done everything from whispering merger advice to promoting stock offerings to arranging billions of dollars in loans -- making more than $100 million in fees in the process.

The two companies' relationship and Salomon's deep pockets will probably make Salomon a focus of lawsuits by disgruntled shareholders and bondholders looking for some payback for the billions they have lost. And WorldCom's acknowledgment this week that it hid $3.8 billion in expenses raises questions about the thoroughness of the due diligence that Salomon conducted before arranging and underwriting a $12 billion bond offering last year.

Salomon's long relationship with WorldCom stems from the investment bank's most widely criticized employee, Jack B. Grubman, Salomon's telecommunications analyst cum banker. Mr. Grubman was considered one of WorldCom's biggest promoters and may have led more investors into securities of nascent telecommunication companies than perhaps any other individual.

Mr. Grubman has been named in several lawsuits by shareholders contending that he made overly bullish recommendations that led to millions in losses. On Thursday, he was subpoenaed to testify before a Congressional committee to explain why he downgraded WorldCom stock on Monday, a day before the company disclosed its accounting irregularities.

Mr. Grubman, a former executive at AT&T, first became associated with WorldCom in the late 1980's when he was a telecommunications analyst at Paine Webber. At the time, WorldCom was called L.D.D.S., for Long Distance Discount Service, and Mr. Grubman became one of the company's biggest cheerleaders. He befriended WorldCom's founder and its chief executive at the time, Bernard J. Ebbers, and became a close adviser.

When Mr. Grubman moved to Salomon Brothers in 1994, he took WorldCom and Mr. Ebbers with him as a client. In many ways Mr. Grubman became WorldCom's chief strategist, helping WorldCom outmaneuver the GTE Corporation to win the battle for MCI in 1997.

Over the years, WorldCom became one of Salomon's biggest clients. Three bankers -- Eduardo Mestre, a senior tactician; Tom King, a runner and hockey player known as Iceman; and Scott Miller, who maintained the account -- became Mr. Ebbers's go-to guys.

That team also negotiated WorldCom's acquisition of M.F.S. Communications and its failed deal to acquire Sprint, which was blocked by regulators.

In the last several years, Salomon's relationship with WorldCom has become more about raising money through bond offerings than offering merger advice.

Legal experts said that while Salomon would probably be sued by shareholders and bondholders, it would be difficult to prove that the firm was negligent. The firm, legal experts said, could be sued under a section of the Securities Act of 1933 that says underwriters, as well as WorldCom's outside directors, must conduct their own due diligence.

A spokesman for Salomon said, ''The underwriters conducted thorough due diligence in connection with WorldCom's bond offering, including reliance on the company's audited financial statements."

July 15, 2002, New York Times, Citigroup's Chairman Urges More Insulation of Analysts, by Patrick McGeehan,

Salomon Smith Barney, one of the Wall Street firms under scrutiny by investigators for the New York State attorney general, has urged regulators to curb stock analysts' conflicts of interest, making them more independent from investment bankers.

In a letter sent on Friday to national securities regulators, Sanford I. Weill, the chairman and chief executive of the parent Citigroup, and Michael A. Carpenter, chief executive of its Salomon unit, said the industry should do more to reduce analysts' conflicts of interest.

Most notably, Mr. Weill and Mr. Carpenter proposed prohibiting analysts from appearing at meetings, known as roadshows, in which companies try to sell their stocks and bonds to mutual fund managers and other institutional investors. They also suggested banning analysts from helping investment bankers sell their firms' services to public companies.

"We believe that further steps need to be taken in order to more completely make research independent from investment banking and therefore bolster investor confidence,'' they said in the letter. It was sent to Harvey L. Pitt, the chairman of the Securities and Exchange Commission; Richard A. Grasso, chairman and chief executive of the New York Stock Exchange; and Robert R. Glauber, head of the National Association of Securities Dealers.

The letter did not provide any details on the reasons or timing for the proposals, nor did the executives volunteer to make any changes themselves.

The dual role played by analysts at the biggest securities firms are the subject of several civil and criminal investigations that followed a investigation of Merrill Lynch by Eliot L. Spitzer, the New York attorney general.

Mr. Spitzer said that during negotiations, Merrill refused to agree to prohibitions on involving its analysts in roadshows and sales appeals. After Merrill agreed to pay $100 million in penalties and make several changes in the structure of its research department, Mr. Spitzer turned his attention to two Merrill rivals, Salomon and Morgan Stanley. In April, Mr. Spitzer's office sent a subpoena to Salomon seeking documents about the firm's research and banking activities related to telecommunications companies.

Jack Grubman, Salomon's senior telecommunications analyst, has a reputation for blurring the line between analysis and investment banking. In testimony at a House committee hearing last week on the accounting problems at WorldCom, he said he had appeared with investment bankers at three meetings of WorldCom's board.

Mr. Spitzer, in an interview yesterday, called the Citigroup executives' proposals ''a very constructive and perhaps important step forward.'' He said he saw them as an invitation to Mr. Pitt to impose rules immediately on the securities industry.

But Mr. Spitzer said he would prefer to see Citigroup go further and lead by example.

"I would love to see Sandy Weill step into the breach," he said, ''and adopt these proposals unilaterally and say to the public, 'You can trust us more because we are voluntarily doing this.' ''

He also said analysts should be banned from selling banking services to companies that are not yet public. Assignments to underwrite first-time stock sales, known as initial public offerings, are among the most lucrative business for banks and usually lead to future assignments.

"It should be extended to the I.P.O," Mr. Spitzer said. "It clearly should be."

In their letter, the Citigroup executives proposed two other prohibitions: Banning investment bankers from having any input into how much analysts are paid and banning the bankers from previewing analysts' reports before they are published.

A Salomon spokeswoman said that the firm already had those restrictions in place.

October 28, 2002, New York Times, Sorting Out the Leadership Puzzle at Citigroup, by Riva D. Atlas,

Sanford I. Weill, the chairman and chief executive of Citigroup, is working quickly to resolve investigations into research practices at its investment banking unit, inquiries that have threatened to tarnish his reputation as the builder of the nation's largest financial services company.

But after the inquiries have been dealt with, some analysts and investors think pressure will be put on Mr. Weill to do what he has long resisted: name a successor.

Mr. Weill, who turns 70 in March, has been coy about succession plans. He has kept investors guessing throughout the year as he has placed three senior executives into positions that could put them in line to become the next chief executive.

"I think you're worrying about this issue way too early," he said in an interview last month, soon after naming Charles O. Prince, the company's former chief legal counsel, to be the new head of Citigroup's investment bank, Salomon Smith Barney, the focus of most of the investigations.

"When the time is right," Mr. Weill said, ''we will make an announcement."

But last Wednesday, news that Mr. Weill had agreed to answer questions from the New York attorney general, Eliot Spitzer, reminded shareholders that, one way or another, Mr. Weill will someday leave Citigroup.

"People want to know if he leaves, where is the floor in the stock?" said Michael Mayo, an analyst at Prudential Financial.

Citigroup's stock fell as much as 6 percent on Wednesday after reports that Mr. Weill would meet with Mr. Spitzer, although the stock mostly rebounded, after a spokesman for Mr. Spitzer said that Mr. Weill was not a focus of the inquiry. Citigroup shares rose $1.03 on Friday, to $35.70.

Mr. Weill has not made any specific announcements about succession for more than two years. The issue received some attention in February 2000, when his co-chief executive, John S. Reed, resigned. At the time, Mr. Weill promised to begin work to identify Citigroup's next leader.

In a statement, the company said then that Mr. Weill planned ''to work with a committee of the board on a plan of succession with the objective of coming up with a successor in two years."

A Citigroup spokeswoman, Leah Johnson, said yesterday that Mr. Weill ''works closely with a subcommittee of the board on the process." She declined to provide any further details.

Investors have wondered about a successor since November 1998, when Mr. Weill dismissed James Dimon, then president of Citigroup, who had long been his closest aide.

Last January, Mr. Weill finally named a new president, appointing Robert B. Willumstad, head of Citigroup's consumer business, to the post. But he quickly dampened speculation that Mr. Willumstad, 57, was the favorite to succeed him.

"I'm a pretty straightforward person, and if that's what I wanted to signal, that's what I would have said," Mr. Weill said at the time.

The whispers started anew in June, when Sir Deryck Maughan, a vice chairman, was named chief executive for Citigroup's international division, a new post. Sir Deryck, 54, had earlier been chief executive of Salomon Brothers, which was acquired by a predecessor to Citigroup in 1997. But once again, Mr. Weill denied having chosen a successor.

Last month, analysts and investors said the promotion of Mr. Prince, 52, put him in the running, especially if he succeeds in quickly resolving the various investigations confronting Salomon. But while Mr. Prince has clearly been busy behind the scenes, Mr. Weill has made most public announcements concerning the investigations.

In recent weeks, Mr. Weill has made several speeches indicating Citigroup's commitment to raising standards that would reduce conflicts between research analysts and investment bankers. He has also made several changes intended to raise corporate governance standards. Earlier this month, he announced he was resigning as a director of AT&T and United Technologies, whose chief executives sit on the board of Citigroup.

Some investors said they were glad Mr. Weill was taking an active role in resolving Citigroup's problems, given his stature and experience.

"At a time when the political winds are roaring, it is probably preferable to have someone in charge who has been battle tested," said Michael F. Holland, president of Holland & Company, a money management firm.

Still, other Wall Street executives have been less reluctant to name a successor. David H. Komansky, the outgoing chief executive of Merrill Lynch who is six years younger than Mr. Weill, first signaled his successor in 1997, when Merrill promoted Herbert M. Allison Jr. to be president and chief operating officer, positions long been synonymous with chief-in-waiting at Merrill.

Mr. Allison abruptly left in 1999, but two years later, Merrill's directors appointed E. Stanley O'Neal to be president. Mr. O'Neal is scheduled to succeed Mr. Komansky as chief executive in December and as chairman next year.

The Goldman Sachs Group has co-presidents, John A. Thain and John L. Thornton, who work with Henry M. Paulson, the firm's chairman and chief executive. Many employees and shareholders expect one or both men will succeed Mr. Paulson.

"It's good management always to have a clear succession plan," said Tanya Azarchs, an analyst who tracks Citigroup's debt for Standard & Poor's. "There's always a chance of that proverbial bus coming down the road and hitting you."

One motivation for Mr. Weill could come from his eagerness to bolster Citigroup's stock, which is down more than 24 percent this year.

After the news last week that Mr. Weill would meet with Mr. Spitzer, one analyst addressed the issue of what Citigroup would be worth if Mr. Weill suddenly left the company. In a report released Wednesday, Judah Kraushaar, an analyst at Merrill Lynch, concluded the stock would not be worth quite as much.

"Were Mr. Weill to leave Citigroup for any reason, our view on valuation appeal would suffer," Mr. Kraushaar wrote, in part because the company would lose Mr. Weill's famous cost-cutting skills.

November 23, 2002, Reuters, Probes Get Citigroup to Rethink Structure,

Citigroup Inc. must rethink the organization of some of its businesses as it deals with federal investigations of alleged stock research abuses at the nation's largest financial services company, the head of its international unit said Thursday.

"We fully recognize the need to rethink the basic structure of some of our companies ... and a drive to establish the highest ethical business practices in the industry, which is beyond what the law requires," Sir Deryck Maughan, Citigroup vice chairman and head of international operations, told a business executive conference in New York.

Maughan was filling in for Citigroup CEO Sanford I. Weill, who pulled out of a scheduled speech at the conference.

Citigroup is in talks with federal and state regulators to resolve allegations that its Salomon Smith Barney securities unit issued overly upbeat research to win lucrative investment banking deals by advising companies on new stock issues.

Salomon Smith Barney and other firms also have been charged with IPO "spinning"-- or bribing executives with shares of hot stock offerings during the late-1990s technology boom in exchange for banking business.

Citigroup last month tried to quell criticism of ties between investment bankers and stock analysts by creating a new unit separating banking from its research and brokerage operations. It brought in Sallie Krawcheck, the head of independent research firm Sanford C. Bernstein, to run the new unit.

September 21, 2003, New York Times, Business People; A Blast From the Past, by Micheline Maynard; Francine Parnes, Melinda Ligos and Leslie Wayne contributed to this report,

In the midst of the Richard A. Grasso pay scandal, Wall Street's old guard gathered to celebrate one of their own and recall the days when word was bond, a handshake closed a deal and civility reigned.

A dinner Thursday night to toast (and roast) Andrew M. Blum, a Wall Street legend, drew many pillars of the old order. Guests included John H. Gutfreund, the former Salomon Brothers chairman; Thomas I. Unterberg and Robert Towbin, co-founders of the eponymous firm; Byron R. Wien, senior investment strategist at Morgan Stanley; Mary Farrell, investment strategist at UBS; Ned Regan, former New York state comptroller; and J. Bruce Llewellyn, chief executive of the Coco-Cola Bottling Company of Philadelphia.

Mr. Blum, whose career spans 50 years, is chairman of C. E. Unterberg Towbin International. "Andy was a part of a world that has ceased to exist," said Mr. Towbin, who added that in the "old days" a Grasso scandal would not have been possible. "This is an appropriate moment for us to meet."

February 23, 2004, Los Angeles Times / Reuters, Citigroup to Acquire Bank in S. Korea,

SEOUL — Citigroup Inc. said today that it would buy South Korea's Koram Bank for $2.7 billion, extending the U.S. bank's push into emerging markets in the largest foreign investment in Asia's fourth-largest economy.

Citigroup beat out British banking group Standard Chartered to buy South Korea's sixth-largest bank from the stock market and from a consortium led by U.S. private equity fund Carlyle Group.

New York-based Citigroup, the world's largest financial services company, is looking for further growth in Asia's developing markets after buying banks in Mexico and Poland.

"It's a large underserved market from our point of view. The Korean financial services market is only opening now," Deryck Maughan, chief executive of Citigroup International, told Reuters.

"There are a whole series of markets ... that are now opening to foreign direct investment. What we have accomplished in Mexico with Banamex or Poland with Handlowy we feel we can accomplish in a number of Asian countries," he added.

Foreign banks can buy South Korea's banks cheaply because share prices have suffered in the fallout from a mountain of unpaid credit card debt.

The proposed acquisition is likely to help Koram compete with bigger rivals, including the country's largest lender, Kookmin Bank, and Shinhan Financial Group, analysts said.

Citigroup, which was one of the first foreign banks to establish a presence in South Korea in 1967, expects the transaction to add to 2004 earnings. The bank earned a record $17.9 billion last year, mostly on its domestic consumer lending.

Citigroup's overseas profits rose 18% to $4.9 billion in 2003, or 27.5% of total earnings.

The terms of the transaction include the acquisition of the U.S. consortium's 36.6% stake in Koram and a tender offer for the remaining shares, for a total of $2.7 billion.

The price represented a 6.7% premium over the average closing price of Koram's stock for the last 30 trading days.

October 15, 2004, New York Times, Citigroup Has Record Gain; Bank of America Up 29%, by Timothy L. O'Brien,

Citigroup, the nation's largest bank, reported a record increase in earnings for the third quarter on Thursday and addressed concerns among investors about a corporate culture that has drawn regulatory scrutiny and a large legal settlement on three continents.

The bank, buoyed by a robust consumer business that largely overshadowed the weak capital markets that continue to plague Wall Street firms, said its quarterly profit rose 13 percent, to $5.31 billion, or $1.02 a share, from $4.7 billion, or 90 cents a share, in the period a year ago.

But the manner in which Citigroup earns its impressive sums has come into question.

In May, the bank agreed to pay $2.65 billion to settle securities claims in the United States by investors who bought stock and bonds in WorldCom Inc. before it filed for bankruptcy protection two years ago; Citigroup was WorldCom's lead banker.

A month later, Citigroup suspended two of its leading investment banking executives in China, citing them for presenting false financial information to Chinese regulators and to the bank itself.

In August, Britain's leading securities regulator announced that it was investigating the circumstances surrounding a $13.5 billion bond trade that Citigroup executed that month. Citigroup essentially orchestrated a large sale of European government debt and then repurchased that debt shortly afterward at depressed prices.

The trade demonstrated Citigroup's market muscle, but also angered European traders who criticized it as, at best, an unseemly use of that power.

The bank has apologized for the bond trade, and the British investigation is continuing.

Last month, regulators in Japan ordered Citigroup to close its private banking operation there, citing securities and lending irregularities at the unit. And the bank still faces uncertainties regarding lawsuits over its involvement in the collapse of Enron.

Citigroup's chief executive, Charles O. Prince, acknowledged yesterday at the start of a conference call with analysts that the events had damaged the bank's reputation.

"When things happen that cause that legacy and history to be tarnished a little bit, it hurts all of us. It hurts me personally," he said. "I just want to make it clear to all of you that for all of us examples like that are simply not acceptable."

Mr. Prince noted the "strong action" the bank had taken to address its cultural problems and said there was more to come. He declined to elaborate when questioned by an analyst, other than to say he did not expect that Citigroup would be forced to add billions of dollars to its already outsize legal reserves.

Citigroup said in its earnings release that it added $100 million in the quarter to legal reserves for its European, Middle Eastern and African corporate and investment banking unit.

Todd S. Thomson, Citigroup's chief financial officer, declined in an interview to detail the reasons for the $100 million increase in reserves. But he said that there had been no ''reputational fallout'' in terms of the bank's profitability or in its ability to hold leading positions in coveted league tables that rank all banks across financial activities.

Some analysts said that concerns about earnings problems related to Citigroup's regulatory woes had been overblown, in part because the bank had done a poor job of courting the investment community.

"Investors perceive that the company is constantly selling them rather than giving them a clear-eyed picture of things,'' said Richard Bove, a banking analyst with Punk, Ziegel & Company, a research firm in New York. But Mr. Bove noted that the bank's share price, which closed down 41 cents yesterday at $43.70, is a weak reflection of Citigroup's earnings potential.

"The company is increasing its profits, increasing its cash flow, and increasing its revenues," Mr. Bove said. "If a company does that it is increasing its economic value."

The Bank of America Corporation, the nation's third-largest bank, also reported increased earnings yesterday, largely because of a strong performance from its consumer units. It said profit for the third quarter rose 29 percent, to $3.76 billion, or 91 cents a share, from $2.92 billion, or 96 cents a share, in the period a year ago.

The bank's earnings per share fell in the quarter because it issued stock to acquire the FleetBoston Financial Corporation for $48 billion in April. Bank of America said third-quarter results for last year did not include the FleetBoston acquisition.

While the bank has heavily deployed one-time gains and other forms of financial engineering in previous quarters, analysts said that this quarter's numbers showed much clearer core earnings growth.

"Our results show we are attracting and deepening customer relationships across the franchise," the chief executive, Kenneth D. Lewis, said. "Commercial is seeing positive growth trends and the consumer business remains our workhorse."

On a down day for the market as a whole, Bank of America's shares fell 81 cents, to $44.20, in light trading.

September 23, 2010, New York Times, Gay Marriage Gets Boost From Wall Street, by Peter Lattman,

The American Foundation for Equal Rights held a fund-raiser in New York City Wednesday night at the Mandarin Oriental hotel on Columbus Circle. The AFER is the organization that led the legal battle, led by lawyers Theodore Olson and David Boies, to challenge California's ban on gay marriage. A trial court judge struck down the statute last month, but the case is on appeal

With scores of first-time donors in the room, many of them from Wall Street, the AFER raised more than $1.2 million – with $100,000 coming in during and after last night’s event. The reception was chaired by three Republicans: Ken Mehlman, left, of private equity giant Kohlberg Kravis Roberts & Company; Paul Singer of hedge fund Elliott Management; and Peter Thiel of hedge fund Clarium Capital.

Financiers in the house included a team of deal makers from KKR. Mr. Mehlman, a former top Republican party official, publicly announced that he was gay last month, in part because of his involvement with this event.

"It was an honor to be able to bring together so many to support AFER's historic effort on behalf of the right of all Americans to marry the person they love," Mr. Mehlman said in an e-mail to DealBook. "One of the great things about last night’s events was how many new and first-time donors participated. We hope that last night is just the beginning, and many people last night committed to look for additional ways to help the cause of equal rights."

From KKR, Henry Kravis, Sir Deryck Maughan, Alex Navab, Scott Nuttall, John Pfeffer, Lewis Eisenberg, and David Sorkin either attended the event or made a donation, according to a document reviewed by DealBook. Other Wall Street executives included Blackstone Group's Garrett Moran; Daniel Loeb of hedge fund Third Point Capital; Jay Sammons of the private equity shop Carlyle Group; Seth Klarman of hedge fund Baupost; Nick Stone of TPG; Todd Malan, in-house lobbyist at Goldman Sachs; and media investor Leo Hindery of InterMedia Partners.

December 14, 2011, States News Service, Testimony on MF Global, Inc. - Federal Reserve Bank of New York,

The following information was released by the Federal Reserve Bank of New York:

Testimony on MF Global, Inc.

December 15, 2011

Posted December 14, 2011

Thomas C. Baxter, Jr., Executive Vice President and General Counsel

Testimony before the Subcommittee on Oversight and Investigations, Committee on Financial Services, U.S. House of Representatives

I. Introduction

Chairman Neugebauer, Ranking Member Capuano, and members of the Subcommittee, on behalf of the Federal Reserve Bank of New York (the New York Fed), I appreciate the opportunity to discuss the New York Fed's relationship generally with institutions with whom the New York Fed undertakes most monetary policy operations, known as primary dealers, and more specifically, our relationship with a former primary dealer, MF Global, Inc. Primary dealers serve as key counterparties to the New York Fed in its implementation of monetary policy and provide an important backbone for the government securities market. The "primary dealer" designation is conferred on those regulated institutions that we consider suitable business counterparties.

I recognize that questions are being asked about why the New York Fed designated MF Global as a primary dealer. As I will discuss, that decision came more than two years after MF Global initially approached the New York Fed about becoming a primary dealer. We made our decision after the firm went through a rigorous and careful application process, during which MF Global met all of our requirements. On October 31, 2011, we ended our counterparty relationship with MF Global and terminated its primary dealer status. We share the Subcommittee's concern for the customers of MF Global who have experienced losses as a result of the firm's bankruptcy, and have offered our assistance to the trustee upon whom the injured customers are relying. Through prompt and progressive action, the New York Fed protected its counterparty position and the interests of the American taxpayer, and we have sustained no loss.

II. The New York Fed's Relationship with Primary Dealers

Being a "primary dealer" means that a specific broker dealer or bank has been determined to be eligible to transact certain types of business with the New York Fed. It does not mean that the New York Fed has undertaken supervisory functions over the designated primary dealer. Primary dealers serve as trading counterparties in the New York Fed's implementation of monetary policy. A primary dealer is required to participate consistently as a counterparty to the New York Fed in our execution of open market operations. These operations are done to implement the domestic policy directives of the Federal Open Market Committee (FOMC). Typically, the directives are satisfied by purchasing or selling U.S. government or agency securities, either outright or through repurchase agreements (repo or reverse repo). More recently, the FOMC directed the New York Fed to purchase agency mortgage backed securities (ABMS) to satisfy the FOMC's dual mandate.

Primary dealers also provide the New York Fed's trading desk with market information and analysis that is helpful in the formulation and implementation of monetary policy. Dealers are also required to participate when the New York Fed, as fiscal agent of the Treasury, auctions U.S. government securities, and the dealer is obliged to participate in all auctions. Finally, the New York Fed holds more than $3 trillion in reserves for foreign central banks and monetary authorities. A primary dealer is required to make reasonable markets for the New York Fed when it invests these official reserves.

In evaluating whether a particular firm may be designated as a primary dealer, the New York Fed will consider whether the firm has the experience and capability to meet the New York Fed's business requirements. A firm must meet particular capital requirements, demonstrate that it has sizable and sustained performance in business areas relevant to a primary dealer (namely, U.S. Treasury auction participation and cash and repo market activity in U.S. Treasuries), and a compliance program specifically related to its trading activities with respect to the cash and repo markets in U.S. Treasuries and any other markets in which the New York Fed transacts. The functionality considered important to meet the unique business needs of the New York Fed may be different from the generic needs of other market participants. Consequently, the New York Fed has repeatedly and publicly stated that the designation of a firm as a primary dealer should not be regarded as a kind of "Good Housekeeping" seal of approval, and we have cautioned market participants that they should not take the primary dealer designation as a substitute for their own counterparty due diligence.

In January 2010, the Federal Reserve announced a revised Policy for the Administration of Relationships with Primary Dealers (the primary dealer policy or the policy). The revised policy, like the policy it superseded, sets out the business standards and technical requirements for primary dealers. While the nature of the New York Fed's relationship with its primary dealers had not changed, the previous policy, which dated back to 1992, needed to be refreshed. This need arose from dramatic changes that had taken place in the financial services industry during the last two decades. The revised policy reflects greater emphasis on compliance and corporate governance. A primary dealer is now required to have compliance professionals dedicated to the business lines relevant to the primary dealer functions and activities at the firm. Furthermore, under the revised policy, the New York Fed will not designate as a primary dealer any firm that is, or recently has been (within the last year), subject to litigation or regulatory action or investigation that the New York Fed determines is material or otherwise relevant to the primary dealer relationship. The New York Fed instituted this "waiting period" so that it could evaluate whether the issue raised by the action or investigation had been sufficiently remediated by the firm.

The revised policy, not surprisingly given the passage of time, raises the capital requirements for primary dealers. Now, a broker-dealer applicant must have at least $150 million in regulatory net capital as computed in accordance with the SEC's net capital rule, while a bank applicant must meet the minimum Tier I and Tier II capital standards under the applicable Basel Accord and have at least $150 million of Tier I capital as defined in the applicable Basel Accord. The New York Fed considered raising the capital requirement even higher but decided not to do so because of the exclusive effect the higher capital requirement would have on smaller firms.

In addition to establishing business standards for primary dealers, the revised Policy governs the application process for a prospective dealer (an applicant). In part I of the application process, an applicant must submit a letter outlining its ability to meet the business standards set forth in the primary dealer policy and its satisfaction of the new capital requirements. Each applicant is required to list its volume of activity in the last year (the seasoning requirement) in the business areas relevant to the primary dealer relationship, including auction participation, cash market activity in U.S. government and agency securities, and repo and reverse repo activity in the same markets. The applicant must also describe how becoming a primary dealer fits with its current business and long-term business plan and provide an organizational chart showing a detailed ownership chain from the applicant to the ultimate parent company that lists the jurisdiction of formation for each entity in the chain.

If the New York Fed makes the discretionary determination that the applicant warrants further consideration, the revised policy provides that the New York Fed will issue an information request (part II) seeking additional information concerning corporate governance, financial condition, regulation, the existing compliance regime, internal controls, and customer base. After submission of the part II information, an applicant can expect at least six months of formal consideration by the New York Fed.

III. The New York Fed's Relationship with MF Global

A. The Application Process

In December 2008, Donald Galante, head of Finance, Trading, and Fixed Income Sales at MF Global, contacted a senior vice president in the New York Fed's Markets Group to inquire about the possibility of MF Global's broker dealer becoming a primary dealer. In early January 2009, representatives of MF Global, including Mr. Galante and the then-chief executive officer of the firm, Bernard Dan, met with officials of the New York Fed's Markets Group. At the meeting, MF Global expressed its strong interest in becoming a primary dealer and provided the New York Fed with background information about the firm. On January 9, 2009, MF Global sent a formal letter requesting that the New York Fed consider MF Global as a prospective primary dealer. In the months immediately following its letter requesting consideration, MF Global started providing the New York Fed's trading desks with market color. The firm also began to participate directly in Treasury auctions, and to provide the New York Fed with mock- FR2004 reports.1 Through these activities, the New York Fed had an opportunity to evaluate, on certain measures, how MF Global might perform as a primary dealer. At the same time that it was interacting with the New York Fed's Markets Group, MF Global also provided its financials for review by our Credit Risk Management area, and with information on its regulatory framework for review by our lawyers and compliance personnel.

In March 2009, after reviewing some of the materials MF Global provided, the New York Fed learned that the parent company of MF Global's U.S. broker dealer was domiciled in Bermuda. New York Fed lawyers advised MF Global that, under the Primary Dealers Act,2 which Congress passed in 1988, the Board of Governors would be required to conduct a socalled "country study" of Bermuda before MF Global could be considered for designation as a primary dealer. In a country study, the Federal Reserve must consider whether the country of incorporation would permit equal access by U.S. firms to its markets. If not, the application must be denied. The requirement is designed to foster competitive equality across countries. MF Global responded that it would change the corporate domicile of the parent company from Bermuda to Delaware. This change was effected in January 2010.

In April 2009, lawyers and compliance personnel at the New York Fed reached out to the U.S. Commodity Futures Trading Commission (CFTC), one of MF Global's federal supervisors.3 In a conference call, the CFTC informed the New York Fed that while it took comfort from certain management changes made by MF Global, there remained several significant control issues. As a result, the CFTC ordered MF Global to overhaul its internal control structure with the assistance of an outside consultant. The CFTC explained that, after the consultant completed its work, the CFTC would review and assess the results of MF Global's efforts in this area. New York Fed staff decided to wait for the CFTC's assessment before taking a view on the firm's suitability as a primary dealer. MF Global was advised in May 2009 that it would not be considered for designation as a primary dealer for at least six months because of its pending compliance issues.

During the months following the decision to proceed more deliberately with MF Global's application, representatives of MF Global periodically contacted New York Fed officials to discuss relevant matters, including a pending CFTC investigation into certain trading irregularities at the firm and the legal issue concerning MF Global's corporate domicile in Bermuda. Also during this time period, the New York Fed was finalizing its revised primary dealer policy. The New York Fed was considering including a provision in that policy that would impose, subject to the New York Fed's discretion, a "waiting period" of one year for a primary dealer applicant that was facing relevant and material litigation, regulatory action or investigation. When MF Global learned that such a provision was under consideration, it sought a meeting with William Dudley (who had become president of the New York Fed in January 2009) to discuss the impact the provision might have on its prospects for becoming a primary dealer. The New York Fed declined MF Global's meeting request.

In the fall of 2009, MF Global asked the New York Fed to re-open the application process that had been suspended earlier in the year during the pendency of the consultant's report. The New York Fed refused to take this step and informed MF Global that, putting aside the issues unique to MF Global, no primary dealer designations would be made until the revised primary dealer policy was finalized. On December 17, 2009, before the revision, the CFTC announced a settlement with MF Global and issued a Consent Order Instituting Proceedings and Imposing Remedial Sanctions (Order) for violations of the Commodities Exchange Act.

The CFTC had found four principal failings in MF's control environment. Over the course of several years, the firm had failed to: (i) supervise a trader's activities; (ii) transmit accurate prices in natural gas options positions; (iii) prepare proper and accurate trading cards; and (iv) maintain written records in at least one client file. The CFTC imposed a number of sanctions including a civil money penalty of $10 million. MF Global also agreed to engage Promontory Financial Group to conduct two independent reviews of the firm's compliance infrastructure.

On January 11, 2010, the New York Fed revised its primary dealer policy. The policy included the following provision:

The New York Fed will not designate as a primary dealer any firm that is, or recently has been (within the last year) subject to litigation or regulatory action or investigation that the New York Fed determines material or otherwise relevant to the potential primary dealer relationship. In making such determination, the New York Fed will consider, among other things, whether and how any such matters have been resolved or addressed and the applicant's history of such matters and will consult with the appropriate regulators for their views.

On the day the revised policy was announced, the media reported that MF Global's CEO, Mr. Dan, had publicly expressed his hope that MF Global would become a primary dealer early in 2010.

On January 13, 2010, MF Global submitted part I of its formal application to become a primary dealer. On January 22, 2010, MF Global submitted the more extensive information required by part II of the primary dealer application. In response, on January 26, 2010, the New York Fed informed MF Global that under the New York Fed's revised Primary Dealer Policy, MF Global could not be designated a primary dealer until at least December 17, 2010uone year after the CFTC Order was issued. MF Global responded the next day with a letter from Mr. Dan arguing that the CFTC action was not material or relevant to MF Global's primary dealer application, and asking the New York Fed to exercise its discretion to approve MF Global's application prior to the expiration of the one year period.

Within days of our receipt of Mr. Dan's letter, I received a telephone call from MF Global's outside counsel, Sullivan and Cromwell, who requested a meeting to allow MF Global to present its case as to why the one year waiting period was unfair. On behalf of the New York Fed, I agreed to allow MF Global an opportunity to be heard on the issue.

In late February 2010, MF Global and its outside counsel met with the New York Fed and had the opportunity to advocate why the CFTC enforcement action should not cause the New York Fed to delay designating MF Global as a primary dealer. In response to MF Global's representations about the impact the delay could have on the firm, my colleagues and I explained that MF Global's application would be evaluated in accordance with the New York Fed's revised Policy, and that we were at the beginning of a review period that they should expect would take at least six months. We also advised MF Global that they should not have an expectation that the outcome of our review would automatically result in MF Global's being designated a primary dealer. Having made the decision to publicize its application for primary dealer status, MF Global needed to accept the possible negative consequences that might result from either a delay or a denial. Following the meeting with MF Global, lawyers in the New York Fed's Legal Group conducted a materiality analysis of the CFTC Order and concluded that the order was material and that any approval of MF Global's application to become a primary dealer should be deferred until at least December 2010.

On March 23, 2010, I was informed by MF Global's General Counsel that Mr. Dan would be resigning as CEO and that Jon Corzine would be taking his place. In mid-April, MF Global's head of Fixed Income Trading contacted an official in the New York Fed's Markets Group to request a courtesy meeting with the New York Fed to introduce Mr. Corzine as MF Global's new CEO. I, together with several of my colleagues, attended this meeting, which took place on June 1, 2010.

During the meeting, Mr. Corzine provided an update on MF Global's business plans, emphasizing the enhancement of its credit structure, by, for example, raising additional capital in the form of $150 million in equity. The New York Fed staff updated the MF Global representatives on the status of MF Global's primary dealer application, and noted that we were in the midst of our formal review period. We emphasized that due diligence was continuing across the business, legal, compliance and credit dimensions of the review process, and again reminded MF Global that the minimum time period for application review was six months after formal review had commenced. We again noted the requirement in the policy that the New York Fed would not designate an applicant as a primary dealer if the applicant had been a respondent in an enforcement action within the last year that the New York Fed deemed material and relevant to the primary dealer relationship.

In the months following the June 1 meeting, New York Fed staff continued the process of gathering and evaluating data and information relevant to MF Global's application. MF Global had submitted a large volume of materials including, but not limited to, audited financial reports (with notes) from the previous three years as well as its most recent quarterly financial statements, copies of its tax returns, and policies and procedures relating to its compliance and ethics programs. With the consent of MF Global, the CFTC provided the New York Fed with its three most recent examination reports. In addition to the materials provided by MF Global as part of its application, the New York Fed staff in the credit, legal and compliance areas made several requests to MF Global for additional information necessary to their evaluation of MF Global's application.

In early November 2010, the New York Fed staff visited the offices of MF Global and conducted an on-site review. Our requests at this point were heavily focused on credit issues arising out of the financial and liquidity position of the broker dealer relative to the corporate entity at large. The New York Fed's principal concern was with the broker dealer because that legal entity would be our counterparty. MF Global responded to all of the additional information requests by mid-November.

A final assessment meeting on MF Global's application took place in December 2010. On January 21, 2011, Richard Dzina, a senior vice president in the New York Fed's Markets Group, circulated a memorandum concluding that MF Global had demonstrated a clear ability to meet each of the requirements for primary dealers set forth in the New York Fed's primary dealer policy. Specifically, the memorandum stated that MF Global had demonstrated activity levels in the various markets in which the New York Fed's domestic trading desk transacts that suggested that MF Global had the capacity to provide sizeable, sustained performance in operations in Treasury repo and cash markets. The memorandum also noted that MF Global appeared capable of making markets for the New York Fed when the New York Fed transacts on behalf of its foreign official account holders. Based on auction awards during the application process, MF Global ranked in the third quintile of the then existing dealer population and ranked in the middle of the existing dealer population based upon Treasury cash and repo volume. The memorandum recommended that MF Global's application to become a primary dealer be approved. The New York Fed's legal, compliance and credit areas had no objections to the recommendation. I acted on behalf of the New York Fed's legal function. Brian Sack, executive vice president of the New York Fed's Markets Group, accepted Mr. Dzina's recommendation. On February 2, 2011, the New York Fed announced that MF Global had been designated a primary dealer, along with another applicant.

B. The Termination of MF Global as a Primary Dealer

We exercised counterparty due diligence over MF Global from February 2011 until October of 2011, when its financial condition deteriorated abruptly and quickly. As noted, we were not the supervisor of MF Global; that role remained with the CFTC and the U.S. Securities and Exchange Commission (SEC). From October 24, 2011 until October 31, 2011, the New York Fed took a series of prompt and progressive actions with respect to MF Global that were designed to protect our position as counterparty and to safeguard the interests of the taxpayer.

On October 24, 2011, Moody's downgraded its credit rating for MF Global Holdings Ltd (the primary dealer's parent) from Baa2 to Baa3. On October 25, MF Global Holdings disclosed its largest quarterly earnings loss ever. Mr. Dzina reported the downgrade to the New York Fed's chief risk officer. Later, on October 25, the New York Fed's president requested an analysis of what a bankruptcy of MF Global might mean for U.S. markets. We actively communicated with MF Global to assess whether MF Global had the ability to perform on its commitments with the New York Fed. On October 26, 2011, I telephoned the regional administrator of the SEC in New York, and a member of the Commission's staff in Washington, DC, to ensure that the SEC was aware of the gravity of the situation. Members of my legal staff contacted the CFTC for the same reason. We learned that the SEC and the CFTC planned to go into MF Global on October 27, 2011, and we understand that they did.

A review of the New York Fed's counterparty exposure led us to take a series of actions. First, the New York Fed mitigated exposure by excluding MF Global from certain primary dealer operations. Second, as a result of our review of exposure to MF Global, we focused on a series of seven AMBS trades with MF Global, which were still outstanding as forward settling transactions. These trades subjected the New York Fed to exposure to MF Global if the firm became insolvent prior to the settlement date and the market price had moved in the New York Fed's favor. In such circumstances, the New York Fed would have to replace these trades by buying the securities at a higher rate. To protect against this exposure, the New York Fed asked MF Global to execute an Annex to the Master Securities Forward Transaction Agreement (the MSFTA), an agreement that MF Global and the New York Fed executed when MF Global became a primary dealer. The annex would require MF Global to post margin to the New York Fed. The margin, which was calculated daily and subject to daily call, would protect the New York Fed from credit risk exposure arising from the unsettled trades. Following the execution of the annex, MF Global posted the initial margin in the afternoon of October 28. Later in the day, the New York Fed made another margin call pursuant to the Annex that would be due on Monday, October 31, at 10 a.m. Third, by the close of markets on Friday, October 28, the future of MF Global was in doubt. Consequently, at approximately 6:00 p.m. on that day, the New York Fed informed MF Global that MF Global was suspended from conducting new business with the New York Fed as a primary dealer (but trades that had not yet settled were still open).

Over the course of the prior week and the weekend, the New York Fed participated in calls with various agencies that regulated or otherwise oversaw MF Global, including the SEC, the CFTC and the U.K. Financial Services Authority, to monitor the events with respect to MF Global's attempts to stabilize its liquidity situation and sell the firm or its assets.

As we all now know, late on October 30, 2011, the prospects for a sale of MF Global dissipated. Before the markets opened on Monday, October 31, the New York Fed publicly announced that it had suspended MF Global from conducting new business as a primary dealer (the decision that it had informed the firm about on Friday evening). Later that morning, MF Global failed to meet the New York Fed's margin call by the prescribed time of 10:00 a.m. As a result, the New York Fed declared an event of default under the MSFTA, and issued a notice of termination of outstanding unsettled AMBS trades. The New York Fed subsequently entered the market, executed replacement trades for the terminated trades with MF Global, and served MF Global with a notice of calculation of loss (based on the cost of those replacement trades and other costs). The New York Fed then exercised its contractual right under the MSFTA to set off the calculated loss against the margin provided to the New York Fed by MF Global.4 Through these actions, the New York Fed protected its position as counterparty and safeguarded the interest of the taxpayer. To be clear, the New York Fed sustained no loss from its relationship with MF Global.

During the afternoon of October 31, the Securities Investors Protection Corporation (SIPC) applied to the United States District Court for the Southern District of New York for the appointment of a trustee to oversee the orderly wind-down of MF Global. Immediately following that filing, the New York Fed terminated MF Global's status as a primary dealer. The New York Fed ultimately returned the excess margin to the SIPC trustee, in accordance with the trustee's instructions.

IV. Conclusion

To conclude, the New York Fed designated MF Global as a primary dealer to meet our highly specialized needs, and we followed our primary dealer policy to the letter without fear or favor. In our role as counterparty, we took prompt and progressive actions to protect the New York Fed and the taxpayer from loss, and we succeeded in this endeavor. The New York Fed is deeply concerned about MF Global's customers who have sustained losses as a result of MF Global's collapse. We have pledged our assistance and cooperation to the trustee, whenever we can be helpful, and we hope that our testimony is useful to the Committee in its oversight activities.

1 Primary dealers are required to provide the New York Fed with information on a form called the "FR2004." The FR2004 reports weekly data on primary dealers' outright positions, transactions, and financing and fails in Treasury and other marketable debt securities.

2 22 U.S.C. * 5341-42.

3 In addition to the Federal supervisors, MF Global was supervised by certain designated self regulatory organizations (DSRO). On the futures side, the Chicago Mercantile Exchange serves as the DSRO. On the securities side, FINRA serves as the DSRO.

4 The set off amount was calculated as the amount of unrealized appreciation on the securities from the trade date through the time of the replacement of the trades plus legal fees related to the termination and replacement transactions.

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