New York Times

October 11, 1987, New York Times, Life After Salomon Brothers, by William Glaberson,
December 22, 1987, New York Times, Credit Markets: Prices of Treasury Bonds Retreat, by Michael Quint,
December 21, 1987, New York Times, Secrecy On Bonds Criticized, bu Michael Quint,
January 10, 1988, New York Times, Too Far, Too Fast; Salomon Brothers' John Gutfreund, by James Sterngold,
February 9, 1988, New York Times, Salomon Loses $74 Million in Quarter, by James Sterngold.
February 10, 1988, New York Times, Salomon Expands at Top; Key Executive Resigning, by James Sterngold,
October 13, 1988, New York Times, Noriega Political Payments Reported by Indicted Banker, by Jeffrey Schmalz,
January 18, 1989, New York Times, L.F. Rothschild Withdraws As a Key Treasury Dealer, by Kenneth N. Gilpin,
December 13, 1989, New York Times, Credit Markets Note and Bond Prices Unchanged, by Kenneth N. Gilpin,
May 25, 1990, New York Times, For Ivan Boesky, Punishment Was Tax-Deductible, by Kurt Eichenwald,
June 21, 1990, New York Times, Finance / New Issues; Government Securities Unit Closed by Westpac Banking,
November 9, 1990, New York Times, Credit Markets; Treasury Bond Auction Ends Well, by Kenneth N. Gilpin,
December 7, 1990, New York Times, Vice Chairman Named At Salomon Brothers,
December 18, 1990, New York Times, Deutsche Bank A Primary Dealer,
December 31, 1990, New York Times, Primary Dealers' Profits Reportedly High in "90, by Kenneth N. Gilpin,
March 22, 1991, New York Times, Company News; Suit Is Settled by Salomon,
May 3, 1991, New York Times, New System for Trading in Treasury Securities, by Michael Quint,
May 15, 1991, New York Times, Credit Markets; Prices of Treasury Bonds Tumble, by Kenneth N. Gilpin,
July 30, 1991, New York Times, A Banking Indictment: New York Lodges Criminal Charges, by Dean Baquet,

August 10, 1991, New York Times, Officer Reportedly Knew of Salomon Plan, by Kurt Eichenwald,
August 10, 1991, New York Times, Salomon Brothers Admits Violations at Treasury Sales, by Jonathan Fuerbringer,
August 10, 1991, New York Times, Salomon Admits Traders Tried To Corner U.S. Bond Markets, by Lawrence Malkin,
August 10, 1991, New York Times, Salomon Brothers Admits Violations at Treasury Sales, by Jonathan Fuerbringer,
August 13, 1991, New York Times, Credit Markets; Prices of Treasury Securities Rise, by Kenneth Gilpin,
August 14, 1991, New York Times / Associated Press, Salomon Officers Sued for Fraud,
August 15, 1991, New York Times, Salomon Violations Detailed, by Barnaby J. Feder,
August 16, 1991, New York Times / Albany Times Union, Salomon Bidding Embarrassment Threatens Its Future, (Highbeam)
August 16, 1991, New York Times, page A1, Wall Street Sees a Serious Threat to Salomon Bros., by Kurt Eichenwald,
August 17, 1991, New York Times, Quotation of the Day
August 17, 1991, New York Times / Albany Times Union, Salomon Tried to Stem Damage, by Jonathan Fuerbringer,
August 17, 1991, New York Times, Salomon's 2 Top Officers to Resign Amid Scandal, by Kurt Eichenwald,
August 17, 1991, New York Times, Salomon Still Facing Broad Legal Problems, by Jonathan Fuerbringer,
August 17, 1991, New York Times, Fate of One Top Officer Still Appears Uncertain, by Sarah Bartlett,
August 17, 1991, New York Times, Changing of the Guard at Salomon, by Sarah Bartlett,
August 18, 1991, New York Times, Shadow on a Market, by Floyd Norris,
August 18, 1991, New York Times, Market Watch; Tidying Up After the Mess At Salomon, by Floyd Norris,
August 18, 1991, New York Times, Wall Street; Salomon -- The Market Hasn't Liked It for Months, by Diana B. Henriques
August 18, 1991, New York Times, Mysteries of Treasury Bonds INSIDE Page 22.
August 18, 1991, New York Times, Shadow on a Market, by Floyd Norris,
August 19, 1991, New York Times, Equity Issues This Week,
August 19, 1991, New York Times, Salomon Is Punished by Treasury, Which Partly Relents Hours Later, by Kurt Eichenwald,
August 19, 1991, New York Times, Upheaval at Salomon; Treasury Statements on Salomon,
August 19, 1991, New York Times, 5 Top Officers Leave Salomon As Buffett Takes Control of Firm, By Lawrence Malkin,
August 19, 1991, New York Times, Such Is War at Salomon, by Floyd Norris,
August 19, 1991, New York Times, Salomon's Remaining Challenges, by Richard D. Hylton,
August 19, 1991, New York Times, Surprise and Questions On Treasury's Retreat, by Keith Bradsher,
August 19, 1991, New York Times, Suddenly, an Outsider Becomes 'Mr. Inside', by Jonathan Fuerbringer,
August 19, 1991, New York Times, Treasury Statements on Salomon, by Jonathan Fuerbringer,
August 19, 1991, New York Times, Disruption Of Bonds Is Doubted, by Kenneth Gilpin,
August 19, 1991, New York Times / Albany Times Union, Salomon Brothers Scouring Its Image, by Richard D. Hylton,
August 19, 1991, New York Times / Albany Times Union, Salomon Brothers Casualty of Greed, by Floyd Norris,
August 20, 1991, New York Times, S.E.C. Widens Inquiry In Treasuries Scandal, by Kurt Eichenwald,
August 20, 1991, New York Times, Salomon's Rules Provide View of What They Avert, by Kurt Eichenwald,
August 20, 1991, New York Times / Albany Times Union, Other Firms Probed as Part Of Salomon Brothers Scandal, by Kurt Eichenwald,
August 21, 1991, New York Times, Brady Raises Possibility Of More Bid Violations, by Louis Uchitelle,
August 21, 1991, New York Times, Salomon Is Losing Big Client, by Kurt Eichenwald,
August 22, 1991, New York Times / Albany Times Union, In Wake of Treasury Scandal More Clients Drop Salomon, by Kurt Eichenwald,
August 22, 1991, New York Times, Cleaning Up Salomon's Mess, by Louis Uchitelle,
August 22, 1991, New York Times, Corporate Bonds Status Stays Intact for Salomon, by Michael Quint,
August 22, 1991, New York Times, New Troubles for Salomon: Suits Grow, Clients Defect, by Kurt Eichenwald,
August 22, 1991, New York Times, Corrections, by Kurt Eichenwald,
August 23, 1991, New York Times, Economic Scene; Brady's Message On the Scandals, by Leonard Silk,
August 23, 1991, New York Times, Salomon Starts to Carry Out Contingency Finance Plan, by Kurt Eichenwald,
August 23, 1991, New York Times, Economic Scene; Brady's Message On the Scandals, by Leonard Silk,
August 23, 1991, New York Times, Smoking Salomon, by Joseph A. Grundfest,
August 24, 1991, New York Times, Chief Legal Counsel Quits Salomon Under Pressure, by Kurt Eichenwald,
August 25, 1991, New York Times, Salomon's Errant Cowboy, by Sarah Bartlett,
August 25, 1991, New York Times, It Isn't the Paul Mozer They Knew, by Jacques Steinberg,
August 26, 1991, New York Times, Correction, by Jacques Steinberg,
August 28, 1991, New York Times, Salomon May Lose Savings Bailout Work, by Jacques Steinberg,
August 28, 1991, New York Times, Credit Markets; Treasury's Note Sale Is Smooth, by Kenneth Gilpin,
August 29, 1991, New York Times, Correction: Resolution Trust Corporation - savings and loan bailout,
August 29, 1991, New York Times, Moody's Lowers Ratings on Some Salomon Debt,
August 29, 1991, New York Times, Dismissed Salomon Trader Sold Stock Before Scandal, by Jonathan Fuerbringer,
August 30, 1991, New York Times, More Actions By Salomon To Aid Image, by Jonathan Fuerbringer,
August 31, 1991, New York Times, Salomon's Law Firm Resigns', by Jonathan Fuerbringer,
September 3, 1991, New York Times, Reluctant Regulator: A special report.; Free-Wheeling Treasuries Market Is at Turning Point With Congress, by Diana B. Henriques,
September 4, 1991, New York Times, Salomon Inquiry Widened, by Stephen Labaton,
September 5, 1991, New York Times, Political Gifts From Salomon,
September 5, 1991, New York Times, Excerpts From Statement By Salomon to House Panel, by Stephen Labaton,
September 5, 1991, New York Times, House Panel Assails Treasury Regulation, by Diana B. Henriques,
September 5, 1991, New York Times, Salomon Describes Lax Unit, by Kurt Eichenwald,
September 6, 1991, New York Times, Salomon Cuts Off Former Managers, by Kurt Eichenwald,
September 6, 1991, New York Times, Spotlight Turning on Those Who Run Billions in Funds, by Kurt Eichenwald,

September 7, 1991, New York Times, Officials Trying to Find Out If Salomon Chief Misled U.S., by Stephen Labaton,
September 8, 1991, New York Times, Business Diary: Punishment at Salomon,
September 8, 1991, New York Times, Time to Open The Treasury's Auction Club? by Diana B. Henriques,
September 8, 1991, New York Times, Letter, by Tom Ballantyne,
September 9, 1991, New York Times, US Broadens Inquiry on Salomon Scandal,
September 10, 1991, New York Times, Officer Reportedly Knew of Salomon Plan, by Kurt Eichenwald,
September 11, 1991, New York Times, Business Digest,
September 11, 1991, New York Times, Salomon Trader in Scandal: 10 Million Pay in 3 Years, by Kurt Eichenwald,
September 11, 1991, New York Times, On Wall St., New Stress on Morality, by Richard D. Hylton,
September 11, 1991, New York Times, Salomon Executive Has an Agenda for Cleaning Up the Desk, by Kenneth Gilpin,
September 11, 1991, New York Times, Educating Young Mr. Rosenfeld, by Kenneth Gilpin,September 12, 1991, New York Times, Treasury Puts Curbs On Market, by Stephen Labaton,
September 14, 1991, New York Times, Fund Denies Salomon Tie In Scandal, by Kurt Eichenwald,
September 15, 1991, New York Times, Business Diary/September 8-13,
September 15, 1991, New York Times, Wall Street/Diana B. Henriques; Treasury's Troubled Auctions, by Diana B. Henriques,
September 15, 1991, New York Times, In Financial Scandals, Is Blind Greed Meeting Sightless Watchdogs?, by David E. Rosenbaum,
September 16, 1991, New York Times, Warburg Describes Its Salomon Role, by Kurt Eichenwald,
September 17, 1991, New York Times, Business Digest,
September 17, 1991, New York Times, Ex-Salomon Trader Said to Seek Legal Deal, by Kurt Eichenwald,
September 19, 1991, New York Times, Salomon Sells Holdings To Finance Operations, by Kurt Eichenwald,
September 20, 1991, New York Times, Salomon Finds New Violations, by Kurt Eichenwald,
September 20, 1991, New York Times, Violations by Salomon,
September 21, 1991, New York Times, Salomon Chairman Pursuing a Tell-All Strategy, by Jonathan Fuerbringer,
September 21, 1991, New York Times, Salomon Expects to Continue Finding Bidding Violations, by Kurt Eichenwald,
September 21, 1991, New York Times, Salomon Is Losing Big Client, by Kurt Eichenwald,
September 22, 1991, New York Times, Ideas & Trends; The Outrage Index Rises; Wall St. Feels the Heat,
September 22, 1991, New York Times, Market Watch; The 'Narcotic' of Crime on Wall Street, by Floyd Norris,
September 22, 1991, New York Times, Making a Difference; Riding Out Solly's Storm, by Kurt Eichenwald,
September 22, 1991, New York Times, No Headline,
September 24, 1991, New York Times, Salomon Plans Reserve For Fines and Lawsuits, by Kurt Eichenwald,
September 25, 1991, New York Times, Greenspan Sees Gains At Salomon, by Kurt Eichenwald,
September 25, 1991, New York Times, Many Avoid Dealers in Note Sale, by Kenneth N. Gilpin,
September 27, 1991, New York Times, Salomon Forms Committee To Watch Rules Compliance, by Kurt Eichenwald,
September 27, 1991, New York Times, U.S. Inquiry Into Salomon Is Expanded, by Martin Tolchin,
September 28, 1991, New York Times / Bloomberg Business News, Fees Decline at Salomon,
September 29, 1991, New York Times, Forcing Salomon Into Buffett's Conservative Mold, by Floyd Norris,
October 1, 1991, New York Times, Another Strong Quarter for Wall St. Fees, by Kurt Eichenwald,
October 1, 1991, New York Times, World Bank Salomon Move, by Stephen Labaton,
October 1, 1991, New York Times, New Team of Lawyers For Salomon Defense, by Stephen Labaton,
October 3, 1991, New York Times, Additional Salomon Violation, by Kurt Eichenwald,
October 4, 1991, New York Times, Credit Markets; Salomon Will Sell Berkshire Notes, by Leslie Wayne,
October 5, 1991, New York Times, Salomon Agrees to Pay Freddie Mac Fine, by Leslie Wayne,
October 6, 1991, New York Times, Speculation and Salomon, by Alison Leigh Cowan,
October 6, 1991, New York Times, Letter, Speculation and Salomon, by William Spier,
October 21, 1991, New York Times, Bank Sues Salomon and Travelers, by Alison Leigh Cowan,
October 22, 1991, New York Times, No New Salomon Fraud, by Alison Leigh Cowan,
October 23, 1991, New York Times / Associated Press, Credit Offer To Salomon,
October 25, 1991, New York Times, Salomon Estimates Illegal Gain, by Jonathan Fuerbringer,
October 26, 1991, New York Times, Treasury Auctions Opened Up, by Stephen Labaton,
October 27, 1991, New York Times, Correction, by Stephen Labaton,
October 27, 1991, New York Times, Letter, The Arrogance of Philipp Brothers, by John F. Lee,
October 31, 1991, New York Times, Rite Aid Seeks to Buy Revco As Salomon Settles Lawsuit, by Kurt Eichenwald,
November 6, 1991, New York Times, Credit Markets; 3-Year Note Auction Goes Badly, by Kenneth N. Gilpin,
November 7, 1991, New York Times, Big Shifts at Salomon Bros.; Directors Will Be Replaced, by Kurt Eichenwald,
November 9, 1991, New York Times, Note Sale Activities Questioned, by Kenneth N. Gilpin,
November 10, 1991, New York Times, Market Watch; The Treasury Opens Up Its Auctions, by Allen R. Myerson,
December 3, 1991, New York Times, World Bank to Let Salomon Handle Its Business Again, by Kurt Eichenwald,
December 4, 1991, New York Times, Low-Price Settlement in Big Salomon Scandal,
December 5, 1991, New York Times, Company News; Dividend At Salomon,
December 7, 1991, New York Times, Appointments at Salomon,
December 20, 1991, New York Times, Another Top Manager Is Leaving Salomon, by Kurt Eichenwald,
December 20, 1991, New York Times, California Lifts Salomon Ban, by Kurt Eichenwald,
December 23, 1991, New York Times, A Salomon Client Is Back, by Kurt Eichenwald,
December 26, 1991, New York Times, 2d Lawyer for Mozer,
December 31, 1991, New York Times, The Year in Finance: Newsmakers in 1991; Money Movers Caught in the Turbulent Times of the 90's; John H. Gutfreund: A Sudden Fall From Grace, by Kurt Eichenwald,

January 17, 1992, New York Times, California Ends Salomon Ban, by Stephen Labaton,
January 17, 1992, New York Times, S.E.C. Sets $5 Million In Penalties, by Stephen Labaton,
January 17, 1992, New York Times, A Departure At Salomon,
January 23, 1992, New York Times, Plan by U.S. Reignites the Debate That Started With the Salomon Scandal,
January 23, 1992, New York Times, U.S. Discloses Tougher Rules To Revamp Treasury Market, by Jonathan Fuerbringer,
February 7, 1992, New York Times, Quarter's Loss Caps Salomon's Rocky Year, by Seth Faison Jr.,
February 15, 1992, New York Times, At Salomon, New Focus, New Attitude, by Seth Faison Jr.,
March 6, 1992, New York Times, AM to Explore Company's Sale, by Seth Faison Jr.,
March 21, 1992, New York Times, The Fed Is Investigating Dealings in U.S. Note, by Kenneth N. Gilpin,
March 27, 1992, New York Times, Market Place; Salomon's Error Went Right to Floor, by Floyd Norris,
March 28, 1992, New York Times, Warren Buffett's Bad Week at Salomon, by Lawrence Malkin,
March 29, 1992, New York Times, Buffett Plans a Salomon Exit,
April 14, 1992, New York Times, Salomon to Sell 42% Stake In Parent of Grand Union, by Adam Bryant,
May 7, 1992, New York Times, A Less Aggressive Salomon Sees Its Profits Decline 30%, by Seth Faison Jr,
May 21, 1992, New York Times, Salomon to Pay Phony-Bid Fine Of $290 Million,
May 28, 1992, New York Times, New Leader at the New Salomon, by Seth Faison Jr,
June 1, 1992, New York Times, Wall Street Opposing Bond Rules, by Stephen Labaton,
June 4, 1992, New York Times, Company News; A Surprise In Chairman At Salomon, by Seth Faison,
June 8, 1992, New York Times, Letter, Wall St. Housecleaning, by John Gutfreund,
June 12, 1992, New York Times, Salomon Names Co-Head of Equities Unit, by Kurt Eichenwald,
July 8, 1992, New York Times, New Details About Salomon, by Kurt Eichenwald,
July 31, 1992, New York Times, Credit Markets; Open Treasury Auctions: Years Away, by Jonathan Fuerbringer,
August 7, 1992, New York Times, A Year Later, Bond Traders Are a Humbler Lot, by Jonathan Fuerbringer,
September 4, 1992, New York Times, Credit Markets; New Process For Auctions To Be Tested, by Jonathan Fuerbringer,
September 8, 1992, New York Times, Salomon Still Struggling To Diversify Its Business, by Kurt Eichenwald,
September 15, 1992, New York Times, Case Is Settled by Salomon,
September 23, 1992, New York Times, Credit Markets; New Treasury Bidding Rule Costly for U.S.,
September 25, 1992, New York Times, Fed Looks Into 'Squeeze' In Treasuries, by Jonathan Fuerbringer,
September 29, 1992, New York Times, Salomon's Deal With U.S. Is Questioned,
September 30, 1992, New York Times, Tax Issues For Salomon,
December 3, 1992, New York Times, Two Sued by S.E.C. in Bidding Scandal at Salomon Bros.
December 4, 1992, New York Times, Low-Price Settlement in Big Salomon Scandal, by Kurt Eichenwald,
December 4, 1992, New York Times, Corrections
December 4, 1992, New York Times, Front Page Caption: A Wall Street Ban,
December 19, 1992, New York Times, Business Digest,
December 19, 1992, New York Times, Company News; Plea Bargain Cited in Salomon Case,
January 5, 1993, New York Times, Salomon Settles 2 Pay Claims, by Kurt Eichenwald,
January 6, 1993, New York Times, Salomon Reinstates Trader, by Kurt Eichenwald,
January 7, 1993, New York Times, Economist Post Filled By Salomon Brothers, by Jonathan Fuerbringer,
January 8, 1993, New York Times, Guilty Plea In Salomon Case Set, by Kenneth N. Gilpin,
January 12, 1993, New York Times, Plea Deal For Trader Unravels, by Kenneth N. Gilpin,
January 13, 1993, New York Times, U.S. Indicts Salomon Ex-Trader, by Kenneth N. Gilpin,
January 16, 1993, New York Times, 2 Key Executives Resign From Salomon Brothers, by Jonathan Fuerbringer,
January 20, 1993, New York Times, Corrections,
February 2, 1993, New York Times, Judge Weighs Salomon Plea,
February 9, 1993, New York Times, Newly Formed Salomon Unit Receives Top Credit Rating, by Saul Hansell,
February 13, 1993, New York Times, New Judge For Trader, by Saul Hansell,
March 9, 1993, New York Times, Ford Motor Unit Prices Notes, by Saul Hansell,
March 21, 1993, New York Times, A Bond That Only a Gambler Would Consider, by Floyd Norris,
March 21, 1993, New York Times, Profile/John F. H. Purcell; Salomon's Guru On the Third World, by Jeanne B. Pinder,
March 25, 1993, New York Times, Company News; 2 Top Bond Traders May Return to Field, by Saul Hansell,
April 5, 1993, New York Times, U.S. Brokers Go Long Traders, by Kevin Murphy,
April 29, 1993, New York Times, Bond System Delay Asked, by Saul Hansell,
June 11, 1993, New York Times, Salomon to Pay $54.5 Million,
June 21, 1993, New York Times, Citicorp Block Trade, by Saul Hansell,
July 13, 1993, New York Times, A Top S.E.C. Regulator Takes Post at Salomon,
July 23, 1993, New York Times, As Firms Shift Strategies, the Old Order Moves On; Top Trader to Quit; Salomon Net Soars, by Kurt Eichenwald,
July 29, 1993, New York Times, Former Salomon Trader Wins Legal Round,
September 4, 1993, New York Times, Donaldson Agrees to Fine,
November 24, 1993, New York Times, Treasury Market Bill Is Passed, by Jonathan Fuerbringer,
December 11, 1993, New York Times, Trader Cites Cooperation, by Jonathan Fuerbringer,
December 15, 1993, New York Times, Ex-Salomon Trader Gets 4 Months, by Susan Antilla,
December 31, 1993, New York Times, Trader Settles S.E.C. Suit, by Susan Antilla,
March 24, 1994, New York Times, Lomas Financial Hires Salomon to Explore Sale, by Susan Antilla,
March 31, 1994, New York Times, A Settlement by Salomon,
April 7, 1994, New York Times, T.W.A. Hires Salomon to Consider Ways of Raising Cash, by Susan Antilla,
May 1, 1994, New York Times, Wall Street; Throwing the Book at the Boss,
May 13, 1994, New York Times, Sentence in Bond Scheme, by Susan Antilla,
June 18, 1994, New York Times, Plan Cleared On Salomon,
July 15, 1994, New York Times, Former Salomon Trader To Pay $1.1 Million Fine, by Keith Bradsher,
July 27, 1994, New York Times, Settlement By Salomon by Keith Bradsher,
August 19, 1994, New York Times, Ex-Salomon Chief's Costly Battle,
August 21, 1994, New York Times, A Sad Tale Of Penalties For Failure, by Floyd Norris,
September 1, 1994, New York Times, Reports Imply Somewhat Faster Inflation, by Robert D. Hershey Jr,
September 18, 1994, New York Times, Wall Street; Salomon's Hong Kong Hangover, by Susan Antilla,
December 9, 1994, New York Times, A Default By Orange County, by Sallie Hofmeister,
December 15, 1994, New York Times, Salomon Will Start Selling Orange County Debt Today, by Saul Hansell,
December 16, 1994, New York Times, S.E.C. Begins to Investigate Orange County Board's Role, by Sallie Hofmeister,
December 29, 1994, New York Times, Orange County Seeks Advice on Bond Sales, by Sallie Hofmeister,
January 4, 1995, New York Times, Orange County Sales Set,
January 17, 1995, New York Times, Merrill Lynch Is Facing Challenge to Credibility, by Laurence Zuckerman,
February 14, 1995, New York Times, After Bad Year, Two Firms Will Cut Investment Staffs, by Kenneth N. Gilpin,
February 28, 1995, New York Times, The Collapse of Barings; Men Who Shook the Foundations, by Kurt Eichenwald,
March 10, 1995, New York Times, Firms Agree to U.S. Review Of Derivatives Operations, by Saul Hansell,
March 11, 1995, New York Times, U.S. Agency Criticizes 2 Big Wall Street Firms, by Peter Truell,
March 25, 1995, New York Times, Securities Firms Seeking to Turn Derivatives Debacle Into Profits, by Peter Truell,
March 29, 1995, New York Times, Market Place; The S.E.C. says a broker helped friends and relatives be insiders., by Susan Antilla,
April 15, 1995, New York Times, Canada's Borrowing, With Its Fat Fees, Lures Wall Street, by Clyde H. Farnsworth,
April 19, 1995, New York Times, The Media Business; Ex-Head of Salomon Brothers Files Libel Suit Against Time Inc, by Peter Truell,
June 6, 1995, New York Times, S.E.C. Said to Prepare Inside-Trading Case, by Stephanie Strom,
June 16, 1995, New York Times, S.E.C. Accuses an Analyst and His Father of Insider Trading on Merger Plan, by Stephanie Strom,
July 12, 1995, New York Times, Salomon Says It Will Report Another Loss, by Peter Truell,
July 29, 1995, New York Times, French Investigation Aims at Salomon and Swiss Bank, by Peter Truell,
August 1, 1995, New York Times, Assembling a Blockbuster Pact At Minimum Professional Wage, by Stephanie Strom,
August 17, 1995, New York Times, A Double Blow to Salomon: Offering Ended, Rating Cut, by Stephanie Strom,
December 1, 1995, New York Times, Retailers Had Weak Sales In November, by Jennifer Steinhauer,
December 5, 1995, New York Times, Market Place;Last Big Wall St. Bear Defects to Optimists, by Floyd Norris,
January 24, 1996, New York Times, Salomon Earnings Declined From 3d Quarter, by Stephanie Strom,
February 4, 1996, New York Times, The Siskel and Ebert of Telecom Investing, by Mark Landler,
March 27, 1996, New York Times / Bloomberg Business News, Merger Expert Quits Salomon
February 14, 1997, New York Times, Even Bullish Analysts Are Looking Sheepish, by Jonathan Fuerbringer,
April 8, 1997, New York Times, Salomon Trader Was Paid $31.45 Million,
May 14, 1997, New York Times, Baron Firm and 13 Charged With Cheating Thousands, by Peter Truell
September 24, 1997, New York Times, Salomon Soars On Speculation Of a Takeover By Travelers, by Peter Truell,
September 25, 1997, New York Times, A Wall Street Behemoth: The Strategist; A Deal Maker's Dream Deal, by Leslie Eaton,
September 25, 1997, New York Times, Travelers to Buy Salomon, Making a Wall St. Giant, by Peter Truell,
October 3, 1997, New York Times, For Salomon, as Adviser, Millions Plus Revenge, by Mark Landler,
November 26, 1997, New York Times, Market Place; Lessons of Boesky and Milken Go Unheeded in Fraud Case,
January 17, 1998, New York Times, Key Figure in Salomon Rescue Is Leaving for Big Hedge Fund, by Peter Truell,
January 29, 1998, New York Times, Is There Life After Wall Street?; Tales of the Players Who Quit the Game, by Leslie Eaton,
February 18, 1998, New York Times, Riding Shotgun for Wall Street,
April 9, 1998, New York Times, Enforcement Chief Named At the S.E.C., by Melody Petersen,
May 3, 1998, New York Times, The New Salomon: A Smaller Fish in a Bigger Pond, by Peter Truell,
May 3, 1998, New York Times, A Fallen King In Search of a Lesser Throne, by Peter Truell,
May 7, 1998, New York Times, Leadership Plan for Citigroup Tilts in Favor of Travelers,
June 19, 1998, New York Times, A Media Specialist Is Leaving Salomon,
June 24, 1998, New York Times, Salomon Buys Morgan's Australian Investment Unit,
August 7, 1998, New York Times, Salomon Smith Barney Executive Joins Goldman, by Laura M. Holson,
September 25, 1998, New York Times, Fallen Star: The Managers -- An Alchemist Who Turned Gold Into Lead; Financial Wizard Done In By His Smoke and Mirrors, by Peter Truell,
October 2, 1998, New York Times, Billion-Dollar Better: A special report -- The Man Behind the Curtain; Hedge Fund Wizard or Wall St. Gambler Run Amok?, by Gretchen Morgenson,
October 2, 1998, New York Times, Fallen Star: The Partners; After Salomon, Friends Built And Lost 'Dynastic Wealth', by Peter Truell,
October 11, 1998, New York Times, Long-Term Capital: A Case Of Markets Over Minds, by Douglas Frantz and Peter Truell,
January 24, 1999, New York Times, How the Eggheads Cracked,
January 4, 2000, New York Times, Lehman Hires Former Salomon Analyst,
August 12, 2001, New York Times, Investing With: Matthew P. Ziehl; Salomon Brothers Small Cap Growth Fund, by Douglas Frantz and Peter Truell,
January 27, 2002, New York Times, Update / Lewis Ranieri; A Mortgage Man Charts New Seas, by Riva D. Atlas,
February 7, 2002, New York Times, Quarter's Loss Caps Salomon's Rocky Year,
March 18, 2002, New York Times, Market Place; Some Lessons For Andersen From Scandal At Salomon,
May 17, 2002, New York Times, Bond Broker Inquiry, July 13, 2002, New York Times, Citigroup Trims Bond Unit,
October 14, 2002, New York Times, Rumsfeld Favors Forceful Actions to Foil an Attack, by Thom Shanker,
November 10, 2002, New York Times, Falling From Grace, Often to the A-List, (Harvey L. Pitt as chairman of the Securities and Exchange Commission)
March 9, 2003, New York Times, Investing With: Peter J. Wilby; Salomon Brothers High Yield Bond Fund, by Carol Gould,
April 13, 2004, New York Times, The Uncertainty Factor, by David Brooks,
October 3, 2004, New York Times, Openers: Refresh Button; New Universe, Same Master, by Robert Johnson,
August 7, 2005, New York Times, Gretchen Morgenson; Was Someone Squeezing Treasuries?, by Gretchen Morgenson,
October 31, 2006, New York Times, A $700 Million Hedge Fund, Down From $3 Billion, Says It Will Close, by Landon Thomas Jr,
September 24, 2008, New York Times, Warren Buffett and the Salomon Saga,
October 23, 2008, New York Times, Op-Ed, From Beirut to 9/11, by Robert C. McFarlane,
February 24, 2009, New York Times, Fed Chairman Says Recession Will Extend Through the Year, by Catherine Rampell and Jack Healy,
August 11, 2009, New York Times, More Firms Pan F.D.I.C.'s Bank Takeover Rules,




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December 21, 1987, New York Times, Secrecy On Bonds Criticized, bu Michael Quint,

The veil of secrecy surrounding trading in the Treasury and agency securities market ought to be lifted, at least partly, according to a report to be published today by the General Accounting Office.

Although the Treasury securities market is the most active in the world, with more than $100 billion in trades a day, there is no central exchange where prices and trades are listed as in the stock market. Instead, trading is handled through brokers acting as middlemen between major banks and securities firms.

Individual investors, pension funds and insurance companies that are customers of the banks and securities dealers have only partial knowledge about the wholesale prices of Government securities.

Data Availability

The G.A.O. report, based on more than two years of research and public hearings held early this year, concluded that the information about trades arranged through the brokers should be more widely available. The report noted that some brokers have already applied to the Justice Department for approval of a plan that would make more price information available, and it said more time should be allowed for voluntary change before Federal regulation is imposed.

Executives at Fundamental Brokers Institutional Associates, the largest broker in Treasury securities, have said in the past that they were considering ways of making available, for a price, information about Treasury issues.

Proposals that brokers be required to provide trading access to more than the 50 or so existing customers were rejected by the G.A.O. because the risks of default would be increased if more firms could trade through the brokers. The report said ''the possiblity that these proposals could damage the market outweighs the potential benefits they might otherwise achieve.'' Relying on the Fed

Because trades through brokers are arranged without buyers or sellers revealing their identity to each other, a system evolved in the Government securities market in which brokers and their customers relied on the New York Federal Reserve Bank's oversight for assurance that their trading partners were financially capable of completing the trades.

But the comfort provided by the New York Fed as a watchdog had diminished in recent years as access to the brokers' services expanded beyond the 40 primary dealers who report financial information to the Fed.

The brokers also serve about 10 other firms, many of them foreign, which aspire to primary dealer status but are not so closely monitored by the New York Fed as primary dealers.

In recent months, access has been further broadened to include a few active traders in the mortgage securities market, like the Federal Home Loan Mortgage Corporation.

While the Treasury and Federal Reserve endorsed the G.A.O. report, the Securities and Exchange Commission said the conclusions were too cautious.

Richard G. Ketchum, director of the division of market regulation at the S.E.C. said a specific deadline should be established for broadening access to price information. He noted that established customers of the brokers already have full access to price and trading information and may not find it in their best interests to make that information available to their trading competitors and customers. In the stock market, Mr. Ketchum recalled, the S.E.C. had to invoke its authority to force securities dealers to publish the price quotes and trade information on over-the-counter stocks.

Expanded Access

As for broadening trading access to the wholesale Treasury market, Mr. Ketchum acknowledged that there was no financial regulator in a position to monitor closely the financial condition of the non-primary dealers who might want to use the brokers services. But he said ''the feasibility of expanded access may increase as the government securities markets evolve.'' If brokers do not move to broaden trading access within two years, the S.E.C. said the issue ought to be taken up by regulators or Congress.

The only brokers that broadly publish price information and handle trades for more than the 50 primary dealers and aspiring primary dealers are the Cantor Fitzgerald Securities Corporation and the Newcomb Securities Company. Cantor is by far the larger of the two but is still small compared with the three largest brokers: Fundamental, Garban Ltd., and the RMJ Securities Corporation. Cantor provides price information through Telerate Inc. Newcomb provides its information through Reuters.

Although both Cantor and Newcomb say they arrange trades for 150 to 200 customers, including primary dealers, neither firm often handles the very largest trades. Both firms display fairly accurate prices for a few dozen actively traded Treasury issues, but they do not have enough business to show quotes for the more than 200 other Treasury issues that trade less frequently.
The Justice Department has also been investigating for more than four years whether the existing arrangement between brokers and securities dealers is an unfair practice that violates antitrust laws. It has not yet published its findings.
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February 9, 1988, New York Times, Salomon Loses $74 Million in Quarter, by James Sterngold.

Salomon Inc., the parent of one of Wall Street's largest securities firms, announced late yesterday that it lost $74 million in the fourth quarter because of trading losses stemming from the stock market collapse and a series of moves to restructure its troubled operations.

Salomon's loss would have been substantially higher if not for a $60 million gain, before taxes, on the sale of its mortgage banking business and a $78 million tax benefit. One bright spot was Salomon's Philipp Brothers commodity trading subsidiary, which earned a surprisingly strong $57 million before taxes.

Salomon also announced that its board had adopted a "poison pill" plan that would make the company, which faced a potential takeover threat last year, more difficult to acquire by a hostile bidder.

Last year Salomon Brothers, the company's brokerage subsidiary, took a number of major steps to rein in bloated costs and regain control over its businesses, including closing down two major operations, laying off 800 staff members and dropping its commitment to build an expensive new headquarters. The firm is considering further important management shifts, which may be announced as early as today, according to a number of professionals close to Salomon.

According to the sources, the key move will involve the promotion of Jay F. Higgins, head of the corporate finance department, to Salomon Brothers' office of the chairman. He will join John H. Gutfreund, Salomon's chairman; Thomas W. Strauss, president, and William J. Voute, vice chairman.

Mr. Gutfreund would not comment on the management changes last night, and a spokeswoman, Caroline Davenport, would only say that a final decision had not been made.

The office of the chairman was created by Mr. Gutfreund in late 1986 to distribute the burden of running the complex global company. Lewis S. Ranieri, who had been head of mortgage securities and a member of the office of the chairman, was dismissed last summer.

Important Symbolism

Mr. Higgins's promotion would carry important symbolism within Salomon Brothers by placing a corporate finance expert at the highest levels of the firm. Currently, the other members of the office of the chairman come from the firm's strong trading divisions.

Salomon's loss during last year's turbulent fourth quarter was in contrast to an $81 million profit in the 1986 period. For the year, one of the rockiest ever on Wall Street, Salomon earned $142 million, a steep 72.5 percent decline from $516 million in 1986.

Analysts described Salomon's results as close to what they had expected.

The Salomon Brothers unit had a $90 million loss before taxes for the quarter, in contrast to $126 million gain in the 1986 fourth quarter. For the year, Salomon Brothers' pretax earnings fell to $261 million from $787 million.

The Phibro Energy unit reported pretax earnings of $4 million in the fourth quarter, down from $15 million the year earlier. Philipp Brothers' $57 million in pretax earnings for the quarter marked a sharp increase over a break-even quarter in 1986.

Salomon executives said that, while Philipp Brothers was performing better after a major shake-up two years ago, its quarter was regarded as extraordinarily strong.

For the quarter, Salomon Inc.'s earnings included, before taxes, a $100 million write-off for the termination of its interest in the new headquarters project, $67 million for the restructuring of its businesses, and a $79 million loss from its role in underwriting shares in British Petroleum.

Salomon Inc.'s quarterly deficit was in contrast to per-share earnings of 53 cents in the 1986 period. For all of 1987, Salomon earned just 86 cents a share, down from $3.32 in 1986.

Salomon announced its earnings and the poison pill plan after the stock market closed yesterday. On the day, the company's stock closed at $21.125, off 37.5 cents.

Salomon enacted the complex anti-takeover plan "to protect stockholders against abusive takeover tactics which are currently prevalent," it said in a letter to shareholders.
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October 13, 1988, New York Times, Noriega Political Payments Reported by Indicted Banker, by Jeffrey Schmalz,

Federal officials, elaborating on the indictment of an international bank concern, said today that the bank walked into a trap without even being invited.

Bonni Tischler, a Customs agent, said the agency had been conducting a relatively simple operation: undercover agents, posing as experts on money-laundering, were given money by drug dealers. The agents deposited it into accounts at a number of banks and wired it to Panama. The money was then withdrawn by checks from the Panama account and delivered to Colombia.

"But then they got wind of it and came to us," Ms. Tischler said of executives of the Bank of Credit and Commerce International S.A., the Bank of Credit and Commerce International Ltd. and their holding company, BCCI Holdings, all of which were indicted. "They said, 'We have a better way to do it.'"

The comments by Ms. Tischler and other Federal officials, in interviews, came a day after the Government announced the indictment of BCCI and 85 people in seven United States cities after a two-year undercover operation in which, the officials said, BCCI laundered $14 million. The laundering process, the indictments said, reached from the United States to Europe to Colombia's Medellin drug cartel.

BCCI continued today to make only brief comments. Patrick Lynch, a spokesman for the concern, said the bank, which has assets of $20 billion and offices in more than 70 countries, ''certainly is not in any drug trafficking or dealings."

"We definitely deny the charges," he added, saying that the bank was reviewing the indictment. ''The board of directors and management have always emphasized dealing with sound and legitimate people."

Mr. Lynch said the bank today was "conducting business as usual."

Generating Paper

Among the elaborate plans created by BCCI after the bank approached undercover agents, Federal officials said, was one involving certificates of deposit and bogus loans. "Remember that the whole purpose of money-laundering," Ms. Tischler said, "is to generate so much paper as to never be able to tell where the money came from."

Under the scheme, Federal officials said, drug dealers in such cities as New York or Detroit or Philadelphia or Chicago would contact the undercover agents who were posing as experts on money-laundering and ask them to pick up the proceeds of drug deals - perhaps $1 million at a time. The agents would then pick up the cash and deposit it in a local bank.

Federal officials said one reason drug dealers use intermediaries to deposit the money is to avoid putting their own names on the slips reporting the transactions, which are required for cash deposits of $10,000 or more.

Special Drug Account

The agents would ask the local banks to transfer it by wire to an account at the BCCI branch in Tampa. BCCI, Federal agents said, would then wire the money to a New York bank and on to BCCI headquarters in Luxembourg.

From Luxembourg, officials said, the money go to the BCCI branch in London, where it would be placed in a certificate of deposit. The certificate would then be used as collateral to generate a loan from the Bahamas branch of BCCI to a bogus corporation.

The money would then be wired to the original account in Tampa, Federal agents said, from which it would be wired to the BCCI branch in Uruguay. From there, they said, it would be carried as cash into Colombia. More Than Loan Amount

Federal agents said the certificate was usually for a larger amount than the bogus loan. The difference, they said, is one way the bank profited.

Asked at what a crime was committed, Federal officials said that technically it was when the drug dealers first transferred the money to the undercover agents.

Federal prosecutors said a key part of obtaining a money-laundering conviction was to prove that the money was derived from an illegal activity and that the parties who handled it knew that. To that end, the prosecutors said, the case will rely in part on wiretapped conversations involving the bankers and others.
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January 18, 1989, New York Times, L.F. Rothschild Withdraws As a Key Treasury Dealer, by Kenneth N. Gilpin,

L.F. Rothschild & Company said yesterday that it had withdrawn as a primary dealer in United States Treasury securities. It cited difficult business conditions and questionable short-term prospects.

Rothschild, which was merged with a subsidiary of the Franklin Savings Corporation in June 1988, is the second primary dealer to withdraw from the business in less than a week. Market participants, who struggled through a tough year in 1988, said more defections were likely.

On Friday, County NatWest Government Securities, a subsidiary of National Westminster Bank P.L.C., left the business scarcely three months after the Federal Reserve Board had approved its status as a primary dealer.

No Comment on Profitability

NatWest said its subsidiary would require an infusion of $50 million to $150 million to comply with the Federal Reserve's minimum capital requirements. It would not comment on whether the unit had lost money in the fourth quarter.

Through a spokesman, Jeffrey H. Aronson, Rothschild also declined to comment on its profitability.

In a statement, the firm said its capital exceeded the $50 million level that the Fed designated as the minimum acceptable level for primary dealers in November.

Rothschild added, however, that "the return on capital devoted to government securities operations was insufficient to warrant continuation of the business."

About 50 to Lose Jobs

In addition to relinquishing its designation as a primary dealer, Rothschild said it would discontinue sales and trading activities in Treasury securities except for its own accounts. About 50 employees will be let go, the firm said.

Long considered a prestigious designation, primary dealerships are special rights granted by the Federal Reserve to deal directly with the Government when it issues debt securities. With Rothschild's departure, there are now 44 primary dealers.

The Federal Reserve has indicated that it can accommodate as many as 50 primary dealers, but the number seems more likely to contract than expand for now.

"There is speculation in the market that there are other firms" that may give up their primary dealership, said Edward J. Geng, a former Fed official who is president of Fundamental Brokers Inc., the largest interdealer broker in government securities.

"There has been an overall decline in profitability over the past year, and some firms may have difficulty complying with the Fed's new requirements on capital and volume,'' Mr. Geng added. In addition to increasing the minimum capital requirement to $50 million, the Fed last November raised volume requirements for primary dealers to 1 percent of overall volume from three-quarters of 1 percent.

Rate Movements Erratic

Daily volume is running at about $100 billion a day, down from a peak of more than $120 billion a day during the spring of 1987. Aside from the drop in volume, market participants have had difficulty anticipating the erratic movements in interest rates in the last year or so.

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December 13, 1989, New York Times, Credit Markets Note and Bond Prices Unchanged, by Kenneth N. Gilpin,

Prices of Treasury notes and bonds traded in a very narrow range again yesterday, with prices essentially unchanged on the day. Dealers, who are awaiting fresh economic data, largely ignored developments in foreign exchange markets, where the dollar was battered.

"We are stuck in a very, very tight trading range, and in those circumstances you just can't trade this market,'' said Joel Kazis, manager of government bond trading at Smith Barney, Harris Upham & Company. ''But in spite of that there is some retail interest in the market. A fair number of people are positioning themselves for the next move by the Federal Reserve.''

The recent lack of price volatility is almost certain to do further damage to profit margins at the 40-odd firms that are primary dealers in Government securities.

A snapshot of how the firms are doing this year was recently provided by the Federal Reserve Bank of New York.

At a meeting of the Public Securities Association, an industry group, officials from the New York Fed said that through the first eight months of 1989 profits on government trading activity at the 44 primary dealer firms were down by two-thirds from the approximately $300 million earned in 1988. And profits in 1988 were half those earned in 1987.
The New York Fed, which closely monitors trading activities at the primary dealers, only makes a very general report on profitability once a year.

Many participants said that the holiday season, when business traditionally slows, was partly responsible for the session's torpid pace.

"The fact that the dollar got pelted was not a significant enough reason for people to get involved,'' said Lawrence N. Leuzzi, a managing director at S.G. Warburg & Company.

"But we have a market environment where the dollar issue could come into play early next year, when a slew of new issues will be offered." Weakness in the Dollar

Mr. Leuzzi said that the dollar's weakness could also have an impact on next week's sale of two-year and four-year Treasury notes.

The Treasury will announce the size of those issues today. Most market participants are expecting the Treasury will sell $10 billion of two-year notes and $8 billion of four-year notes.

Richard Hoey, chief economist at Drexel Burnham Lambert, said yesterday that the dollar is likely to decline further in 1990, and that the slide would be sufficient to produce a "weak dollar recession" next year.

At a semiannual meeting with reporters, Mr. Hoey said that growth would turn negative in the second quarter, and likely stay that way for the balance of the year.

"We expect a three-quarter recession beginning in the spring or early summer," he said.

Despite weakness in a number of key sectors like housing, autos and computers, Mr. Hoey said that growth has not yet turned negative.

"Right now we are in the ante-chamber of recession in this country," he said.

Prices of Treasury issues barely budged in the secondary market.

By late in the day, the Treasury's 8 1/8 percent bonds of 2019 were offered at a price of 102 23/32, down 1/ 32, to yield 7.88 percent.

Among note issues, the 7 7/8 percent 10-year notes were offered at 100 3/8, unchanged on the day, to yield 7.82 percent. The price of the 7 3/4 percent five-year notes was also unchanged, at 100 1/32, to yield 7.73 percent.

Short-term Treasury bill rates inched a bit higher.

In late trading, three-month bills were offered at a discount rate of 7.64 percent, up 6 basis points, or hundredths of a point. Six-month bills were offered at 7.40 percent, up 1 basis point. And one-year bills were offered at 7.23 percent, up 1 basis point.

In the tax-exempt municipal bond market the New York State Medical Facilities Finance Agency offered $472 million worth of bonds through an underwriting syndicate led by Kidder, Peabody & Company.

The offering consists of four term issues. The largest issue, $332 million worth of bonds maturing in 2029, carry a 7.50 percent coupon and were priced on a preliminary basis at at ''par,'' or $100.

The issue is rated AA by the Standard & Poor's Corporation.

Activity in the secondary market for investment-grade corporate bonds was very light, dealers reported. Prices of most issues were unchanged on the day.

Municipal bond traders said that prices of most secondary issues dipped by about 1/4 of a point.

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June 21, 1990, New York Times, Finance / New Issues; Government Securities Unit Closed by Westpac Banking,

In the latest sign of financial troubles in the Government securities business, Westpac Pollock Government Securities Inc., a primary dealer in Treasury securities since late 1986 and one of the 10 largest in terms of trading volume, ceased operations yesterday.

The firm, an American subsidiary of Australia's largest banking holding company, the Westpac Banking Corporation, has been losing money since the end of September, the close of its 1989 fiscal year. For the first six months of the 1990 fiscal year, the firm had an operating loss of $29 million, Elaine Svensson, a spokeswoman, said.

Anthony J. Walton, an executive vice president of Westpac Banking's Americas division, said that a sharp increase in the number of primary dealers since the firm entered the business four years ago had squeezed profit margins considerably.

"Compared to four years ago, when there were fewer participants, it has been increasingly difficult to make money in a reasonably conservative fashion," he said.

At the time of Westpac's entry into the business, there were roughly 30 primary dealers, Mr. Walton said. With Westpac's defection yesterday, the total now stands at 43.
Primary dealers are designated by the Federal Reserve Bank of New York to make markets in Government securities. The Federal Reserve conducts its open market operations only through primary dealers.

Mr. Walton acknowledged that over the last few months Westpac had held discussions about a possible sale with a number of foreign and domestic firms.

"Because of the people involved, a sale was our strongest preference, he said. "But we got no offers."

Westpac Pollack has 160 employees. Mr. Walton said efforts were being made to relocate the workers elsewhere in the bank or to place them with other organizations.

Mr. Walton emphasized that all of Westpac's remaining operations in the United States are profitable and remain intact.
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November 9, 1990, New York Times, Credit Markets; Treasury Bond Auction Ends Well, by Kenneth N. Gilpin,

The last, most speculative leg of the Treasury's quarterly refunding auctions went smoothly yesterday, as credit market participants bought $10.75 billion in 30-year bonds.

Worries about the auction and continued jitters about the Middle East helped to push down prices before the sale, and the decline was sufficient to spur demand for the securities.

The new bonds, a reopening of the 8 3/4 percent issue originally sold at the last refunding auction in August, were sold at an average yield of 8.71 percent, down from the average yield of 8.87 percent at the August refunding. That is the lowest yield on a new 30-year bond since the Feb. 8 auction, when the 30-year securities were sold at an average rate of 8.50 percent.

Light Foreign Demand

Foreign demand for the new bonds was light, and traders said primary dealers bought most of the issue.

"The Street owns this issue," a government bond trader said. "But at least it was able to beat the market down before it bought the bonds."

As recently as two days ago, the 30-year securities sold yesterday were offered on a when-issued basis at a price to yield 8.64 percent.

Kristen Foster, a financial market economist at Citicorp Investment Bank, said, "Given the light foreign demand and the continued uncertainties about the Middle East, there seemed to be a reasonable amount of demand for the bonds."

Analysts at MMS International, an economic information service company, said in their daily market commentary that "after the strong showings for the 3-year and 10-year auctions, the last leg of the refunding was respectable."

The bond auction, which took place at 1 P.M., was preceded by the sale of $11.1 billion worth of 161-day cash management bills.

The bills were sold at an average discount rate of 7.08 percent. Recovery After Bush News

Concerns about the Middle East reached a crescendo late in the afternoon, as speculation heightened about what President Bush might say at a 4 P.M. news conference.

Mr. Bush confirmed that an additional 100,000 American troops were on their way to the Middle East and openly suggested for the first time the possibility that the forces could be involved in an offensive action.

Credit market participants had apparently feared that Mr. Bush would announce even more dramatic news. After his comments, prices recovered somewhat in the secondary market for Treasury securities.

By late in the day, the 8 3/4 percent 30-year bonds of 2020 were offered at a price of 100 15/32, down by 6/32, to yield 8.70 percent, compared to 8.68 percent late Wednesday.

Prices of Treasury note issues were largely unchanged.

By late in the day, the 8 1/2 percent five-year notes were offered at 101 13/32, unchanged, to yield 8.13 percent. And the 7 3/4 percent two-year notes were also unchanged, at 100 6/ 32, to yield 7.64 percent.

Short-term Treasury bill rates rose.

In late trading, three-month bills were offered at a discount rate of 7.08 percent, up by a basis point, or hundredth of a percentage point. Six-month bill rates rose by a similar amount, to a late offered rate of 7.04 percent.

Turning to Inflation

With the refunding auctions behind them, market participants will shift their attention today to an inflation reading that is likely to be favorable, analysts said.

Because of a large drop in oil prices during October, economists are projecting that the producer price index probably rose at a much less rapid clip than in August and September.

Most analysts are forecasting that the index rose by about six-tenths of a percentage point last month, compared with a 1.2 percentage point rise in September. And the so-called "core" inflation rate, the measure that excludes food and energy prices, may have risen by only two-tenths of a percentage point.

In other developments, a number of issues were offered in the investment-grade corporate bond market yesterday, including at $250 million four-year note issue by the General Electric Credit Corporation.

The 8.60 percent notes, which mature on Nov. 15, 1994, were priced at $100, or par, 62 basis points over the prevailing yield on the Treasury's 8.50 percent four-year notes at the time of pricing.

Merrill Lynch Capital Markets acted as lead manager for the underwriting. The securities, noncallable for life, are rated AAA by Moody's Investors Service Inc. and by the Standard & Poor's Corporation.

In addition, the Weyerhauser Company offered $200 million in 9 1/4 percent five-year notes.

The notes, which mature on Nov. 15, 1995, were priced at $100, or par, 1.10 percentage points over the prevailing yield on the Treasury's 8.50 percent five-year notes at the time of pricing.

Morgan Stanley & Company acted as the lead manager for the underwriting, which is rated A-1 by Moody's and A-plus by Standard & Poor's. The securities are noncallable for life.

In the municipal bond market, traders said the revised budget submitted by Mayor David N. Dinkins had no effect on the prices of New York City bonds.

Prices of most widely quoted tax-exempt municipal bonds dipped by about an eighth of a point, according to market participants.

Elsewhere, the Federal Reserve Board reported yesterday that the two broadest measures of the money supply fell during the week that ended on Oct. 29. M-1, the basic money supply, rose by $1.6 billion during the period.

Following are the results of yesterday's auction of the 30-year Treasury bonds, and the results of the sale of the 161-day cash management bills: (000 omitted in dollar figures) Average Price . . . 100.376 Average Yield . . . 8.71% Low Price . . . 100.270 High Yield . . . 8.72% High Price . . . 100.589 Low Yield . . . 8.69% Accepted at low price . . . 15% Total applied for . . . $22,080,303 Accepted . . . $10,754,473tr N.Y. applied for . . . $20,555,921 N.Y. accepted . . . $10,190,071 Noncompetitive . . . $482,000 Interest set at . . . 8 3/4%
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December 7, 1990, New York Times, Vice Chairman Named At Salomon Brothers,

Salomon Brothers Inc. yesterday announced the appointment of Deryck C. Maughan as its fifth vice chairman, effective Jan. 1. The 43-year-old British-born executive is chairman of Salomon Brothers Asia Ltd.

Mr. Maughan will also become the seventh member of the office of chairman, which is the investment banking firm's management group.

Mr. Maughan joined Salomon in 1983 and became a managing director in 1986. Shortly after joining Salomon, he went to the firm's Tokyo office where, a company spokesman said, he developed an expertise in Japanese economic and financial affairs.

That interest in Japan's economic development led him to become a founding member of the Tokyo International Financial Futures Exchange. He is also active in the America-Japan Society.

After his position in Japan, Mr. Maughan became Salomon's corporate and international fixed-income product manager in New York.

Before joining Salomon Brothers, Mr. Maughan worked in the London office of Goldman, Sachs & Company for four years. Before that, he served with the British Treasury as an adviser on global economic and financial affairs for 10 years after graduating from King's College at the University of London in 1969. He also earned a master's degree from the Graduate School of Business at Stanford University.

In addition to Mr. Maughan's appointment, Salomon announced it had added 14 new managing directors, also effective Jan. 1. The new appointments will raise the number of Salomon's managing directors to 164.

The new managing directors are: Joseph Anastasio, domestic support-operations; Christopher Baine, Tokyo sales management; Victor Haghani, domestic fixed-income arbitrage; Gregory Hawkins, domestic fixed-income arbitrage; Robert Huffman, domestic fixed-income sales; Toshiharu Kido, Tokyo fixed-income sales; Richard Lampen, domestic investment banking; William McDonald, domestic investment banking; David Shulman, domestic research/real estate; Rick Singer, domestic investment banking; Robert Smith, domestic investment banking; Richard Stuckey, domestic hedge management; Scott Wilson, domestic investment banking, and Gary Wolens, European equities.
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December 18, 1990, New York Times, Deutsche Bank A Primary Dealer,

At a time when many primary dealers in United States Treasury securities are getting out of the business, complaining as they leave that a crowded playing field has severely crimped profits, Deutsche Bank Government Securities Inc., a wholly owned subsidiary of the Deutsche Bank, has been accepted as a primary dealer by the Federal Reserve Bank of New York.

Primary dealers make markets in government securities. More importantly, the Fed conducts its open market operations exclusively through primary dealers.

Deutsche Bank, which began building its government bond trading operations in 1988, becomes a primary dealer fully aware of the industry's current difficulties.

"We have no high expectations of profitability in the near term," said Christian Strenger, a managing director of the Deutsche Bank Capital Corporation and chairman of the government securities unit. "But if you are not a primary dealer, you don't get an opportunity to trade with some of the more important accounts. Becoming a primary dealer is part of our overall commitment to the American capital markets."

Mr. Strenger said the shakeout among primary dealers -- five firms gave up their dealerships this year, while two, Deutsche Bank and SBC Government Securities Inc., a subsidiary of the Swiss Bank Corporation, have been added -- is not over yet.
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December 31, 1990, New York Times, CREDIT MARKETS; Primary Dealers' Profits Reportedly High in "90, by Kenneth N. Gilpin,

One bright spot in the gloom that has hung over Wall Street for much of this year was the financial performance of the 41 primary dealers of Government securities.

A number of people at these firms say that the trading profits of primary dealers for 1990 were the highest since 1986, a time when financial firms of all stripes seemed to be printing money.

The financial condition of the primary dealers is monitored on a daily basis by the Federal Reserve Bank of New York. But the New York Fed, which also has the responsibility of awarding primary dealership status to firms that seek the designation, allows the public a glimpse only once a year at how the dealers are doing . Even then, the information covers just the first eight months. The firms that are designated as primary dealers by the New York Fed make markets in Government securities. In addition, the Fed conducts its open market operations exclusively through those firms.

Released Each November

The figures are released each November at the annual meeting of the Public Securities Association, an industry group.

The New York Fed said at that time that the combined profit of the primary dealers was $600 million through August. A steady decline in interest rates since then has helped to raise profits further, because the direction of interest rates has been obvious, and market participants were saying late last week that profits for all of 1990 probably amounted to $800 million or more.

In contrast, the New York Fed said primary dealers posted a small loss in the comparable period of 1989, while in 1988 aggregate profits amounted to $300 million.

The New York Fed declined to comment further on 1990 earnings or on industry speculation about profits.

Plagued by Overcapacity

The rebound in the earnings of primary dealers has been hard-won. As with much of Wall Street, as the 1980's drew to a close primary dealers were plagued by overcapacity. Too many firms were chasing the limited amount of business, and profit margins became razor thin.

A shakeout, which began in 1989, continued this year. Five firms gave up their dealerships in 1990, while two, Deutsche Bank and SBC Government Securities Inc., a subsidiary of the Swiss Bank Corporation, were added to the list. Some people in the industry expect that the number of primary dealers will shrink, within the next year or so, from 41 to the mid-30's.

Almost certainly, not all of the firms that remain primary dealers made money in 1990. "I would bet that a large number were either in the red or broke even, at best," said Leonard J. Santow, a managing director at Griggs & Santow Inc., a financial consulting firm that has a number of primary dealers as clients. "Maybe a dozen firms accounted for all of the profits; 1990 was a respectable year, but the last three years were miserable."

Richard M. Kelly, president of Aubrey G. Lanston & Company, a primary dealer, said that "assuming that most dealers were profitable in the last four months, we can say that 1990 was a better year than any of the past four." He continued, "This business has been in a recession since 1986, but in my judgment there is light at the end of this tunnel."

Aided by Correct Bets

Mr. Kelly added that the contraction in the business in the last few years had slightly widened profit margins on trades. In addition, dealers were helped by their correct bets in August and September, when the markets were roiled by rising oil prices and fear of war in the Middle East. Finally, he said, with fewer players in the business the prospects for making money at a Treasury auction had increased.

"In past years, competition among dealers was so intense that bidding in the auction process was a losing proposition, even though it was something you had to do," he said. "In 1990, as the competition became somewhat less intense, dealers had greater success in underwriting Treasury securities."

A trader in Government bonds at a primary dealer firm, who insisted that he not be identified, said, "This year it seemed like 9 out of 10 times you made money when you bought securities at the auctions."

Focus on Other Matters

Aside from celebrating the holidays, shoring up the bottom line has been the main focus for dealers in the last two weeks. But now, with the books on 1990 all but shut, the focus will shift to other matters.

The first reports on how the economy fared in December will be the object of much attention this week. Analysts said the data, especially a report expected Friday on employment conditions in December, will probably be very weak, rekindling thoughts among market participants that the Fed will again lower the Federal funds rate from its current target level of 7 percent.

"Barring a seasonal fluke, the December employment report should be substantially a replay of the prior month's debacle," Robert DiClemente, an economist at Salomon Brothers, wrote in the firm's weekly "Comments on Credit."

Further Easing in Rates Seen

"The broad-based slowing in business spending and consumer outlays, together with the deterioration in direct measures of the labor market, points to further easing in the funds rate to at least 6.75 percent soon after Friday's report," he said.

Salomon analysts are forecasting that nonfarm employment probably fell by an additional 200,000 jobs in December, after a drop of 267,000 reported in November. A contraction of that size would raise the unemployment rate, which last month stood at 5.9 percent, to 6.1 percent.

"We think that by Friday the market will take a different attitude with respect to the Fed," Mr. Santow said. "After the employment data we think the market will be absolutely convinced the Fed will ease by the second week in January."

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January 11, 1991, New York Times, Salomon Brothers May Move 700 Jobs Out of New York City, by Kurt Eichenwald,

Joining the corporate concern about the cost of doing business in New York City, Salomon Brothers Inc., the large Wall Street investment house, is considering moving hundreds of jobs out of the city, executives with the firm and city officials said yesterday.

The executives said the firm was negotiating to move 700 jobs in its operations division to sites in Tampa, Fla., and Columbus, Ohio. Although keeping the jobs in New York has not been ruled out, they said Salomon was leaning toward a move to Tampa. A final decision is not expected for 60 days.

No employees would be moved until after the end of the year, the executives said. Salomon is said to be planning to keep 3,000 employees in New York.

The disclosure of the negotiations came a day after W. R. Grace & Company, whose ties to New York go back a century, announced it would move most of its staff from Manhattan to Boca Raton, Fla. The move was made for economic reasons.

"We obviously can't be happy that they are considering moving personnel out of the city," said Jeanne Nathan, a spokeswoman for Sally B. Hernandez-Pinero, the Deputy Mayor for Finance and Economic Development. "But we are glad that they are keeping their headquarters in the World Trade Center and that they will continue to have a very major stake in New York City."

While the Salomon negotiations involve only workers in the operations division, known in Wall Street parlance as the back office, such a move could have a large impact on employment in the city. The back office is a labor-intensive part of any Wall Street firm. Through the back offices, millions of securities trades are cleared each day, meaning that securities are moved to the account that purchased them and cash is moved to the seller.

In recent years, city officials have been working to provide spaces for back offices to move to, but some firms have moved their operations from Manhattan. Some have moved out of Manhattan to less expensive boroughs, while others have left New York State.
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January 25, 1991, New York Times, Salomon Picks Chief for Asia,
Salomon Brothers Inc. announced yesterday that it had appointed William S. Thompson Jr. chairman of Salomon Brothers Asia Ltd.

Mr. Thompson will replace Deryck Maughan, who is returning to New York to become co-head of Salomon's investment banking division.

Mr. Thompson is a managing director of Salomon Brothers. He joined the firm in 1975 and has been in charge of its San Francisco office and corporate finance activities in Northern California and the Pacific Northwest.

Mr. Thompson, a native of St. Louis, is a graduate of the University of Missouri and received his M.B.A. at Harvard.
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March 22, 1991, New York Times, Company News; Suit Is Settled by Salomon,

Salomon Brothers Inc. agreed yesterday to pay $15 million to the State of West Virginia to settle a lawsuit that charged the firm with securities fraud.

Lawyers for West Virginia contended that Salomon had improperly allowed the state's investment fund to pursue a risky trading strategy from 1985 through 1988 in violation of state law.

The strategy, which resulted in hundreds of millions of dollars in losses in 1987, involved the purchase and rapid turnover of Treasury notes in the investment fund for West Virginia. The strategy essentially involved a bet on interest rates, which rose sharply in 1987.

The investments were made with the agreement of the state's Treasurer, A. James Manchin, who was forced to resign in mid-1989 because of the scandal stemming from the investment. The fund lost $231 million more in 1987 than it was reporting, a fact not uncovered until an audit in 1988.

A number of other firms, including Merrill Lynch & Company and Shearson Lehman Brothers, have already settled similar charges with the state. The total amount that the state has received in settlements is $20 million.

In a statement, Salomon said that it was not admitting any liability in the case. "Salomon concluded that it would be prudent to settle the matter to avoid the risk and further expense of litigation," the statement said.
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May 3, 1991, New York Times, New System for Trading in Treasury Securities, by Michael Quint,

Seeking to reduce the cost of trading Treasury securities, EJV Partners, a newcomer with blue-chip backing, plans to introduce a new computerized system where trading firms will arrange their purchases and sales electronically.

The new system is expected to start within the next month or two, and if successful, could eliminate hundreds of jobs for brokers who talk with dealers by telephone and collect price information that is then displayed on video screens.

Using Available Technology

The backers of the new venture are six of the most active trading firms in the Treasury market -- Goldman, Sachs & Company, the First Boston Corporation, Salomon Brothers, Morgan Stanley, Citicorp and Shearson Lehman Brothers. Those firms, in combination with 34 more firms that are also primary dealers in the Treasury market, trade about $100 billion of securities daily, and pay annual brokerage fees estimated at more than $500 million. In 1988, before Wall Street consolidations, there were 46 primary dealers.

None of the firms would comment on EJV, whose initials stand for Electronic Joint Venture, but all six are known to be keenly interested in reducing costs in the highly competitive Treasury securities market.

"What we are doing is using the available technology in a way that over the long term will keep our costs well below our competitors," said Richard K. MacWilliams, president of EJV Brokerage.

The competitors are a half-dozen brokering firms that match securities firms' orders to buy Treasury issues with orders to sell; they do no business with the general public. Securities dealers trade through brokers rather than directly with each other to conceal their identity and trading strategies.

"You have to question whether there is a need in this market for 40 primary dealers and five or six brokers," said Peter Carney, president of Fundamental Brokers Inc., one of the brokering firms, when asked about EJV. "With so many people serving vanilla ice cream, you see people putting sprinkles on top to make themselves different."

Harry Needleman, senior vice president at the Cantor Fitzgerald Securities Corporation, one of the largest brokers of Treasury securities, said the idea of matching buyers and sellers electronically "is something we have seriously considered," but he declined to discuss the firm's current plans.

The prices and yields of Treasury securities are closely watched and serve as benchmarks for other interest rates ranging from home mortgages to short-term corporate i.o.u.'s.

Most of the advantage of EJV comes, Mr. MacWilliams said, from its system of allowing buyers and sellers to enter the amounts and prices of securities they wish to trade directly into a computer, which then displays the information on a screen.

Trades on the EJV system would also be handled by the computer, following instructions received directly from the securities dealer. The system would use a voice recognition system where each trader's voice pattern is identified by the computer so that trade instructions can be taken verbally rather than by entering numbers and letters on a keypad. At present, a securities dealer delivers instructions to a human broker.

EJV has not yet set a price for its service, "but we expect to have the lowest price in the market," Mr. MacWilliams said. He said the firm would begin brokering only Treasury bills and notes due in less than three years, but would expand to longer term issues by the end of the year.

"When you have a commodity-type product, such as Treasury securities, electronics can play a role in breaking down the cost structure, and that is what EJV is doing," said one of the largest dealers in government securities, who asked not to be identified.

Treasury Bill Fees Fall

Securities dealers noted that anticipation of EJV's arrival had already caused brokerage fees on Treasury bills to fall by about a third to around $12 to $15 per $1 million of securities traded from about $20.

In the long-term bond market, where EJV does not pose any immediate threat, brokering commissions are much higher -- about $39.06, or 1/256th of a point, for each $1 million of bonds. Brokers fees for long-term bonds were about twice as high in the early 1980's, before securities dealers joined forces to create Liberty Brokerage Inc., which cut prices to levels that became the industry standard.

When EJV stops testing its system and begins live trading, Mr. MacWilliams expects that the firm will need only six to eight people to provide the training and instruction dealers need to use the new system for short-term issues, plus the Digital Equipment Corporation computer that organizes and displays the information that securities dealers provide. At a traditional brokering firm, more than a dozen brokers would be needed just to handle trading in very short-term Treasury issues, and a few hundred are needed to handle the full range of Treasury securities.
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May 15, 1991, New York Times, Credit Markets; Prices of Treasury Bonds Tumble, by Kenneth N. Gilpin,

A favorable report on inflation yesterday was not enough for the credit markets to overcome news that consumers may be leading the economy out of recession, and Treasury bond prices tumbled.

The number that led to all the selling was a very large upward revision in March retail sales. The Commerce Department, which initially reported last month that sales had fallen by eight-tenths of a percentage point in March, said yesterday that they actually rose by four-tenths. It also said that retail sales slipped by one-tenth in April, a smaller-than-expected decline, which did not help either.

Because consumer activity makes up two-thirds of the economy, any indication that spending is on the rise -- particularly when some analysts have suggested the recession may be nearing an end -- concerns credit market participants.

Called a Useful Pretext

But some traders said the retail sales figures were merely a useful pretext to sell as a way of paring inventories that remain full of still unwanted Treasury securities from last week's quarterly refunding auctions.

"Who cares about March retail sales?" asked one trader in government bonds. "The bonds that were sold last week are still in dealer hands, and they are not going anywhere right now. They continue to be a problem, and the Street is taking lots of paper losses."

Prices of the new 8 1/8 percent bond have deteriorated since last Thursday, when the Treasury auctioned the 30-year issue at an average yield of 8.21 percent. By late yesterday, the bonds were offered at a price of 97 22/ 32, down 7/8 point, to yield 8.33 percent, up from 8.26 percent late Monday.

'Not Focusing' on Fundamentals

"The market is not focusing on the economic fundamentals right now, even though the statistics we have gotten over the last two weeks still make it look like the economy is in a downturn," said Alan Leslie, chief economist at the Discount Corporation of New York. "At some point retail investors will feel bond yields are comfortable relative to their costs. When that point is reached, the market will do better."

Market participants were not placated yesterday by the small rise in the Consumer Price Index, just two-tenths of a percentage point, showing that inflation has grown at an annual rate of just 1.5 percent over the last three months. But the statistics may soon reassure would-be bond investors that inflationary pressures are easing.

"I am very surprised at the market's reaction," said Joseph Carson, chief economist at the Chemical Bank. "The inflation news is extremely good. And even with the revisions on retail sales, there has been no growth in sales over the last two months. Consumers have yet to open their wallets, because income growth is extremely weak, and payroll employment is still declining, albeit at a slower rate."

View Backed by Car Sales

Evidence supporting Mr. Carson's view about the consumer was supplied in midafternoon, when the nation's automobile manufacturers reported that sales of motor vehicles during the first 10 days of May were an anemic 5.4 million units at an annual rate, up only slightly from the 5.3 million units in late April.

Those numbers include estimates for the Chrysler Corporation, which stopped releasing 10-day sales numbers some months ago. Since then, the estimates from Ward's Automotive Report have consistently been higher than what Chrysler ultimately reported at the end of each month, Mr. Carson said.

"I'm a bit surprised the market didn't react more positively to the auto sales numbers," Mr. Leslie of the Discount Corporation said.

Prices in the secondary market for Treasury notes were mixed. Longer-term issues moved lower, while short-term maturities were little changed.

By late in the day, the new 8 percent 10-year notes were offered at a price of 99 6/32, down 14/32, to yield 8.12 percent. But the new 7 percent three-year notes were unchanged, at 99 23/32, to yield 7.10 percent. And the 7 percent two-year notes were offered at 100 11/32, also unchanged, to yield 6.80 percent.

Short-term Treasury bill rates dipped slightly. In late trading, three-month bills were offered at a discount rate of 5.46 percent, down two basis points, or hundredths of a percentage point. Six-month bill rates fell by a like amount, to a late offered rate of 5.59 percent.

Focus on Citicorp Issue

Attention in the investment-grade corporate bond market was focused on Citicorp's two-part $1.686 billion offering of new five-year asset-backed securities through underwriters led by Salomon Brothers. Because of good investor demand, the size was increased from the originally announced $1.25 billion. Underwriters said the class A certificates, which are to mature on June 7, 1996 and consist of $1.5 billion in securities, have an 8.5 percent coupon and are priced at 99.15 to yield 8.712 percent. No other corporate debt offerings were priced yesterday.

Drop in Secondary Market

In the secondary market for investment-grade corporate bonds, traders said that prices of most issues fell by an eighth of a point to about three-eighths of a point.
Activity in the secondary market for tax-exempt bonds was sluggish, market participants said. Prices of the most widely quoted municipal issues fell by three-eighths of a point to half a point.

For the first time in several days, a sizable bloc of New York City bonds were traded yesterday. Dealers said that $6.5 million of the 7.5 percent bonds of 2009 were traded at a price to yield 8.50 percent. Last week, those bonds were trading at a price to yield 8.35 percent, the traders said.
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July 30, 1991, New York Times, A Banking Indictment: New York Lodges Criminal Charges, by Dean Baquet,

A state grand jury in New York City indicted the Bank of Credit and Commerce International and two former executives yesterday on fraud, theft and money-laundering counts. At the same time, the Federal Reserve Board announced it was seeking a $200 million penalty against the bank for violating United States banking laws.

Besides the proposed fine, which would be by far the largest in the Federal Reserve's history, the central bank wants to bar nine foreign businessmen permanently from American banking institutions.

The 12-count indictment by a grand jury convened by Manhattan District Attorney Robert M. Morgenthau in New York, the first law-enforcement action in the United States, goes beyond money-laundering charges to which the bank pleaded guilty in Tampa, Fla., in 1990. The indictment included counts that bank officials had lied to New York bank regulators, customers and other institutions, including a bank owned by American Express, about its financial health and ownership. It also accuses the bank of bribing two former officials of Peru's central bank.

Bank Executives Charged

In addition to naming the bank as a defendant, the indictment names Aga Hassan Abedi, a former Pakistani banker who started the Bank of Credit and Commerce, and Swaleh Naqvi, its former chief operating officer. If the bank is convicted, it faces fines and forfeiture of assets.

The Federal Reserve's report is the first official account of how the bank used front men to invest bank money in American financial institutions like First American Bankshares Inc., a large Washington banking company, the National Bank of Georgia and Centrust Savings Bank of Miami. [ Page A15. ]

Defense lawyers are expected to argue that Mr. Morgenthau's jurisdiction in the case is tenuous. The bank is based in Luxembourg and Abu Dhabi, and its main American interests are outside New York.

Mr. Morgenthau countered that he had jurisdiction because the bank had a subsidiary in New York, and that some illegal acts, including some money-laundering, had taken place here.

At a news conference at his Manhattan office, Mr. Morgenthau would not say whether government officials in other countries were under investigation. But law-enforcement officials said the New York grand jury and Federal investigators were examining favors the bank might have granted public officials in the United States and elsewhere.

The law-enforcement officials, who spoke only on condition of anonymity, said the bank's internal records included notations of loans and other favors for several present and former officials in the United States. But investigators have not yet determined the nature of these gifts, or even if the bank's records are false.

The report confirms connections between B.C.C.I.'s operations and First American. For example, it asserts that a longtime B.C.C.I. employee was hired for First American's New York City office after discussions between Robert A. Altman, First American's chief executive, and Mr. Naqvi.

Also, Aijaz Afridi, a longtime B.C.C.I. executive, served in First American's New York bank, the Federal Reserve report said. The report said that Mr. Afridi had been hired for his First American job by Mr. Abedi, and that he had spoken almost daily with B.C.C.I.'s London office.

Clark M. Clifford, a prominent Washington lawyer who is chairman of First American, has insisted that B.C.C.I. did not control his bank.

Mr. Morgenthau said that his investigation was continuing and that today's indictment represented "maybe 20 to 25 percent of what will ultimately be the result of the investigation."

The Bank of Credit and Commerce, which was seized on July 5 by financial regulators in seven countries including the United States, is also the subject of criminal investigations in Washington, Atlanta, Miami and Tampa.

Attempts to obtain comment from bank officials were unsuccessful. Elkan Abramowitz, a lawyer for the company before it was seized by international regulators, said he had not heard from bank officials recently and was not sure he was still their lawyer.

Legal experts say fashioning indictments as broad conspiracies gives prosecutors great leeway in creating jurisdiction.

One count in the indictment, for instance, charges that the bank defrauded American Express Bank Ltd., which is in New York City, out of $30 million. The fraud occurred because American Express Bank did business with B.C.C.I. based on B.C.C.I.'s claim that it was in good financial condition. When the regulators closed the bank, it owed American Express Bank $30 million, the indictment said.

American Express Bank officials said it had ultimately lost no money because it also owed B.C.C.I. money.

Even if Mr. Morgenthau is able to get past the jurisdictional issue, he may have a difficult time extraditing the two B.C.C.I. executives to stand trial in New York.

Standing of Other Creditors

Additionally, if there is a conviction against the bank and a judge levies a fine, officials may have to stand in line behind the bank's other creditors to collect any penalties.

Mr. Morgenthau's comments during the news conference, a rare public discussion of an investigation he described as the "largest bank fraud in world financial history," shed light on B.C.C.I.'s efforts to court politicians, particularly in the third world.

He said the bank desperately needed to attract large deposits from governments because it never had as much money as it claimed. In a news release, Mr. Morgenthau said, "The defendants created the appearance of respectability by persuading world leaders to appear with them, and defrauded their depositors, both small and large, who relied on that appearance of respectability."

The indictment makes no mention of any involvement of Mr. Clifford, the Washington lawyer and Democratic Presidential adviser who has represented the bank and serves as chairman of First American. Mr. Morgenthau's grand jury is investigating whether Mr. Clifford knew of the ties between B.C.C.I. and First American when he assured Federal banking regulators that he, not B.C.C.I., would run First American.
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August 10, 1991, New York Times, Officer Reportedly Knew of Salomon Plan, by Kurt Eichenwald,

One of the key Salomon Brothers executives involved in the Treasuries market scandal was given information in May indicating that a Salomon trader had tried to corner the two-year note auction that month but did not inform the Government, people involved in the case said yesterday.

This does not indicate that the former executive, John W. Meriwether, did anything illegal, or knew that laws were being violated in the May auction. But it demonstrates that Salomon executives had far more knowledge about the activities of the firm's former chief government-bond trader, Paul W. Mozer, than had previously been believed and had apparently not reined him in, people involved in the case said.

Mr. Meriwether, a former vice chairman, was told days after the May auction of two-yea notes that Mr. Mozer had signaled to at least one customer before the auction that Salomon would have a controlling position in the notes.

People involved in the case said that Mr. Meriwether was given this information in the technical language of bond traders. These sources said that the trader's statements about "special rates" in trading following the auction indicated that Salomon had, through its own bids and customers' bids, a controlling position in the securities. The firm disclosed last month that Mr. Meriwether and two other Salomon executives knew that Mr. Mozer had engaged in illegal bidding in February but failed to tell the Government.

The information about the May auction was learned by Mr. Meriwether before a meeting in June between officials of the Treasury Department and John H. Gutfreund, the former chairman of Salomon. At that meeting, Mr. Gutfreund assured Treasury officials that nothing unusual had occurred at the May auction.

A lawyer for Mr. Meriwether said yesterday that his client had done nothing wrong. "We categorically deny that he knew of anything improper," Theodore A. Levine said.

The firm also lost business from another client as a result of the scandal yesterday. The Pacific Investment Management Company, known as Pimco, discontinued doing business in Treasury securities with Salomon. Pimco's name had been improperly used by Salomon in a practical joke that resulted in a $1 billion bid being submitted without authorization.

Under Investigation

Lawyers for Salomon informed the Government of Mr. Meriwether's knowledge of some of Mr. Mozer's activities in an Aug. 14 meeting with officials of the Securities and Exchange Commission, the Treasury Department, the Federal Reserve, the Justice Department and the New York Stock Exchange, people involved in the case said. The firm is under investigation by each of these bodies.

Government investigators are said to believe the details indicated that the firm had known much more of what occurred than had been disclosed. "A lot of what went on in that time period the management had knowledge of," one person involved in the case said. "They knew the guts of the story."

People who have heard the information Salomon gave the Government said that the details raised even more questions about the firm's top three former managers, who resigned in the wake of the disclosure that they had known in April about Mr. Mozer's illegal bidding in the February auction and had failed to inform the Government.

Investigators have questioned how Salomon's managers could have known that their government-bond trader violated the law and then allowed him to engage in violations in the May auction.

The information that Mr. Meriwether reportedly learned stemmed from a meeting Mr. Mozer had with representatives of the Tiger Management Company, an investment concern that did business with Salomon's government desk in the May auction for the first time.

At the dinner meeting, which was held six days before the auction, Mr. Mozer informed Tiger's officials that the two-year note auction was likely to result in a "special rate" for repurchase agreements in subsequent trading. Mr. Mozer's statements proved to be right.

Repurchase agreements are essentially overnight loans involving baskets of Treasury securities. A borrower pays a rate, like interest, known as a repo rate. When the number of Treasury securities trading is limited, and there is a strong demand for them from investors who are obliged to buy them because of previous investment commitments, the repo rate is higher and is known as a special rate.

"Mozer could not sit there and tell a customer what was going to trade on special in the repo market before the auction unless he knew exactly what was going to happen at the auction," one person involved in the case said. "How could he tell that far in advance that they are going to be on special? He is not supposed to have any idea what the customer demand is."

Days after the auction was completed, Mr. Meriwether was informed that Mr. Mozer had been telling customers before the auction exactly what would happen afterward. Investigators are said to believe that with that information, Mr. Meriwether knew Mr. Mozer had planned to squeeze the market and was indicating as much to others beforehand.

But Mr. Meriwether's information was much more detailed, people involved in the case said. He was said to know the bidding positions of Salomon and its largest customers, in which the firm purchased for itself and clients $10.6 billion of the $11.3 billion of securities available to competitive bidders.

Moreover, Mr. Meriwether also learned the day before the auction that there would be large demand in the secondary market for the securities. People involved in the case said that Steinhardt Partners, an investment partnership, held $3 billion of the securities acquired in when-issued trading, which is done before an auction. That indicated that investors borrowed and sold $3 billion of the Treasury securities and would have to buy back an equal number to cover their positions.

Mr. Meriwether was said to have learned of the Steinhardt position in a meeting with Mr. Mozer and other Salomon executives, who were discussing a request by Steinhardt to finance its position in the Treasury notes; that request was rejected.
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August 10, 1991, New York Times, Salomon Brothers Admits Violations at Treasury Sales, by Jonathan Fuerbringer,

Salomon Brothers, one of the dominant buyers of Government securities, yesterday suspended the two executives in charge of trading these issues and admitted to violating Government rules.

The violations, a big embarrassment for this prominent Wall Street firm, include exceeding the 35 percent limit on the portion of a Treasury issue any one buyer can purchase, and using the names of customers without authorization.

Salomon said its actions had caused the Government no losses. But some Federal officials have recently said questionable trading practices could discourage investors from participating in the Treasury-securities market, raising the Government's cost of borrowing. Some traders at other firms who asked not to be identified said the Salomon's activities in May left them with large losses.

The Treasury securities, bills, notes and bonds of various maturities, are sold by the Government to finance the growing budget deficit and become part of the national debt. The big dealers buy the securities from the Government to sell to investors.

Federal Agencies Investigate

The Treasury Department, the Securities and Exchange Commission, the Federal Reserve and the antitrust division of the Justice Department all began investigating Salomon's activities before yesterday's announcement. The firm said that it was cooperating.

In a two-page statement, the firm spoke of finding "irregularities and rule violations" in three Treasury securities auctions, in December 1990 and February and May this year. Through such actions, a firm could profit by squeezing the market -- controlling a large enough share of the securities to raise the prices for others whose trading strategy obligates to buy them under certain circumstances. Salomon has not admitted to creating a squeeze.

Calls for More Regulation

The $2.2 trillion government securities market is one of the most lightly regulated securities markets in the United States -- free from many of the regulations that apply to brokers and traders in the stock market.

The Salomon case is already generating some calls from Congress for increased regulation. But before Salomon's admission, several regulators said they did not need new powers.

The market was rife with rumors that a squeeze occurred in May. The Federal Reserve and the Treasury both later agreed, but at the time they did not imply that there was any wrongdoing. It is not known if those officials knew then whether the 35 percent rule had been violated. Dealers said yesterday that there was no such talk of squeezes in the two other cases Salomon cited.

Salomon's admission sheds light on a market where a handful of huge dealers dominate trading of more than $100 billion a day. Traders on Salomon's cavernous trading floor swap billions in securities at a time, often moving the market, nudging interest rates and muscling competitors aside. Squeezes in some cases are considered just an ordinary part of the game.

"What some people call a squeeze is just the way the market works," said William M. Brachfeld, the head of fixed-income trading at Daiwa Securities America Inc. and chairman of the Primary Dealers Association, which includes the leading dealers in this market.

Alan Greenspan, the chairman of the Federal Reserve, concurred in a June letter to Representative Edward J. Markey, Democrat of Massachusetts, chairman of the House Subcommittee on Telecommunications and Finance, that "squeezes are not all that unusual."

An S.E.C official said yesterday that any legal action in this case was at first likely to concern fraud in the use of customer names to buy more than 35 percent of the securities in a Treasury auction.

The unauthorized use of customers' names and the recording of possibly false sales from these customers might violate fraud statutes, the official said.

The immediate focus, he said, is less likely to be a market squeeze or its impact. Some Federal officials have minimized the damage from such a squeeze. John P. LaWare, a governor of the Federal Reserve, told Congress in June, "I don't think that anyone involved in it was significantly damaged by it." But a bond dealer said yesterday, "A tremendous amount of money was made and lost in May." A Treasury official declined to discuss what the penalty might be for violating the Treasury's 35 percent limit.

Suspensions at the Firm

Salomon did not name the two managing directors it suspended. But employees at Salomon and other dealers in the bond market said they were Paul W. Mozer and Thomas Murphy. The two were not discharged, indicating that their fate will depend on the results of the investigations by Salomon and the Government. Two lower-level employees were also suspended, Salomon said.

Attempts to reach the two executives were unsuccessful. "These were individuals acting on their own without the knowledge of management," said Robert Baker, a Salomon spokesman. Mr. Baker said Salomon had uncovered the irregularities itself and informed the Government.

The announcement shocked many within Salomon and the broader investment community. "I'm stunned," one Salomon employee said. One bond market analyst who asked not to be named said: "This is misuse of the names of the clients and that is a no-no. That goes beyond a squeeze."

Use of Unauthorized Accounts

The Salomon statement said the firm submitted bids for four-year Treasury notes in December 1990 and five-year notes in February this year "using the names of persons who had not authorized such bids." Then Salomon purchased those bonds from the customers. Together with the separate amount that the firm bought under its own name, the total purchases exceeded 35 percent of each of the two issues.

Salomon did not say how much of each issue the firm bought.

In the third case, in an auction for two-year notes in May, Salomon said that through an apparent oversight, it had failed to report some securities it already held when it bid for, and purchased, 35 percent of the new issue. Again, the investment bank exceeded the limit. The securities were brought in the "when issued" market, where securities are traded for several days in anticipation of the actual Treasury auction.

The firm said it was still trying to determine if it also violated the 35 percent limit in May by the same method as in the other two cases.

Investigation Continues

Salomon said it was continuing its own investigation and had discovered other irregularities that it did not divulge in the statement.

Some dealers in the bond market said yesterday that they feared that the Salomon case might cause the Government to tighten its regulations, making investors more reluctant to buy and trade. "If there has been a transgression, that should be dealt with," said Mr. Brachfeld of Daiwa. "But we should not interfere with the Treasury market and make the Treasury pay a higher price because this is paid for by the taxpayers."

But Representative Markey, whose subcommittee oversees this area, called yesterday for "improvement in the regulation of the government securities market."

Officials from the Fed and the Treasury have said the Treasury may review its auction regulations, but they did not ask for more authority. The chairman of the S.E.C., Richard C. Breeden, said he did not need more power to deal with manipulation of the Treasury securities market. But he advocates extending to the Treasury market the rules governing the stock market. Some of these rules would not cover the practices at issue in the Salomon case.
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August 10, 1991, New York Times, Salomon Admits Traders Tried To Corner U.S. Bond Markets, by Lawrence Malkin,

NEW YORK— One of Wall Street's biggest securities houses suspended two of its top players on Friday and admitted that they had repeatedly tried to corner the market for government bond issues in auctions during the last year.

Salomon Brothers Inc. did not name the pair, but it said they held the rank of managing director. In Wall Street argot, they were Masters of the Universe: swaggering traders who can make millions of dollars for their firm on the turn of a single issue.

A Salomon spokesman refused comment on a Reuters report identifying them as Thomas Murphy, head of the government securities trading desk, and Paul Mozer, who has responsibility for foreign exchange trading. Mr. Murphy is also chairman of the committee on government trading practices of the Public Securities Association, the trade group for government bond dealers.

Salomon acknowledged that the two suspended traders violated Treasury rules by bidding for more bonds than any one dealer is allowed to hold at an auction, and that they did it by bidding for the securities in the names of others who had not authorized the bids.

The results had already been the source of wide complaint in bond trading rooms: a squeeze that forced prices up after the auctions. This meant that Salomon could sell the bond inventory it controlled at a higher price than if the firm had restricted itself to the maximum bid for 35 percent of each issue.

By dodging that rule, Salomon said it bought and held more securities than it was legally entitled to at an auction of four-year Treasury notes in December 1990, and an auction of five-year Treasury notes in February of this year.

In a third auction, of two-year notes in May, the method apparently changed. The company said that "due to an apparent oversight" it did not reveal an advance commitment to buy the securities when they were issued but nevertheless went ahead and put in the maximum bid of 35 percent.

Salomon Brothers spokesmen declined to comment further on its investigation, but it clear that the firm acted quickly before the federal government could move. It acknowledged what was widely known on Wall Street, that the Securities and Exchange Commission and the Treasury Department were investigating.

[A Treasury spokesman in Washington said the Treasury, the SEC and the Justice Department were investigating Salomon's auction activities, Reuters reported. An SEC spokesman said the agency was investigating irregularities in Treasury bond auctions, but he refused to confirm or deny that Salomon under scrutiny.]

One government bond analyst said it would only have been a matter of time before the SEC caught up with the firm because its computer had begun tracking sales after the squeeze plays emerged after the auctions.

At least one other old-line securities firm is believed to be under investigation, along with customers that include major mutual funds.

"This would never have happened if the Treasury would modernize the bidding process for government bonds and install a computer," said Joseph Plocek of McCarthy Crisanti & Maffei Inc., a Wall Street bond firm. "The computer would sound every time anyone went above the 35 percent limit, and that would be it."

Salomon is one of the largest of the 40 primary dealers in government securities. Primary dealers have the privilege of bidding for Treasury securities at government auctions and the responsibility of making sure they are all bought up so that, in theory, a government auction never fails.

John Meriwether, a vice chairman reputed to be the best in the firm in gambling at liar's poker, according to the recent book of the same name, was named to assume responsibility for the government bond department. Liar's poker, played with serial numbers on currency bills, is a high-stakes game popular with Salomon traders.
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August 13, 1991, New York Times, Credit Markets; Prices of Treasury Securities Rise, by Kenneth N. Gilpin,

Prices of Treasury securities rose in sluggish trading yesterday, pushing interest rates slightly lower.

"The market is in very good technical shape," one government bond trader said. "Of the refunding issues sold last week, only the bond is poorly distributed. As long as the economic numbers hold up this week, the market should do fine."

Despite the positive outlook, credit market participants spent a good bit of time yesterday talking -- and worrying -- about the potential impact of the market manipulation charges levied against Salomon Brothers by the Government last week.

"Nobody can think about the business because they are thinking about the business," the trader said. "It's impossible to say what the near-term implications of this are, but over the longer haul people are concerned about greater regulation. The timing of this couldn't be worse."

Last week Salomon admitted that at three separate Treasury note auctions held within the last nine months -- for two-, four- and five-year notes -- it had placed bids well in excess of the 35 percent cap any one firm can attempt to purchase at an auction. The firm also said that at some of those auctions it had submitted bids in the names of customers who had not authorized it to do so.

Suspicion that Salomon had been trying to corner the market in these issues had been circulating through the credit markets for months. But traders at rival firms said they derived little comfort when their worst thoughts were realized.

"This is a real black eye for the business," another bond trader said.

Investigations by the Securities and Exchange Commission and the Justice Department into Salomon's activities began before Salomon's announcement. With the Government Securities Act of 1986 up for reauthorization by Congress in the fall, market participants fear much tighter scrutiny in the future.

Traders and analysts said it would be impossible to begin to assess the market impact of the Salomon scandal until later this month, when the next two-year and five-year note auctions are scheduled.

"We will have a better feel for Salomon's reaction to this once we get through those auctions," said Steven A. Wood, director of financial markets research at Bank of America. "Then we will need to see what the S.E.C. and the Justice Department turn up."

Concerns about Salomon had no apparent effect on trading yesterday, as the successful completion of the refunding auctions and the positive implications of the Federal Reserve Board's decision to ease short-term interest rates last week continued to flow through the market.

Mr. Wood and other analysts said the Fed's move to lower the target for the overnight rate on bank loans in the Federal funds market to 5.50 percent had led to speculation that the central bank might move soon to lower the discount rate from its current 6 percent level.

That sort of speculation helped to bolster prices in the secondary market for Treasury securities.

In late trading, the new 8 1/8 percent issue of August 2021, sold at auction last week, was offered on a when-issued basis at a price to yield to yield 8.20 percent, down from 8.22 percent late Friday.

In when-issued trading, the 7 7/8 percent 10-year notes sold last week were offered at a price to yield 7.93 percent, while the new 6 7/8 percent three-year notes were offered on a when-issued basis at a price to yield 6.82 percent.

The recent slide in short-term interest rates was graphically visible in the results of yesterday's auction of three-month and six-month Treasury bills. Three-Month Bill Rates

Three-month bills were sold at an average discount rate of 5.36 percent, down sharply from an average rate of 5.51 percent at last week's sale.

Bids on the new six-month securities produced an average yield of 5.39 percent, compared with 5.59 percent a week ago.

The drop in rates served as encouragement to a number of investment-grade corporations to price new issues yesterday. Five corporations offered a total of $875 million worth of new securities.

Among the issuers was Joseph E. Seagram & Sons, which offered $200 million worth of 30-year noncallable debentures through an underwriting syndicate led by Goldman, Sachs & Co.

The 9 percent debentures were priced at $99.178, to yield 9.018 percent, 87.5 basis points, or hundredths of a percentage point, over the prevailing yield on the new 8 1/8 percent Treasury bonds of August 2021 at the time of pricing.

The securities are rated A-2 by Moody's Investors Service and A by the Standard & Poor's Corporation. Motorola 40-Year Debentures

Goldman, Sachs also acted as lead manager on a $200 million offering of 40-year debentures for Motorola Inc.

The 8.40 percent securities, which may be redeemed by the issuer at par, or $100, on Aug. 15, 2001, were priced at par, 45 basis points over the prevailing yield on the Treasury's new 7 7/8 percent 10-year notes at the time of pricing.

The issue is rated AA-3 by Moody's and AA-minus by Standard & Poor's.
A sharp improvement in the prices of outstanding debt securities issued by the Security Pacific Corporation highlighted activity in the secondary market for investment-grade corporate bonds.

Prices of Security Pacific bonds surged by as much as six points shortly after it was announced the bank would be acquired by BankAmerica.

By contrast, traders said that bids on BankAmerica issues slipped by about a point. However, few securities actually changed hands.

Following are the results of yesterday's auction of three-month and six-month Treasury bills:

(000 omitted in dollar figures) 3-Mo. Bills 6-Mo. Bills Average Price 98.660 97.275 Discounted Rate 5.30% 5.39% Coupon Yield 5.46% 5.63% High Price 98.663 97.285 Discounted Rate 5.29 5.37% Coupon Yield 5.45 5.61% Low Price 98.658 97.270 Discounted Rate 5.31% 5.40% Coupon Yield 5.47% 5.64% Accepted at low price 4% 1% Total applied for $40,638,705 $28,592,265 Accepted $10,476,425 $10,429,815 N.Y. applied for $36,767,715 $25,489,400 N.Y. accepted $9,077,355 $9,018,400 Noncompetitive $1,836,820 $1,450,410 Both these issues are dated Aug.8, 1991. The three-month bills mature Nov. 14,1991 and the six-month bills, Jan. 13,1992.
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August 14, 1991, New York Times / Associated Press, Salomon Officers Sued for Fraud,

Investors filed a class-action lawsuit on Monday accusing officers of Salomon Brothers Inc. of fraud.

The suit, filed in Federal District Court in Manhattan, said Salomon officers knew, but failed to tell investors, that employees had violated Federal and state laws and regulations. It seeks unspecified damages for people who bought Salomon shares since December.

The firm announced last Friday that two of its managing directors and two other employees had been suspended after it found "irregularities and rule violations" in Treasury note auctions in December 1990 and February and May of this year.

Salomon did not name the two managing directors it suspended. But Salomon employees and other bond dealers said they were Paul W. Mozer and Thomas Murphy.

"Salomon was exposed to loss of its good reputation among its individual customers, corporations, banks and the government," the lawsuit said.

Also Monday, the Public Securities Association said it would replace Mr. Murphy, a managing director at Salomon, as chairman of one of its watchdog committees.
The Treasury Department will not widen its investigation of violations of rules for selling Government securities, a department spokeswoman said on Tuesday.
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August 15, 1991, New York Times, Salomon Violations Detailed, by Barnaby J. Feder,

Salomon Brothers Inc. said yesterday that it had provided the Government with evidence that it had violated rules governing bids for Treasury bonds at the April auction. The disclosure followed its report last week of transgressions at three other auctions.

The firm also said that it had routinely overstated the quantities of Treasury securities it traded so that it could increase its chance of being allocated enough of each new issue to satisfy all its customers. It pledged to discontinue the practice.

Salomon also said a committee of independent members of its board would be appointed shortly to review the situation. Facing Lawsuits

Salomon already faces private lawsuits from traders in securities markets who contend that the leverage Salomon had over bond prices as a result of its activities cost them money.

Salomon noted yesterday that it and various employees also faced possible criminal fines and sanctions. Under the securities laws, the sanctions might include suspending or banning Salomon from acting as a broker-dealer or primary dealer in Treasury securities, but there is no indication that the Government currently plans such a step.

Salomon is one of the three largest firms in the Treasury securities market, where $115 billion worth of issues are traded daily. At the end of last year, $2.2 trillion in Treasury securities were outstanding.

The announcement included surprising details on the extent of the previously disclosed violations, including an admission that a managing director whom it did not name caused the firm to make an unauthorized $1 billion bid in the name of a customer at the February auction as part of a practical joke on a fellow employee. Salomon said the managing director had been suspended.

Four men were suspended last week. They were reported to be Paul Mozer, the head of government bond trading; Thomas Murphy, a top deputy; Christopher Fitzmaurice, a trader, and Henry Epstein, a clerk. A Salomon spokesman declined last night to confirm the names of the suspended employees, but said that no new suspensions had taken place.

Yesterday's disclosures came on a day when Richard C. Breeden, chairman of the Securities and Exchange Commission, told reporters in Washington that the actions of Salomon's powerful bond trading unit demonstrated that the "honor system" was not an adequate method of policing securities markets. The government securities market is far more lightly regulated than the stock market or commodities markets.

Some of the details in yesterday's announcement indicated that Salomon's bidding violations did not leave the firm controlling as large a percentage of the securities sold at the recent auctions as had been rumored. For example, although some reports suggested the company ended up with as much as 85 percent of the two-year notes sold at the May auction, Salomon said yesterday that the firm acquired 44 percent of the issue, just nine percentage points more than the allowable limit.

Salomon said two actions put it over the 35 percent limit in May. It bid $2 billion for a customer and then repurchased $500 million of the notes at the auction price; also, it held $497 million of the notes on a when-issued basis before the auction began. Those purchases came on top of its routine bid for the maximum 35 percent.

Questions on May Auction

That part of the report did not address one of the most persistent rumors surrounding the May auction, namely that Salomon acted in concert with outside investors to control a much larger percentage of the notes and squeeze prices upward. Dealers said the price impact of Salomon's activity seemed more evident in May than in the other months in which, according to yesterday's report, Salomon actually went further over the 35 percent limit.

In December 1990, for example, Salomon bid the maximum 35 percent for its own account and, without authorization, $1 billion using a customer's name, leaving it with 46 percent of the four-year notes.

In February, Salomon submitted three bids for 35 percent of the five-year notes, two of which were unauthorized bids in customers' names. Salomon said yesterday it ended up with 57 percent of the notes. Salomon said that it ended up with 30.2 percent of the 30-year bonds that were involved in the practical-joke incident.

In the April auction of five-year notes, the firm exceeded the 35 percent limit by bidding the full amount for its own account and repurchasing $600 million worth of notes from a customer who wanted $1.9 billion of them. Salomon had bid for $2.5 billion in the customer's name to make sure that it would be allocated enough to fill the order.

Following Salomon's announcement, Edward J. Markey, Democrat of Massachusetts, chairman of the House Subcommittee on Telecommunications and Finance, likened the firm's actions to "high-stakes games of 'Jeopardy' being played with investors' and taxpayers' money." His subcommittee will be drafting proposed changes in securities laws this fall, which may include tighter rules for the auction and trading of government securities.

Louis Crandall, chief economist at R. W. Wrightson & Associates, said, "That kind of arrangement sounds almost Japanese," referring to recent scandals at Japanese securities houses.

Indeed, Wall Street is wondering whether the Government's desire to have Japan do more to regulate its markets may encourage it to come down harder on Salomon than it might otherwise have.

Questions about how far up the chain of command the problems ran remain unanswered. Salomon conceded in yesterday's announcement that John H. Gutfreund, its chairman and chief executive; Thomas W. Strauss, its president, and John W. Meriwether, a vice chairman, had all been informed by April of at least one transgression -- an unauthorized bid in February. But a decision to tell the Government was not carried out. Indeed, the Government was not told about that or any other rule violation until Aug. 9, when the Government was also told about the delay in reporting, Salomon said yesterday.
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August 16, 1991, New York Times, page A1, Wall Street Sees a Serious Threat to Salomon Bros, by Kurt Eichenwald,

The disclosure that Salomon Brothers' three top officials had known for several months about illegal bidding by the firm in the Treasury securities market has moved an unfolding scandal from an embarrassment to a serious threat to the future status of the investment house.

The view of traders and analysts on Wall Street seemed to turn markedly against Salomon, after the firm's disclosure on Wednesday that John H. Gutfreund, the chairman and chief executive, knew in April about one illegal bid made by the firm, as did Thomas W. Strauss, the firm's president, and John W. Meriwether, a vice chairman.

As a result of a series of improper bids in four auctions, the firm said that it faces not only possible fines and sanctions, but also possible debarment as a primary dealer in Treasury securities. Regulators Are Amazed

The embarrassment strikes at the very heart of Salomon Brothers, in the $2.2 trillion Treasury securities business, where it forged its reputation and where it is one of the three largest firms. Salomon made its way into Wall Street's big leagues by its prowess in bond trading, and it would represent a particular humiliation for it to lose access to a choice part of that business.

Government regulators expressed a degree of amazement about the magnitude of the violations Salomon had admitted. "The matters disclosed are obviously very serious," said William R. McLucas, the head of the enforcement division for the Securities and Exchange Commission. "There were clearly some matters that will have to bear scrutiny."

Some of the growing disenchantment on Wall Street was reflected in the precipitous drop in the firm's stock yesterday. Trading was delayed almost half an hour on the New York Stock Exchange, and the stock closed down $4.75, at $26.875.

Talk of Departures

The mood was also evident in a growing sense on Wall Street and in Washington that regulators would have to punish Salomon severely to maintain their credibility as a strict enforcer of market rules. Otherwise, one former Government official said, American regulators could not continue to criticize lax enforcement by officials in Japan, where securities and bank scandals are growing.

Talk throughout Salomon and on Wall Street centered on which senior executives might have to leave for the firm to recover.

"People are very concerned about the stability of the organization with senior management in question, and whether these guys are going to be" able to stay, said Gary Goldstein, president of the Whitney Group, a Wall Street recruiter and consulting firm. "It has got to be a real problem for Salomon Brothers."

The questions surrounding top management, particularly Mr. Gutfreund (pronounced GOOD-friend), are difficult for the firm. As Salomon's chief since 1978, Mr. Gutfreund has been the main architect in building Salomon into an even bigger factor on Wall Street, especially in mergers and other lucrative areas of investment banking where the firm had lagged behind.

But the keys to the firm's success could now prove to be a strange liability, Wall Street executives said. Salomon's sharp elbows and tough business practices won it a top spot, but also made many enemies along the way. And those people are now delighted at the firm's troubles.

A number of institutions that do business with Salomon also expressed concerns yesterday about the firm, raising the specter that Salomon could start to lose some big business if the investigations being conducted by the Securities and Exchange Commission and the Justice Department uncover further wrongdoing.

"Our business dealings with Salomon Brothers are under review because of this," said Steven Kornrumpf, assistant director for New Jersey's division of investment.

Other officials made decisions to stick with with the firm -- at least for now. Edward V. Regan, New York State's Comptroller, said the state would continue to do business with Salomon while the investigations continued. After those inquiries are completed, the state will review its investment relationship with the firm, he said.

Call for Legislative Review

The scandal has also prompted calls for legislative review. Senator Christopher J. Dodd, the Connecticut Democrat who is chairman of the Senate banking subcommittee on securities, in a letter yesterday to Nicholas F. Brady, the Secretary of the Treasury, asked for a report on the roles of the Treasury, the Federal Reserve and the S.E.C. in supervising Treasury auctions, "specifically with respect to the incidents involving Salomon Brothers Inc."

Wall Street analysts quickly reassessed the company's securities yesterday. "This could take a while to get resolved," said Lawrence W. Eckenfelder, a securities industry analyst with Prudential Securities, who told clients to avoid Salomon stock. "I would be more inclined to sit on the sidelines, until we get a better sense of what the outcome is going to be."

Also, Moody's Investors Service, the rating agency, said it was considering downgrading Salomon's debt issues because of "the possible legal, financial and business consequences" of the scandal.

The troubles at Salomon also spurred a raft of rumors about the future role of Warren Buffett at the investment house. Mr. Buffett's investment vehicle, Berkshire Hathaway Inc., holds a large stake in the investment house. Mr. Buffett did not return a telephone call seeking comment.

The flurry of activity surrounding Salomon accompanied concern about the impact any banning of the firm from the Treasury securities market might have. But, while some have speculated that barring Salomon from the Treasuries market could cause excessive upheaval, Government officials and other experts dismissed that notion.

"If Salomon is forced to exit that market, I don't think that it would create any kind of trading vacuum," said James Grant, editor of Grant's Interest Rate Observer. "The longer term significance of this might be to chip away at the this gossamer thing called confidence. It is intangible, can't be quantified, but is nonetheless important in the way markets operate"

Exceeding the Limit

The Salomon scandal began to unfold last Friday, when the firm disclosed that in several recent Treasury auctions, it had improperly purchased substantially more than the 35 percent of a Treasury securities issue that any one firm is allowed to buy. The firm admitted submitting bids in the names of customers who had not authorized it to do so in some of the auctions, enabling it to purchase more of the securities than it was allowed.

At first, Salomon said the improper purchases had been made without the knowledge of the firm's senior managers. Rather, it suspended three traders and a clerk in the department. Paul Mozer, the head of Government bond trading, was among those suspended.

But on Wednesday, the firm said Mr. Gutfreund and the other executives had been informed four months ago that the firm had made an unauthorized customer order in the February auction of five-year Treasury notes.

No Action Was Taken

While all three men decided that the problem should be brought to the attention of the Government, no one did, the firm said.

As a result, by the time the information was finally turned over to the Government, the number of violations had increased, and Salomon was on the spot, having to explain why it failed to alert regulators months earlier. Salomon had violated rules in at least four Treasury auctions, including accidentally making a $1 billion bid that was the result of a practical joke.

By yesterday, the rapid change in position spawned joking at Salomon's expense on Wall Street's trading desks. "Everybody is happy they fired that clerk," an executive with another investment house said. "That really indicated they had their fingers on the pulse of the problem."

People close to the firm said the scandal was bred in Salomon's fast-moving, independent culture that was fostered by Mr. Gutfreund and that lionized the traders who made the most money. "Gutfreund doesn't run the departments; the departments run themselves," one executive close to the firm said. "There is a tremendous amount of independence and latitude given over the years to guys who are successful, and Governments was very successful."

Regaining Some Swagger

Only in the last year had Salomon regained its old swagger, having overcome the humbling and extremely costly consequences of several failed efforts in the 1980's to capture a large piece of the lucrative merchant banking business.

"This is the first time in all the years that there has been a problem in Salomon's core business, the area where through thick and thin Salomon has been the best," said one Wall Street executive, who, like many people interviewed spoke on condition that he not be identified. "That is one of the things that is so painful."

Indeed, Wall Street had been admiring the results that were finally beginning to come in from Salomon's effort to steady itself. "Salomon has been working very hard at trying to reorganize their businesses and to be a greater factor in a number of areas," Mr. Goldstein said. "Just when they are starting to reap some benefit, something like this has to happen that is going to have a major effect of the business going forward."

Savings and Loan Connection

Some areas where Salomon was reaching forward into new business could prove to be the most hurt. With the firm under criminal and civil investigation by the Government, its role as a central adviser on the junk bond holdings of the Resolution Trust Corporation, which is overseeing the bailout of the nation's savings and loans, is also under scrutiny. "We are definitely watching as everything unfolds," said Felisa Neuringer, a spokeswoman for the R.T.C. "If we feel as things develop down the road that we need to take any kind of action, we will."

Traders said there was little evidence that the firm's bond trading operation had been adversely effected by the scandal. But employees, who were looking toward the setting of bonuses that account for a substantial part of their compensation within the next month, viewed the developments as devastating.

"People are concerned that with an investigation going on, if that continues, the firm won't be able to afford bonuses at the end of the year" because of reserves that might have to be taken for a possible fine, one Salomon executive said.

One Wall Street executive with ties to the firm said, "How can they rightfully pay out big bonuses when they face civil suits and other litigation?"
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August 17, 1991, New York Times, Salomon's 2 Top Officers to Resign Amid Scandal,

John H. Gutfreund, the powerful chairman and chief executive of Salomon Brothers Inc. who molded the firm into the premier bond-trading house on Wall Street, announced yesterday that he would resign amid the widening scandal involving illegal bidding by the firm in the Treasury securities market.

The firm's president, Thomas W. Strauss, also announced that he would step down as a result of the scandal. Mr. Gutfreund, Mr. Strauss and a third executive had been told four months ago that the firm had made illegal bids, but failed to report it to the Government until last week.

That failure caused the Salomon scandal to mushroom, as many other traders and analysts on Wall Street feared that the affair could tarnish the reputation of American securities markets worldwide and raise the Government's cost of financing its debt.

Warren E. Buffett, the investor from Omaha whose company, Berkshire Hathaway Inc., put $700 million into Salomon in 1987, agreed yesterday to become chairman and chief executive of the firm on an interim basis, pending acceptance tomorrow by the board of directors, as the firm moved quickly to halt the crisis of confidence. Mr. Buffett is known for his brilliant investing and a caustic attitude regarding the foibles of Wall Street. [ Page 33. ]

Salomon Inc. called for a meeting of its 13-member board for tomorrow. The executives said yesterday that they would submit their resignations at the meeting, and Wall Street executives with ties to Salomon said the resignations would surely be accepted.

By asking for the dramatic Sunday meeting and by turning to Mr. Buffett, whose years of investing have won him a reputation as a "Mr. Clean" on Wall Street, Salomon signaled the gravity for the firm of the unfolding scandal and the threat to its reputation.

After the announcement of the resignations, Salomon's stock which had not been allowed to open for trading most of the day, rose $1, to $27.875, on the New York Stock Exchange. The shares had fallen sharply after the scandal was disclosed, losing $7.875 in the first four days of trading this week.

If the resignations of Mr. Gutfreund and Mr. Strauss help the firm's share price continue to recover, their decisions could also help them financially. With the stock being beaten down by the scandal, the two men's multimillion-dollar holdings in the firm were being hurt. 'To Protect the Firm'

In a joint statement Mr. Gutfreund (pronounced GOOD-friend) and Mr. Strauss said they had made their decision because of the scandal's effect on the firm. "We cannot let our unfortunate mistake of not taking prompt action, when in April we learned of one unauthorized bid at a February Treasury auction, to harm the firm," they said. "We are taking this action to protect the firm, its 9,000 people and its clients."

The firm disclosed last week that in several recent Treasury auctions, it had improperly purchased substantially more than the 35 percent of an issue than any one firm is allowed to buy. The firm also admitted submitting bids in the names of customers who had not authorized it to do so, enabling it to buy more of the securities than allowed.

The resignations of the two top executives -- in a bold attempt to save the firm a week after the scandal came to light -- is in sharp contrast to the actions of the heads of big firms that were subject to criminal investigations during the 1980's, notably Drexel Burnham Lambert and E. F. Hutton & Company. In the inquiries into those two firms, the managements fought the investigations before finally pleading guilty to felonies. But the managers stayed on and ultimately saw their firms collapse.

The decisions to resign, which came after hours of tense meetings among senior executives, leaves Salomon's management in a hobbled position. John W. Meriwether, a vice chairman who had been thought on Wall Street as a possible successor to Mr. Gutfreund, was the third executive informed of the illegal bidding in April. While Mr. Meriwether did not resign, his status at the firm is going to be reviewed by the directors at the special meeting tomorrow.

A senior Wall Street executive with ties to the firm said more high-level resignations were expected.

Late yesterday, Mr. Gutfreund, Mr. Buffett and other senior executives met for 35 minutes with the firm's managing directors at the firm's headquarters at Seven World Trade Center. At the meeting, Mr. Buffett told the directors that he would be very open as he worked to straighten out the firm's status, according to Salomon executives. Mr. Buffett said the firm's reputation for staying just within the bounds of the rules would not be acceptable.

Mr. Buffett also alluded to the potential troubles in the management structure, saying that he would need to name a chief operating officer to handle the daily operations of the firm.

Significance to the Market

The scandal also has sweeping significance for the operation of the entire $2.2 trillion Treasuries market, Wall Street executives and others said. The perception that a leading force in that market is not honest can damage the credibility of the American markets worldwide.

"The way our business operates is because everybody is completely honest," a senior Wall Street executive with a background in the Treasury securities markets said. "You transfer billions of dollars on a phone call, my word to your word. And these people lied."

The decision of Salomon's top management to step down was an attempt to heal the wounds to the firm that have deepened in recent days. But lawyers with knowledge of the investigation said the resignations would do little to temper any penalties the Government might bring against the firm. Salomon has said that it faces not only possible fines and sanctions, but also possible debarment as a primary dealer in Treasury securities as a result of its illegal bidding.

Inquiry Is Continuing

Regulators said yesterday that they were continuing their inquiry into the situation. In a statement, the Federal Reserve Bank of New York said that the resignations would be "an important factor" in its evaluation of its relationship with the firm. The Fed said its review of Salomon's violations would be finished "in a matter of weeks."

The firm is also still under criminal and civil investigation by the Justice Department and the Securities and Exchange Commission.

The decision to quit is also a significant embarrassment for Mr. Gutfreud, an executive so influential that he was once proclaimed by Business Week magazine as the "King of Wall Street." Mr. Gutfreund, the firm's chairman since 1978, has been the main architect in building Salomon into an powerful factor on Wall Street, especially in mergers and other lucrative areas of investment banking where the firm had lagged.

But he also set the tone for the firm, making it one of the most aggressive and creative of Wall Street's houses. It was a firm where securities traders were king, and it rewarded employees who could land big profitable trades with some of the highest pay on Wall Street. And Mr. Gutfreund was not shy about pushing out the door high-level employees who no longer fit into his strategy.

The decisions yesterday came after several hours of meetings between Mr. Gutfreund and other top executives of Salomon, several Wall Street executives said. Mr. Gutfreund arrived at the meeting apparently having decided to resign before he arrived at work yesterday.

Mr. Buffett was reached by telephone during the meeting, these executives said. He was said to have flown to New York City yesterday to prepare for tomorrow's board meeting and hold further discussions with Salomon officials.

After the meeting, Mr. Gutfreund visited the offices of his colleagues, as well as Salomon's trading floor. During that personal trip, the Salomon executive informed his co-workers about his decision and the other developments.

The mood was somber at Salomon, but it brightened late yesterday, when Mr. Buffett and Mr. Gutfreund met with the firm's managing directors. After Mr. Buffett's discussion, in which he told the managing directors that the firm would have to follow the laws closely, the firm's executives burst into applause for the man who would soon be their chairman, executives said.

Mr. Buffett was said to have told the executives that after the board meeting tomorrow, he would hold a news conference to answer questions and name the chief operating officer.

Also during the conversation, Mr. Buffett cautioned the executives about the liabilities the firm faced because of the scandals, including fines and litigation costs, that the company would have to shoulder going forward.

The developments yesterday led to speculation about who the most likely candidates for other top slots at the firm might be. Analysts and other Wall Street executives speculated that the top candidates were Deryck C. Maughan, a vice chairman of the firm's parent who was recently named to revitalize the firm's investment banking effort, and James L. Massey and Leo I. Higdon Jr., who are both vice chairmen of the firm.

A Failure to Report

The heart of the scandal that touched Mr. Gutfreund and Mr. Strauss occurred when they were told in April that a bid was made in a customer's name without authorization during the February Treasury auction. While the firm's senior management concluded that the violation should be reported to the Government, no one did until last week, when Salomon reported a series of other violations during several auctions.

That failure to report the violation has left Salomon officials and supporters of the firm stunned.

In the statement yesterday, Salomon said the board would address "the management control failure that have occurred" at its meeting tomorrow. Substantial Holdings

According to Salomon's filings with the Securities and Exchange Commission, Mr. Gutfreund owns the equivalent of about 989,000 common shares in Salomon, mostly through options and convertible notes, while Mr. Strauss owns about 649,000. That means that since in the first four days of this week, Mr. Gutfreund's holdings had lost about $7.8 million in value, while Mr. Strauss stake's had lost about $5.1 million.

After the announcement Mr. Gutfreund's and Mr. Strauss's holdings increased by $1 a share, or about $989,000 and $649,000, respectively.
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August 17, 1991, New York Times, Quotation of the Day
"We cannot let our unfortunate mistake of not taking prompt action, when in April we learned of one unauthorized bid at a February Treasury auction, to harm the firm. We are taking this action to protect the firm, its 9,000 people and its clients." -- John H. Gutfreund and Thomas W. Strauss, announcing they would resign the top positions at Salomon Brothers. [ 1:3. ]
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August 17, 1991, New York Times, Salomon's 2 Top Officers to Resign Amid Scandal, by Kurt Eichenwald,

John H. Gutfreund, the powerful chairman and chief executive of Salomon Brothers Inc. who molded the firm into the premier bond-trading house on Wall Street, announced yesterday that he would resign amid the widening scandal involving illegal bidding by the firm in the Treasury securities market.

The firm's president, Thomas W. Strauss, also announced that he would step down as a result of the scandal. Mr. Gutfreund, Mr. Strauss and a third executive had been told four months ago that the firm had made illegal bids, but failed to report it to the Government until last week.

That failure caused the Salomon scandal to mushroom, as many other traders and analysts on Wall Street feared that the affair could tarnish the reputation of American securities markets worldwide and raise the Government's cost of financing its debt.

Warren E. Buffett, the investor from Omaha whose company, Berkshire Hathaway Inc., put $700 million into Salomon in 1987, agreed yesterday to become chairman and chief executive of the firm on an interim basis, pending acceptance tomorrow by the board of directors, as the firm moved quickly to halt the crisis of confidence. Mr. Buffett is known for his brilliant investing and a caustic attitude regarding the foibles of Wall Street. [ Page 33. ]

Salomon Inc. called for a meeting of its 13-member board for tomorrow. The executives said yesterday that they would submit their resignations at the meeting, and Wall Street executives with ties to Salomon said the resignations would surely be accepted.

By asking for the dramatic Sunday meeting and by turning to Mr. Buffett, whose years of investing have won him a reputation as a "Mr. Clean" on Wall Street, Salomon signaled the gravity for the firm of the unfolding scandal and the threat to its reputation.

After the announcement of the resignations, Salomon's stock which had not been allowed to open for trading most of the day, rose $1, to $27.875, on the New York Stock Exchange. The shares had fallen sharply after the scandal was disclosed, losing $7.875 in the first four days of trading this week.

If the resignations of Mr. Gutfreund and Mr. Strauss help the firm's share price continue to recover, their decisions could also help them financially. With the stock being beaten down by the scandal, the two men's multimillion-dollar holdings in the firm were being hurt. 'To Protect the Firm'

In a joint statement Mr. Gutfreund (pronounced GOOD-friend) and Mr. Strauss said they had made their decision because of the scandal's effect on the firm. "We cannot let our unfortunate mistake of not taking prompt action, when in April we learned of one unauthorized bid at a February Treasury auction, to harm the firm," they said. "We are taking this action to protect the firm, its 9,000 people and its clients."

The firm disclosed last week that in several recent Treasury auctions, it had improperly purchased substantially more than the 35 percent of an issue than any one firm is allowed to buy. The firm also admitted submitting bids in the names of customers who had not authorized it to do so, enabling it to buy more of the securities than allowed.

The resignations of the two top executives -- in a bold attempt to save the firm a week after the scandal came to light -- is in sharp contrast to the actions of the heads of big firms that were subject to criminal investigations during the 1980's, notably Drexel Burnham Lambert and E. F. Hutton & Company. In the inquiries into those two firms, the managements fought the investigations before finally pleading guilty to felonies. But the managers stayed on and ultimately saw their firms collapse.

The decisions to resign, which came after hours of tense meetings among senior executives, leaves Salomon's management in a hobbled position. John W. Meriwether, a vice chairman who had been thought on Wall Street as a possible successor to Mr. Gutfreund, was the third executive informed of the illegal bidding in April. While Mr. Meriwether did not resign, his status at the firm is going to be reviewed by the directors at the special meeting tomorrow.

A senior Wall Street executive with ties to the firm said more high-level resignations were expected.

Late yesterday, Mr. Gutfreund, Mr. Buffett and other senior executives met for 35 minutes with the firm's managing directors at the firm's headquarters at Seven World Trade Center. At the meeting, Mr. Buffett told the directors that he would be very open as he worked to straighten out the firm's status, according to Salomon executives. Mr. Buffett said the firm's reputation for staying just within the bounds of the rules would not be acceptable.

Mr. Buffett also alluded to the potential troubles in the management structure, saying that he would need to name a chief operating officer to handle the daily operations of the firm. Significance to the Market

The scandal also has sweeping significance for the operation of the entire $2.2 trillion Treasuries market, Wall Street executives and others said. The perception that a leading force in that market is not honest can damage the credibility of the American markets worldwide.

"The way our business operates is because everybody is completely honest," a senior Wall Street executive with a background in the Treasury securities markets said. "You transfer billions of dollars on a phone call, my word to your word. And these people lied."

The decision of Salomon's top management to step down was an attempt to heal the wounds to the firm that have deepened in recent days. But lawyers with knowledge of the investigation said the resignations would do little to temper any penalties the Government might bring against the firm. Salomon has said that it faces not only possible fines and sanctions, but also possible debarment as a primary dealer in Treasury securities as a result of its illegal bidding. Inquiry Is Continuing

Regulators said yesterday that they were continuing their inquiry into the situation. In a statement, the Federal Reserve Bank of New York said that the resignations would be "an important factor" in its evaluation of its relationship with the firm. The Fed said its review of Salomon's violations would be finished "in a matter of weeks."

The firm is also still under criminal and civil investigation by the Justice Department and the Securities and Exchange Commission.

The decision to quit is also a significant embarrassment for Mr. Gutfreud, an executive so influential that he was once proclaimed by Business Week magazine as the "King of Wall Street." Mr. Gutfreund, the firm's chairman since 1978, has been the main architect in building Salomon into an powerful factor on Wall Street, especially in mergers and other lucrative areas of investment banking where the firm had lagged.

But he also set the tone for the firm, making it one of the most aggressive and creative of Wall Street's houses. It was a firm where securities traders were king, and it rewarded employees who could land big profitable trades with some of the highest pay on Wall Street. And Mr. Gutfreund was not shy about pushing out the door high-level employees who no longer fit into his strategy.

The decisions yesterday came after several hours of meetings between Mr. Gutfreund and other top executives of Salomon, several Wall Street executives said. Mr. Gutfreund arrived at the meeting apparently having decided to resign before he arrived at work yesterday.

Mr. Buffett was reached by telephone during the meeting, these executives said. He was said to have flown to New York City yesterday to prepare for tomorrow's board meeting and hold further discussions with Salomon officials.

After the meeting, Mr. Gutfreund visited the offices of his colleagues, as well as Salomon's trading floor. During that personal trip, the Salomon executive informed his co-workers about his decision and the other developments.

The mood was somber at Salomon, but it brightened late yesterday, when Mr. Buffett and Mr. Gutfreund met with the firm's managing directors. After Mr. Buffett's discussion, in which he told the managing directors that the firm would have to follow the laws closely, the firm's executives burst into applause for the man who would soon be their chairman, executives said.

Mr. Buffett was said to have told the executives that after the board meeting tomorrow, he would hold a news conference to answer questions and name the chief operating officer.

Also during the conversation, Mr. Buffett cautioned the executives about the liabilities the firm faced because of the scandals, including fines and litigation costs, that the company would have to shoulder going forward.

The developments yesterday led to speculation about who the most likely candidates for other top slots at the firm might be. Analysts and other Wall Street executives speculated that the top candidates were Deryck C. Maughan, a vice chairman of the firm's parent who was recently named to revitalize the firm's investment banking effort, and James L. Massey and Leo I. Higdon Jr., who are both vice chairmen of the firm. A Failure to Report

The heart of the scandal that touched Mr. Gutfreund and Mr. Strauss occurred when they were told in April that a bid was made in a customer's name without authorization during the February Treasury auction. While the firm's senior management concluded that the violation should be reported to the Government, no one did until last week, when Salomon reported a series of other violations during several auctions.

That failure to report the violation has left Salomon officials and supporters of the firm stunned.

In the statement yesterday, Salomon said the board would address "the management control failure that have occurred" at its meeting tomorrow. Substantial Holdings

According to Salomon's filings with the Securities and Exchange Commission, Mr. Gutfreund owns the equivalent of about 989,000 common shares in Salomon, mostly through options and convertible notes, while Mr. Strauss owns about 649,000. That means that since in the first four days of this week, Mr. Gutfreund's holdings had lost about $7.8 million in value, while Mr. Strauss stake's had lost about $5.1 million.

After the announcement Mr. Gutfreund's and Mr. Strauss's holdings increased by $1 a share, or about $989,000 and $649,000, respectively.
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August 18, 1991, New York Times, Mysteries of Treasury Bonds INSIDE Page 22.
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August 18, 1991, New York Times, Shadow on a Market, by Floyd Norris,

The admission by Salomon Brothers that it had violated Treasury market rules and the resignation on Friday of its top two executives have focused new attention on this huge but little understood and lightly regulated market, and generated renewed calls for tighter regulation.

The resignations of the top two executives of Salomon Brothers Inc., John H. Gutfreund, the chairman and chief executive, and Thomas W. Strauss, the president, which the board is expected to accept today, followed the furor over their failure to disclose promptly the firm's irregular activities in buying Treasury securities.

The abuses took place in the little-known but important corner of the market, the when-issued market in which new Treasury securities -- the bonds that are sold to finance the Government's ever-growing national debt -- are traded even before they are sold by the Government. That pre-sale trading helps insure that the bonds slide easily into the marketplace when they do arrive.

Over all, the Treasury market dwarfs most others in size, with more than $2 trillion in bonds outstanding and more than $100 billion of them traded each day. By contrast, the value of the more than 1,800 companies on the New York Stock Exchange exceeds $3 trillion, but daily trading volume is less than $10 billion. Many of those buying and selling bonds are large institutions, including pension funds, insurance companies and mutual funds, in which most Americans have a stake.

Because there is no risk of default by the bond issuer -- the Federal Government is presumed to be able to print dollars, if necessary -- this market has largely escaped the extensive regulation of others.

Importance of Dealers

The Treasury Department conducts a series of auctions of bills, of up to a year; notes, of up to 10 years; and bonds, generally up to 30 years. Individuals may place direct orders, too. But dealers usually account for much of the auction, buying for themselves or their customers.

Salomon has long been one of a select group of firms, the Federal Reserve's primary dealers, that are required to bid at every auction. They are the only firms the Federal Reserve deals with in the open market transactions it uses to make adjustments to interest rates and the money supply. Besides being required to participate in all auctions, primary dealers must make markets in all Treasury securities and report weekly to the Fed on their volume and their market positions.

To qualify for the Fed's inner circle, these firms -- there are now 40 -- must meet certain criteria. They must account for at least 1 percent of the trading for customers (as opposed to inter-dealer trading) in Government securities, and the Fed must be satisfied with their finances. Before the Auctions

Even before the auctions, there is a good deal of action in the when-issued segment of the market. While it may seem odd for firms to be trading securities that have not yet been issued, it is considered necessary to allow investors and dealers to estimate demand for the bonds. But the market is also subject to abuse. Although there are no public statistics on this market, it is clear that billions are traded during the intense activity that accompanies the auctions.

When-issued trading begins as soon as the Treasury announces just how large a bond sale will be. For example, on Wednesday it will announce the size of a two-year note auction, to be held Aug. 27, and a five-year note auction to be held the following day. The bonds will be issued on Aug. 30.

While some dealers and investors are buying bonds, other will be selling them, on a when-issued basis, expecting to buy them at the auctions. They are betting that interest rates will rise, and bond prices decline, by the time the actual auction is held.

Treasury rules bar bidders from buying more than 35 percent of the issue, including whatever bonds have been previously bought in the when-issued market. The 35 percent rule is one of the rules that Salomon has admitted breaking. It has also said it bought bonds for itself using customer names, without their authorization. Preventing a 'Squeeze'

The reason for the 35 percent rule is to prevent a "squeeze" from developing. In such a case, those who had sold bonds in the when-issued market would be forced to buy them from the few dealers who had possession of the actual bonds, and thereby be forced to pay higher prices than overall market levels would indicate.

The Treasury Department believes such a squeeze occurred last May, in an auction of two-year notes. Salomon has admitted buying at least 44 percent of the issue, saying the violation was inadvertent. The Government has not said how much, if at all, it thinks the squeeze did move rates. There was a spike in rates at the time of the auction.

But even as Salomon's board moves to name Warren E. Buffett, the respected chairman of Berkshire Hathaway Inc. and a Salomon director, as an interim successor to Mr. Gutfreund, there will be intense scrutiny of the workings of the Treasury markets -- and of Salomon's actions and their consequences.

Decisions for the Government

It is expected that any Government action against Salomon will include fines but could stop short of putting the firm out of the Treasury bond business. The Government needs to sell bonds, and Salomon's withdrawal from the market could make that more difficult. At the same time, a perception that an important part of the market is being abused could cost the Government money if buyers shy away.

The Treasury says that as a result of the squeeze, some dealers lost money, and it has expressed concern about future auctions. "If dealers are not reasonably comfortable that they can deliver securities that they have sold prior to the auction, they will be less likely to participate in pre-auction distribution of new issues," Assistant Secretary Mary C. Sophos wrote in a letter to Representative Edward J. Markey, Democrat of Massachusetts.

Representative Markey, the chairman of the subcommittee on telecommunications and finance, said the Salomon scandal "underscores the need for improvements in regulation."

Those changes could include requirements to make more information about pricing available to the public and to open trading practices to closer scrutiny. The Securities and Exchange Commission would like to get jurisdiction over such trading, a desire that bond dealers have resisted.
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August 19, 1991, New York Times, Equity Issues This Week,

BMC West Corp., 1.9 million common shares. Salomon Brothers. EZCORP Inc., 1.8 million common shares. Kidder, Peabody.

Foxmeyer Corp., 9 million common shares. Paine Webber. IMRE Corp., 2 million units, each unit consisting of 3 shares and one warrant. Allen & Co. Infrasonics Inc., 1.5 million common shares. Kemper. Jundt Growth Fund, 6 million common shares. Merrill Lynch.

Main St. & Main Inc., 1.3 million units, each unit consisting of 2 shares and 1 warrant. H. J. Meyers. Orchids Paper Products Co., 3.2 million common shares. Prudential Securities. Rabco Health Services Inc., 8.2 million common shares.

Salomon Brothers. Vans Inc., 4.1 million common shares. Montgomery Securities. Zenith Laboratories Inc., 1.6 million common shares. Kidder, Peabody. Source: MCM CorporateWatch
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August 19, 1991, New York Times, Salomon Is Punished by Treasury, Which Partly Relents Hours Later, by Kurt Eichenwald,

In an extraordinary action, the Treasury Department yesterday suspended Salomon Brothers Inc., one of Wall Street's biggest trading and investment houses, from bidding in Treasury auctions, because of the scandal involving the firm's illegal bidding in that market.

But hours later, the department partly reversed itself after a personal appeal to Nicholas F. Brady, the Treasury Secretary, by Warren E. Buffett, who was named chairman and chief executive of the scandal-torn firm at a dramatic board meeting yesterday.

Mr. Buffett's appeal, made during the course of several telephone calls yesterday, did not succeed, however, in stopping the department from limiting Salomon's role in the auctions until the scandal is fully investigated.

While Salomon will be permitted to bid in the auctions for itself, the firm will not be allowed to place orders for clients, a move that will drive that business to the firm's competitors and prevent Salomon from examining customer sentiment to make its own investment decisions.

The actions by the Treasury came as the scandal at Salomon appeared to widen further. Mr. Buffett disclosed yesterday that records of the firm had been altered by some executives in what appeared to be an attempted cover-up of the illegal bidding. He also said the firm had committed one additional violation of the bidding rules that had not been previously disclosed, by failing to count the purchase of Treasuries by a subsidiary.

Illegalities Admitted

Previously, Salomon had admitted illegally purchasing more than its allowed share of 35 percent at several Treasury auctions by submitting bids in customers' names without their approval. In addition, the firm said it had mistakenly purchased $1 billion worth of the securities as the result of a practical joke.

The disclosures capped a weekend of rapid developments in the unfolding scandal. Mr. Buffett yesterday selected Deryk C. Maughan, a vice chairman who only came to the New York office from Tokyo last month, to run the daily operations and help restore the shaken confidence of the firm. [ Page D1. ]

The appointment was made because of a vacuum in leadership caused by the scandal. John W. Meriwether, a vice chairman who has long been thought a possible leader for the firm, informed Mr. Buffett on Saturday that he would resign. In doing so, he joined John H. Gutfreund, the chairman and chief executive who built the firm into a bond-trading powerhouse, and Thomas W. Strauss, the president and Mr. Gutfreund's protege, both of whom announced Friday that they would resign.

Board Accepts Resignations

The resignations of all three men, who were told of an illegal bid in April but failed to inform the Government until this month, were accepted by the board at yesterday's meeting.

The board yesterday also dismissed two senior executives whose activities are at the heart of the scandal. They are Paul Mozer, the head of Salomon's government bond trading desk, and Thomas Murphy, a top aide to Mr. Moser.

Late last night, executives with the firm continued meetings to name new heads of trading desks vacated as a result of the resignations and dismissals.

The result of the management upheaval is that Salomon, the firm which built itself into a Wall Street powerhouse on the back of its trading prowess, will now for the first time in its history not have a trader as chairman.

In addition to making sweeping management changes, Mr. Buffett said yesterday at a news conference that he saw his role as making sure the firm cleaned itself up.

"The job we have is to come clean in an appropriate way with whatever regulatory authorities believe we may not have behaved in an appropriate way," Mr. Buffett said. "It is in our interest and it is certainly in the market's interest to find out what has been done."

Interim Changes in Procedure

The firm yesterday released a copy of interim changes to its Treasury auction procedure. The four-page, single-spaced document contains some surprising new rules; for example, the trading desk is now not permitted to withhold order confirmation slips to customers without written approval.

At the news conference, Mr. Buffett disclosed a number of new details about the widening scandal. As part of the illegal bidding, records of the firm were altered by executives in what Mr. Buffett said he "would characterize as a cover-up" of the illicit transactions. Mr. Buffett said that none of the senior executives who resigned knew anything of the cover-up, adding that the firm was examining the role of the dismissed executives.

Mr. Buffett said he did not have sufficient information to provide more details. But other executives with the firm said that order tickets, which are filled out after bids are placed, were altered in what appeared to be an effort to hide the scheme from Salomon's compliance department.

In at least one additional violation of the rules, Mr. Buffett also disclosed that Phibro Energy, Salomon's oil refining and trading operation, had submitted a bid for $104 million of Treasury securities at the May auction, with that bid not being reported by the government bond trading desk as part of Salomon's full position.

Mr. Buffett also provided new details about how Mr. Gutfreund and other executives first learned of the illegal bidding and about actions the firm took when it concluded there was something seriously wrong at the desk. While shedding more light on the episode, the additional details also created more questions, about the actions of both the firm and Government regulators.

Mr. Gutfreund and two other senior executives learned of one illegal bid in April, Mr. Buffett said, when Mr. Mozer showed them a copy of a letter the Treasury had sent to a Salomon client asking about a bid the client was said to have made in the February auction.

The bid turned out to have been entered by Salomon in the client's name but without that client's knowledge or request. Mr. Buffett added that, while the letter was not accusatory, "it was obviously going to lead to something if you answered it truthfully."

Questions on Letter

That information suggests that if the client told Treasury that it had not made such a bid, the Government could have known as early as April that something had gone wrong -- possibly even illegal bidding. Treasury Department officials did not offer further comment on the letter or say what they had learned from the client or even who the client was.

Mr. Buffett's statements also raised new questions about actions taken by the firm in recent months and by its lawyers, Wachtell, Lipton, Rosen & Katz. The new chairman said that in early July, the firm was so concerned about questionable activities on its government trading desk that it hired Wachtell, Lipton to conduct an inquiry.

Mr. Maughan said that Wachtell, Lipton was hired because "senior management had come to believe they were not getting the whole story" from its traders. Weeks of Silence

Even as Salomon brought in lawyers to conduct the inquiry, it still apparently did not report these suspicions to regulators until weeks later, on Aug. 9, one day after it had participated in the Government's huge quarterly refinancing.

It is not clear whether Wachtell, Lipton pressed Salomon to make a report any earlier. "Wachtell, Lipton's response was to report to senior management," Mr. Maughan said of the action by the law firm.

A telephone call to Martin Lipton, a partner at the firm, was not returned late yesterday.

All of the questions surrounding the Salomon scandal will be part of the investigations currently being conducted by the Government. In addition to the Treasury inquiry, civil and crimnal investigations of the affair are being conducted by the Federal Reserve, the Securities and Exchange Commission and the Justice Department.

Impact on Bottom Line

But the action taken by Treasury yesterday, even though it was less severe than it might have been, will have an impact on the firm's bottom line. Stanley Shopkorn, a vice chairman at the firm, said the action would "make things a little more difficult" for the firm at Treasury auctions.

"The less inquiries you see, the less flow you see," Mr. Shopkorn said, referring to market activity. "The less flow you see, the more you have to act on intuition."

This additional obstacle to doing business will come as the very character of Salomon Brothers is put under a microscope by its new management. In his statements, Mr. Buffett made clear that there would be changes in the culture and character of Salomon Brothers perhaps as significant as those made by Mr. Gutfreund, who over the last decade molded the firm into one of the biggest, most successful and most aggressive investment banking houses on Wall Street.

'Macho and Cavalier'

Mr. Buffett said the scandal at Salomon, also known as one of the toughest and most arrogant financial firms, was in part fueled by what he described as the firm's "macho and cavalier" culture.

"The culture did, in some way, contribute to a couple of people's behavior," he said, adding that he viewed changing that culture as an important part of his job.

"I have seen cultures change," Mr. Buffett said, referring to other companies, adding that "the behavior and goals of the top people will have a lot to do with" a change at Salomon.

Although Mr. Buffett said he had long admired Mr. Gutfreund, he made clear yesterday that he was extremely distressed by the actions of the former management. "The failure to report is, in my view, inexplicable and inexcusable," he said.

Moreover, Mr. Buffett said that employees who did not understand that Salomon had entered a new era would be dealt with harshly.

"If they don't get the message, and act in a way that is harmful to our goals, they will be out," Mr. Buffett said.

Painful Period Expected

Executives with other Wall Street firms predict that this is going to be a painful period for Salomon. A firm that has, by temperament and history, been led by traders, will now be under the control of a long-term investor and an investment banker.

With Mr. Buffett holding his post on only an interim basis, much of the focus will be on Mr. Maughan, the new chief of operations. While Mr. Maughan has been seen as a rising star at the firm for more than a year,he has not yet had a chance to make much of an impression on Wall Street.

Indeed, two senior Wall Street executives in administrative positions at other firms said yesterday that they could not comment on Mr. Maughan's appointment simply because they had never heard of him.

But Mr. Maughan's colleagues, many of whom praised his appointment yesterday, had expected him to rise to the top. At his going-away party in Tokyo, when he was moving to New York to take over the investment banking job after many years in Japan, his coworkers joked that he should not worry about the change because he would be running the firm in two years.
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August 19, 1991, New York Times, Upheaval at Salomon; Treasury Statements on Salomon,

Following are two statements from the Treasury Department today about action it was taking against Salomon Brothers. The first, released in the morning, barred Salomon from bidding in Treasury auctions. The second, released in mid-afternoon, explained that the Treasury was amending its earlier action after discussions between Treasury Secretary Nicholas F. Brady and Warren E. Buffett, Salomon's new chairman.

The Treasury Department stated today it has withdrawn Salomon Brothers' right to participate directly in further Treasury auctions until appropriate steps are taken to address irregularities and pending the results of ongoing investigations.

This decision does not otherwise affect Salomon Brothers' status as a primary dealer, which the Federal Reserve Bank of New York indicated on Friday is under review.

Early this afternoon, the Treasury Secretary was informed of the scope of management changes at Salomon Brothers and of plans to address management and adminstrative problems that surfaced last week.

The Treasury welcomes these important steps, and in view of these developments the Treasury has agreed that Salomon Brothers will be permitted to participate in Treasury auctions for the purpose of purchasing securities for its own account.

The secretary expressed high regard for Mr. Buffett and stated he looks forward to a constructive working relationship with the new chairman.
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August 19, 1991, New York Times, 5 Top Officers Leave Salomon As Buffett Takes Control of Firm, by Lawrence Malkin,

NEW YORK— Warren E. Buffett, one of the most respected private investors in America, took control of Salomon Brothers Inc. as chairman Sunday, and he quickly talked the U.S. Treasury secretary out of a ban on the firm's participation in government bond auctions.

Salomon jettisoned its chairman and four other top executives Sunday because of a scandal involving the firm's attempts to corner the market in Treasury bonds at several recent auctions.
Mr. Buffett is taking over from John Gutfreund, whose trading skills animated the Salomon during the 1980s.

Berkshire Hathaway Inc., a holding company of which Mr. Buffett also is chairman, owns a 14 percent stake in Salomon. Moving to protect that investment, Mr. Buffett said he would serve as interim chairman while Salomon tried to regain its reputation.

To help him "clean up the sins of the past and capitalize on the assets of the firm," Mr. Buffett said, he appointed Deryck Maughan as Salomon's president and chief operating officer. Mr. Maughan, 43, was head of Salomon's Asian operations for five years and was appointed co-chairman of the firm's investment-banking department in New York.

The straight-laced and poker-faced former British Treasury official was chosen over about a dozen other Salomon senior insiders to enact controls on Salomon's free-wheeling traders. The controls had been voted by the board and discussed with Treasury Secretary Nicholas F. Brady in several phone calls from Mr. Buffett on Sunday.

The Treasury suspended the firm from its auctions Sunday morning because of attempts by Salomon to corner government securities markets, but it partly rescinded the decision following the announcement that Mr. Gutfreund and the four other executives would leave the firm.

Mr. Brady relented to the degree of allowing the firm to join in the auctions, but only to buy bonds for its own inventory and not on behalf of clients. The essence of Salomon's auction rule violations was that it tried to corner the market during three Treasury auctions by submitting the names of customers who had not put in orders.

The firm remains under investigation by the Treasury, the Federal Reserve Board and the Securities and Exchange Commission.

The aim of the Treasury ruling was to restrict Salomon's government bond business to maintain confidence in the honesty of the market that depends heavily on the trust of the public as well as among the dealers themselves.

Along with Mr. Gutfreund's resignation came those of Thomas W. Strauss, the firm's former president, and John Meriwether, who was named head of the government bond department earlier this month as the scandal unfolded.

Salomon also dismissed two other executives who were directly involved with the market-cornering activity, in which the firm bid for more than the 35 percent maximum amount at three auctions. The two, who previously had been suspended, were Thomas Murphy, head of the government securities trading desk, and Paul Mozer, who had responsibility for foreign exchange trading. Mr. Murphy is chairman of the committee on government trading practices of the Public Securities Association, the dealers trade group.

Recounting what he had been told since taking over at Salomon, Mr. Buffett said at a news conference Sunday that Mr. Meriwether was approached by Mr. Mozer and shown a letter from the Treasury to a Salomon client with a copy to Mr. Mozer. Mr. Mozer knew the letter "would lead to trouble relating to the April bond auction," Mr. Buffett said.

Mr. Gutfreund learned about it within a day, Mr. Buffett said, "but it is inexplicable to me that this did not get reported."

He continued: "Mr. Meriwether said it was not his job to report this. I've seen similar dumb things happen in companies I've been involved in, and I cannot explain the subsequent failure to report."

Salomon began an investigation on July 6 by bringing in Wachtel Lipton Rosen & Katz, a New York law firm.

Mr. Buffett, 60, is one of the wealthiest people in the world, with a net worth of $4.4 billion. He operates his company on the long-term principles of value. He invests from his home in Omaha, Nebraska, and he is the antithesis of the swaggering Salomon trader. He protected Salomon from the corporate raider Ronald O. Perlman and saved Mr. Gutfreund's job in 1987 by investing $700 million in Salomon preferred stock.

Mr. Buffett made it clear that the most difficult thing about his task would be to change Salomon's wheeling and dealing corporate culture,which also has been the source of its big profits. The trading culture was satirized in a best-seller entitled "Liar's Poker," written by a former junior Salomon bond salesman.

The new chairman warned that traders who did not abide by the new controls would be let go.

The controls include the restriction of advance trading in Treasury securities before auctions to the government securities desk, as well as more stringent record keeping and daily reports than in the past, and confirmation in writing of all customer orders.

Mr. Buffett said the firm had to "earn back its integrity, 98 percent by behavior and only 2 percent by words." One way of doing so was clearly to bring in Mr. Maughan as president from the investment-banking side of the firm.

Mr. Maughan told reporters, "I am not an American, not a trader, and I am as astonished as you."

Mr. Buffett's task was made a little easier by the Treasury's change of heart on the suspension of Salomon from the regular auctions of bills, notes and bonds. These sales are not only are essential for financing the U.S. government's annual deficit, now running at almost $300 billion, but also for the the smooth operation of the nation's money markets.

Salomon can also continue to trade in the huge private, or secondary, market for the resale of Treasury securities. These account for less than 10 percent of Salomon's gross revenue but represent the firm's flagship business.

More crucial to the firm's future are the millions of dollars at stake in civil suits filed by competitors who claimed they lost money in Salomon's squeeze on the market. Any civil or criminal indictments that could further damage the firm's reputation and credibility.

The threat of such events sent the firm's stock down by $7 last week, to $27.875 a share. On Friday, the fears also knocked $110 off the value of a share of Berkshire Hathaway, which closed at $8,825.
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August 20, 1991, New York Times, S.E.C. Widens Inquiry In Treasuries Scandal, by Kurt Eichenwald,

The Treasuries market scandal that has rocked Salomon Brothers Inc. widened yesterday as the Securities and Exchange Commission began requesting documents from dozens of other firms, people who have been briefed on the growing inquiry said. The commission is seeking evidence of possible widespread collusion, fraud and other illegal practices in the $2.2 trillion Treasuries market.

The far-reaching requests began to go out over the weekend, providing the first indication that Government investigators suspect that illegal bidding practices of the sort disclosed at Salomon Brothers may have been more widespread than previously thought. All primary dealers, which are the institutions authorized to trade directly with the Federal Reserve, are being asked to provide documents in the inquiry, said the people who were briefed on the investigation. They spoke yesterday on condition that they not be identified.

The requests were issued after a formal order of investigation was approved by the S.E.C.'s commissioners. People involved in the case said that the Government's official name of the investigation did not even mention Salomon Brothers; it is called "In the Matter of Certain Treasury Notes."

Naming the securities and not Salomon would seem to indicate that the commission believes the illegal activities might not be limited to those disclosed by the firm earlier this month.

The S.E.C. has not yet subpoenaed other firms. Rather, it is asking for voluntary cooperation. "They expect voluntary compliance," one person involved in the case said. "If they don't get it, they will send subpoenas right away."

The broadening of the investigation came as Salomon Brothers continued to move to restore order after the upheaval created by its admissions of illegal bidding in the Treasury market. Warren E. Buffett, the Omaha investor who was named chairman and chief executive of the firm on Sunday, flew to Washington yesterday to meet with a series of regulators who are currently investigating the firm.

Mr. Buffett, whose company, Berkshire Hathaway Inc., put $700 million into Salomon in 1987 as the firm was fighting off a hostile takeover, replaced John H. Gutfreund, whose resignation as chairman and chief executive was accepted at a board meeting on Sunday.

Salomon is currently under investigation by the S.E.C., the Treasury, the Federal Reserve and the Justice Department for its illegal bidding during several Treasury auctions.

Salomon has admitted illegally purchasing more Treasury securities than the 35 percent maximum allowed any one firm, as well as other violations. Wall Street executives said such actions could create the perception that a leading force in the Treasuries market was dishonest and could damage market credibility worldwide.

Dismissed Executives Replaced

The firm also moved rapidly yesterday to replace two senior Salomon executives who were dismissed on Sunday for their role in the unfolding scandal.

Salomon told its employees that Eric R. Rosenfeld, a 38-year-old managing director and co-head of fixed-income arbitrage, would be interim head of the Government trading desk. Hans Ulrich Hufschmid, 35, a vice president and manager of the foreign exchange desk in London, was named head of foreign exchange in New York.

The two men replace Paul Mozer and Thomas Murphy, the two former top traders on the government desk who were dismissed for their roles in submitting illegal bids during several Treasury auctions since last December.

As Mr. Buffett worked in Washington yesterday to contain the damage at Salomon, Deryck C. Maughan, the former co-head of investment banking, who was named chief operating officer on Sunday, took the firm's reins, seeking to calm executives at the New York office.

In a series of morning meetings, Mr. Maughan repeatedly told the firm's executives and employees that he believed that Salomon should now turn back to its business.

The statements were given at 8 A.M. at a meeting of the sales and trading departments and were repeated at a meeting of the investment banking division at about 8:35 A.M.

"He said that we have hit bottom and we are going to go up from here," one executive who heard Mr. Maughan's statements said. "He said that there were going to be some of them who worried about these extraordinary events, and that the rest of us should get back to business."

Mr. Maughan's statements were greeted with applause by Salomon employees, people who attended the meetings said.

Effect of Soviet Coup

Salomon was also helped yesterday by outside factors. With traders re-energized by the tumult created in the financial world by the coup that deposed President Mikhail S. Gorbachev of the Soviet Union, morale at the firm picked up.

"I don't mean this the wrong way, but the coup couldn't have happened at a better time," one executive with the firm said. "In this, the marketplace needs Salomon Brothers, and people here can't help but focus on the marketplace."

But many changes at the firm were evident. During yesterday's Treasury auction, Salomon participated, but employees were under the watchful eyes of lawyers and compliance officers to insure that all bids were properly done. As mandated by the Government on Sunday, the firm was prevented from placing bids for clients at the auctions.

The government trading desk was also operating under a series of new rules that the lawyers and officers made sure were met.

The changes at Salomon have not yet solved the firm's problems with its customers. Indeed, the California Public Employees' Retirement System, the nation's largest state pension fund, met yesterday to decide what actions it should take because of the scandal.

"The question of whether or not to impose any sanctions on Salomon is currently under discussion," said Gray Davis, the California State Comptroller. "Clearly we have a fiduciary obligation to our benficiaries in this."

The efforts to control the damage at Salomon Brothers came as primary dealers throughout Wall Street began to receive notification that the S.E.C. wanted voluminous documentation from them as part of its investigation of the scandal.

A six-page letter dated Aug. 16 from William McLucas, the head of the S.E.C.'s enforcement division, began to be sent over the weekend to the 40 primary dealers, which are the largest buyers at government auctions.

Mr. McLucas declined yesterday to comment on the S.E.C. investigation.

The S.E.C. Request

In the letter, he said that the "staff of the Securities and Exchange Commission is requesting that primary dealers provide" documents that might detail a number of illegal schemes being examined by the commission. The requests apply to documents held by both the firms and their employees.

The S.E.C. inquiry is examining possible illegal activities that have taken place at Treasury auctions since July 12, 1990 -- far earlier than the first violation that was admitted this month by Salomon. That violation took place at the December auction last year.

Many of the requests for information deal with any collaborative arrangements that would indicate an effort to purchase secretly more than the legal maximum for a firm -- 35 percent of any single auction.

A Line of Inquiry: 'Parking'

The request for documents indicates that the S.E.C. suspects the Salomon scandal could involve "parking," the same violation that was at the heart of the scandal that brought down Drexel Burnham Lambert Inc. in the 1980's. Parking is a practice in which the true owner of a security is hidden through an arrangement with another party, allowing the owner to avoid reporting and other legal requirements.

In its letter, the S.E.C. asked for documents that relate to "the submission of false bids at any auction for U.S. Treasury securities or any parking or similar arrangements."

That line of inquiry is focusing on whether firms may have submitted bids in customers' names with an agreement that the firm, not the customer, would be the true owner of any securities purchased. Such an arrangement could allow a firm to buy more than 35 percent of the securities.

Deadline of Aug. 29

Salomon has admitted submitting bids in the names of customers who had not authorized or approved the orders.

The S.E.C. is also seeking any information that would indicate that any customers of the primary dealers had submitted bids for any single Treasury auction at a single yield level that would exceed the 35 percent maximum.

In addition, the inquiry is examining whether any firms have maintained "overstated, excessive or inaccurate information" in their records.

The S.E.C. appears to be trying to gather the information quickly in its inquiry. Despite the breadth of its request, the commission has set an Aug. 29 deadline for voluntary compliance with the requests for information.
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August 20, 1991, New York Times / Albany Times Union, Other Firms Probed as Part of Salomon Brothers Scandal, by Kurt Eichenwald,

The scandal that has rocked Salomon Brothers Inc. widened Monday as the Securities and Exchange Commission began requesting documents from dozens of other firms, seeking evidence of possible collusion, fraud and other illegal practices in the $2.2 trillion market for U.S. Treasury issues, people who have been briefed on the inquiry said.

The far-reaching requests began to go out over the weekend, providing the first indication that government investigators suspect that illegal bidding practices of the sort disclosed at Salomon Brothers may have been more widespread than previously thought.

All primary dealers, which are the institutions authorized to trade directly with the Federal Reserve, are being asked to provide documents in the inquiry, these people, who spoke on condition that they not be identified, said.

The requests were issued after a formal order of investigation was approved by the SEC's commissioners. People involved in the case said that the government's official name of the investigation did not even mention Salomon Brothers; it is called "In the Matter of Certain Treasury Notes."

Naming the securities and not Salomon would seem to indicate that the commission believes the illegal activities might not be limited to those disclosed by the firm earlier this month.

The SEC has not yet subpoenaed other firms. Rather, it is asking for voluntary cooperation.

"They expect voluntary compliance," one person involved in the case said. "If they don't get it, they will send subpoenas right away."

The broadening of the scandal came as Salomon Brothers, deeply troubled, continued to move to restore order.

Warren E. Buffett, the Omaha investor who was named chairman and chief executive of the firm Sunday, flew to Washington on Monday to meet with a series of regulators who are investigating the firm.

Buffett, whose company, Berkshire Hathaway Inc., put $700 million into Salomon in 1987 as the firm was fighting off a hostile takeover, replaced John H. Gutfreund, who resigned as chairman and chief executive Sunday.

Salomon is under investigation by the SEC, the Treasury, the Federal Reserve and the Justice Department for its illegal bidding during the Treasury auctions.

Salomon has admitted illegally purchasing more Treasury securities than the 35 percent maximum allowed any one firm, as well as other violations.

Wall Street executives said that such actions could create the perception that a leading force in the Treasuries market was dishonest and could damage market credibility worldwide.

The firm also moved rapidly Monday to replace two senior Salomon executives who were dismissed Sunday for their role in the unfolding scandal.

Salomon told its employees that Eric R. Rosenfeld, 38, a managing director and co-head of fixed-income arbitrage, would be interim head of the government trading desk.

Hans Ulrich Hufschmid, 35, a vice president and manager of the foreign exchange desk in London, was named head of foreign exchange in New York.

The two men replace Paul Mozer and Thomas Murphy, the two former top traders on the government desk who were dismissed for their roles in submitting illegal bids during several Treasury auctions since last December.

The appointments came as Salomon's new senior management, named Sunday at a weekend meeting of the firm's board, moved swiftly to try to contain the damage, both in Washington and at the firm.

As Buffett worked in Washington, Deryck C. Maughan, the former co- head of investment banking, who was named chief operating officer Sunday, took the firm's reins, seeking to calm executives at the New York office.

In a series of morning meetings, Maughan repeatedly told the firm's executives and employees that he believed that Salomon should now turn back to its business.

Salomon was helped Monday by outside factors. With traders re-energized by the tumult created in the financial world by the coup that deposed President Mikhail S. Gorbachev of the Soviet Union, morale at the firm picked up.

"I don't mean this the wrong way, but the coup couldn't have happened at a better time," one executive with the firm said. "In this, the marketplace needs Salomon Brothers, and people here can't help but focus on the marketplace."
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August 21, 1991, New York Times, Brady Raises Possibility Of More Bid Violations, by Louis Uchitelle,

Treasury Secretary Nicholas F. Brady suggested yesterday that other Wall Street dealers in Treasury securities, in addition to Salomon Brothers, might have violated the Government's rule against buying more than 35 percent of the bills, notes or bonds offered at each Treasury auction.

"I certainly hope there have not been other violations of the 35 percent rule, but I don't know," Mr. Brady said in an interview. He said the Salomon scandal had prompted an inquiry into the practices of other dealers to determine whether "any were involved in similar incidents."

Mr. Brady also said that while he knew of no violations as egregious as Salomon's, there might well be cases in which dealers went just over the line, purchasing 37 or 38 percent of an auction. "The highway speed limit is 55 miles an hour, and you go 57," Mr. Brady said. "What happens to you most of the time? Nothing. But that is a violation of the speed limit."

Government Is Defended

Mr. Brady rejected any suggestion that Government supervision of the auctions might have been lax. Last May, he said, the Treasury knew that Salomon had made auction purchases well in excess of the 35 percent limit and hidden the illegal transactions under other names. The Treasury was building a case against Salomon, Mr. Brady said, when the firm announced its own transgressions last week, precipitating the current scandal.

Nevertheless, other Government officials said this week that Government supervision of the auctions had been lax. They said, for example, that the Federal Reserve Bank of New York collected detailed data about auction purchases by the 40 dealers authorized to participate in them, but rarely reviewed the data to spot illegal activity.

Penalty Intended as Signal

The Securities and Exchange Commission has been seeking greater authority to regulate the $2.2 trillion Treasury security market, with $124 billion in daily trading. The Treasury has favored the present sharing of responsibilities with the Federal Reserve and the S.E.C. Nevertheless, Mr. Brady said Salomon's transgressions -- stretching back at least into 1990 -- "made this moment a good time to review the regulatory process itself."

Mr. Brady also portrayed the Treasury Department's disciplinary action against Salomon last Sunday as largely a signal to the world that the United States Government intends to enforce honest auctions of Treasury securities.

He offered that view in explanation of the Treasury's announcement, at 10:30 A.M., Sunday that Salomon would be banned from Treasury auctions, a severe penalty. The announcement came just as Salomon's directors, under Warren E. Buffett, the firm's newly appointed chairman, were gathering in New York to consider steps to prevent future rules violations. Five hours later, the Treasury reduced the penalty, permitting Salomon to participate in the auctions for its own account, but not in behalf of customers. The pullback came after Mr. Buffett spoke with Mr. Brady by telephone.

Mr. Brady did not disclose the details of the conversation with Mr. Buffett, but he denied that the initial stiff penalty was intended to coerce Salomon's directors into taking strong measures against those who had violated the rules and to adopt regulations that would prevent future violations. Privileges and Obligations

Rather, Mr. Brady said, the stiff prohibition announced in the morning was intended "to make a clearcut statement" that the privilege granted to dealers to participate in auctions "carries with it the obligation to conduct one's business in a manner that is acceptable to the public."

The stiff initial penalty, Mr. Brady said, also represented an effort to prevent any political damage from the Salomon scandal, with its suggestion that the Government regulatory system had failed to function properly. The Salomon scandal was a particularly important moment to make tis point, he suggested, coming as it did on top of other events that have eroded public confidence in government regulation. The most recent have included the Japanese stock market scandal and the illegal operations of the Bank of Credit and Commerce International.
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August 22, 1991, New York Times, Corporate Bonds Status Stays Intact for Salomon, by Michael Quint,

While controversy swirls around Salomon Brothers' bidding for Treasury securities, and it is barred from submitting bids for customers at future auctions, the firm has become even more prominent in the corporate bond market.

Salomon's strength in distributing new securities to investors was recognized yesterday when it joined Goldman, Sachs & Company in managing a $602 million issue of taxable bonds issued by the State of California.

Although the California Public Employee Retirement System has suspended Salomon Brothers from the list of firms it will do business with in Treasury securities, the State Treasurer's office was willing to sell the new bonds to an underwriting group that included Salomon Brothers.

Jennifer Openshaw, a spokeswoman for the State Treasurer's office, said yesterday that Salomon's problems in the Treasury market "pose no risk to the bonds we sold today." She added that the State Treasurer's decision to stop making short-term investments in commercial paper issued by Salomon Brothers did not have any bearing on the bond issue that Salomon helped underwrite "because they were part of the group which submitted the best bid."

The bid submitted by the team of Goldman and Salomon for the California bonds set an interest cost to the state of 7.911 percent. That rate was low enough to narrowly edge out a competing bid by a large group of securities firms led by Merrill Lynch & Company, whose bid was 7.923 percent. An additional four bids were submitted by other Wall Street firms.

Since Aug. 9, when Salomon Brothers first announced problems in its Treasury securities department, the firm has been handling more than its normal share of new corporate issues. Last week, Salomon Brothers was lead manager for $500 million of new issues, or about 12.5 percent of the week's new offerings, while this week it has managed $400 million of new issues, or 29.6 percent of the new offerings.

The recent new issues handled by Salomon Brothers included $250 million by Capital Cities/ ABC, $125 million by Ingersoll-Rand and $250 million by United Airlines.
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August 23, 1991, New York Times, Economic Scene; Brady's Message On the Scandals, by Leonard Silk,

THE Salomon Brothers' misconduct in the Treasuries market -- coming after such scandals as the fall and bailout of hundreds of savings and loans, the drug and money-laundering and bribing activities of the Bank of Credit and Commerce International, the junk bond debacle of Drexel Burnham Lambert and the assorted frauds in the Japanese stock market -- has further stirred anxieties about the integrity of financial markets. Unless they are quelled, such anxieties could hurt saving and investment all around the world.

In cracking down hard on Salomon Brothers for exceeding the 35 percent quota for primary dealers in the auction markets for Government securities, the Treasury was sending a message to the other 39 primary dealers in that market that conduct like Salomon's would be dealt with harshly. With $2.3 trillion in Federal debt to be marketed and rolled over ad infinitum -- a debt total that is expected to increase by $279 billion in the fiscal year 1991 and by $362 billion in 1992 -- any loss of faith in the integrity of the Government securities market might be extremely costly.

Treasury Secretary Nicholas F. Brady, in an interview on Tuesday, said he did not know how "deep" the problems in the Government securities market went. The Treasury, he said, was not an investigative agency; the S.E.C. and the Federal Reserve, on which the Treasury depends, are now "collecting information." But Mr. Brady is clearly warning every house that might be acting as Salomon was to clean up its act fast.

He was asked why the Treasury, having first announced, at 10:30 Sunday morning, that Salomon had been barred from bidding in the primary Treasury auction market, said five hours later, following a telephone conversation between Mr. Brady and Warren E. Buffett, the firm's new chairman, that Salomon could bid for its own account but not for its customers. Mr. Brady replied, "In substance, that changed the situation only marginally."

At the time of the first announcement Sunday morning, he said, there had been only "a lot of talk about what might happen," but no concrete action. By the time of the second announcement, said a Treasury official, who requested anonymity, the Salomon board had taken four actions: (1) Dismissed the top three executives -- John H. Gutfreund, the chairman; Thomas W. Strauss, president, and John W. Meriwether, vice chairman; (2) discharged the head of the Government trading desk, Paul Mozer, and his No. 2, Thomas Murphy; (3) announced other administrative and management changes, and (4) pledged, through Mr. Buffett, to cooperate fully with the Treasury, S.E.C. and Fed, to "right the wrongs." Mr. Buffett gave Mr. Brady his personal assurance that the situation at Salomon would be cleared up.

Mr. Brady denies that confidence in United States securities has been shaken. He said that the Federal deficit was "too big" but that the United States was able to sell its obligations to the world. "The enormous amount of our bonds people buy," he said, "imply confidence not only in United States securities but in the method by which we distribute them, directly and with dispatch."

Instead of damage to the United States resulting from the Salomon scandal, he said, the way it was being handled would "enhance everybody's confidence." The United States financial market, he said, is "deep and liquid -- I'm not sure whose exceeds it."

But with financial markets having gone global on a 24-hour-a-day basis, don't investors need better international regulation? "Good question," Mr. Brady said. But he added, "We have to rely on the individual countries." Every country, he noted, has its own rules and codes. He conceded that it might be desirable to negotiate standard regulations at least for the principal financial markets.

He cautioned against overregulating financial markets, contending that "the cure can be worse than the disease being cured." The United States, he said, now has the opportunity to "do it right" and show that "our market is the safest in the world."

Did he have any new thoughts on how to bring the climbing budget deficit down? He said the worsening of the projected deficit for 1992 was the result of to the "vagaries of the S.& L. bailout and Desert Storm," but he had "confidence that in the long run -- that is, the next five years -- the outlook was for the deficit to slope downward."

Official projections support that view. The Congressional Budget Office projects the deficit will peak at $362 billion in the fiscal year 1992 and fall to $156 billion by 1996.

The Administration's Office of Management and Budget sees a peak deficit of $348 billion in 1992 and expects a surplus of $20 billion in 1996.

Herbert Simon, Carnegie-Mellon's Nobel laureate in economics, says, "If you can't forecast, stay flexible." And Treasury Secretary Brady, the nation's premier bond salesman, seems to be saying, in the wake of the Salomon scandal: If you can't forecast the public debt, just be sure you can sell it to the world.
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August 23, 1991, New York Times, Salomon Starts to Carry Out Contingency Finance Plan, by Kurt Eichenwald,

Salomon Brothers Inc. has begun using a contingency financing plan the firm had developed to deal with periods of crisis, executives at the investment firm said yesterday.

As the firm moved to steady its finances, details of the Justice Department's criminal investigation into the Salomon scandal began to emerge. People involved in the case said prosecutors were considering antitrust charges against some traders at Salomon and other Wall Street firms.

The prosecutors are examining whether antitrust law were violated by traders acting together to put a "squeeze" on the market, these sources said.

Under Salomon's contingency plan, which was put into use last Friday, the firm is no longer selling new commercial paper as outstanding issues come due. Commercial paper, or short-term i.o.u.'s, is used by most Wall Street investment houses to finance daily operations.

Instead, Salomon is turning to repurchase agreements, or repos as they are known, in a widely used technique to raise money. Repurchase agreements are a short-term contract under which the seller of a security agrees to buy it back at a fixed price. In effect, repos are very short-term loans secured by the Treasury instruments.

The use of the plan is a sign that the firm is moving aggressively to protect its financial position in the wake of the Treasuries markets scandal that has shaken the firm in recent weeks. Salomon executives said they had decided to turn to the plan after John H. Gutfreund announced last week that he would resign as chairman and chief executive of the firm, as did Thomas W. Strauss, Salomon's president.

"As long as the contingency plan is playing out, we don't expect to have any funding problems for several weeks into the future," said Donald S. Howard, Salomon's chief financial officer. "It was designed to give us 60 days to gain credibility in the marketplace. I hope that in 60 days we will have that credibility."

Some clients and one purchaser of the firm's commercial paper have announced since the scandal began that they plan to curtail their business with the firm. Those announcements raised questions about whether Salomon could withstand a loss of confidence as a result of the scandal. The contingency plan allows the firm to bypass investors to finance its operations.

Salomon is doing repos with a number of banks, Mr. Howard said, including J. P. Morgan, BankAmerica, Citicorp, Manufacturers Hanover and others throughout the world.

The firm had about $10 billion in securities available in inventory for the repos before the scandal began to unfold. Since last Friday, that amount has dropped to about $7 billion as the securities have been used in repurchase agreements, Mr. Howard said.

The commercial paper that Salomon had outstanding last Friday was about $6.5 billion, he said. That amount has been reduced since then to about $6.2 billion yesterday, as the short-term paper matured.

While repo financing is easier to do when the markets are shaky, the firm will pay a slightly higher price for it. The difference between the interest charged on overnight repurchase agreements and the commercial paper rate fluctuate greatly each day. Mr. Howard said that while the total cost of financing would increase, in part because of greater operational costs, the difference would be minimal.

Development of the plan began several years ago. It is based in part on lessons Salomon executives learned from the collapse of Drexel Burnham Lambert Inc., the former Wall Street giant, after years of criminal and civil investigation.

"We went to school on Drexel Burnham," Mr. Howard said. "We saw what happened to them, and we learned from their experience. So we built a program to avoid the kind of problems that led to their demise."

The decision to use the contingency plan appears to have led to some harsh rumors about the firm yesterday that deeply affected the price of Salomon's stock. Shares of the company closed yesterday at $22.625, down $2.125, on rumors that the firm had stopped making markets in the secondary trading of its commercial paper.

Mr. Howard denied those rumors but said the firm was not offering the most attractive prices to investors who wanted to sell the paper. "They bought it for maturity," he said. "If they want to put it back to me now, they are going to have to pay a price for it." Trading Seems to Be Busy

As the firm worked to insure its financing, the trading floors at Salomon were busy yesterday. A number of traders said in interviews that although the firm had lost some clients' business in recent days, a number of other long-term clients had stepped up their trading activity.

Robert A. Kleinert, a trader on the firm's syndicate desk, said yesterday, "Our best customers are starting to send more business to us."

While it is impossible to confirm whether individual customers are increasing their business, such moves are likely. Whenever Wall Street firms with long-term customer relationships have faced trouble, it has been a standard response for the customers to begin to concentrate more of their business with that firm, not only as a show of support, but also to help keep the firm in good shape. That would keep competition healthy, and in the long run, hold down costs of doing business.

Tapping Long-Term Clients

Stanley Shopkorn, the vice chairman in charge of equities trading, said he had begun to tap into his long-term clients to seek more business for the firm during the crisis. "When you have business relationships over 18 years, you have customers who are very important to you," he said. "There are a number of those customers whose business is much higher."

It seemed to be back to business as usual on the Government trading desk, which has been at the center of the Treasuries market storm. Eric Rosenfeld, who was named head of that desk on Monday, said that while there was widespread concern, the traders seemed to be coping.

"No one is leaving the desk and going anywhere," he said yesterday while standing near his desk on the trading floor. "Nothing unusual is going on, except occasionally I'll get a call from a reporter or regulator trying to learn something about the Treasuries market." A Scandal Unravels

The scandal at Salomon began to unravel with a bid placed by Salomon in the February Treasuries auction in the name of Mercury Asset Management, people involved in the inquiry said yesterday.

Mercury, a pension fund part-owned by S. G. Warburg, the British investment firm, was said to have received an inquiry by the Treasury Department after officials there noticed that bids had been submitted in its name by both Salomon and S. G. Warburg & Company, the American subsidiary of Warburg. The total amount of those bids was more than the maximum allowed 35 percent of the auction, these sources said.

A copy of the letter was also sent to Paul Mozer, the former head of the firm's Government trading desk who was dismissed by the firm on Sunday. That letter was shown to Salomon's senior management in April, and they decided that the firm had submitted an illegal bid and that someone should tell the Government. But no one in the management did so.
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August 24, 1991, New York Times, Chief Legal Counsel Quits Salomon Under Pressure, by Kurt Eichenwald,

The Salomon Brothers scandal has ended another executive's career with the firm.

Donald M. Feuerstein, the firm's chief legal counsel, resigned yesterday under pressure from Warren E. Buffett, the new chairman and chief executive.

Mr. Feuerstein, a longtime Salomon executive, was one of the four senior Salomon managers who were told in April that at least one Government bond trader had engaged in illegal bidding in the Treasury securities market.

The other executives who were told of the violations of Treasury rules have already resigned. They include John H. Gutfreund, the firm's chairman and chief executive; Thomas W. Strauss, its president, and John W. Meriwether, a vice chairman.

People inside and outside the firm have been questioning since Sunday why Mr. Feuerstein, who bore the greatest responsibility for the firm's legal activities, was allowed to remain when the other three had to resign.
But people inside the firm have countered that Mr. Feuerstein told senior management repeatedly that the Government had to be informed of the transgression, although no action was taken.

Despite his apparent persistence, Mr. Feuerstein has still been criticized for failing to take the matter into his own hands and report it himself.

As a result, people inside the firm said, Mr. Buffett was put under increasing pressure to ask the firm's legal adviser to leave.

Mr. Feuerstein did not return a telephone call to his office yesterday seeking comment. But in a statement, he said, "I fully understand Mr. Buffett's request for my resignation and appreciate that the new management team at Salomon Inc. should have in my position an individual of their own choosing."

It was not immediately clear who Mr. Feuerstein's successor would be. But Richard Scribner, an official with the firm's compliance division, has been given increasing authority since the scandal began to unfold. For example, new rules issued for the government trading desk require that Mr. Scribner be consulted on many activities.

Salomon disclosed on Aug. 9 that it had submitted bids at several Treasury auctions in the names of customers without their authorization, enabling it to buy more than the maximum allowed. Federal rules allow a firm to buy no more than 35 percent at any single auction. The firm also submitted a $1 billion bid in error as the result of a practical joke.

Class Action Suit

Investors have been lining up to sue the firm. A class-action lawsuit on behalf of all purchasers of Treasury securities since December has been filed against Salomon, the firm disclosed yesterday.

In a filing with the Securities and Exchange Commission, Salomon said the suit, Wolf v. Salomon Inc., claimed that the firm violated racketeering laws through its illegal bidding practices in the Treasuries markets. Civil racketeering charges, which allege a pattern of behavior, can result in awards that are three times the actual damage.

The damages are not specified in the suit.

The Wolf case asks for all purchasers of Treasury securities from Dec. 1 through Aug. 12 to be allowed as a class to sue Salomon and a number of former executives, including Mr. Gutfreund.

In addition to the Wolf suit, three other actions have been filed against the firm by investors in the last two days. That brings the total number of suits filed to 16 since the violations were disclosed.

A number of clients of the firm have suspended some or all of their business with Salomon, including the World Bank and the California Public Employees' Retirement System, known as Calpers.

In its filing yesterday, Salomon acknowledged the loss of business, saying the firm "cannot preidict the ultimate impact of these actions."

After one of its most difficult days of trading in the past week on Thursday, Salomon stock recovered some of its losses yesterday, closing at $23.75, up $1.125 in trading on the New York Stock Exchange. The stock had fallen more than $2 on Thursday on rumors that it was no longer making markets in its commercial paper. Those rumors were unfounded, and were spurred by a decision by Salomon to stop issuing new commercial paper, or short-term i.o.u.'s, as the old debt matured. Salomon instead turned to other forms of financing.

Also yesterday, Standard & Poor's said it would continue to monitor the firm's debt with the possibility of a downgrade.

In a statement, S.& P. said Salomon "is now exposed to a number of material risks, including fines, litigation, organization turmoil and lack of confidence on the part of trading counterparties and providers of short-term funding."
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August 25, 1991, New York Times, It Isn't the Paul Mozer They Knew, by Jacques Steinberg,

Those who worked closely with Paul W. Mozer during his dazzling 12-year career at Salomon Brothers say they are shocked and baffled by the pivotal role he played in the bond scandal.

Though he traded Government securities with gusto, Mr. Mozer was not perceived, before this month, as a man who would cross the line into illegal or unethical activity. Many of Mr. Mozer's former colleagues said they were reserving judgement until he tells his story. Mr. Mozer, through his attorney, Lee Richards, has declined to comment.

But if, as the firm contends, Mr. Mozer submitted illegal bids at Treasury auctions, none of his former colleagues said they could understand why.

Mr. Mozer, a short, soft-spoken man who was the head of Salomon's Government bond desk until being dismissed last weekend, attacked his work as aggressively as he hit tennis balls on the private court outside his spacious weekend home in Sands Point, L.I.

"He runs down every ball he can," said one Salomon trader, who, like the six other current and former Salomon employees interviewed , insisted on anonymity. "He plays until he's exhausted." The trader said Mr. Mozer never resorted to cheating on line calls to win a match. "If anything," the trader said, "he's too lenient to the other guy."

"It's difficult for me to imagine he broke the law," said one Salomon trader. "It's not difficult for me to imagine that he would trade in an aggressive fashion within the boundaries of the law."

Paul William Mozer, who was born on April 23, 1955 in New York City, showed promise at an early age. A second-grade classmate at St. Mary's elementary school in Manhasset, L.I., who also became a Government bond trader, recalled that "he was one of the brightest kids in the class."

One of eight children raised by Robert Mozer, a labor lawyer, and his wife, Patricia, Mr. Mozer once had dreams of becoming a rock-and-roll drummer. He kept his hair long and straggly and enrolled at the Berklee College of Music in Boston in the fall of 1973. But though his interest in rock music has persisted -- a picture of guitar legend Jimi Hendrix was prominently affixed to the side of his desk at Salomon -- he soon decided that he had little talent. He transferred to Whitman College, in Walla Walla, Wash., where he majored in economics, edited the school newspaper and graduated in 1977.

After earning his master's degree at the Kellogg Graduate School of Management at Northwestern, Mr. Mozer joined Salomon's Chicago office. "Many people didn't like him," said one trader who worked with Mr. Mozer early on. "He set very high standards for himself. He expected a lot from other people."

In the summer of 1983, Mr. Mozer's life underwent two dramatic changes. In June, he married Francine Lee, whom he had met in the Salomon training program four years earlier (and who is now a principal in the fixed-income division at Morgan Stanley & Company).

Then, one month after his wedding, Mr. Mozer was transferred to the Government bond desk of Salomon's New York office.

There, he was admired for his intellect, his mastery of the markets, his shepherding of young traders and his composure under immense pressure. "I think, in the entire world of bond trading, he considered himself the best there is," one former colleague said. "And I think he is every bit as good as he assumed himself to be."

As a current Salomon employee put it, "This was not driven by personal gain, if this is true. There's a game here. And it was a desire to win the game."
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August 25, 1991, New York Times, Salomon's Errant Cowboy, by Sarah Bartlett,

Wall Street bond traders have two theories about what happened at Salomon Brothers Inc. One is the conspiracy theory. The other involves Paul W. Mozer.

The conspiracy theory contends that Salomon was deliberately trying to manipulate the Treasury market for its own gain and that if the top brass, including the firm's crusty chairman, John H. Gutfreund, didn't actually encourage it, they at least looked the other way. They did so because the practice had the potential to earn immense profits for Salomon.

The second theory is that Mr. Mozer, the head of Salomon's Government-bond trading desk, acted without permission and that Salomon's senior management had no knowledge that a cowboy in their midst was continually flouting Treasury rules.

Much of the evidence made public to date supports the Mozer theory, and Warren Buffett, the respected Omaha investor brought in as an interim chairman to clean up Salomon, evidently believes it.

But even if this theory is correct it nevertheless fails to explain why Mr. Gutfreund and three other senior Salomon executives waited more than three months before telling Federal officials about Mr. Mozer's improper action and taking steps to see that it didn't happen again.

Not taking action immediately -- suspending Mr. Mozer, for example, launching an investigation and informing the Government -- shattered Mr. Gutfreund's 38-year career at Salomon and also ended those of Thomas W. Strauss, Salomon's president, and John W. Meriwether, a vice chairman. This past Friday, Donald M. Feuerstein, Salomon's general counsel, also resigned.

Should the conspiracy theory gain enough credence, it has the potential to further erode investor confidence in Salomon, perhaps even lead to its failure. .

But numerous interviews with Salomon executives and traders, as well as alumni of the firm -- many of whom refused to be quoted by name -- provide a revealing portrait of Mr. Mozer and his role in the bidding affair.

By all accounts, Mr. Mozer earned widespread respect from colleagues for his intelligence, fairness and energy. Although many traders at Salomon have been depicted as loud, aggressive and given to juvenile antics like food fights, Mr. Mozer was relatively calm and even-tempered. "He was not one of those who went stomping around the trading floor," said one Salomon trader who worked near him.

He was also a classic trading-desk workaholic who always carried a calculator-like device that allowed him to constantly monitor markets around the world.

Mozer's Ascent

Mr. Mozer joined Salomon's Chicago office as a corporate bond salesman in 1979, after majoring in economics at Whitman College in Walla Walla, Wash., and earning a master's degree in management at Northwestern University. In 1980, he began selling Government bonds for the firm, and by 1983 had impressed superiors sufficiently to warrant a transfer to New York.

In 1985, he was plucked from a lowly position on the Government-bond sales desk and invited to join Salomon's prestigious bond-arbitrage unit, a group of "high-tech" traders who employ sophisticated computer programs to take advantage of tiny discrepancies in prices between markets and between financial products. The group was headed by Mr. Meriwether, a brilliant trader who saw early on that computer-based trading was the wave of the future. During some quarters, Mr. Merriweather's elite band generated the bulk of Salomon's profits.

After just a year and a half, Mr. Mozer was named a managing director. And when E. Craig Coats Jr., the head of the firm's Government-bond desk resigned in 1988 to set up his own firm, Paul Mozer got the job.

Wall Street bond traders have two theories about what happened at Salomon Brothers Inc. One is the conspiracy theory. The other involves Paul W. Mozer.

The conspiracy theory contends that Salomon was deliberately trying to manipulate the Treasury market for its own gain and that if the top brass, including the firm's crusty chairman, John H. Gutfreund, didn't actually encourage it, they at least looked the other way. They did so because the practice had the potential to earn immense profits for Salomon.

The second theory is that Mr. Mozer, the head of Salomon's Government-bond trading desk, acted without permission and that Salomon's senior management had no knowledge that a cowboy in their midst was continually flouting Treasury rules.

Much of the evidence made public to date supports the Mozer theory, and Warren Buffett, the respected Omaha investor brought in as an interim chairman to clean up Salomon, evidently believes it.

But even if this theory is correct it nevertheless fails to explain why Mr. Gutfreund and three other senior Salomon executives waited more than three months before telling Federal officials about Mr. Mozer's improper action and taking steps to see that it didn't happen again.

Not taking action immediately -- suspending Mr. Mozer, for example, launching an investigation and informing the Government -- shattered Mr. Gutfreund's 38-year career at Salomon and also ended those of Thomas W. Strauss, Salomon's president, and John W. Meriwether, a vice chairman. This past Friday, Donald M. Feuerstein, Salomon's general counsel, also resigned.

Should the conspiracy theory gain enough credence, it has the potential to further erode investor confidence in Salomon, perhaps even lead to its failure. .

But numerous interviews with Salomon executives and traders, as well as alumni of the firm -- many of whom refused to be quoted by name -- provide a revealing portrait of Mr. Mozer and his role in the bidding affair.

By all accounts, Mr. Mozer earned widespread respect from colleagues for his intelligence, fairness and energy. Although many traders at Salomon have been depicted as loud, aggressive and given to juvenile antics like food fights, Mr. Mozer was relatively calm and even-tempered. "He was not one of those who went stomping around the trading floor," said one Salomon trader who worked near him.

He was also a classic trading-desk workaholic who always carried a calculator-like device that allowed him to constantly monitor markets around the world.

By most accounts, Mr. Mozer's style was quite different from that of Mr. Coats. He relished talking with customers directly, instead of having sales people do it. Over time, say Salomon traders, he came to be the person who talked with the firm's largest customers the most, personally taking their orders in the frantic minutes before a Treasury auction deadline.

But friends and former colleagues say that the longer Mr. Mozer held his job, the more consumed he became with his work. His business was buying bonds and keeping Salomon's shelves filled with inventory that could be sold for a profit. That meant being aggressive indeed.

For the head of a Government-bond desk like Mr. Mozer, the object at a Treasury auction was to bid as low as possible for the bonds, without bidding so low as to lose out on the sale. The way the Treasury auction works, bonds are parcelled out first to the buyer willing to pay the most. Then the Treasury goes to the next highest bidder and fills that allotment. It gradually works its way down the bidding hierarchy. When it gets to those who are the lowest, it divies out bonds in proportion to the size of the bid.

Thus, the larger the bid at a low price, the more bonds a dealer is likely end up with. And the lower the bid, the more a firm like Salomon will make when it turns around and sells those bonds in the public market. When Paul Mozer moved to his new job, the Treasury had no limit on how much of a bond issue any one firm could bid for, though a firm could actually buy no more than 35 percent. Mr. Mozer gradually began putting in bids for larger and larger amounts. When the Treasury came to his low bid and awarded him a percentage of it, he would often end up with more bonds than other competitors, all bought at the cheapest price.

By July, 1990, according to bond market participants, Mr. Mozer's bids had gone off the charts. In one auction for $5 billion of 30-year Resolution Funding Corporation bonds, Salomon, under Mr. Mozer's direction, was said to have bid an astonishing $15 billion. "He embarrassed the Treasury," said one Salomon trader.

Losing Tempers

In fact, the Treasury got so annoyed with Mr. Mozer at the R.F.C. auction that the next day it slapped on new rules. From now on, it said, no one would be allowed to submit a bid for more than 35 percent of an issue at any one price level.

Mr. Mozer was furious at the Treasury's attempt to curtail his activities. "As a practical proposition, the Treasury was very rash in making their decision without any prior consultation with the primary dealers," he told The New York Times at the time. "The Treasury has tied the hands of large dealers who time in and time out are the ones who underwrite the Treasury's debt."

For its part, the Treasury was so angry with Mr. Mozer, said Salomon traders, both for his public statements and his behavior, that Salomon had to remove him as the person who had the closest contact with the Treasury. Dealing with the Treasury fell to Mr. Mozer's colleague, Thomas Murphy. (Along with Mr. Mozer, Mr. Murphy was fired by the Salomon board last Sunday.)

Salomon executives who have examined what happened said they now believe that Mr. Mozer was determined to show that he could get around the Treasury's regulations. "He thought he was bigger than the U. S. Treasury," was how one senior Treasury official is said to have described Mr. Mozer.

No one at Salomon has suggested that there were any problems with Treasury bids until the auction last December, after the rules had changed. That month, according to Salomon, Mr. Mozer submitted a maximum bid of 35 percent for the firm in an $8.57 billion auction of four-year notes. At some point, he took a fateful step: He submitted another bid for $1 billion using the name of a customer without any authorization from the customer. The two bids together comprised 46 percent of the issue. The unauthorized bid apparently went undetected.

In February, when the Treasury was issuing $9.04 billion of five-year notes, Mr. Mozer submitted a bid in Salomon's name for 35 percent, and two others each at the maximum level of 35 percent in the names of customers who had not authorized such bids. One was Mercury Asset Management Group, an affiliate of the British merchant bank, S. G. Warburg Group

Mr. Mozer's bold tactic earned Salomon 57 percent of the issue. Amazingly, Salomon executives who are now retracing Mr. Mozer's steps say his February actions caused Salomon to lose money -- another reason why they believe his tactics were more about ego and getting the best of the Treasury than they were about earning bonuses or career enhancement at Salomon.

"He just wanted to buy bonds," said one Salomon executive, describing Mr. Mozer's passion to be the best Government bond trader around.

But the Treasury Department had apparently noticed something unusual.

A Key Letter

Sometime in April, according to Salomon, Mr. Mozer received a copy of a letter from the Treasury reminding Mercury Asset Management that any bids submitted by the Warburg affiliate should be lumped together with Warburg's bid so that the total bid by both parent and affiliate did not exceed 35 percent of the auction.

To anyone who knew that bids had been submitted in customers' names without their knowledge, the letter was a clear sign of trouble ahead. "If you were Mr. Mozer and you got that letter, you would know you had a problem," said Mr. Buffett at a news conference last Sunday.

But to anyone who didn't know about irregularities at Salomon, , the letter might have seemed far less ominous. "I think they were saying, 'explain this.' . . . I don't think there was anything accusatory about that letter," said Mr. Buffett, although he conceded that he had not yet seen it.

On April 27, four days after his 36th birthday, Mr. Mozer went to his boss, Mr. Meriwether, showed him the letter and told him of the one unauthorized bid, according to Salomon officials. Mr. Meriwether asked Mr. Mozer whether he had committed any other trading violations, Mr. Buffett said.

"Mr. Mozer looked him in the eye and said, 'No'," according to Mr. Buffett.

Mr. Meriwether then called Mr. Strauss, the firm's president, and told him what had happened. The next morning, the two men sat down with Mr. Feuerstein, the firm's chief legal officer, to discuss the matter. Mr. Gutfreund, who was traveling, was told about the situation the next day.

Imagine the scene. Four of the firm's most senior officers are told that the head of their Government-bond desk has admitted submitting a $3.2 billion bid in a Treasury auction in the name of a customer who has no knowledge of the bid and in direct violation of Government regulations. And this same person has already angered the Treasury Department so deeply that the agency changed its regulations to constrain him.

According to Mr. Buffett, the four men were all in agreement that this was an offense that had to be reported to the Government. Yet they apparently took Mr. Mozer at his word that this was the only such offense, and they left him in place as the head of the firm's all-important Government-bond desk.

A Matter of Trust

Then, inexplicably, for the next four weeks they apparently did nothing of substance. Mr. Buffett says he asked Mr. Meriwether whether anyone told him it was his job to report the incident. "John says no. I believe him," Mr. Buffett said. As for the firm's general counsel, Mr. Buffett said, "I have no reason to question his efforts or enthusiasm in terms of moving the information." Nevertheless, five days later, Mr. Buffett requested, and got, Mr. Feuerstein's resignation.

What about Mr. Gutfreund? Mr. Buffett was less charitable. "It could well be that one thought another was doing it," Mr. Buffett said. "I have seen it happen. It does not happen very often."

None of the four men are talking. But one theory to explain their lack of action is that if senior managers were going to report it to the Treasury, they would have wanted to approach a Government official who would give them a decent hearing. And given Mr. Mozer's previous history with certain Treasury officials, Salomon would have to tread very carefully. All that might take time.

But most current and former Salomon executives interviewed found the delay inexplicable. They note that in the past, Mr. Gutfreund has been unforgiving in punishing those he even remotely suspected of doing something wrong. Former employees recall at least two incidents when he fired traders "in a heartbeat" when he thought they might be engaging in unethical behavior.

It is certainly plausible, said some who know Mr. Gutfreund well, that this time around, he may have hoped that in time some rational explanation or solution to the "Mozer problem" might be found. After all, it was just one transaction, a single mistake, he was told. And the Treasury's letter didn't sound that serious.

As for Mr. Strauss, Salomon executives describe him as affable and easy to get along with but sometimes prone to indecisiveness, unlikely to take the initiative in reporting Mr. Mozer's misdeed.

Then came May 22, the day the Treasury auctioned $12.26 billion of two-year notes. This time, according to Salomon, Mr. Mozer bid the 35 percent maximum, plus $2 billion for a customer. Although there is no suggestion that he did so without the customer's knowledge, he subsequently repurchased $500 million worth of bonds from the customer at the auction price, an unusual maneuver that was similar to a trade he had conducted in the April Treasury auction. Asked about it last week, a Treasury spokesman declined to comment on the particulars of Salomon repurchasing bonds, but said, "The Treasury has a rule that there can be no pre-arrangement on repurchasing bonds."

Mr. Mozer also neglected to tell the Treasury that the firm had already committed to purchasing $497 million of the bonds in the "when issued" market, where bonds are traded before they are actually issued. That amount should have been counted toward the firm's 35 percent bidding limit. Nor did Salomon disclose to the Treasury that its energy subsidiary, Phibro, purchased $105 million of the bonds in the auction, a mistake that officials do not blame on Mr. Mozer, but describe as inadvertent.

In a Squeeze

All told, Salomon acquired 45 percent of the bonds. This time, however, there was little chance that it would go undetected. Many traders at other firms had decided to "short" that particular Treasury issue. That means they had committed to sell the bonds without actually owning them, on the assumption that they would be able to buy the bonds later at a lower price, making a greater profit when they resold them.

But the traders found that several large firms owned so many of the bonds that they had effectively "cornered" the market, forcing people to pay much more to cover their short positions than they had expected.

Losses sprouted all over Wall Street. So did the howls of outrage. Representative Edward M. Markey, Democrat of Massachusetts and chairman of the House Subcommittee on Telecommunications and Finance, received a number of complaints from traders and asked regulators to look into the matter. By the end of May, Salomon; Steinhardt Partners, an asset management fund, and a fund run by George Soros were among those named in the financial press as having "squeezed" the market. A squeeze is not necessarily illegal -- unless it occurred because a group of traders acted in concert.

One Salomon trader remembers that Mr. Gutfreund was fuming about Mr. Mozer's activities in May. It may have contributed further to delays in reporting the February episode, since the May auction could have been seen as another incident to be unraveled before approaching the Government.

'Unfolding Events'

According to Deryck C. Maughan, who Mr. Buffett chose as Salomon's new chief of operations: "I would say that as we listened to the accounts, one event seemed to overtake another. It was only one episode we were told. Then the May auction happened. Attention was paid to that. It was a series of unfolding events."

By the end of May, Mssrs. Gutfreund, Strauss, Meriwether and Feuerstein knew that Mr. Mozer may have been up to more than they originally realized. But still they did not suspend Mr. Mozer or ask him to step aside while they conducted an internal investigation. Nor did they ask their outside counsel, Wachtell Lipton Rosen & Katz, to conduct an investigation. And they did not inform Federal regulators.

In fact, Salomon did not turn to its outside counsel until early July, after Government regulators had apparently subpoenaed its trading documents. Mr. Buffett said that Wachtell, Lipton was finally called in because of, "senior management's concern that they were not getting the full story."

But Mr. Buffett was at a loss to explain why four or five weeks elapsed between the time the law firm was apprised of the situation and the time that they and Salomon approached the Government. Martin Lipton, the Wachtell, Lipton partner in charge of the Salomon investigations, did not return a reporter's calls.

It was not until the evening of Aug. 8 that Mr. Gutfreund called Mr. Buffett, one of Salomon's largest investors, to inform him of the problem. That same evening, calls were placed to top Salomon officials alerting them to a special meeting the following day. At that meeting, according to some of those who were there, Mr. Gutfreund told the firm's managing directors that they had found a problem, had begun an investigation and there was no cause for alarm.

A public statement was issued admitting some of the bidding irregularities and Mr. Mozer and Mr. Murphy were suspended. Many of those at the meeting left for the weekend thinking everything was under control. It wasn't until five days later that Mssrs. Gutfreund, Strauss and Meriwether acknowledged to their colleagues that they had known there was a problem for more than three months.

Many Salomon executives were stunned by the second round of revelations. They could not believe that the firm's top officials had let the matter ride so long. Some concluded that senior managers had been trying to hide their inaction from their own managing directors at the meeting the Friday before.

It was this omission that has partly fueled the conspiracy theory, which holds that the firm's top officials knew about -- and even encouraged -- Mr. Mozer's activities all along.

After all, the theory goes, if Mr. Mozer and his colleagues could manipulate certain bond issues in the Treasury market, they would have better information than competitors about the direction of certain interest rates. And if Salomon knew what would happen to those rates, it could make huge profits by placing big bets in the bond and related markets, like futures and options.

Everyone knew from Salomon's annual report that the area in which it made most of its money was what was known as "principal trading" -- that is, trading for its own account. Surely it was possible that in trying to buy so many Treasury securities, Mr. Mozer was merely carrying out the stated or unstated wishes of superiors. After all, Mr. Gutfreund and Mr. Strauss were known for being avid bond traders themselves. They bragged that they sat on Salomon's raucous trading floor, that they were hands-on managers, ever present at Treasury auction time.

"How could they not have known?" is the cry on Wall Street. There are several possible reasons.

One factor was Mr. Mozer's unusually close relationship with major Salomon customers. As the pressure built toward the 1 P.M. bid deadline on auction day, he would personally take large customer orders, scribbling down numbers on slips of paper that few others could read or follow. One trader who sat nearby, said, "I never had any idea what he was doing."

Mr. Gutfreund, Mr. Strauss and Mr. Meriwether may indeed have conferred with Mr. Mozer about the shape of the firm's order book, the tone of the market and how much they were bidding for and at what price. But if someone wanted to disguise the fact that a large customer order had never actually been placed, there was no reason to be suspicious.

[How about when it came time to pay for it? Even on margin---especially on margin!---$10 billion shows up on the books. None of Mozer's transactions could have been kept from the supervising chain of command, especially such hands-on, in-the-trenches types]

The firm has daily position sheets, which show how many bonds the firm owns. And the three men undoubtedly reviewed them. But by the end of the day, if the sheet showed that the firm owned more than 35 percent of an auction, that would not necessarily have tipped them off. Salomon often bought and sold bonds in the secondary market after the auction was over, and there was nothing illegal about owning more than 35 percent of an issue at that point.

As to the theory that Salomon was deliberately trying to manipulate certain interest rates so that its proprietary trading group could make huge profits, in only one of the four auctions that Mr. Mozer is said to have committed trading violations has anyone asserted that a squeeze actually developed.

Acting Alone?

Salomon traders and executives also cite two facts that tend to support the theory that Mr. Mozer was acting of his own accord.

One is that many of the trades of the bond arbitrage group run by Mr. Meriwether are extremely complex and extend over many months. Traders say that a short-term blip in certain interest rates generated by auction bidding would not necessarily offer that group any real opportunities.

Also, those who believe the conspiracy theory are forced to go up against the much-respected Mr. Buffett, whose assurances to Federal officials last week persuaded the Treasury Department not to take harsh disciplinary action against Salomon. At Salomon's press conference last week, Mr. Buffett faced a crowd of reporters and said that he did not believe that Mssrs. Gutfreund, Strauss, or Meriwether had any knowledge of what Mr. Mozer had been doing, or that they in any way participated in what he described as a coverup by altering records, or that they knew of any other offenses the firm had committed.

"They told me, and I believe, that they know of nothing else," he said. "I believe that."

Last week, Mr. Mozer was closeted with his lawyers, apparently preparing for Federal investigations and readying a defense for the lawsuits that Salomon customers are filing, which name the firm and often include him as a defendant as well.
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August 28, 1991, New York Times, Salomon May Lose Savings Bailout Work,

Correction Appended

Salomon Brothers, which has lost several big clients after it admitted violating Government rules at four bond auctions, was notified today that it might lose its coveted role in the sale of assets seized from failed savings and loans.

The Resolution Trust Corporation, the Federal agency charged with selling off assets from failed savings institutions, said it was considering whether to halt further business dealings with Salomon.

Over the last year, Salomon received about $3 million in fees by advising the agency on the sale of such assets. The brokerage is also a big buyer of junk bonds and other securities seized by the agency.

Although Resolution Trust said there was no suggestion of wrongdoing in Salomon's dealings with the agency, Felisa Neuringer, a spokeswoman for the agency, said, "The situation is of obvious concern."

Colorado Pension Fund Quits

The furor surrounding Salomon has led to the resignation of its top executives and to a decision today by the state pension fund of Colorado to leave the brokerage as a client.

Resolution Trust is preparing a report on any potential business problems or ethical concerns raised by Salomon's violations, and a special committee may reach a decision based on the findings in the next few weeks, Ms. Neuringer said.

The Federal agency will not investigate wrongdoing, only Salomon's fitness to continue contracts with the agency, she added.

The Wall Street investment bank is being investigated by several Federal agencies, as well as the New York Stock Exchange, after disclosing this month that it had violated Treasury rules by buying more bonds than allowed.

Salomon Status Unchanged

Kenneth Bacon, assistant director of asset sales at the bailout agency, said its policy was to continue doing business with the firm unless its review panel decided that Salomon no longer was qualified.

Salomon is one of several lead underwriters for mortgages held by the agency that are packaged and sold as securities.

Mr. Bacon said he has seen no evidence that the furor surrounding Salomon has affected its ability to underwrite securities for the agency. Although Salomon managed a $373 million offering of multifamily mortgages last week, Mr. Bacon said, its services are not indispensable.

Executive Quits Panel

The chairman of a committee that advises the Treasury Department on its debt management practices said today that a Salomon executive, Gedale Horowitz, had resigned from the committee.

Mr. Horowitz, a senior executive director at the brokerage, is in charge of government relations. He has not been implicated in the scandal at Salomon.

Mr. Horowitz resigned on Aug. 12, shortly after the Salomon scandal erupted, from the Treasury Borrowing Advisory Committee, a committee of the Public Securities Association that is composed of officials from brokers and institutional investors.

Jon S. Corzine, a partner at Goldman, Sachs & Company and chairman of the committee, called Mr. Horowitz "a man of integrity" and said the resignation was voluntary. "I think he did the responsible thing in light of the current situation, which could potentially compromise the committee's position with the Treasury."

A Salomon spokesman said Mr. Horowitz was traveling and could not be reached for comment.

Correction: August 29, 1991, Thursday An article by Reuters in Business Day yesterday about the Resolution Trust Corporation's review of its dealings with Salomon Brothers referred incorrectly to the corporation's comments on the review. A representative of the corporation, the agency overseeing the savings and loan bailout, mentioned the review in response to a reporter's questions. But the corporation did not announce it on Tuesday or notify Salomon of it that day.
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August 29, 1991, New York Times, Correction: Resolution Trust Corporation - savings and loan bailout,

Correction: An article by Reuters in Business Day yesterday about the Resolution Trust Corporation's review of its dealings with Salomon Brothers referred incorrectly to the corporation's comments on the review. A representative of the corporation, the agency overseeing the savings and loan bailout, mentioned the review in response to a reporter's questions. But the corporation did not announce it on Tuesday or notify Salomon of it that day.
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August 29, 1991, New York Times, Moody's Lowers Ratings on Some Salomon Debt,

Moody's Investors Service Inc. dealt a mild blow to Salomon Inc. yesterday when it lowered by a notch the credit ratings on billions of dollars of Salomon's debt. But Moody's kept the ratings at investment grade and Salomon said it did not expect the reduction to hurt.

The ratings agency announced it had lowered Salomon's senior debt to A-3 from -2, and its commercial paper to Prime-2 from its highest level, Prime-1, because of concerns over the Government-bond trading scandal that is plaguing the company and its main subsidiary, Salomon Brothers.

The downgrading is expected to raise Salomon's costs the next time the firm borrows money in the capital markets, but it is not expected to have an immediate effect because the firm is now using an alternative financing plan.

Salomon's common stock and some of its bonds traded slightly higher yesterday. The common shares closed at $25.375, up 12.5 cents, on the New York Stock Exchange.

Salaries Discontinued

In another matter, a Salomon spokesman said yesterday that the firm had stopped paying salaries to the four former top executives who resigned in response to the scandal, including former chairman John H. Gutfreund.

But the spokesman said that decisions on other compensation, including participation in a deferred-pay pool and severance benefits, would be delayed until its investigation was finished.

Three of the executives -- Mr. Gutfreund, Thomas W. Strauss, the former president, and John W. Meriwether, a former vice chairman -- are being provided temporary offices in Salomon space outside its headquarters, at 7 World Trade Center, the spokesman said.

He added that the executives' legal fees were being paid by Salomon, but that other benefits, including chauffeured limousines, had been eliminated.

Former Traders Cut Off

The two traders who were dismissed in the wake of the scandal, Paul Mozer and Thomas Murphy, have been cut off from all compensation and benefits from the firm, the spokesman said. A clerk and another trader who were suspended continue to receive their salaries, and their legal fees will be paid by Salomon pending results of the investigation, he said.

In reducing the bond ratings, Moody's expressed particular concern over the criminal charges Salomon could face and the judicial and regulatory sanctions that could result. The agency said it would continue to review Salomon's debt for another possible downgrading.

Yesterday's downgrading affects about $7 billion in long-term debt and $6 billion in commercial paper, which are essentially short-term loans. Salomon had already stopped issuing new commercial paper.

Moody's said Salomon's credit standing continued to be supported by the firm's financial management, adequate capital and healthy liquidity.

"When we looked at the range of possible outcomes, our judgment was that the ratings ought to be downgraded," said John J. Kriz, a Moody's vice president. "I would emphasize that we still have the long-term and short-term ratings at investment-grade level," he added.

'No Significant Impact'

Salomon released a statement saying: "Moody's action will have no significant impact on the firm's overall liquidity, which remains strong."

The statement did acknowledge, however, that Moody's change would raise Salomon's cost when it next goes to the market to borrow money. Since the scandal, Salomon has implemented a contingency financing plan in which it has borrowed money against bonds it owns through repurchase agreements, rather than by issuing commercial paper.

"There will be no immediate impact from this action per se because we are not issuing commercial paper or term securities," said Donald S. Howard, Salomon's chief financial officer.

Mr. Howard said the firm may not go back to the commercial paper and bond markets until its rating is upgraded.

Under Investigation

Salomon has been engulfed in scandal since earlier this month, when it admitted to unauthorized use of customers' names to make bids beyond the legal limit at auctions for Treasury securities. The firm is now under investigation by the Justice and Treasury departments, as well as by the Securities and Exchange Commission and the Federal Reserve Board.

The Standard & Poor's Corporation, the other major bond-rating agency, said yesterday that it was still reviewing Salomon's ratings, which were comparable to the Moody's ratings before Moody's made the changes yesterday.

The Moody's decision means that many money managers will not be able to buy Salomon commercial paper because they are restricted to buying only top-rated securities. But most such managers could hold on to the paper until it matures.

Witnesses at Hearing

In another development, it was announced that Warren E. Buffett, the interim chairman of Salomon, would be the leadoff witness next Wednesday at a Congressional hearing. Other witnesses at the hearing by the House Energy and Commerce Subcommittee on Telecommunications and Finance include Richard C. Breeden, chairman of the Securities and Exchange Commission; E. Gerald Corrigan, president of the New York Federal Reserve Bank; David Mullins, vice chairman of the Federal Reserve, and Jay Powell, assistant Treasury Secretary.

One more investigation of the brokerage firm was disclosed yesterday, as Roy Blunt, Missouri's secretary of state, said he would head a task force of regulators from several states that will look into possible state action against Salomon.
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August 29, 1991, New York Times, Dismissed Salomon Trader Sold Stock Before Scandal,

Shortly before the Salomon Brothers scandal erupted, Paul W. Mozer, the bond trader the firm has blamed for ordering illegal trades, sold about $1.7 million worth of Salomon Inc. stock, the firm said yesterday.

When the sale of 46,000 shares was discovered after the firm disclosed illegal bond trading on Aug. 9, the proceeds were frozen in Mr. Mozer's account in Salomon's private investment division, said a Salomon spokesman, who was asked about the transaction. The firm's managing directors are required to conduct all securities transactions through the division.

Salomon Brothers and Mr. Mozer's lawyer said yesterday that Mr. Mozer had offered to reverse or rescind the sale. Salomon's stock price sank sharply after the scandal was disclosed, so it would cost Mr. Mozer hundreds of thousands of dollars to rescind the sale.

The offer to rescind the sale was seen as an indication that Mr. Mozer thought the sale could be challenged as a violation of insider-trading laws. But his lawyer denied that any violation had occurred.
The disclosure came as the firm was dealt a mild blow when Moody's Investors Service Inc., the bond rating agency, lowered the credit ratings on billions of dollars of Salomon's debt. [ Page D6. ]

In the weeks before the scandal erupted, Salomon's stock hovered around $36, far above the current level. Yesterday, it closed at $25.375, up 12.5 cents on the New York Stock Exchange, making the shares sold by Mr. Mozer worth about $500,000 less than he evidently had received.

Some current and former Salomon executives have said privately that they thought the sale raised the question of insider trading, the trading in a stock by someone with knowledge of material non-public information that could affect the stock's price. That determination could depend on whether Mr. Mozer had reason at the time to think that he and the firm were about to get into serious trouble.

Mr. Mozer, according to the details of the scandal Salomon has acknowledged, made the firm's top managers aware of a bidding violation in April. At a Treasury auction In May, he supervised bidding that the firm said violated Treasury rules. In July, Salomon hired an outside law firm to do an internal investigation becasue top management was not happy with the answers it was getting.

Top Officers Resign

The investment bank first acknowledged violating regulations for bidding for Treasury securities on Aug. 9. Several days later, the firm acknowledged that three top executivies, including the chairman, the president and a vice chairman, had known of one bidding violation since April but had failed to report it to the Government. Subsequently, the three resigned and Warren E. Buffett, the Omaha investor whose Berkshire Hathaway Inc. has a large Salomon stake, took over as interim chairman, while the board dismissed Mr. Mozer. Donald M. Feuerstein, the firm's chief counsel, has since resigned.

In a statement yesterday, Lee Richards, Mr. Mozer's lawyer, said: "Paul Mozer did not sell shares in Salomon based on inside information. Mr. Mozer sold shares of Salomon at a time when he was not aware of any plans by the company to make any public announcement. When he learned of the public announcement on Aug. 9, he instructed the company through counsel to reverse or rescind the trades."

A Salomon spokesman said yesterday, "When the appropriate people at the firm heard of this, they froze the proceeds in his account and the firm notified the Securities and Exchange Commission." He also said that the firm, with Mr. Mozer's permission, would "offer rescission to those who bought the stock."

Neither the spokesman nor Mr. Richards would give the exact date of the sale. And Mr. Richards would not comment on the number of shares involved. But the spokesman said that the sale was "shortly" before the Aug. 9 announcement.

Last night, the Salomon spokesman said no other executives who had resigned had made similar transactions.

"Since the time in late April when the four resigned executives learned of an unauthorized bid by Mozer in a February auction, we are not aware of any transactions that seem to be similar in character to Mozer's," he said. "However, we want you to know that Donald Feuerstein sold 5,000 shares in mid-June in a transaction reported by him on a Form 4 filed with the S.E.C."

Other Reverberations

The Salomon Brothers scandal has been widening from the day it first became public. The Justice Department, the Securities and Exchange Commission, the Federal Reserve and the Treasury are all investigating. Some of the inquiries began before Salomon's public acknowledgement of its violations, as concerns grew over trading related to the May auction.

The investigation has moved beyond Salomon to include the other primary dealers in the Treasury securities market who buy bonds, notes and bills directly from the Treasury and then sell them to investors. In addition, commercial bank and investment bank records have been subpoenaed to determine whether any collusion or price fixing occurred in the securities market.
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August 30, 1991, New York Times, More Actions By Salomon To Aid Image, by Jonathan Fuerbringer,

Salomon Brothers, in another series of moves to restore confidence, has hired a new crisis-management public relations firm, bade farewell to its old one and brought in a leading accounting firm to review the troubled company's internal compliance controls.

The firm also said it was setting up a permanent compliance committee at the board level that would have the responsibility of seeing that "all regulatory procedures are followed to the letter."

Salomon got a small lift yesterday from Gov. Mario M. Cuomo, who instructed the state Treasury and the New York State Urban Development Corporation to add Salomon to the list of companies that can bid on selling securities to the state and the U.D.C.

The Governor purposely wanted to give a vote of confidence to the firm, which has 9,000 jobs in the state. Salomon has bid on the state securities business in the past, though not recently.

The new public relations firm is Burson-Marsteller, which was called in over the weekend, said James E. Murphy, the chairman of Burson's New York office. He declined to comment on what the firm would do. Burson won wide acclaim for its handling of Johnson & Johnson's public relations when a woman died after taking a cyanide-laced Tylenol capsule in 1986.

Kekst & Company, the firm that left, had been designated the crisis manager two weeks ago when Warren E. Buffett, the Omaha investor, became Salomon's interim chairman after three of its top executives resigned because of their role in the widening bond trading scandal.

Thomas Daly, a partner at Kekst, said yesterday, "Basically under the circumstances, at the end of last week we decided to end the relationship."

A Salomon spokesman declined to comment yesterday on the changes.

But some people at Salomon suggested yesterday that Kekst's founder, Gershon Kekst, had a close relationship to John H. Gutfreund, who stepped down as Salomon's chairman, and that the relationship had a role in the decision to bring Burson in. They also suggested that Mr. Buffett was trying to cut ties with people associated with Salomon before the scandal erupted on Aug. 9.

A Few Less 'Cooks'

Another person involved in the switch, who asked not to be identified, said yesterday, "You can't have too many cooks in the kitchen." He added that it might not have been long before Salomon directly broke off the relationship.

The special auditor is Coopers & Lybrand, which Mr. Buffett said would conduct "a comprehensive internal control and compliance review of our U.S. securities trading operations."

Mr. Buffett said in a statement that he would implement any recommendations that Coopers & Lybrand made. He also changed Salomon's reporting structure "to insure that these procedures are followed in the future." From now on, Richard O. Scribner, the chief compliance officer, will report directly to Robert E. Denham, whom Mr. Buffett named a week ago as Salomon's new general counsel.

The compliance committee at the board level will be headed by the Rt. Hon. Lord Young of Graffham, a member of the board of Salomon Inc., the parent company. It will meet before each board meeting. Compliance officers in the company will be required to report to the committee when "they are not fully satisfied with existing or any future practices."

The compliance procedures, and other moves and statements that Mr. Buffett has made, all are part of his stated effort to restore confidence in the firm by making Salomon "a leader in setting new standards in regulatory behavior in the financial services industry." Need for Independence

Salomon's current auditor is Arthur Andersen. A Salomon spokesman said the decision to bring in Coopers & Lybrand was no reflection on Arthur Andersen's performance. To have an independent review, he said, Salomon needed a firm with no connection to it. A spokesman for Arthur Andersen declined to comment.

The decision by Governor Cuomo to put Salomon on the bidding lists for the state Treasury and the Urban Development Corporation was made at his initiative, officials involved in the decision said yesterday.

"The Governor saw other states that were piling on Salomon, and he saw the housecleaning done by Warren Buffett and the credible commitment he made to apply the highest ethical standards at Salomon," said James W. Wetzler, the state Tax Commissioner. "And I think he thought it was appropriate to do something to help Salomon." Confidence in Buffett

The Governor said in a statement, "I have every confidence that Warren Buffett is doing everything he can to stabilize Salomon Brothers at this critical time."

Salomon is now eligible to bid for the daily investments of the state Treasury's $800 million portfolio and the U.D.C.'s $760 million portfolio. In the Treasury's case, it is several million dollars a day, which is small compared with the billion-dollar transactions Salomon has made in the United States Treasury securities market.

State officials suggested yesterday that the business had just been too small recently to interest Salomon. But the Salomon spokesman said the firm had tried to be in the group of bidders for the business but the state had seemed comfortable with those it had.
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August 31, 1991, New York Times, Salomon's Law Firm Resigns', by Jonathan Fuerbringer,

Salomon Brothers announced yesterday the resignation of the law firm that had been conducting an internal investigation of the firm's trading violations in the Treasury securities market.

The firm, Wachtell, Lipton, Rosen & Katz, was hired in July to conduct the investigation, but it was several weeks before Federal regulators were told of the problems. Salomon disclosed earlier this month that the chairman, the president and a vice chairman of the investment banking firm had known since April of one bidding violation but had not reported it to the Treasury Department.

Omission in First Release

Some current and former Salomon executives familiar with the situation also said yesterday that Martin Lipton, a partner in the firm who is a close friend of Salomon's former chairman, John H. Gutfreund, was involved in the crafting of the first and second news releases in which Salomon publicly acknowledged its trading violations.

The first news release, issued on Aug. 9, did not mention that Mr. Gutfreund, who was then chairman; Thomas W. Strauss, the president, and John W. Meriwether, a vice chairman, had known of the violation since April 27. The second release, issued on Aug. 14, made this clear at the bottom of the second page.

But lawyers at Wachtell, Lipton have made no comments on their work for Salomon, and it is not known what recommendations the law firm made for action by Salomon and its top executives.

Hired to Provide Information

The law firm's role was the subject of repeated questions at a news conference two weeks ago, when Warren E. Buffett, the Omaha investor who owns a large stake in Salomon, took over as interim chairman. When asked why the law firm was being kept on even though it had not induced the Salmon executives to report the violations, Deryck C. Maughan, who was appointed chief operating officer at the time, said only that he had not yet reviewed the law firm's mandate.

Mr. Maughan did say that the firm was hired because top people at Salomon did not feel they were getting all the facts about the bidding problems.

In a statement issued by a spokesman, Salomon said, "The action does not in any way reflect adversely on the work that has been done by Wachtell, Lipton, which has been of critical importance to Mr. Buffett in his efforts since assuming the job as chairman."

Neither Mr. Lipton nor anyone else at the law firm returned repeated telephone calls seeking comment.

According to the Salomon statement, the law firm offered to step aside as the investigating counsel when Mr. Buffett took control on Aug. 18. But Mr. Buffett asked the firm to stay on to help complete the investigation and "to help Salomon in providing information as quickly as possible to regulatory authorities."

The law firm, the statement continued, had offered periodically to resign since then, and "Mr. Buffett has now accepted it so as to get on with the task of forming a new team at Salomon."

The statement gave no further indication of why Mr. Buffett chose to act now. A spokesman said that the investigation had not been completed and that a new outside counsel would be retained over the next 45 days.

Mr. Buffett made clear from the beginning that he wanted a clean break with the past and with people who were involved in the irregularities or associated with the failure to deal with them before they grew into the scandal that now threatens Salomon's future.

Salomon has said that two bond traders, who have been dismissed, violated Treasury rules limiting bids to 35 percent of the securities available in a Treasury auction. To do this, Salomon has said, the traders submitted unauthorized bids in customers' names.

The firm is being investigated by the Treasury Department, the Justice Department, the Federal Reserve and the Securities and Exchange Commission. It faces the possibility of both criminal and civil penalties in addition to lawsuits from customers and shareholders.

The Federal investigation has moved beyond Salomon to examine whether there was an effort to rig prices by many others in the Treasury securities market.
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September 3, 1991, New York Times, Reluctant Regulator: A special report.; Free-Wheeling Treasuries Market Is at Turning Point With Congress, by Diana B. Henriques,

When a Congressional committee convenes tomorrow to examine the Salomon Brothers scandal and its implications, it will set the stage for a battle over the regulation of one of the world's largest and most important financial arenas: the market for United States Treasury securities.

That market -- where $117 billion in bills, notes and bonds changes hands daily -- is the mechanism on which the Government relies to finance the nation's $3.61 trillion public debt. The unfolding scandal at Salomon Brothers is forcing a fresh examination of how the market operates, what rules govern it and how those rules are enforced. The recent query by the Securities and Exchange Commission to all big Treasury dealers is an effort to find out more about what really goes on in this important corner of Wall Street.

But even as the S.E.C. awaits its answers, the picture that is emerging shows a trading community governed under a poorly defined set of rules by a reluctant regulator: the Treasury itself, an agency that has grown increasingly dependent on the financial companies it oversees to channel the Government's flood of debt securities into investors' hands.

In the face of the Treasury's apparent reluctance to be a tougher policeman, market participants say, some dealers have grown increasingly arrogant about their power and casual about overstepping bounds, putting the market's reputation at risk in the global finance community.

"People in this market have long had a belligerent attitude toward the regulators," said a top executive at a New York firm, stating a view expressed by many in the market. "They think, 'Hey, we're doing you a favor, so get out of our way.'"

A Lot of Anger in Congress

The very nature of the misbehavior at Salomon -- the use of phony bids to buy more than the legal limit of Treasury securities, and the failure of top executives to take action when they found out -- has generated a lot of anger in Congress. One person there said the firm's activity "communicates a very high level of contempt for one's regulators."

At the same time, the common response to critics, heard even in the wake of the Salomon disclosures, is that the market is highly effective. Market professionals are warning Washington that clumsy attempts to regulate this market more tightly could impair its ability to function efficiently and could burden the taxpayer with higher interest costs.

"The rules in this market are certainly unclear," said Thomas A. Russo, a partner at the law firm of Cadwalader, Wickersham & Taft in New York. "They are not of the 20th century, and they should certainly be clarified. But Washington should not add two and two and get six. The Treasury market generally has worked very well, and regulators must resist the temptation to overreact."

The critical issue facing policy makers is to find a way to preserve the strengths of this vast debt-financing network while correcting a regulatory culture that one senior Wall Street executive said had turned the market into "an accident waiting to happen."

While the scope of Salomon's missteps took some by surprise, critics of the system say such problems are encouraged by the Treasury's light regulatory touch, combined with an equal reticence on the part of the Treasury's agent, the Federal Reserve Bank of New York. Treasury and Federal Reserve officials, for example, are said to have done little more than admonish firms when they have overstepped boundaries in the past.

"What you had was an honor system," said one senior Government official who insisted on anonymity. "It was not rationally designed. Authority and responsibility were not assigned in a clear-cut way. We have to sit down and design something that everyone is confident about to assure anyone looking at this market that this cannot happen again."

The First Skirmish The Regulators Are Divided

Four Congressional committees have announced plans to examine the Salomon problems and the subsequent questions about the market's regulation. The first skirmish will be the hearing tomorrow of the Telecommunications and Finance Subcommittee of the House Committee on Energy and Commerce, led by Representative Edward J. Markey, Democrat of Massachusetts.

The key regulatory players will all be represented: Nicholas F. Brady, Secretary of the Treasury, which maintains that its oversight has been sound; E. Gerald Corrigan, president of the Federal Reserve Bank of New York, which conducts the Treasury's weekly auction but has shrunk from assuming regulatory oversight, and Richard C. Breeden, chairman of the Securities and Exchange Commission, which is showing signs of wanting to take a more active role, even as the other financial agencies hang back. Warren E. Buffett, the new chairman of Salomon Brothers, will also testify.

The S.E.C. is the watchdog for most securities markets, and its primary job is to protect investors. But it has almost no mandate in the Treasury markets except for cases that clearly constitute fraud. With its all-encompassing query to leading Treasury dealers and big investors, the S.E.C. has shown its eagerness to get involved.

Differences Are Already Evident

While none of the agencies are saying much publicly about their views, differences are already evident.

Treasury Secretary Brady, in a recent telephone interview, defended the department's actions so far, saying they had sent "word to the world that we intend to conduct an honest market." At the same time, he said, the Salomon case has made it "worthwhile to review the process itself."

Mr. Breeden, on the other hand, seems to express more doubts about the adequacy of the current system. "Questions about the regulatory structure are not just questions of turf; they go to whether we can design a system that is likely to achieve our objectives," he said. "And our objectives here must be to finance Government at the lowest cost, but also to maintain a respect for law and integrity in the market."

In an interview last week, he gave no indication of what he thought might be needed to improve regulatory oversight of the market. "We are in the midst of a very active and very widespread investigation, and I would prefer to learn the outcome before I comment specifically," he said.

As the S.E.C.'s investigation proceeds, and as more is learned about the Salomon episodes, there is sure to be extensive debate on how to fix what went wrong. But even now, there are widespread predictions that the result will be more power for the S.E.C.

"You will never see the Treasury and the Fed totally supplanted," said Harvey Pitt, a partner at the law firm of Fried, Frank, Harris, Shriver & Jacobson. "They will set the tone and policy. But in terms of enforcement, it is simply logical that people will conclude that there was a vacuum, and that the S.E.C. is the most competent agency to fill it."

A Bit of Dickens A Large, Simple Trading Machine

The Government bond market was born in 1791 as a byproduct of the original debt-financing activities of Alexander Hamilton, the first Secretary of the Treasury. For years, it existed as an unexciting backwater of the financial markets, the province of a handful of firms. In the late 1800's, the Treasury used only a single investment banker, Jay Cooke, as its agent in selling its debt.

Today, in a world increasingly linked by trade, the vast and still-growing market is a linchpin of the United States economy, as well as of the world economy. As it helps finance the Government, it also sets the benchmark interest rates that affect the cost of everything from home mortgages in New York and California to rates in London and Tokyo to the cost of the Brazilian debt.

For all its importance, the market is a fairly simple machine, a network of dealers who transact business over telephone lines and computer screens, rather than on some central trading floor. The core of the system is the primary market, the auctions where giant dealers like Salomon Brothers and Merrill Lynch and Citibank bid against each other for a share of billions of dollars worth of Treasury securities, ranging in maturities from three months to three decades.

The method by which the auctions are conducted is "right out of Dickens," as Joseph A. Grundfest, a former S.E.C. commissioner, put it. Written bids are due at the offices of the Federal Reserve Bank of New York on Liberty Street in lower Manhattan by 1 P.M. on the day of an auction. Some firms send runners to deliver their hand-scribbled bids to the Fed. Others install employees at a small bank of telephones in the Fed's lobby and relay their bids by telephone minutes before the deadline.

Back at the firms' trading desks, high-powered executives are talking feverishly to their counterparts at other firms and to their biggest clients, trying to get an idea of how strong the buying interest is. It is this judgment, combined with how rates are behaving in other securities markets, that helps the traders figure out where to peg their bids.

Taking the Lowest-Rate Bid

A typical bidder might offer to buy "$2 billion at 8.25," which means the bidder wants to buy $2 billion in bonds paying an interest rate of 8.25 percent. The lower the quoted rate, the better the deal for the Government, so in this auction, the low bidder wins.

When all the firms have submitted their sealed bids, Fed officials take the best bids and announce them about an hour later.

In theory, anyone can buy the securities directly. In practice, however, the bidding is dominated by the giant firms, like Salomon Brothers, that have been designated by the Fed as primary dealers. They typically buy more than 80 percent of the securities at most Treasury auctions, for their own accounts and for customers.

These firms, which now number 39, agree to bid in all auctions and to continue to make a market in Treasury securities afterward. In return, they are the only bidders other than commercial banks that are allowed to submit bids on behalf of other buyers. They are also the firms the Fed uses to conduct routine purchases and sales of Treasuries to modulate the nation's money supply.

Orbiting around the small primary-market nucleus is the vast secondary market, where successful bidders resell the newly issued securities to other dealers and investors, who add them to the mountain of seasoned securities that change hands each day.

A Free Market A Rule Born In August 1962

The 1929 market crash led Congress to enact the set of laws that created the S.E.C. and empowered it to monitor securities markets in order to protect investors. But the Treasury market was largely exempted from that framework on the grounds that the Treasury was a uniquely solid credit risk and would not mislead investors.

As it moved to using more dealers, the main rules, which evolved over time, mainly focused on the conduct of the auction, including limits on how much any bidder could buy and who could bid. Dealers whose only business was selling Government securities in the secondary market were subject to virtually no rules at all until 1986.

A review of recent history shows that clearly codified rules and stern enforcement have never been a prominent characteristic of this marketplace. Several Wall Street executives and Government officials said behavior by a primary dealer that displeased the Treasury was most likely to result in a private frown -- and a brief public announcement of some small rule change that addressed the issue at hand.

For example, on Aug. 28, 1962, the Treasury tersely disclosed an "unusual occurrence" in the auction of three-month Treasury bills on the day before. A single bidder, unnamed, bid for an exceptionally high proportion of the total volume of three-month bills offered for sale.

Rules Not in Any Codified Form

At the time, no rules prohibited such an aggressive strategy, although anyone who controlled a very large portion of a single issue might be able to extract near-monopoly profits later. The Treasury simply rejected the bid and announced that no single bidder would be awarded more than 25 percent of the total supply of three- or six-month Treasury bills in the future. The limits were gradually modified and extended to cover purchases of Treasury notes and bonds as well. Most rule changes were set out only in news releases, mailed to firms and not pulled together in any codified form.

Although dealers consistently seemed to find ways around each new rule, the Treasury continued its pattern of meeting each thrust by quietly tinkering with the rules. This continued through the 1980's -- a period during which the once-sedate government securities market went into overdrive.

The Federal deficit began to skyrocket, requiring the Government to begin borrowing on a scale that dwarfed anything the market had seen in its 190 years. The Government's debt has nearly doubled from 1980 to 1990 as a percent of gross national product, and the government securities market, ready or not, had to grow along with it.

Through this period, the primary market appeared relatively placid, but problems emerged in the secondary market, where Treasury securities are traded after they are issued. Some small, unregulated firms selling these issues were defrauding investors in various ways, including overcharging and borrowing against securities they did not own. These problems prompted Congress to propose legislation that would bring the secondary Treasury market under closer supervision. The hearings on those proposals now seem almost like a dress rehearsal for the current debate.

As administrative and industry witnesses came forward, legislators asked: Should the S.E.C. assume greater supervision and authority over the market? Should the rule-making authority for the market be shifted to the Federal Reserve? Did the Treasury's role as a huge issuer of debt conflict with its role as a market regulator?

In each case, the Treasury answered, "No." Paul A. Volcker, who was chairman of the Federal Reserve at the time, and John S. R. Shad, who was chairman of the S.E.C., supported the Treasury's position.

In the Government Securities Act of 1986, Congress left regulatory responsibility with the Treasury and omitted any rules over sales practices. But it gave the S.E.C. some power over the previously unsupervised dealers in the secondary market.

The Bombshell Salomon Admits It Cheated

After 1986, other problems on Wall Street held Washington's attention until the bombshell fell on Aug. 9. That was when Salomon Brothers, one of the most powerful and respected brokerage houses on Wall Street, announced that it had cheated in several recent Treasury auctions.

It is still hard to measure who was harmed by Salomon's actions, and how much. Investors are already suing Salomon, contending that its actions artificially pushed up the prices of securities they bought. Shareholders in the firm are also suing it.

Perhaps the biggest concern is that the audacity of the misdeeds, and the Government's apparent slowness in reacting, could damage the credibility of the market, causing investors to stay away and forcing the Government to pay higher interest rates.

Recent auctions do not seem to have lacked for buyers. Nonetheless, the Salomon episode has generated uneasiness about the current regulatory structure -- especially Treasury's role in policing its own underwriters. Government policy experts say such an arrangement does not foster strong enforcement.

"It is very difficult to mix the regulatory function and other kinds of functions," said Michael Danielson, professor of politics and public affairs at the Woodrow Wilson School of Princeton University. "If my primary function is to sell something, and in the end I'm going to be judged on how effectively I sell it, then I am likely to have problems carrying out regulatory functions that get in the way."

Relationship With Group Questioned

Some critics also question the Treasury's close relationship with an influential industry organization once known as the Primary Dealers Association, now the Public Securities Association. Its members, which include all the big bond-trading houses, consult with the Treasury on the structure and scheduling of new issues. Critics of the current framework point out that there is no separate unit at the Treasury charged with checking for rule violations by auction bidders.

Frances Bermanzohn, general counsel for the association, said there was nothing inappropriate in the group's relationship with the department. "There has never been any undue influence on the Treasury in its regulatory capacity," she continued. "Regulators invite and solicit industry feedback for information. Anything that has been done in this market has been in that spirit."

But not everyone is satisfied by that response. Even during the 1985 testimony, Aulana Peters, an S.E.C. commissioner, declared, "I do think that the Treasury Department would have a conflict of interest." She said she was "a little more comfortable" with moving the regulatory baton to the Federal Reserve. "But if I had my druthers," she added, the regulator "would be the S.E.C."

Others, too, have suggested that other agencies would be preferable to the Treasury, and the Fed is a frequent choice because, as the Treasury's fiscal agent, it is most familiar with the auction process.

Need Seen for Clearer Division of Labor

If nothing else, the Congressional hearings are expected to call for a clearer division of labor among regulators in this market.

"One of the things that should come out of this is a more careful consideration of the rules that govern the entire market, and whether these rules are the best for the taxpayer," said Mr. Grundfest, the former S.E.C. member, who now teaches law at Stanford University.

For example, he said, the Government could change its auction methods entirely -- automating the process, encouraging more bidders or selling a broader variety of issues. These regulatory revisions, in Mr. Grundfest's view, might produce less risk of abuse and lower borrowing costs.

One common bet in Washington is that at the very least, the S.E.C. will be given power to gather more information about the Government securities market. "It is inevitable that one of the recommendations you'll have to see come out of this," said Mr. Pitt, the lawyer, "is that the Government will start now to collect data in a more rigid way."

The immediate focus for the debate will be the reauthorization of the Government Securities Act of 1986, which will expire in October unless renewed. Although the act was meant to deal with problems in the secondary market, similar concerns have emerged following the disclosures about Salomon's behavior in the primary market.

'Broader Issues' Said to Be at Stake

The big question now, Representative Markey said, "is the broader issues surrounding the need for reform of the Government securities market." His committee and others, he added, need to explore "where we, in the Congress, need to go from here."

Treasury officials seem hopeful that they will be able to keep their pre-eminence as the regulator for their market, although they will not rule out the adoption of new procedures within the department. "We feel our authority is sufficient," one official said, "and we have begun reviewing the rules governing Treasury auctions to see what, if any, changes would be appropriate."

However the Washington power struggle turns out, it is likely that the fate of Salomon Brothers itself will be more instructive to Wall Street than anything either Congress or the Treasury could cook up. As Victor Chang, a former bond market executive and now the head of his own investment advisory firm, said after the resignation of John H. Gutfreund, Salomon's former chairman, and his two top executives: "This problem, and the way it was resolved, with three top people losing their jobs, will do more to prevent future abuses than any piece of legislation which could be introduced."
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September 4, 1991, New York Times, Salomon Inquiry Widened, by Stephen Labaton,

The chairman of the Securities and Exchange Commission said today that his agency was investigating whether the improper bids for Treasury securities submitted by Salomon Brothers were part of a broader effort by a group of investment houses to corner the bond market.

In a letter sent to Congress today, the chairman, Richard C. Breeden, said the commission had issued more than 135 subpoenas and requests for information to determine whether Salomon acted alone in violating Government securities regulations or had worked with other bond-trading firms to drive up the price of bonds. He did not identify any other firms.

"While it appeared that there may have been some concerted activity in the auction, the issue of whether this was a part of a market manipulation required a careful assessment of the activity in the after-market trading for these securities," Mr. Breeden said, referring to a May auction of two-year Treasury notes.

Mr. Breeden said the matter had been referred to the antitrust division of the Justice Department and the United States Attorney in Manhattan for criminal investigation.

Violations Admitted

Salomon has admitted that it placed bids at Treasury auctions for more than the legal limit of 35 percent of the total amount of securities being offered. It also admitted to the unauthorized use of customers' names to place bids.

Providing his most detailed picture so far of the rapidly expanding investigation, Mr. Breeden also questioned whether senior executives at Salomon, by failing to report the infractions, may have actually covered up their own participation in the improper bidding.

"Without seeking to draw, at this time, any conclusions regarding whether the law was violated and, if so, by whom, the firm's silence throughout this time frame raises serious questions about whether there was a climate within Salomon that appeared to tolerate or even to encourage wrongdoing," Mr. Breeden said in a letter to Senator Christopher J. Dodd, the Connecticut Democrat who heads the Senate banking subcommittee on securities.

Senator Dodd last month requested information from the regulators on the Salomon case in an effort to assess how Congress should deal with the Government Securities Act, which regulates the industry and expires next month.

Mr. Breeden is scheduled to appear on Wednesday with senior officials of the Treasury and the Federal Reserve Board, and with Warren E. Buffett, the new chairman of Salomon Brothers, before a House panel that is investigating the Salomon scandal.

For months, Treasury officials and the S.E.C. have been at odds over how to rewrite the laws supervising the Government securities market. Mr. Breeden has sought a stronger role for the S.E.C. in regulating the market, which is now supervised primarily by the Treasury.

Irregularities Detected

A separate letter sent to Senator Dodd today by Alan Greenspan, chairman of the Federal Reserve Board, said that officials of the Federal Reserve Bank in New York initially detected irregular bids from Salomon Brothers for Treasury notes in February, even though it was only last month that the Government formally acknowledged that Salomon had violated Federal regulations.

The irregularities were reported by the Fed to the Treasury Department and ultimately led to the scandal that developed last month at Salomon. But in the time between the detection of improper bids in February and last month, Salomon has acknowledged that traders at the firm continued to violate bidding rules.

Mr. Greenspan's letter appeared to raise the new question of why it took from February until last month for the Government to expose the improper Salomon bids and prevent the firm from continuing to violate Federal regulations during Treasury auctions in April and May. Role of the Fed

In his letter, Mr. Greenspan distanced the Fed from the growing scandal, emphasizing that it "does not have express statutory authority to regulate or supervise the primary dealers" of Government securities.

Nonetheless, he said it was the staff of the Federal Reserve Bank in New York that initially "raised a question with the Treasury about the bids by two entities thought to be closely affiliated, which, if awarded and added together would have exceeded the 35 percent limit set by the Treasury on awards to a single bidder."

Mr. Greenspan did not name the entities, but they have been previously identified as two Salomon customers, the Mercury Asset Management Group and its affiliate, the British merchant bank S. G. Warburg Group, in whose names Salomon made bids on Treasury securities in order to exceed the 35 percent limit.

Letter From Treasury

The Fed's action prompted the Treasury, in April, to write to Salomon that any bids submitted by the Warburg affiliate should be lumped together with Warburg's bid so that the total bid by both parent and affiliate did not exceed 35 percent of the total securities offered at the auction.

The disclosure last month that Salomon had made bids that exceeded the legal limit and that senior executives failed to report the violations to the Government has led Congress to reconsider the laws governing the government securities marketplace.

Fees Decline at Salomon

Revenues at Salomon Brothers from new stock and bond issues fell to $15.7 million in August from $114.5 million in July. IDD Information Services said had Salomon slipped to fifth place in the Wall Street underwriting rankings in August with 5.8 percent of the fees paid for new securities issues, though it remained in third place for the first eight months of the year with 11.4 percent.
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September 5, 1991, New York Times, Excerpts From Statement By Salomon to House Panel,

Following are excerpts from the statement submitted by Salomon Inc. with the testimony of its chairman, Warren E. Buffett, describing the key event that led to Treasury Department inquiries into the firm's bidding at securities auctions.

The people referred to are: Paul W. Mozer, former managing director in charge of the firm's government trading desk; Thomas Murphy, also a former managing director who assisted Mr. Mozer in managing that desk; Christopher Fitzmaurice, a trader; John W. Meriwether, former vice chairman; Thomas W. Strauss, former president, and John H. Gutfreund, former chairman and chief executive of Salomon. Also mentioned is Charles Jackson, a senior director of Mercury Asset Management.

On Feb. 21, 1991 . . . Mr. Mozer told Mr. Murphy that he had submitted an unauthorized customer bid in the name of "Warburg" to obtain the amount of notes Mr. Mozer wanted to purchase. . . .

At some point after the auction . . . Mr. Fitzmaurice answered a telephone call from a representative of the Treasury who was trying to reach Mr. Murphy. The Treasury representative inquired about the identity of the "Warburg" listed on the Feb. 21, 1991, bid placed by Salomon and wanted to know whether the entity in question was S. G. Warburg & Co., which, like Salomon, is a primary dealer.

["At some point after the auction" just won't do. My adrenaline would have gone through the roof after a phone call like that. The professional response would be to mark down the date in a calender and take notes of all the conversations. That would be called the "covering your ass stage," which the not-guilty do before they begin "lawyering-up." So it's clear, right off the bat, that this is not a professional communique between a supervisory House panel and their subservient agents, but just the reverse.]

After being advised by Mr. Fitzmaurice of the Treasury inquiry, Mr. Murphy discussed with Mr. Mozer how to respond. . . . At Mr. Mozer's instruction, Mr. Murphy obtained information on the corporate structure of Mercury Asset Management Company. . . . Mercury and S. G. Warburg are both subsidiaries of S. G. Warburg P.L.C., but, unlike S. G. Warburg, Mercury is not a primary dealer.

[After the fact they get information about the corporate structure, but first they submitted a bid to the Federal Reserve in the name of "Warburg."]

. . . Messrs. Mozer and Murphy agreed that Mr. Murphy would . . . advise a Treasury representative that the bid submitted in "Warburg's" name should have been submitted in the name of "Mercury." . .

Apparently unbeknownst to Messrs. Mozer or Murphy, S. G. Warburg had submitted a bid for $100 million in its own name in the Feb. 21, 1991, auction. In the view of the Treasury, as expressed in an April 17, 1991, letter . . . to Mercury [ with a copy to Mr. Mozer ] , Mercury's affiliation with S. G. Warburg was sufficient to require aggregation of S. G. Warburg's own bid with the unauthorized bid submitted by Salomon in the name of "Mercury" for purposes of the Treasury's 35 percent bid-limit rule. Aggregation of these two bids would have resulted in a bid by S. G. Warburg greater than the 35 percent of the offering amount. . . .

[First, in my understanding, there is no 35-percent bid rule, it is a 35-percent awards rule. It was Mozer's taking advantage of this as a tactic (one time bidding 200 percent of a total auction) that was considered "gaming" the system. Remember also that the Basham-Mozer rule was only enacted in late 1990 in response to his ongoing pattern of behavior. One would assume that a gentlemanly collegiality had prevailed untill then. ]

[Now here's the rub! Nowhere are we told the size of Mozer's fraudulent Warburg order, but if a measly $100,000,000 tipped it over the line, then in a $12 billion auction, Mozer was bidding something on the order of $3.9 billion on the Warburg's name. Doesn't a bid on that scale draw attention to itself?]

[Why would Mozer use the name of a fellow primary dealer instead of some obscure customer's name? Since it is a requirement of primary dealers to "make markets" and bid at auction (at every auction?) such piggybacking should be prohibited on its face. Where is the logic? Was Warburg required to then pay a commission to Salomon for this effort? Furthermore, Mozer wasn't bidding on other firm's "names."  He was bidding on Salomon's account. It seems clear that even if the Fed had some requirement that bids be broken down into a list with pending orders--versus purchases for in-house "stock"--there is no obviously no follow through to verify if sales and transfers were actually finalized, i.e. the $1 Billion dollar "practical joke" order, or any of the many fraudulent orders placed by Salomon. (Writing "Warburg" in pencil on a slip somewhere doesn't indicate anything. Try going to a real auction for farm equipment and see what I mean.)]

[If the Fed was concerned that Warburg was wrongly or mistakenly segmenting their bid in some act of legerdemain (oh, $4 billion plus $100,000,000--really tricky maneuver there! You got me!) wouldn't that issue be addressed at the time of the bid openings? How else would they determine the awards? Why wait 54 days to write a letter?]

. . . Apparently concerned that the Treasury would learn from Mercury or S. G. Warburg representatives that neither of those entities had authorized Salomon's initial submission of a bid in "Warburg's" name, or its subsequent use of "Mercury" to identify the bid, Mr. Mozer contacted Mr. Jackson and told him that Salomon had mistakenly submitted a bid in Mercury's name in the Feb. 21, 1991, auction. Mr. Mozer requested that Mr. Jackson not embarrass Mr. Mozer with the Treasury and the Federal Reserve by responding to the Treasury's letter. (The letter itself did not ask for a response.) . . .

[So not only was the letter written 54 days after the fact, (isn't it about time for another auction?) it had no discernable interrogative, admonishment or ministerial purpose.]

In late April 1991 . . . Mr. Mozer approached his supervisor, John W. Meriwether . . . and advised him that he had submitted an unauthorized bid in the name of "Warburg." Mr. Mozer also advised Mr. Meriwether that he had asked Mr. Jackson not to respond to the Treasury's letter. . .

[If Mozer and his underlings didn't take the matter seriously enough to note the time and date of the phone call, wouldn't you think when that when the issue is raised to the attention of their superior, Mr. Meriwether, that one of them would have taken notes? But asking for a professional response is hard when a key aspect of your defense is that a you consummated a $1 billion order resulting from a practical joke gotten out of hand.   This is supposed to be a submission to the fucking Congress and "late" April, is the best they can do?]

Mr. Meriwether told Mr. Mozer that the matter was very serious and represented career-threatening conduct. Mr. Meriwether asked Mr. Mozer whether unauthorized customer bids had been submitted on other occasions. Mr. Mozer told Mr. Meriwether that the Feb. 21, 1991, Warburg/Mercury incident was the only time that an unauthorized customer bid had been intentionally submitted by the government trading desk. Mr. Mozer did not advise Mr. Meriwether that he had submitted a second unauthorized customer bid . . . in the name of "Quantum" in the same . . . auction. Mr. Meriwether told Mr. Mozer that he would have to bring the matter to the attention of Thomas W. Strauss, then Salomon's president. Mr. Mozer asked Mr. Meriwether not to do this.

[Again with the "customer bids," authorized or unauthorized, "in the name of shit." They act as if we don't know what wholesale means. But if this is the case, why not just be a customer of the Treasury or the Fed itself, and save yourself the $5 million a year bonus Mozer's paid as gatekeeper?]

Mr. Meriwether promptly met with Mr. Strauss, who asked Donald M. Feuerstein, then Salomon's chief legal officer, to join the meeting. Very soon thereafter, Messrs. Strauss, Meriwether and Feuerstein met with John H. Gutfreund. . . . Messrs. Gutfreund, Strauss, Meriwether and Feuerstein have stated that they decided that Mr. Mozer's conduct should be reported to governmental authorities and discussed how this should be done. They have also stated that no final decision was made concerning the manner in which the matter would be reported to governmental authorities. As this committee is aware, governmental authorities were not notified until August 1991. As Warren Buffett has stated, the delay in reporting remains "inexplicable and inexcusable."

[Some important people lost their positions because of the matter of non-reporting. But with that one last, final, imprecise August 1991 we know they were canned for bad playacting, and the real center of gravity is not with the Congress but in this nursery school. Too bad their PR grownups couldn't even get a semblance of a logical real-world narrative put together.]

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September 5, 1991, New York Times, Political Gifts From Salomon,

As a powerhouse on Wall Street and big campaign contributor, Salomon Brothers wielded considerable influence in Washington before the scandal began unfolding last month.

In five and a half years, the investment house and its employees have contributed almost $1 million to members of Congress, according to a report today by Common Cause, a lobbying group that has sought changes in campaign financing rules.

The group found that the leading recipient of Salomon's largesse in the Senate was the minority leader, Bob Dole, Republican of Kansas, who had received $85,250, and in the House was Speaker Thomas S. Foley, Democrat of Washington, who received $28,000. It also found that contributions were given to nearly every current member of the Senate Banking and Finance committees and to more than half of the current members of the House Energy and Commerce, and Ways and Means committees.

Common Cause said that among the Salomon employees who contributed the largest were the firm's chairman, John H. Gutfreund, who gave $40,500; the vice chairman, John W. Meriwether, who gave $49,750, and the president, Thomas W. Strauss, who gave $62,000. The three executives resigned last month.
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September 5, 1991, New York Times, Salomon Describes Lax Unit, by Kurt Eichenwald,

A Salomon Brothers report submitted to Congress yesterday on the activities of the firm's Government bond trading desk paints a picture of a loosely managed operation that ignored many rules and kept little documentation.

A single trader was given enough power that he was able to submit phony bids, alter back-office records to cover up the transactions and then act as a contact between the firm and Government officials investigating those very trades, for which records are now scanty.

A surprisingly casual approach also appears to have characterized the way the firm's former senior management dealt with the illegal bidding scandal.

Government Pressure

The report disclosed that the firm made damaging information public only because of Government pressure. Last month the Treasury threatened Salomon's privilege of dealing directly with the Federal Reserve, unless it publicly disclosed that its management, including John H. Gutfreund, the former chairman, had known of illegal bidding by the investment house since April but had failed to report it to the Government. Salomon issued a news release the next day.

The report highlights the tension that emerged between Government investigators and senior management. Mr. Gutfreund, and Thomas W. Strauss, the firm's former president, say several Government agencies were told of management's knowledge of one illegal bid. But the report says "one or more of these Governmental representatives question whether they were in fact advised" that senior managers knew of illegal bidding at the firm.

The report, submitted as part of testimony to a Congressional panel by Salomon's new chairman, Warren E. Buffett, discusses a number of practices that were highly unusual for a Wall Street firm. But it also raises questions about some of Wall Street's accepted activities. Records Easily Changed

The report discloses the ease with which Paul Mozer, the former head of the trading desk, was able to change records of submitted bids just by saying the wrong name had been written down.

The report says clerks on the trading desk reported that Mr. Mozer had told them only he and his assistant were authorized to alter or remove confirmation of customer orders, apparently to prevent the customers from knowing their names were submitted without approval.

The report also names the customers whose accounts were used without authorization, as well as some whose actions with the firm are under question. The customers included the Quantum Fund, the Mercury Asset Management Company, Warburg Asset Management and Tiger Investments.

Other Government bond traders expressed dismay at the details in the report. "It's outrageous," said one trader, who spoke only on condition that he not be identified. "It is abuse, pure and simple: Abuse of customers, abuse of our industry. It's terrible."

The report also raises questions about some practices accepted on Wall Street in the Treasuries business. For example, the report said Salomon did not keep records of the bids it submitted. When the violations came to light, the firm's lawyers had to piece together details of the purchases by making estimates.

A number of other firms from which the Securities and Exchange Commission has subpoenaed information for the Treasury market investigation have found that they also do not maintain such records, known as tender forms. A number of firms said they had to ask the Federal Reserve, which receives the original tender forms, for copies so that they could comply with the S.E.C. request.

Salomon said in the report that the first illegal bidding it had uncovered occurred at the Dec. 27, 1990, auction of four-year notes. The trading desk submitted a bid for the firm of $2.975 billion of four-year notes -- the 35 percent maximum allowed any one firm under the rules. But the desk also submitted an unauthorized bid of $1 billion in the name of Warburg Asset Management, a subsidiary of S. G. Warburg & Company.

Salomon was awarded $1.52 billion of the four-year notes, and the "Warburg" bid received $510 million, which was then transferred in a rigged sale to Salomon at the auction price.

In February, according to the report, Mr. Mozer decided to play a practical joke on a saleswoman at the firm, with the result that a $1 billion bid was submitted in error during an auction of 30-year bonds in the name of the Pacific Investment Management Company, known as Pimco.

Mr. Mozer arranged for a Pimco employee to call in the $1 billion bid with the saleswoman, the report said. Mr. Mozer was to stop the bid from being submitted to the Federal Reserve. Then, after the auction, the Pimco employee was supposed to complain to the saleswoman that the bid was not filled.

Mr. Mozer crossed the bid out on the worksheet maintained by a clerk, Henry Epstein. The joke went awry, the report said, because Mr. Epstein "apparently did not understand the significance of the cross-out, and thus called in the Pimco bid" to the Fed.

Pimco unknowingly was awarded $870 million of 30-year bonds. The Government desk then made a rapid succession of corrective -- and potentially illegal -- moves. The $870 million was placed without the customer's knowledge in the account of the Quantum Fund, then sold to Salomon.

The bid that led to the unraveling of the illegal bidding was also made in February. It was submitted in the name Warburg without customer authorization. After an inquiry by the Treasury Department, Mr. Mozer and Thomas Murphy, his top aide, told the Government that the Warburg name had been used accidentally, and that the bid should have been submitted in the name of the Mercury Asset Management Company, a Warburg affiliate.

The Treasury Department then requested information about the bid from Mercury, which had not submitted one, and send Mr. Mozer a copy of the letter.

Mr. Mozer then told John W. Meriwether, a vice chairman of the firm, of the second unauthorized Warburg bid. Mr. Meriwether told Mr. Mozer that the bid represented "career-threatening conduct."

Mr. Meriwether alerted senior officers of the firm, including Mr. Gutfreund and Mr. Strauss. All decided that Mr. Mozer's conduct should be reported to the Government, but the authorities were not told until last month.
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September 5, 1991, New York Times, House Panel Assails Treasury Regulation, by Diana B. Henriques,

Brushing aside regulators' appeals for time to weigh the results of an investigation into the Salomon Brothers scandal, influential members of Congress said today that they were prepared to move quickly to tighten surveillance of the $2.2 trillion Treasury securities market.

The warning came after representatives of the Treasury, the Federal Reserve and the Securities and Exchange Commission were questioned closely by a Congressional panel reviewing the supervision of Treasury auctions.

The panel, a subcommittee of the House Committee on Energy and Commerce, called the session in the wake of disclosures on Aug. 9 that Salomon, one of the largest dealers, had submitted phony bids to acquire more than its permitted share of the securities sold by the Treasury at three auctions earlier this year.

Different Interpretations

The lawmakers' frequently rancorous questioning produced two sharply different interpretations of how the market's regulators performed -- with the regulators insisting that existing supervision deserved much of the credit for forcing Salomon to disclose its misbehavior, and the lawmakers arguing that little but luck had brought the misdeeds to light.

The hearings opened with Warren E. Buffett, the new Salomon chairman, apologizing to the panel for "the actions that have brought us here." He pledged the firm's cooperation, and presented the Representatives with a 52-page report on the firm's internal investigation of the matter.

"I have no trouble with there being very tough penalties administered by very tough people for anybody who messes around with this market," Mr. Buffett said.

Salomon Brothers and the behavior of other dealers in the Treasury market are now the target of a broad investigation led by the S.E.C. and the Justice Department, and the regulators appealed today for at least six months to assess the findings of that examination before Congress acted.

But Representative Edward J. Markey, Democrat of Massachusetts, chairman of the panel, said: "The rules that are on the books are clearly unacceptable. We need an overhaul of these procedures."

The speed of the Congressional response will largely depend on John D. Dingell, the chairman of the panel's parent committee. Mr. Dingell, who attended the hearings, harshly criticized what he called "a direct failure of supervision" by the Treasury.

The legislative pace is also aided by the fact that Congress was already working on a bill renewing the Government Securities Act of 1986 when the Salomon case erupted. The law expires in October, and its extension provides Congress with a vehicle for new provisions.

Mr. Markey said proposals included making any infraction of Treasury auction rules a securities law violation; requiring Treasury dealers to set up mandatory procedures within their firms to detect bidding or trading irregularities; giving the S.E.C. the power to oversee how prices and trading information are distributed in the market, and requiring leading traders to report to regulators on the positions held by large customers.

For months, Treasury officials and the S.E.C. have been at odds over how to rewrite the laws supervising the Government securities market. Richard C. Breeden, the S.E.C. chairman, testified today that his agency had sought a stronger role for his agency in regulating the market, which is now policed primarily by the Treasury. The subcommittee is generally sympathetic to his view.

Impatience with the current regulatory framework was echoed by other members of the committee, who spent much of the afternoon interrogating Jerome H. Powell, Assistant Secretary for domestic finance at the Treasury, and E. Gerald Corrigan, the president of the Federal Reserve Bank of New York.

The lawmakers wanted to know what specific steps the two agencies had taken between February, when a minor bidding irregularity was noted at the Fed, and May, when the Treasury and the Fed first informed the S.E.C. of their concern about a possible attempt to manipulate the market in a specific issue.

The irregularity was ultimately revealed to have been a phony bid by Salomon, using the name of a client that had put in a bid of its own.

What Was Detected

Several committee members argued that the bogus bid phony bid would not have been detected at all if the firm had simply used a different customer's name. Even after the irregularity was detected, they said, the regulators simply accepted what they were told by the firm.

Under questioning by the panel, Mr. Corrigan said his agency had reported the bidding anomaly to the Treasury within an hour of the February auction.

Mr. Powell, the Treasury official, said his department had then asked Salomon Brothers in April about the bid and accepted the assurances of executives that it was valid.

No further steps were taken until after the May 22 auction, when the current S.E.C. inquiry was begun. David W. Mullins Jr., vice chairman of the Federal Reserve Board, said many of the surveillance and enforcement activities at the Fed "have already been intensified."
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September 5, 1991, New York Times, Britain Ousts Salomon From Role in Stock Sale, by Steven Prokesch,

The British Government announced tonight that it had dismissed Salomon Brothers from its prestigious and potentially lucrative position as lead manager in the United States of the planned sale of British Telecommunications P.L.C. shares.

The British Treasury cited the scandal over Salomon's illegal dealings in United States Treasury securities. "In the light of recent events in New York and investigations in progress there, it is regretfully concluded that a change is appropriate," a British Treasury spokesman said.

The loss of the lead manager job in the huge offering comes as Salomon is trying to reassure clients that it has cleaned up the problems that led to its illegal Treasury dealings.

James L. Massey, chairman of Salomon Brothers Europe Ltd., said in a statement: "We regret that Her Majesty's Government found it necessary to make this decision. The new management at Salomon Brothers has dealt speedily and effectively with the violations which came to light a few weeks ago."

Co-managers have not been named, but Salomon officials said they did not expect to be allowed to participate in the offering while the investigation in the United States was continuing.

The British Government, which sold off 51 percent of British Telecom in 1984, has not yet said how much of its remaining 49 percent holding it intends to sell now. Analysts predict that it will sell about half of its holding for $:4 billion to $:5 billion ($6.78 billion to $8.47 billion). The offering is expected in late November or early December.

Talk About Goldman, Sachs

British newspapers have speculated that Goldman, Sachs & Company, the runner-up for the lead manager job in the United States, would now get the job. The Treasury spokesman said a decision had not yet been made.

"We are the only U.S. investment bank that has played a lead role in all previous U.K. privatizations with a U.S. tranche," and look forward to renewing our longstanding relationship with Her Majesty's Government in the near future," Mr. Massey said.

A Salomon spokesman said that until now the firm's European business has not suffered since the scandal broke. "August as a whole has been our best August in Europe," he said. "We've continued to do very good business."

A person knowledgeable about the Treasury decision who insisted on anonymity, said Norman Lamont, Chancellor of the Exchequer, had made the final decision and informed Salomon himself. This source denied that British Telecom had asked the Treasury to dismiss Salomon.

The lead manager of the offering in Britain and adviser to the Treasury on the overall sale is the S. G. Warburg Group. Salomon has acknowledged that it illegally used the name of Warburg, and one of its affiliates, Mercury Asset Management, in bidding at Treasury auctions.

But another person familiar with the British Treasury decision who also insisted that his name not be used said Warburg had not recommended to the Treasury that it dismiss Salomon. "Warburg gave some advice on some of the pros and cons, and I should say that there were pros and cons," he said.
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September 6, 1991, New York Times, Six B.C.C.I. Officials Are Indicted, by Stephen Labaton,

The Justice Department today unsealed the indictment of six officials of the Bank of Credit and Commerce International and a reputed leader of the Medellin drug cartel on charges that they had used the bank for six years to launder millions of dollars of cocaine profits.

Officials at the Justice Department have been widely criticized for not moving quickly against the bank, and today's indictment was viewed by some as an effort to seize the offensive.

"Today's indictment should have occurred two or three years ago," said Representative Charles E. Schumer, Democrat of Brooklyn, who released a report today that criticized Federal law enforcement officials for failing to investigate the bank aggressively. "It comes from material that lay fallow for a couple of years."

'Corporate Policy'

But some experts said the case was nonetheless significant as the clearest evidence so far that prosecutors believe that corruption and the laundering of drug money had reached the highest levels of the bank.

"If they have a strong legal case, it means that the top-level people in the bank were involved in laundering drug money," said John Moscow, the investigator who has headed the prosecution of B.C.C.I. by the Manhattan District Attorney's office. "Before, the claim was that drug laundering was done by lower-level guys."

Douglas Tillet, a spokesman for the Justice Department, said the indictment "characterizes money laundering as a corporate policy of B.C.C.I."

The indictment was handed up two weeks ago and unsealed by the United States Attorney in Tampa, Fla., today. Earler, French authorities arrested the former treasurer of the bank, Syed Ziauddin Akbar, in Calais. Mr. Akbar is a defendant in the case, which names the bank not as a defendant but as a "racketeering enterprise" through which the defendants are said to have laundered drug profits from 1983 through 1989.

Mr. Akbar is also a senior executive and controlling shareholder of Capcom Financial Services, a trading company based in London that does business in the United States. Authorities assert that it was used by the former Panamanian dictator, Manuel Antonio Noriega, and his family to conceal drug profits. Jury selection in the Federal case against Mr. Noriega began today in Miami.

Defendants Are Scattered

But Federal authorities acknowledged today that the case would be difficult to pursue because none of the other defendants were in the Government's custody and were scattered throughout Latin America, Europe and the Middle East.

Robert W. Genzman, the United States Attorney in Tampa, said the three-count indictment announced today was part of a sweeping money-laundering investigation by the Justice Department that began in 1986.

"In this investigation, one case builds on another," Mr. Genzman said. "We continue to work up the ladder and are proceeding carefully."

According to the indictment, millions of dollars in drug profits from 1983 to 1989 were placed in certificates of deposit in bank branches in France, Panama, Uruguay, the Bahamas, Luxembourg, Britain and elsewhere. The indictment says that drug traffickers then took out loans from other branches and repaid them with the certificates of deposit.

Last year the bank reached a $15 million plea agreement with the Justice Department that has been denounced by some members of Congress for being too lenient and for limiting the ability of Federal authorities to take further actions against the bank. As part of that case, five officials who worked in various branches of B.C.C.I. were also convicted of money laundering.

Besides Mr. Akbar, the defendants in the case unsealed today are Gerardo Moncada, a leader in the Medellin drug cartel in Colombia; Swaleh Naqvi, Dildar Rizvi, Bashir Shaikh, Wilfredo Glasse and A.M. Bilgrami, former executives of B.C.C.I.; Santiago Uribe, a lawyer in Medellin, and Jesus Mesa, Jairo Ossa and Victor Giraldo, who are said to have moved drug profits from the United States into foreign bank accounts.

Federal prosecutors are also preparing cases in Miami, Atlanta and Washington involving the bank, and a case is also being brought by the Manhattan District Attorney's office. In addition, Federal banking regulators have begun civil and administrative proceedings against former senior executives at the bank.
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September 6, 1991, New York Times, Spotlight Turning on Those Who Run Billions in Funds, by Kurt Eichenwald,

The Salomon Brothers scandal is placing a harsh spotlight on what is normally one of the quietest but most influential groups on Wall Street: money managers and investment partnerships that control billions of dollars in capital.

A number of Salomon clients have been subpoenaed by the Government or asked for information about their involvement with Salomon in the purchases of Treasury securities during several auctions since late last year.

Among the clients are some powerful money managers and institutional investors, including the Quantum Fund, Tiger Investments, Steinhardt Partners, the Mercury Asset Management Company, the Tudor Investments Corporation and the Pacific Investment Management Company.

An Unusual Apology

Even as Salomon's troubles spread to a number of its clients, the firm yesterday made an unusual public apology to one client, Tudor Investment, for implying during the Congressional hearings that Tudor had a secret agreement with a Salomon trader to hold securities in the Tudor name illegally for the bond-trading firm.

"I did not mean to imply there was such an agreement," Warren E. Buffett, Salomon's new chairman, said yesterday in a statement. "Nor did I mean to suggest wrongdoing on the part of Tudor."

Descriptions of the firms' dealings with the clients in the Salomon report suggest a close relationship between a trader that seemed too willing to bend the rules to make customers happy, and clients who, at best, seemed to look the other way.

The report detailed how the trader, Paul Mozer, placed bids for the clients in Treasury auctions in excess of the maximum amount allowed, apparently to win their favor by insuring that their entire orders would be filled. For example, Mr. Mozer placed multibillion-dollar orders for Tiger and Tudor far above what they actually wanted; then when securities were awarded, he secretly bought any excess for Salomon's own account. But it is not entirely clear from the report whether clients were overly agreeable with Mr. Mozer, possibly working together, or whether they were unwittingly used by the firm.

"That's the $64 question," one person involved in the case said yesterday.

Before Salomon's first dealings with Tiger in the Treasury market, Mr. Mozer met with representatives of Tiger and told them that Salomon would be taking large positions, and provided them other information that would make the investment in the auction seem potentially more lucrative.

When the Treasury Department sent a letter in April to Mercury about an unauthorized bid made in its name by Mr. Mozer, the Salomon trader made a personal plea with a senior director of the pension fund not to embarrass him by responding to the Government letter, which did not ask for a response. But the report does not indicate how Mercury responded to Mr. Mozer's plea.

A telephone call to Mercury yesterday was not returned. The firm has refused to comment beyond confirming that its name was used without permission by Salomon.

A number of facts have raised suspicions among investigators. For example, at the May 22 auction of two-year notes, Salomon improperly purchased in its own name and in the name of a client $4.7 billion of the $12.25 billion in notes, which put it in excess of the 35 percent allowable.

If Salomon were in collusion with its two largest customers at that auction, Quantum and Tiger, the firm would have controlled 86 percent of that entire auction. People who have discussed the case with Government investigators said the focus of the investigation of that auction, where a so-called squeeze is believed to have taken place, is whether Salomon and those two clients acted together.

If there was an effort to control the market, Mr. Mozer appears to have gotten skittish at the end. The report said that he had given instructions to Salomon's finance desk not to charge borrowers of the notes too harshly, indicating that if there was a squeeze, he did not want to call attention to it.
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September 6, 1991, New York Times, Salomon Cuts Off Former Managers, by Kurt Eichenwald,

In a stunning break with its past management, Salomon Brothers Inc. announced yesterday that it would pay no compensation, severance or future legal expenses stemming from the Treasury markets scandal to the four senior executives who have resigned, including John H. Gutfreund, the former chairman who built Salomon into a bond-trading giant.

The decision, reached at an early morning meeting yesterday by the firm's board, would also end compensation and payment of legal expenses to Thomas W. Strauss, the former president; John W. Meriwether, a former vice chairman, and Donald M. Feuerstein, the former general counsel. The men, or lawyers for them, all declined to comment.

The firm said it would continue to meet any legal obligations to the men that could arise under their employment contracts or other agreements. The firm's new legal counsel will determine over the next few weeks what those obligations are.

The decision could be a significant tactical move to portray the actions of the senior executives as outside the scope of their employment, said a lawyer who has discussed the case with executives involved in it.

"They directors have made the decision that they will argue that these executives were not acting on behalf of the company," said the lawyer. "It means that the directors have decided that the interests of the executives are not congruent with those of the firm."

Salomon's decision, in effect, now isolates the firm's former top managers, as investigations continue into the unfolding illegal bidding scandal in the Treasury markets.

The board's action is perhaps the most surprising for Mr. Gutfreund, who until last month was one of Wall Street's most powerful executives. Mr. Gutfreund resigned his post days after Salomon disclosed that he and the other three executives had known of illegal bidding by the firm since April, but had failed to inform the Government for four months.

The decision is likely to prevent the executives from receiving a portion of a three-year, $100 million deferred payment pool that is scheduled to be distributed to the firm's top executives early next year. Mr. Gutfreund is the only executive who is not a member of that pool.

Robert Baker, a spokesman for the firm, said the conditions on the decision were there only because of legal limitations. "The board went as far today as they can legally go," he said.

The salaries of at least three of the executives were in the multimillion-dollar range. Last year, according to Government filings by the firm, Mr. Gutfreund was paid $2.264 million, and Mr. Strauss was paid $2.014 million. In 1990, Financial World magazine identified Mr. Meriwether as one of Wall Street's highest paid executives, with an estimated annual compensation of $8 million. Mr. Feuerstein's salary has not been disclosed.

The board also decided that the men would no longer provided offices or paid for expenses. The executives have continued to work in Salomon's old headquarters building, and the decision indicates that if they do not move, they will have to pay Salomon for their space.

During testimony before a Congressional subcommittee on Wednesday, Warren E. Buffett, the new chairman of the firm, was told that Salomon should have no further financial dealing with the former executives, a suggestion that appears to have been quickly accepted.

"There should not be a dime spent by the firm to defend the wrongdoers" Representative Jim Slattery, Democrat of Kansas, told Mr. Buffett. "These men should be in striped suits, sweeping up Wall Street."

Last night, Representative Edward J. Markey, Democrat of Massachusetts, who conducted the Congressional hearing on Wednesday, applauded the board's decision. "This kind of misconduct requires strong medicine," he said. "By today's action, Salomon continues to show it is taking its problems -- and the need for strong remedies -- seriously."

Buffett's Philosophy

Thomas A. Russo, a partner at Cadwalader, Wickersham & Taft, a Wall Street law firm, said, "This fits with Warren Buffett's general philosophy of taking anyone who has anything to do with the scandal and divorcing them from the new Salomon Brothers."

A partner at the law firm Howard, Darby & Levin, which represents both Mr. Gutfreund and Mr. Strauss, said he had no comment on Salomon's announcement. Mr. Feuerstein said, "I don't think it's appropriate to comment." A spokesman for Mr. Meriwether said his client was unavailable for comment.

With the interests of the firm and the former management now completely broken, the possibility of Salomon's uncovering more information about the executives' knowledge of the illegal bidding and other actions seems more remote. In a report submitted to Congress on Wednesday, the firm said that it had asked to re-interview Mr. Gutfreund and Mr. Strauss about the case, but that the request had not yet been granted. The report said the two men had indicated that they would continue to cooperate with the firm's investigation.

Before the firm announced its final break with the former management yesterday, Standard & Poor's lowered Salomon's credit ratings a notch because of the scandal. The ratings went to A from A+ on billions of dollars of senior long-term debt, to A- from A on subordinated debt and to BBB+ from A- on preferred stock. Moody's Investor Service Inc. lowered its rating on some Salomon debt a week ago. Salomon's stock closed yesterday at $24, down $1 on the New York Stock Exchange.

In a statement, Salomon said the move by S.& P. "will have no significant impact on the firm's overall liquidity, which remains strong." But the rating change will increase the cost of borrowings for Salomon when its finances are already under stress
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September 7, 1991, New York Times, Officials Trying to Find Out If Salomon Chief Misled U.S., by Stephen Labaton,

Federal officials are investigating whether John H. Gutfreund, the former chairman of Salomon Brothers Inc., violated a Federal criminal law by misleading a senior Treasury official in June about the firm's improper bidding practices for Treasury securities, Government officials said today.

Mr. Gutfreund met on June 10 in Washington with Treasury Under Secretary Robert R. Glauber, the third-ranking official at the department, to discuss a May 22 auction of two-year Treasury notes. The firm has acknowledged that its bond traders sought to corner that market.

According to accounts of the half-hour meeting by some Government officials, Mr. Gutfreund requested the meeting and assured Mr. Glauber and other officials present that there was nothing improper about the May bid, but that it was routine. Mr. Gutfreund also apparently did not disclose that he had known since April that Salomon Brothers had violated bidding rules in a February auction. Government officials said Mr. Gutfreund had not been asked about other auctions.

A few days before the meeting, a Treasury official had referred the matter to the Securities and Exchange Commission for investigation, but did not inform Mr. Gutfreund.

"We're examining the meeting very closely to see whether he misled Treasury," said an official today who insisted on not being identified. "The June meeting is a pivotal event in this case."
Aaron Marcu, a lawyer representing Mr. Gutfreund, declined to comment about the investigation or the June meeting.

The disclosure by officials comes a day after the Salomon Brothers board voted to sever all ties with Mr. Gutfreund and three other senior executives caught up in the scandal who resigned from the company last month. The company decided to suspend all compensation, severance and legal expenses of Mr. Gutfreund; Thomas W. Strauss, the former president; John W. Meriwether, a former vice chairman, and Donald M. Feuerstein, the former general counsel.

Investigators are now considering whether Mr. Gutfreund at the June meeting violated Section 1001 of Title 18 of the United States Code, which makes it a crime to make false statements in any matter within the jurisdiction of any department or agency of the United States knowingly and willfully. A violation of the statute is punishable by a fine of up to $10,000 and a prison sentence of up to five years.

If he is charged with such a violation, lawyers involved in the case said, Mr. Gutfreund would probably contend that he did not intentionally mislead the Goverment because he did not know the extent of the firm's violations until weeks later, after an investigation by the company's outside law firm, Wachtell, Lipton, Rosen & Katz.

That defense may be difficult, however, because Mr. Gutfreund was known to have watched bond auctions at Salomon closely and maintained a dominating presence on its trading floor.

According to a report issued by Salomon this week on the case, the company's outside counsel uncovered that the firm acted improperly in the May bid. The report does not say when Mr. Gutfreund himself learned that the bid was improper, although Warren E. Buffett, the new chairman of the company, has said he does not believe Mr. Gutfreund knew about it before the investigation by the outside counsel.

A few days after the June meeting, Mr. Glauber ducked a question from a Congressional panel about the May auction, saying that his main concern was not with improper bidding, but with the rule that forbids companies to acquire more than 35 percent of an issue.

"Our major responsibility here is, of course, auctioning the securities," Mr. Glauber said. "In the after-market, whether there was fraud or not, is an issue, really, under 10(b) of the Securities Act and is an S.E.C. issue or perhaps an antitrust issue, which is a Department of Justice issue."

But another official at the Senate hearing, a Federal Reserve Board governor, John P. LaWare, told the senators that the Government had "not been able to discern anything illegal." Not Typical, Not Unusual

"While this particular experience, the extent of concentration here was not typical, it was not that unusual," Mr. LaWare said. "It was toward the high end of concentrations in a successful auction, but it was not just an event that only happens every five years by all means, at all."

The Federal Reserve Bank of New York is the Treasury's agent for the auctions, and it has generally worked closely with the Treasury on the case.

"I don't think that anyone who was involved in it was significantly damaged by it," Mr. LaWare said at the June 12 hearing of the Senate banking subcommittee on securities. "And it was within the limits of what we will allow or what the Treasury will allow as the maximum percentage allotment to a successful bidder."
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September 8, 1991, New York Times, Letter, by Tom Ballantyne,

To the Editor:

The Market Watch column (Aug. 18) states that John Gutfreund was "the man who built and ruled Salomon," but anyone familiar with the Street knows that Billy Salomon brought the firm from obscurity to earn it a place as the top market maker and one of the big five investment bankers. Billy was a man of character while John, the opportunist to whom Billy handed the reins, was driven by personal avarice. He was one of those instrumental in putting together the Phibro deal that lined all the Salomon partners' pockets with millions. Wall Street lore has it no members of the cabal had the courtesy to inform Billy of what was afoot. TOM BALLANTYNE Melbourne Beach, Fla., Aug. 20
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September 8, 1991, New York Times, Business Diary: Punishment at Salomon,

It was a week full of apologies. Warren E. Buffett, the Omaha investor who is interim chairman of Salomon Brothers Inc., told a House subcommittee that he was sorry for "the actions that have brought us here." Then he presented a report to Congress about some of Salomon's wrongdoings. The report detailed what was a lax management style. It said Paul Mozer, Salomon's former head of the government trading desk, changed records of submitted bids and called in at least one unauthorized bid for a customer he was not even in touch with.

It said the trading desk had "rules" about who could and could not approve illegal activities.

The severity of the report must have persuaded Salomon to judge more harshly the top executives who resigned because of the scandal. The executives, including John H. Gutfreund, the former chairman, will not share in bonuses, will not get office space and will not be defended at Salomon's expense.

The British Treasury last week ousted Salomon from managing its sale of British Telecommunications stock in the United States. 

Companies: Why It Took So Long to Expose B.C.C.I.

When the Justice Department unsealed six indictments against officials of the Bank of Credit and Commerce International and a reputed leader of the Medellin drug cartel for money laundering, some wondered why it took so long.

"Today's indictment should have occurred two or three years ago," said Representative Charles E. Schumer, Democrat of Brooklyn, who released a report last week critical of the slow pace. The problem, he said, is that leads were never followed up. Some suspect B.C.C.I.'s network of consultants and highly placed friends slowed discovery.
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September 8, 1991, New York Times, Time to Open The Treasury's Auction Club? by Diana B. Henriques,

The Federal Government has always depended upon rich and powerful men to help it make ends meet. For the past two centuries, the plutocratic assistance has been provided by the likes of John Jacob Astor and J. P. Morgan and, of course, Jay Cooke, the legendary banker and devout abolitionist who almost singlehandedly sold the Treasury bonds that financed the Civil War.

Today, the rich and powerful men on which the Government relies are the usually obscure executives of the 39 firms known as "primary dealers," the firms through which the Federal Reserve Bank of New York buys and sells Treasury securities to adjust the nation's money supply. The Fed also requires primary dealers to bid regularly at Treasury auctions and to make a market in Treasury debt. In return, the primary dealers are the only institutions, besides banks, that are allowed to submit auction bids on behalf of other investors -- and thus, they can spy out market trends and attract new customers seeking their guidance.

This vague but apparently valuable "franchise" is coming under intense scrutiny in the wake of disclosures that executives at Salomon Brothers, a primary dealer, submitted phony customer bids to circumvent Treasury limits on how much each bidder can purchase.

Some critics ask why auction bids should be channeled through this club at all. Richard Sylla, an economic historian at New York University, said the system offers some protection in that the Treasury will not lack for bidders -- a comfort, given the projected growth in Federal deficits in the next few years. No one can be forced to remain a primary dealer, however, so the assurance is hardly ironclad. "And the disadvantage," said Professor Sylla, "is that the Government is, in effect, sponsoring a cartel."

Jacob Dreyer, chief economist for the Investment Company Institute, also questioned "whether the market would not be better served if there were more bidders" -- the nation's mutual funds, for example.

E. Gerald Corrigan, president of the New York Fed, explained at Congressional hearings last week that the Fed simply cannot do business with everyone when it needs to adjust the money supply. That, he added, "necessarily implies that some will be chosen and some will not." But it is not clear why those chosen to handle the Fed's money-modulating business should, ex officio, get the right to play a privileged role at Treasury auctions.

In the distant past, as Professor Sylla noted, the Government turned to tycoons to sell its debt because it could not find buyers otherwise. But the perverse lesson of the Salomon case is that demand for Treasury securities debt is so strong today that people are breaking the rules to buy more of them. "It does strike me as a little funny," said Professor Sylla. "In a global financial system, perhaps it just doesn't make sense to limit the bidding anymore."
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September 9, 1991, New York Times, US Broadens Inquiry on Salomon Scandal,

September 10, 1991, New York Times, Officer Reportedly Knew of Salomon Plan, by Kurt Eichenwald,

September 11, 1991, New York Times, Business Digest,
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September 11, 1991, New York Times, On Wall St., New Stress on Morality, by Richard D. Hylton,

The Salomon Brothers scandal has sent tremors along Wall Street, as firms rush to clean house and distance themselves from employees who may have violated securities laws.

Investment bankers, traders and analysts say some firms are overreacting as they try to make sure they are not hit by the kinds of troubles that have engulfed Salomon.

Last week, two firms -- Shearson Lehman Brothers and U.B.S. Securities -- announced that they had suspended or dismissed executives who may have violated securities laws.

"Regardless of how tight your organization is and how many rules you follow carefully, when a lot of publicity hits someone in your industry it causes people to look again," said Arnold Kroll, a managing director at Wertheim Schroeder & Company, a Wall Street investment bank.

And Felix G. Rohatyn, a senior partner of Lazard Freres & Company, the old-line investment firm, suggested that the moral climate was changing much the way the mood in Japan had changed in the wake of financial scandals there. Some kinds of behavior are suddenly no longer acceptable, and executives now tend to be more deliberate than bold.

"There is a change in mood in the industry that is making people more introspective," Mr. Rohatyn said, adding that this was "not only in view of what happened, but in view of changes in legislation and regulatory procedures that may be forthcoming."

In some cases, firms are examining the breadth of authority and access they allow to key traders and are considering limiting this reach as a way to prevent future problems. Paul W. Mozer, the Salomon trader who violated Treasury bidding rules, had control over both government securities and foreign exchange, and did much of the dealing with major customers and the Government himself.

At Salomon, "a few people did things that had the potential to seriously damage an institution," said Thomas A. Russo, a partner in Cadwalader, Wickersham & Taft, the New York law firm. "Executives are asking, 'Could this happen to me,' and so they are reviewing their compliance with the law and not only in the Treasury area."

Mr. Russo and others say that the reigning sentiment among Wall Street executives is that it is better to ferret out problems and act quickly than to face the prospect of damaging outside investigations.

"There is a feeling that where there is a problem, one must move quickly, and when there are questions about conduct, one must do something rather than nothing, and that may be suspensions or it may be something else," Mr. Russo said.

Scrutiny by the F.B.I.

In addition to internal investigations, all 39 primary dealers in Treasury securities are being scrutinized by agents of the Federal Bureau of Investigation working for the Treasury Department who have subpoenaed records and conducted interviews. This surveillance has contributed to the fearful environment on Wall Street.

Last week, Shearson Lehman Brothers suspended two of its top equities traders while it investigates allegations of stock-price manipulation in a $132 million offering in November. The suspensions shocked many on Wall Street because one suspended executive, Peter DaPuzzo, is a veteran trader well known in investment circles.

In addition, news of the Salomon scandal may have prompted Shearson to put more pressure on some employees in its equities group in an effort to determine exactly who was involved in the stock-price scheme.

Dismissal at U.B.S.

U.B.S. Securities, the United States unit of the Union Bank of Switzerland, said it found evidence of illegal trading of securities and quickly suspended Jay Buck, the managing director and head of its fixed-income department. U.B.S. dismissed another executive who it believed was involved in the scheme.

Throughout the securities industry, executives in charge of legal compliance, risk management and trading reacted to the Salomon revelations by implementing detailed reviews of their trading records and procedures.

At Merrill Lynch & Company, for example, Daniel P. Tully, the president and chief operating officer, called a meeting shortly after the Salomon scandal broke last month to review Merrill's position. Along with Stephen L. Hammerman, executive vice president and general counsel, Roger M. Vasey, the head of Merrill's debt markets group, and Daniel T. Napoli, the head of the risk management team, Mr. Tully set in motion a review of the firm's compliance record and trading practices.

By now, the same scene has been repeated at most if not all of the major securities firms and the push is on to excise problems as quickly as possible. Among the steps the securities firms are taking is keeping better records and more copies of customer orders and tender sheets, particularly on the Treasury securities desk.

Curbing Information Exchange

In addition, the issue of how much primary dealers can say to each other and to customers before a Treasury auction continues to cast a pall over that market. Regulators have not yet clearly defined what constitutes collusion, and dealers in the Treasury market are still reluctant to exchange information as freely as they did before.

"Previously in auctions, we would get 10 or 15 calls from different dealers on how they thought the auctions would be going," said Heather Landon, a vice president of T. Rowe Price who is a trader in its fixed-income department. "On the last two-year and five-year auctions, it was so quiet you wouldn't know that there was an auction."

How the legislators and various government regulators handle the Salomon case is being watched carefully by Wall Street. If the firms that move quickly to punish those who break the rules are dealt with favorably by the Securities and Exchange Commission and other regulatory agencies, a different Wall Street climate may develop that runs counter to the "old boy" support system.

"This is turning having a clean shop into a competitive tool, but it will only work that way if government rewards a clean shop," said Mr. Russo of Cadwalader, Wickersham & Taft. "If this turns out to be how many scalps Government can get, it will turn something that could be a good opportunity into an adversarial situation."

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September 11, 1991, New York Times, Salomon Trader in Scandal: 10 Million Pay in 3 Years, by Kurt Eichenwald,

The former head of Salomon Brothers' Government securities trading desk, whom the firm has blamed for ordering the illegal trades that have shaken the firm, was paid more than $11 million in the last three years, Salomon disclosed yesterday.

The trader, Paul W. Mozer, saw his compensation climb rapidly in that time, and received $4.75 million in 1990 alone, the firm said in a letter to Representative Edward J. Markey, the Massachusetts Democrat who has held hearings on the scandal.

The trader's earnings have been the center of rumors on Wall Street since the Treasuries market scandal broke. People inside and outside the firm said that, despite the sizable sums, Mr. Mozer was unsatisfied with his compensation, and was envious of Salomon traders in other divisions who made more.

Mr. Mozer, who was dismissed from the firm in August, was paid a salary of $150,000 a year, plus bonus, according to the letter. The bonus was determined by John H. Gutfreund, the chairman of the firm at the time, and approved by a compensation committee, the letter said.

Mr. Mozer's bonuses were $2.85 million in 1988, $3.85 million in 1989 and $4.6 million in 1990. Mr. Mozer also qualified for a bonus from a special $100 million deferred compensation pool established in 1989 for most of the firm's managing directors. Having been dismissed, Mr. Mozer no longer qualifies to receive that additional compensation, which is to be disbursed after the end of this year.

Mr. Mozer also avoided losses by selling a huge stake in Salomon before the scandal broke. Shortly before Salomon announced the illegal trades in August, he sold $1.7 million worth of stock in the firm, Salomon has said. The proceeds were frozen in Mr. Mozer's account after the firm announced details of the scandal.

Salomon continued yesterday in its efforts to clean up its image in the wake of the scandal. Wall Street executives said yesterday that Warren E. Buffett, the new chairman of the firm, ordered that the firm's commodities unit cease doing business with Marc Rich, who fled the United States for Switzerland in 1983. He still faces criminal charges in the biggest tax fraud case in American history.

Informs Phibro Unit

Mr. Buffett, who was installed as interim chairman days after the Treasuries market scandal broke, told employees of Phibro Energy, the commodities unit, of his decision in a memorandum sent on the firm's electronic mail system. A spokeswoman for the firm declined to comment.

Mr. Buffett has said that the firm's future actions must be beyond question. Some on Wall Street, including investors in the firm, have long criticized Salomon for its close work with Mr. Rich.

Mr. Rich's relationship with Salomon was highlighted last year when he purchased the base metals business of Philipp Brothers, a subsidiary of Salomon Inc., the investment firm's parent.

Mr. Buffett's move spurred some rumors in the market that Salomon was preparing to sell Phibro Energy, but a spokeswoman denied that was true. "There is no plan, there is no action being taken by the board to do such a thing at this point," she said.

Morgan Stock Drops

Market jitters stemming from the scandal also struck Morgan Stanley & Company yesterday, as rumors circulated that the large investment house was also a target in the Government investigation.

Morgan saw its stock fall 7.5 percent as nervous investors sold their shares on the rumors. Morgan stock closed yesterday at $41.50, down $3.375, in trading on the New York Stock Exchange.

After the close of trading, Morgan issued a statement saying it had no reason to believe it was the target of any Government investigation.

Morgan said in the statement that it had conducted an internal review of its Treasuries markets business after the Salomon scandal erupted. "On the basis of that review, we are satisfied that Morgan Stanley has not engaged in any market manipulation, including a 'short squeeze' or collusive bidding," the firm said.

Like each of the 39 financial institutions that has been granted the privilege of dealing directly with the Federal Reserve, Morgan has received a request for information from the Securities and Exchange Commission as part of its investigation of the scandal.
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September 14, 1991, New York Times, Fund Denies Salomon Tie In Scandal, by Kurt Eichenwald,

The Tiger Management Company, in its first public comments on the firm's business with Salomon Brothers, said yesterday that it had no knowledge that Salomon had used its name fraudulently in a Treasury auction until months later. It added that it had engaged in no wrongdoing.

Tiger's role has been under scrutiny because Salomon said in a statement to Congress that it had submitted a $2 billion bid for Tiger at the May auction of two-year notes, although Tiger had authorized a bid of only $1.5 billion.

In denying its involvement in any illegal activities, the investment fund provided numerous new details about its relationship with Salomon and with Paul W. Mozer, the former head of Salomon's Government securities desk, who is at the center of numerous investigations.

The Salomon scandal has put an uncomfortable spotlight on Tiger, a hedge fund headed by Julian H. Robertson Jr. Since its founding in 1980 by Mr. Robertson and a partner, Tiger has quietly built itself into an influential force in the market.

Following Mr. Robertson's style of making quick and decisive investment decisions based on fundamental analysis of each security, Tiger has won respect on Wall Street, developing close relationships with some of the biggest investment houses, particularly Morgan Stanley & Company. Tiger was one of two large investors that purchased more than $1 billion of securities through Salomon in the May auction. The Government is investigating whether Salomon colluded with other investors to squeeze the market.

Salomon purchased for itself and its largest customers, Tiger and the Quantum Fund, a financial vehicle run by George Soros, $10.6 billion of the $12.25 billion auction.

In its statement, Tiger said its purchases through Salomon involved no improper activities, and that it had not engaged in any collusion or effort to corner the market. "The evidence shows that in connection with its trading of two-year notes, Tiger at all times adhered to the letter and spirit of every applicable law and regulation," the statement said.

The firm also said that it had begun cooperating early and voluntarily with the Justice Department, the Federal Bureau of Investigation, the United States Attorney in Manhattan, the Treasury Department and the Securities and Exchange Commission. Executives with the firm have provided testimony and documents for the investigations.

Discrepancy Noted

In testimony before Congress, Richard C. Breeden, chairman of the S.E.C., said that in July or August, a customer told investigators examining the May auction that there was a discrepancy between the amount listed on the bid sheets submitted to the Government and the amount of notes they had purchased. Tiger's name was not mentioned, but it was the only large customer whose name was used without authorization to buy securities in the May auction.

Tiger said it had decided to invest in Treasury notes after receiving investment advice from Lehrman Bell Mueller Cannon Inc., an economic consulting firm. In May, the fund purchased $800 million in two-year notes that had been auctioned in April in the secondary market through Morgan Stanley.

After the purchase, on May 16, Morgan Stanley told Tiger that it would not be able to finance a Tiger position in the two-year notes in excess of $2 billion for what were described as internal accounting reasons.

As a result of the decision, Tiger turned to Salomon as the largest primary dealer in the country and also because a trader at Tiger knew a Salomon trader, the firm said.

In a telephone conference on May 16, Salomon told Tiger that it was better to buy Treasury securities at auction than in the secondary market, in part because of what was described as greater liquidity in the auction market.

As a result of the conversation, a dinner meeting was set for May 20, two days before the auction. That meeting has been the subject of Government scrutiny because of concern that Mr. Mozer improperly provided proprietary information to the fund, or persuaded it to collude with Salomon.

At the dinner meeting, held with Mr. Mozer, another Salomon executive and two Tiger traders at Le Refuge restaurant in Manhattan, Tiger was performing what it described as its own due diligence before investing in the auction. "At that meeting, Salomon Brothers did not identify any of its customers, did not represent that Tiger would receive a special -- as opposed to general -- repurchase interest rate," the statement said.

While not promising such a rate, Mr. Mozer discussed the likelihood that the special rate would be available in related trading subsequent to the auction, a Tiger executive said.

Shortly before the auction on May 22, Tiger telephoned the Government trading desk at Salomon Brothers and placed an order for $1.5 billion of securities. Mr. Mozer subsequently placed an order for $2 billion, and purchased the additional $500 million from Tiger at the auction price. Tiger apparently did not know of the transaction, according to Salomon, because its confirmation slip showed only the $1.5 billion purchase.

Also, Mr. Mozer telephoned Tiger after the auction and told its representatives that the fund had been awarded $1.5 billion in notes in competitive bidding. Tiger then sold the $800 million in two-year notes it held with Morgan Stanley.

On May 30, before the settlement date for the securities and after consulting with Lehrman Bell, Tiger sold its position in two-year notes to Salomon, eliminating the need for financing of the position from the firm.

September 15, 1991, New York Times, Business Diary/September 8-13,

September 15, 1991, New York Times, Wall Street/Diana B. Henriques; Treasury's Troubled Auctions, by Diana B. Henriques,
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September 15, 1991, New York Times, Business Diary/September 8-13, by Joel Kurtzman,

September 15, 1991, New York Times, Sympathy, But Not Credence, as Clark Clifford Explains, by Joel Kurtzman,

It was a curious defense for a lawyer of such immense stature as Clark Clifford. Mr. Clifford, who has advised every Democratic President since Harry Truman and is a former Secretary of Defense, told the House Banking Committee last week that he had been duped by the Bank of Credit and Commerce International. Mr. Clifford was chairman of First American Bankshares, one of the banks secretly -- and illegally -- owned by B.C.C.I., but he said he did not know that. The Committee was skeptical. B.C.C.I. was a client of Mr. Clifford's law firm for more than a decade. It lent him millions of dollars to buy First American's stock. And there was a memorandum from Mr. Clifford to B.C.C.I.'s chairman warning that First American's link to B.C.C.I. could come to light. "My heart wants to believe you," said Representative Charles E. Schumer, a Brooklyn Democrat who is a member of the committee (page 11). "But my head says 'No.' "

The Salomon Victims Bond trading is what mathematicians call a zero-sum game. For every winner there has to be a loser. That logic also applies to the scandal surrounding Salomon Brothers Inc., whose every illegal gain inflicted a loss on someone else. Last week, while naming no names, the Big Board said two firms lost millions due to Salomon's manipulation of the market. It did not name the firms. It also said several traders lost their jobs. Once it is determined how much Salomon won illegally, it is believed the Government will ask it to forfeit that money. Paul Mozer, who was head of the government trading desk at Salomon Brothers Inc., is catching most of the heat from the scandal. But Mr. Mozer also made a lot of money. According to Salomon, Mr. Mozer's compensation topped $10 million over the last three years.
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September 15, 1991, New York Times, In Financial Scandals, Is Blind Greed Meeting Sightless Watchdogs?, by David E. Rosenbaum,

ON the surface, the recent financial scandals have little in common. But the more that comes to light about such seemingly disparate cases as cheating by Salomon Brothers in the Treasury market, corruption at the Bank of Credit and Commerce International, the nationwide savings and loan debacle and the shaky condition of many of the nation's largest banks and insurance companies, the more an underlying thread becomes apparent:

As national and international finance has become increasingly complicated, the Government's regulatory apparatus, mostly designed about 60 years ago, has proved unable to cope. "Fragmented, underfunded and perhaps not particularly talented regulators find it difficult to outsmart centralized, wealthy and extremely talented crooks," said Robert B. Reich, an economist at Harvard.

Donald F. Kettl, a political scientist at the University of Wisconsin who has been studying how the Government and business interact, agreed with that analysis. "A phenomenon sweeping across the society is the lack of Government expertise in dealing with the private sector it is charged with regulating," he said in an interview.

Mr. Reich and Mr. Kettl are liberals. They place much of the blame on the Reagan and Bush Administrations' deep cuts in the staffing and financing of the regulatory agencies, and they would like to see the Government's hand strengthened.

Conservative scholars agree that the scandals grew at least in part out of a failure of Government regulation. But they argue that the solution is not tougher regulation but for the Government to withdraw altogether and let the invisible hand of the marketplace work unfettered.

Existing financial regulation, in the view of Jerry L. Jordan, a member of President Ronald Reagan's Council of Economic Advisers, is based largely on the principle of "permission and denial." Those who want to move in the financial world, said Mr. Jordan, now chief economist at First Interstate Bancorp in Los Angeles, must concentrate on making friends in high places or finding loopholes in the system, and sometimes they cross the line and act improperly.

If, Mr. Jordan argued, the Government did nothing but publish what everyone in the markets was doing, a philosophy he called "information and disclosure," the resulting competition would prevent scandals like those now in the headlines.

Joseph A. Grundfest, a former member of the Securities and Exchange Commission and now a professor at Stanford Law School, cast the problem somewhat differently. "Regulation," he said, "is not something like butter that can be measured in pounds. The question is smart regulation or dumb regulation, good regulation or bad regulation."

Political scientists and economists cautioned against finding too many similarities in the scandals. After all, what Salomon did -- submitting phony bids to acquire more than its legal share of Treasury securities in several auctions this year -- was an isolated case as far as is known. The massive failure of savings and loan institutions, on the other hand, was a systemic disaster that developed over many years and is costing taxpayers hundreds of billions of dollars.

Money laundering and other corruption at the Bank of Credit and Commerce International occurred largely overseas. Although the international bank is accused of illegally controlling a majority of the stock in Washington's largest bank holding company, First American Bankshares, the criminals and most if not all of the victims in B.C.C.I.'s scams were foreigners. By contrast, the failure of the Bank of New England early this year and the weakness of other large banks and insurance companies in the United States could portend danger throughout the American economy.

But however large the differences, a theme running through the scandals was the sense of financial high rollers that they could make big money by taking advantage of the Government's role in the financial world.

John G. Heimann, who was the New York State Superintendent of Banks and the Federal Comptroller of the Currency and is now an executive at Merrill, Lynch, described the connection this way: "When the Government is involved in the marketplace, there's an assumption that the rules are being followed. Somebody who breaks the rules has an advantage."

Thus, B.C.C.I. got itself chartered in Luxembourg and the Cayman Islands so it could avoid many of the regulations that its international competitors in America, Europe and Japan were subjected to. Salomon used its Government-sanctioned position as one of only 39 firms allowed to bid on Treasury notes to corner the market. And greedy savings and loan operators had the money to take wild risks because their depositors had been attracted in part by the protection of Government insurance.

That raises another similarity. Traders at Salomon Brothers and the shady savings and loan operators thought they could make big profits with little risk, a philosophy that defies common sense but typifies the free-lunch attitude that more and more has characterized finance and in some cases politics in recent years.

The regulators eventually wised up, but at least in the case of the savings and loan industry and B.C.C.I., not until heavy damage had been wreaked.

"Regulators," said L. William Seidman, chairman of the Federal Deposit Insurance Corporation, "are always behind the curve, always correcting for last year's folly while people are finding new ways to beat the system."

More than the other financial regulatory agencies, the Securities and Exchange Commission, which has jurisdiction over the stock market, has managed to stay ahead of the curve. Exactly why is not clear, but it seems to have much to do with what Mr. Grundfest, the former commissioner, called "a certain culture, an unmistakable esprit de corps and competence that the other agencies cannot match."

Warren E. Buffett, the new chairman named to clean up Salomon Brothers, told Congress early this month that the main reason why "the United States has the best equity markets in the world" was that the S.E.C. was such a "tough cop."

"I think," Mr. Buffett continued, "that there's a feeling they can attract young people out of school who could probably earn a lot more money elsewhere and that there's a certain Marine Corps mentality about getting the job done."

But as good as it is, the S.E.C. could not prevent the insider trading and other crimes that were so prevalent on Wall Street in the 1980's.

"You can't keep fraud out of the system," said Mr. Heimann, the former comptroller. "The key to good regulation is how quickly you catch it."
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September 16, 1991, New York Times, Warburg Describes Its Salomon Role, by Kurt Eichenwald,

The S. G. Warburg Group, the British investment house, yesterday disclosed details of its relationship with Salomon Brothers Inc., portraying itself as a victim of Salomon's illegal actions in the Treasury market scandal.

The disclosures were the first details of the scandal provided by Warburg and its affiliate, Mercury Asset Management, which says its name was submitted by Salomon without authorization in a February auction for five-year Treasury notes.

Investigators have focused much of their attention on Warburg and Mercury because of suspicions that the firms had worked with a Salomon trader to cover up the illegal bidding. Mercury was contacted by the Treasury Department in April about the February bid, and did not disclose in its reply that the bid was unauthorized..

Two Days of Washington Meetings

The disclosures followed two days of meetings in Washington between Warburg and Mercury executives and officials of the Treasury, the Federal Reserve Board and the Securities and Exchange Commission. In a statement, Warburg implied that it was considering whether to bring a lawsuit against Salomon.

In the statement, Warburg said Mercury was contacted by the Treasury on April 17 about the rules limiting bids to 35 percent of the securities being auctioned. In the letter, the Treasury noted that Mercury's name had been used by Salomon in February for a bid of $3.15 billion, and that S. G. Warburg & Company, the American investment arm of the British firm, had also submitted a bid of $100 million. Salomon has subsequently admitted that Mercury made no bid in February.

In its letter, Warburg said, the Treasury advised Mercury that future bids of Mercury and the American arm of Warburg would be counted together in calculating whether the 35 percent limit was reached.

In yesterday's statement, Warburg said that after receiving the Treasury letter Mercury was immediately contacted by Paul W. Mozer, the former head of Salomon's Government securities trading desk who is at the center of the civil and criminal inquiries. Warburg did not disclose yesterday who at Mercury had been contacted by Mr. Mozer. In Salomon's own recent accounts of the scandal, however, the person receiving the phone call has been identified as Charles Jackson, a senior director of Mercury.

Bid Explained as a Clerical Error

In that telephone conversation, Warburg said, Mr. Mozer explained that the bid was "mistakenly submitted in Mercury's name due to a clerical error at Salomon." Mr. Mozer added that the mistake had been caught and that the correct bidder had been allocated the securities, Warburg said.

But according to recently released information, the bid had originally been submitted in the name of Warburg Asset Management, and Mr. Mozer told the Treasury that he had meant to use Mercury's name, but failed to do so because of a clerical error. Salomon has since disclosed that the securities purchased by Mr. Mozer were purchased for Salomon.

Warburg said that in the conversation with Mercury Mr. Mozer indicated that since the error had been Salomon's, he thought his firm should report it and asked that Mercury allow Salomon to contact the Treasury about the problem.

According to yesterday's statement by Warburg, "Mercury accepted Mozer's explanation and, believing that the matter had been resolved and was being corrected by Salomon with the Treasury, did not, when it acknowledged receipt of the Treasury's letter, point out that it had not in fact submitted any bid in the February auction."

The explanation raises questions about why Mercury would allow someone at another firm to explain away an error of more than $3 billion in its name. But Warburg said it complied with Mr. Mozer's request because it had no knowledge of any improper actions.

The firm said in its statement that "no one at Mercury or at Warburg had any reason to believe or suspect that what was described by a managing director of Salomon as a clerical error was in fact part of a pattern of improper or unlawful activities or that Salomon would not, as Mozer had committed to do, itself bring the matter to Treasury's attention.

Warburg added that Mr. Mozer's explanation was "not one that would have aroused suspicion on Mercury's part of any wrongdoing."
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September 17, 1991, New York Times, Business Digest,



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September 20, 1991, New York Times, Salomon Finds New Violations, by Kurt Eichenwald,

Salomon Brothers Inc., already hobbled by the Treasuries market scandal that erupted last month, has uncovered two additional violations of trading rules in that market, Government officials said yesterday.

The additional violations, which the firm is expected to announce today, include another instance of illegal bidding involving the S. G. Warburg Group P.L.C. Salomon has already disclosed that it illegally used Warburg's name and those of affiliates of the British investment banking firm in bids for Treasury securities for its own account.

The discovery of new violations, coming after months of internal investigation by Salomon, indicates that the full dimensions of the scandal are still not fully known. Their disclosure is certain to again batter the firm, which has already lost prominent customers and been hit with dozens of lawsuits.

New Challenge for Buffett

The new violations also present an additional challenge to Warren E. Buffett, the firm's new chairman and largest investor, who has been working to steady Salomon's financial position and relationships with customers in the wake of the scandal.

A Salomon spokesman declined to comment when asked about the new violations.

Even as Salomon was preparing to admit the additional violations, the stock of the firm's parent company took a heavy beating yesterday. Shares of Salomon Inc. closed at $22.75, down $1.25 on the New York Stock Exchange. The stock is now down nearly 40 percent from $36.625 on Aug. 8, before the scandal erupted.

The new violations are said to involve additional instances in which Salomon submitted fictitious customer bids. In those instances, Salomon would use the name of a customer in bidding for Treasury securities, and then illegally retain the securities itself.

35% Rule Not Exceeded

In neither of the two new violations did Salomon exceed the 35 percent limit on Treasury securities that any bidder is allowed. That violation in several auctions since the end of last year enabled Salomon to secretly control more of each auction than was allowable, and in May enabled it to "squeeze" other investors who were forced by earlier investment decisions to purchase Treasury securities.

It was not immediately clear if the new violations occurred in Treasury auctions where no wrongdoing had been disclosed earlier. If the violations did not occur at the February auction of four-year notes -- the only time the firm has admitted improper bidding without violating the 35 percent rule -- then Salomon would have had to violate the rules in at least one auction that has not already been publicly disclosed.

Salomon learned of the violations after receiving documents from Government investigators about the firm's bidding activities. With the additional information, which did not in itself disclose the improper bidding, Salomon was able to determine additional violations had occurred.

The previous Salomon violations, which were disclosed in August, occurred in auctions between December and May of this year. While it could not be determined when the additional violations took place, Salomon has dismissed traders it says were responsible for the illegal trading, and has instituted new rules and supervision, making similar violations since August highly unlikely.

In its August disclosure, Salomon admitted illegally purchasing more than its allowed share of 35 percent at several Treasury auctions by submitting bids in customers' names without their approval. In addition, the firm said it had mistakenly purchased $1 billion worth of securities as a result of a practical joke.

Wall Street executives have said that the perception that a leading force in the Treasuries market was dishonest could damage market credibility worldwide.

Top Executives Lose Jobs

The scandal involving previously disclosed illegal bids, which Salomon says were entered by Paul W. Mozer, the former head of the firm's government trading desk, has already cost top executives of the firm their jobs. John H. Gutfreund, the former chairman and chief executive; Thomas W. Strauss, the former president; John Meriwether, a former vice chairman, and Donald Feuerstein, the former chief legal counsel, have all resigned from the firm. The four executives were informed of one instance of Mr. Mozer's illegal bidding in April, but failed to disclose it to the Government until August.

Salomon is currently under investigation by the S.E.C., the Treasury, the Federal Reserve and the Justice Department for its illegal bidding during the Treasury auctions.

The inquiries have become extremely broad, with the Government examining whether there was widespread collusion in the Treasuries market, including between other firms.

The news of new violations is expected to give Salomon's stock another bad day. Market analysts attributed yesterday's decline to investors' reaction to Salomon's latest disclosure about its financial condition. The firm said in a filing with the Securities and Exchange Commission on Wednesday that it was selling large holdings of its securities to help finance its operations.

The filing also said that Salomon's ability to continue its current method of financing could be harmed if the firm's status as a primary dealer is changed. As part of the Treasuries market investigation, the Federal Reserve is examining that status, which allows the firm to deal directly with the Fed in buying and selling government securities.

"It's an admission on their part that there are problems," said Lawrence W. Eckenfelder, an analyst with Prudential Securities. "All you were hearing from them was that there were no financial problems, but now here they say there are problems."

Salomon said in a statement regarding the filing that the firm's liquidity position was still strong. And the disclosure of the shifts by the firm in financing its operations had already appeared in news reports.

But analysts said the filing, with the implications that Salomon is going to have to shrink the size of the company to emerge from the scandal, added more concern to investors. "Everyday it's something else, and none of it is good news," Mr. Eckenfelder said.
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September 20, 1991, New York Times, Violations by Salomon,
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"When the Regulators Stood Still," Sept. 22, 1991
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September 22, 1991, New York Times, Ideas & Trends; The Outrage Index Rises; Wall St. Feels the Heat,
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September 22, 1991, New York Times, No Headline, by Louis Uchitelle and Stephen Labaton,

John H. Gutfreund sought the unusual audience, and on the hot and humid afternoon of Monday, June 10, the chairman of Salomon Brothers Inc., the most powerful firm on Wall Street, was ushered into the imposing third-floor office of Robert R. Glauber, with its heavy, Victorian-style furnishings and dark oil portraits of unsmiling, bygone financiers.

More than anyone at the Treasury Department's headquarters in Washington, Mr. Glauber, the Under Secretary for Finance, is responsible for regulating the monthly auctions at which the Treasury sells billions of dollars in securities to finance the Government's huge debt. Evidence had been piling up that Salomon might have broken the rules -- particularly the rule aimed at preventing any one firm from hogging too many of the securities at a given auction. Mr. Gutfreund had come to Washington to try to head off an investigation that Mr. Glauber's team had quietly initiated.

The meeting lasted less than 30 minutes, Mr. Glauber recalls. But as summer turns to fall, that brief conversation begins to look like the start of a new direction in the unfolding Salomon Brothers scandal -- one in which the firm's fraudulent auction bids in the names of unknowing customers, much in the news today, take a back seat to a larger and more troubling issue.

The new concern is whether Salomon acted alone; whether the Wall Street firm and a few big customers -- perhaps acting together -- cornered the market in two-year Treasury notes auctioned last May 22, forcing others to pay exorbitant prices to acquire them. If that is the case, then the Salomon scandal goes far beyond the aberrant behavior of Paul W. Mozer, who was chief of Salomon's Government trading department, and a few assistants who helped Mr. Mozer rig bids in the names of customers without their knowledge.

That broader case would spotlight the failure of Mr. Glauber and E. Gerald Corrigan, the 50-year-old president of the Federal Reserve Bank of New York -- the two officials most responsible for regulating and supervising the Treasury market -- to curb Salomon and perhaps other firms earlier this year.

By mid-May, their staffs had detected, in a new study, a striking pattern of aggressive bidding going back to the spring of last year. But until the May 22 auction, this behavior had not distorted Treasury securities prices, so regulators had no compelling reason to act, in the opinion of Mr. Glauber and his staff. Indeed, Mr. Gutfreund sought the June 10 meeting to contest the Treasury's concern that Salomon's behavior and the distorted pricing after the May auction were linked.

"This was a meeting that he set up; we did not ask him to come in," Mr. Glauber said last week. "He told us some things and we listened. We could have asked him more about the May auction. But we listened."

Some Missing Questions

Nor did Mr. Glauber ask Mr. Gutfreund about auctions in February and April in which Salomon had executed what seemed to Treasury to have been excessive bids. And soon after the June 10 meeting, Mr. Glauber made a fateful decision. He decided to postpone until August at the earliest consideration of any proposed changes in Treasury auction rules designed to prevent the concentration of purchases in a few hands.

"You don't want to rush in and make modifications with a sledgehammer until you know the full extent of the problems," Mr. Glauber said. "Rushing to judgment in this kind of market is a mistake. And we do not know yet whether we know the full extent of what happened."

But the reluctance to act raises troubling questions about the close-knit relationships among the Treasury, the Fed and the primary dealers like Salomon who play the major role in financing the huge Federal debt. Did those relationships lull the regulators into a false sense of confidence that the Government securities market was free of corruption?

Even within the ranks of the Treasury and the Fed, which through its New York office conducts the principal Treasury auctions, there is criticism that regulation of the Treasury markets -- where $5 billion to $12 billion in new notes and bonds are auctioned monthly -- had become too lax and too trusting.

"The plain fact is that the Federal Reserve Bank of New York is on the front line," said a high Fed official in Washington, who declined to be identified. "They see all the data and they are in daily contact with the dealers. They are the source of identifying problems and sounding the alarm."

Cast of Characters

Whatever the criticism, the Treasury, the Fed, the Securities and Exchange Commission and the Justice Department are conducting civil and criminal investigations of the Treasury securities marketplace. And Salomon officials, who have tried to characterize the scandal as one limited to Mr. Mozer and a few misbehaving confederates, do not discount the possibility that the misbehavior might go well beyond the firm.The main evidence leading in this direction so far is twofold: The study showing Salomon to have been a far more aggressive bidder in Treasury auctions than had previously been disclosed and the frequency with which the firm illegally used the names of others to buy securities that it secretly kept for itself. Two firms whose names have been used more than once were Quantum Fund and S. G. Warburg & Company.

Warburg, a London-based investment house, is itself a primary dealer in Treasury auctions. Quantum is a mutual fund that invests the savings of others, often in Treasury securities. Both deny that they had any knowledge of Salomon's activities.

The Treasury and the Fed have turned up a startling trend. In a retrospective study, requested by the Treasury and completed by the Fed in mid-May, they found that in three different auctions, over 13 months, Salomon had acquired more than 75 percent of the notes and bonds sold, either in its own name or as an agent for customers. And in nearly 30 of the approximately 230 weekly or monthly auctions held since early 1986, Salomon had bid for and acquired up to 50 percent of the securities.

"Only Salomon would commit the capital required to take such aggressive positions," said Michael E. Basham, a key Treasury deputy under Mr. Glauber until early September, when he left to join Smith Barney Harris Upham & Company Inc. "Regulating the Treasury market is really regulating Salomon."

The Fed study showed that before the spring of 1990, not even Salomon had accounted for 75 percent of any auction. So the new figures should have aroused the Fed's and the Treasury's suspicions that Salomon might have been trying to exercise undue control over the market, some critics say. Apparently, they didn't.
No rule bars Salomon from acquiring most of the securities at an auction, as long as it bids for 35 percent or less in its own name, with the rest ordered for customer accounts. But some argue that the huge chunks taken by Salomon in March 1990 and then in February and April of this year should have prompted the New York Fed to check whether Salomon might have been violating auction rules, as it turns out it was.

"Enormous power over a particular market segment can lead to arrogance, can lead to conclusions that it's within a firm's power to do things that would be unlawful and that might lead to temptations to do so," Richard C. Breeden, chairman of the S.E.C., told a Congressional committee this month.

Mr. Corrigan's people are now making such checks part of their regular routine. But such policing goes against ingrained habits. Mr. Corrigan, a Fordham-trained economist who has spent most of his career in the Federal Reserve system, told Congress this month that the Treasury auction system "has worked incredibly well until now." He testified that the Fed's relationship with Salomon and the 38 other primary dealers who purchase most of the securities at the auctions has been much more that of a trusting business relationship than a regulatory one.

"The data and information we collect from primary dealers are aimed at providing broad insights into the workings of the market," Mr. Corrigan told the Securities Subcommittee of the Senate Banking Committee in written testimony. "Information gathering activities have never been structured with a view toward enforcement or compliance activities."

The fourth time that Salomon went above the 75 percent mark was on May 22, only a week after the Treasury had received the revealing Fed study. More than $12 billion in two-year notes were sold that day. Immediately after the auction, however, other traders trying to acquire the new notes to meet obligations to sell them to customers, found themselves forced to pay excessively high prices.Within days, the uproar on Wall Street over the unusual "squeeze" -- resulting in big losses for some traders -- was noted in Congress. Mr. Glauber's staff on May 29 asked the S.E.C. to begin an investigation  the first ever undertaken by that agency into the Treasury market. And Mr. Basham telephoned Salomon on June 4 to express the Treasury's concerns. "My call was a modest attempt to get them to unwind their position," Mr. Basham said. Six days later, Mr. Gutfreund paid a visit to Mr. Glauber in Washington.

At 62, Mr. Gutfreund is a decade older than Mr. Glauber, but the two men are similar in height and build (about 5-foot-7 and stocky) and in intensity. While Mr. Gutfreund is a hard-driving Wall Street trader, Mr. Glauber, a Harvard economics professor temporarily on leave, works endless hours trying to shepherd the Bush Administration's bank reform legislation through Congress.

Because of the banking bill, the investigation of Salomon's trading practices was, in June, a lesser priority for Mr. Glauber -- and it remained that way until August, when Salomon suddenly disclosed that Mr. Mozer, the head of its Government desk, and a few of Mr. Mozer's staff had purchased Treasury securities in customers' names apparently without their knowledge. The practice illegally circumvented the 35 percent maximum purchase for a single buyer.

A Matter of Delays

Mr. Mozer had told Mr. Gutfreund in April of some of these violations, but he made no mention of them at the June 10 meeting in Mr. Glauber's office. Indeed, Mr. Gutfreund's long failure to report the transgressions to the Fed or the Treasury cost him and other top Salomon officials their jobs in mid-August, after the bid-rigging was finally revealed.

In early June, sitting on a couch in Mr. Glauber's office and puffing on a cigar, Mr. Gutfreund spoke only of the squeeze on the two-year notes -- admitting its existence, but arguing that such squeezes are not all that uncommon and can be the result of natural market forces. As he left, he handed Mr. Glauber an envelope of charts, which have yet to be made public, intended to illustrate his case. Mr. Glauber did not tell the S.E.C. about the meeting, although the S.E.C. had been working on the case.

Mr. Gutfreund in June and Salomon today offer various explanations of how a squeeze can occur naturally. With interest rates declining, as they have in recent months, a new Treasury note sold at auction for a yield of, say, 6 percent, gains in value as market interest rates decline below this level. The greater value increases the demand for the notes. A price squeeze can then develop if traders need to acquire some of the notes because they had sold them to others even before they owned them in so-called "when-issued" trading in advance of the auction. Such traders are called short-sellers.

"The development of a squeeze does not imply any deliberate effort by holders to 'corner' the issue," Salomon said in a question-and-answer press release. "Indeed, the possibility of squeezes is inherent in when-issued trading."But the May two-year notes ended up mostly in the hands of Salomon and three funds -- Tiger Investment Inc., Quantam and Steinhardt Partnership Inc. With short-sellers seeking to borrow or purchase roughly $6 billion of the May notes, or half the issue, the price squeeze continued until July, as Salomon and Steinhardt in particular appeared to hold their positions. Now the S.E.C. is trying to determine whether Salomon and the others somehow worked together to obtain such control.

"Ultimately, the public debate will be whether this was a case of pre-agreement or coincidence," said an executive who trades in Treasury securities at a Wall Street firm.

Like many of Salomon's prior infractions, the May auction prompted some Treasury officials to rethink the rules. They and the New York Fed considered but rejected a proposal that would have limited all traders in the primary market to 35 percent of an issue for both themselves and their customers. Conforming to the current 35 percent ceiling, a primary dealer could theoretically buy 100 percent of an issue on behalf of itself and two customers.

Instead, Mr. Basham said he viewed the problem as one of disclosure. Because the largest Wall Street firms know the positions of their customers and often financed their purchases, they are able to use this information in their own trading in the after-auction secondary markets and could thus cause squeezes.

A Postponed Rule

The proposed solution, circulated in June as a memo from Mr. Basham, was a two-part rule. First, a company that sought to acquire more than 5 percent of an auction would have to make the bid directly to the Fed and not go through a primary dealer. This would reduce the chances of phony bidding. And, secondly, any bidder acquiring more than 20 percent of the securities at an auction would have to publically disclose its holdings, a rule roughly analogous to S.E.C. regulations for stock market investors.

Such proposals most likely would have drawn opposition from the largest primary dealers, and Mr. Glauber decided to postpone its implementation until he could solicit the industry's views. The plan was to make a presentation in early August, at a meeting in Washington of the Treasury Advisory Borrowing Committee, a group representing primary dealers, including Salomon. Mr. Glauber and some of his staff were tied up in Congressional hearings on bank reform, and the presentation was postponed until early September.

But Salomon's bombshell confession about unauthorized bids came in mid-August. Now Mr. Glauber and Mr. Corrigan are awaiting the outcome of the various investigations under way before making any changes in the rules -- changes that would substitute regulation for the old mutual trust in the marketplace.

"This was a gentlemanly world, where one's word was very, very important," said a lawyer for Salomon. "You see on dollar bills the phrase 'In God We Trust.' At the Treasury Department, there was a view of, 'In the primary dealers we trust.'" Now that trust is gone.

WHY SALOMON'S SUDDEN AGGRESSION?

The Salomon scandal raises a tantalizing question: Why now? Why haven't dealers in Treasury securities broken the rules so flagrantly in the past? No one has a definitive answer, but there are various theories.The main one is disregard of moral standards coupled with Salomon's pay incentive system -- a sort of 1980's Wall Street mentality reaching the Treasury security market well after the retreat of Ivan Boesky and Michael Milken. Salomon's traders in this market receive annual bonuses tied to the profitability of their operation, and in pursuit of bigger bonuses they cheated, many analysts say.

In doing so, they took advantage of lax auction supervision by the Federal Reserve Bank of New York, which supervises the auctions for the Treasury. "The Fed felt that anyone who would be admitted to the inner-sanctum of doing business with the Fed as a primary dealer was virtually by definition an honorable person," said Francis Schott, an economic consultant and a former research director at the New York Fed.

There are other theories, as well. The recession has produced a steady decline in interest rates since last year. That has made made the prices of Treasury securities rise, emboldening Salomon and other investors to take big positions. Finally, the disappearance of Drexel Burnham Lambert Inc., another major trader in Treasuries, left the field wide open, perhaps encouraging Salomon traders to operate more aggressively.
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September 22, 1991, New York Times, Market Watch; The 'Narcotic' of Crime on Wall Street, by Floyd Norris,

MEMO to Wall Street chief executives: One way to detect wrongdoing is to look for high-level employees doing work that is beneath them.

As a rule, that is not a problem. The sense of hierarchy is strong, and it is young associates who do much of the real work in many a Wall Street firm, although they are never the ones who get the credit.

In fact, one of the reforms that Warren E. Buffett has instituted at Salomon Brothers is to bar the people running the bond trading desk from taking customer orders, as Paul W. Mozer used to do. By Salomon's account, that made it easier for him to fake orders. Salesmen were cut out of the process.

It is a historical accident that only a few weeks after Mr. Mozer became famous -- and, if the leaks are right, simultaneous with his efforts to cut a deal with prosecutors -- the publicity mills are churning for another once-obscure Wall Streeter who gained fame through crime.

That fellow is Dennis B. Levine, who used to be an investment banker specializing in takeovers at Drexel Burnham. His fame came when the Government discovered he had made more than $10 million on insider trading. In 1986, that seemed like a lot of money, and Mr. Levine briefly became the embodiment of greed in America. He was soon replaced by Ivan F. Boesky, whom he fingered, and then by Michael R. Milken, whom Mr. Boesky fingered.

Mr. Levine is on the publicity trail to promote his memoirs, something your average 39-year-old has not yet thought about writing. But Mr. Levine's career came to an abrupt halt at 33.

In the book, he tells of frantically engaging in "research in retrospect," a vain effort to concoct a paper trail of plausible reasons for his buying.. For obvious reasons, it was not work to be farmed out, but everyone in the office could see him busily using computer data bases. "Many of the junior associates in the office were impressed with how much time I, as a managing director, devoted to research," Mr. Levine wrote in "Inside Out," published by Putnam.

The book provides an insightful view of the fevered merger scene of the 1980's and of an amoral young man who began trading on inside information as soon as he got any and did not stop even when he was making millions and knew the S.E.C. was sniffing at his trail. And it may help to explain Mr. Mozer as well.

"It was a narcotic almost," Mr. Levine said, in an interview last week, when asked why he did not stop. "I was enthralled. It was like knowing the numbers in the lottery before you buy your ticket."

One suspects that when the 36-year-old Mr. Mozer finally tells his story, he will have similar things to say. For what is most stunning is that Salomon's most egregious violations of Treasury bond auction rules came after earlier violations had been detected.

"I developed a sense of legal invulnerability," said Mr. Levine. "I believed I would never be caught."
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September 25, 1991, New York Times, Greenspan Sees Gains At Salomon, by Kurt Eichenwald,

The efforts that Salomon Brothers Inc. has made to clean house as a result of the Treasuries market scandal may preserve its status as a primary dealer, a letter by Alan Greenspan, chairman of the Federal Reserve, indicates.

Salomon's status among the elite group of investment firms has been under review by the Fed since the firm last month admitted a series of bidding violations. A suspension as a primary dealer, Wall Street executives have said, could drastically shrink the firm and diminish its ability to survive.

In a letter released yesterday, Mr. Greenspan wrote Representative Henry B. Gonzalez, Democrat of Texas, chairman of the House Banking Committee, that Salomon's efforts to correct the problems, which have included changing top managment, could preserve the firm's position as a primary dealer.

New Management Praised

"It is the prospect for future compliance by the firm that is a key consideration in this decision," Mr. Greenspan said in his letter. "In that regard, the new management of Salomon Brothers has demonstrated an acute sensitivity to the need for absolute integrity in the Government securities market and is taking steps to assure compliance with applicable laws and regulations and -- more broadly -- to change the culture of the firm."

Mr. Gonzalez criticized Mr. Greenspan's letter as a "wholly inadequate" response to a request he made last month for a report on a number of questions.

Mr. Greenspan also said in his letter that Government investigators were closely examining whether other primary dealers might have engaged in illegal bidding. "The issue of whether other auction participants also violated the Treasury's rules is one that is at the heart of the investigations currently under way," he wrote.

Much Government Auditing

According to the letter, the Government is also auditing every large customer bid submitted by all primary dealers for the last two years, presumably to determine authenticity.

Mr. Greenspan also detailed changes in enforcement activities in the Treasuries market that have resulted from the scandal. They include spot checks of customer orders by the Federal Reserve Bank of New York to determine authenticity and new requirements by the Treasury Department for written confirmations from customers who win large amounts of securities in competitive bidding before settlement.

Mr. Greenspan also said a permanent surveillance group composed of representatives from several agencies had been set up to act as a watchdog for the Treasuries market and insure that all regulatory agencies were notified of any difficulties.

Mr. Gonzalez replied, "I asked for a more detailed and comprehensive report, rather than a perfunctory three-page letter." He added that the limited information released by the Fed, and its failure to address specific questions asked by the Banking Committee, reflected the Government's "questionable relationship with the industry they do business with and regulate."

The release of the letters came on a wild day of trading in Salomon's stock on the New York Stock Exchange. Salomon fell to $20.75, a new low for the year, before recovering to $22.50, up 75 cents for the day. The stock has lost nearly 40 percent of its value since the scandal came to light on Aug. 9.

Salomon was the third-most-active issue on the Big Board, with 2.23 million shares changing hands.

The stock sank after Salomon issued a statement that it planned to take what it described as a substantial charge against third-quarter earnings to create a reserve to pay for expected Government fines and costs of lawsuits stemming from the Treasuries market violations.

The Salomon statement also indicated that the company had reduced the size of its balance sheet by about $40 billion.
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September 25, 1991, New York Times, Many Avoid Dealers in Note Sale, by Kenneth N. Gilpin,

In an apparent reaction to the shadow the Salomon Brothers scandal has cast on Wall Street, many participants at yesterday's auction of two-year Treasury notes chose to bypass dealing with the 39 institutions that are primary dealers in Government securities. Instead, they placed bids directly wih the Federal Reserve Bank of New York.

In releasing the auction results, the Treasury Department said 79 percent of the bids submitted by New York primary dealers for the $13 billion issue were accepted, compared with an average of 90 percent in past auctions.

With the exception of four concerns -- the First National Bank of Chicago, Harris Trust, Fuji Securities and the Bank of America -- all the primary dealers, a collection of big banks and securities houses, are in New York.

"I can't ever remember seeing that before," said Joseph Liro, a senior vice president and money market economist at S. G. Warburg & Company.

And Stephen A. Wood, director of financial market research at the Bank of America, said, "The bids suggest that people are pulling away from the dealers."

"It seems that customers are probably making a collective decision to go directly to the Fed in order to avoid any chance of a problem," said a trader at a primary dealer, who asked not to be identified.

Bids at the auction produced an average yield of 6.14 percent, well below the 6.46 percent average yield at the last two-year note sale on Aug. 27.

Yesterday's auction was the second sale of two-year notes since the Salomon scandal erupted on Aug. 9. The first auction went smoothly, as did yesterday's. But at the Aug. 27 auction, just under 89 percent of the bids made by New York dealers were accepted by the Treasury.

At yesterday's sale, unusually large competitive bids were submitted through a number of regional Federal Reserve Banks, most notably the Federal Reserve Bank of Richmond, which was awarded more than $860 million, and the Federal Reserve Bank of Atlanta, which was awarded nearly $550 million.

Dealers said that bids from those two institutions alone were $1 billion higher than usual.

More Complicated Process

The process of placing a competitive bid through a regional Federal Reserve Bank is somewhat more complicated than doing business directly with a primary dealer.

In working through the regional Federal Reserve banks, a client wishing to bid on securities needs to submit either an automated or written tender form. Through primary dealers, a telephone call specifying the size of the bid and the price is all that is necessary.

Results of an auction of $12.5 billion of one-year notes last week gave little sign that this sort of shift would occur. At that auction, 93 percent of the bids submitted by New York dealers were accepted.

"A month ago, it would have made sense to stay with the dealers," said Louis v. B. Crandall, chief economist at R. H. Wrightson & Associates, an economic consulting firm. "But given what's happened since, you would have expected to see some of this shift at the one-year bill auction.

"The fact that something changed between that auction and this one is surprising, and makes me wonder if this is an aberration," Mr. Crandall continued. "It is certainly something people will be watching at the five-year auction tomorrow." 5-Year Note Sale

The Treasury is expected to sell $9.5 billion worth of new five-year notes today. In when-issued trading late yesterday, the securities were offered at a price to yield 7.06 percent.

Demand for the two-year notes sold yesterday remained strong after the auction results were announced, and by late in the day the securities were offered on a when-issued basis at a price to yield 6.12 percent.
The auction was the highlight of an otherwise slow day in the secondary market for Treasury notes and bonds.

After moving higher early in the session on news that the Conference Board's index of consumer confidence declined for the third straight month in September, prices of Treasury securities staged a reversal and ended slightly lower on the day.

Analysts said that car sales data for the middle 10 days of September were a bit stronger than anticipated, showing a seasonally adjusted annual selling rate of 6.4 million vehicles.
Though far from robust, the rise from the 5.4 million annual rate for the first 10 days of the month provided traders with an excuse to take profits after the recent run-up in prices.

30-Year Bonds Off

By late in the day, the Treasury's benchmark 8 1/8 percent 30-year bonds of 2021 were offered at a price of 102 25/32, down 1/8 point, to yield 7.88 percent, compared with 7.87 percent late Monday.

Among Treasury note issues, the 7 7/8 percent 10-year notes were offered at 102 10/32 in late trading, down 3/32, to yield 7.55 percent. And the outstanding 7 1/4 percent five-year notes were offered at 100 26/32, unchanged from late Monday, to yield 7.05 percent.Short-term Treasury bill rates were little changed. Three-month bills were offered at a discount rate of 5.17 percent late yesterday, up one basis point, or one one-hundredth of a percentage point. Six-month bills were unchanged at a late offered rate of 5.21 percent.

In the investment-grade corporate bond market, Salomon Brothers acted as lead manager on an offering of $175 million of 10-year securities for the Masco Corporation.

The 9 percent notes, which mature Oct. 1, 2001, were priced at $100, or par, 1.44 percentage points higher than the prevailing yield on the Treasury's 7 7/8 percent 10-year notes at the time of pricing. Following are the results of yesterday's auction of two-year Treasury notes: (000 omitted in dollar figures) Average Price . . . 99.972 Average Yield . . . 6.14% Low Price . . . 99.954 High Yield . . . 6.15% High Price . . . 99.991 Low Yield . . . 6.13% Accepted at low price . . . 31% Total applied for . . . $39,162,525 Accepted . . . $13,185,450 N.Y. applied for . . . $34,465,930 N.Y. accepted . . . $10,384,900 Noncompetitive . . . $1,067,000 Interest set at . . . 6.125%
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September 27, 1991, New York Times, Salomon Forms Committee To Watch Rules Compliance, by Kurt Eichenwald,

Salomon Brothers has established a committee of its outside directors to monitor the firm's compliance with trading rules, the firm disclosed yesterday in a report submitted to Congress.

The report also disclosed the preliminary findings of Coopers & Lybrand, the accounting firm that Salomon retained to review the new compliance measures put in place since the Treasuries market scandal began to unfold in August.

The report said Coopers had concluded that the compliance procedures "would be sufficient to meet the objectives" of insuring adherence to Treasury auction rules, if the procedures are put into effect as planned. New Compliance Details

Salomon's report to the House Ways and Means Committee described in detail the numerous changes that the firm has put in place since August. Most of the changes, including a greater division of responsibilities and new rules for dealing with letters from the Government, have been previously disclosed.

But the memorandum does give some new details, including the establishment of the compliance committee. Salomon said in the memorandum that the committee was created "to insure that Salomon's new compliance is followed in both letter and spirit, and to demonstrate the importance with which Salomon views these matters."

The committee, composed of Salomon board members who are not on Wall Street, will give Salomon's internal compliance personnel a means for reporting any problem directly to the board. The committee was established by Salomon earlier this month, and is charged with overseeing compliance not only at Salomon Inc., but at all related subisidiaries of the firm. Committee Members

The chairman of the committee is Lord Young of Graffham, the executive chairman of Cable & Wireless, an international telecommunications company. The other members include William C. Turner, chairman of the Argyle Atlantic Corporation, an international consulting firm and William F. May, chairman and chief executive of the Statue of Liberty-Ellis Island Foundation Inc.

The one other member is Charles T. Munger, chairman of the Daily Journal Corporation, a newspaper publishing company, and vice chairman of Berkshire Hathaway, the investment firm headed by Warren E. Buffett, who is Salomon's interim chairman.

Lord Young, as part of his duties, has already met with Coopers & Lybrand officials to discuss their review of the firm's compliance procedures. The committee will review a copy of the complete Coopers findings after the report is submitted.
The Coopers report will include a review not only of the firm's government securities trading desk, where the scandal developed, but also all of the firm's United States trading operations. In response to a request by the compliance committee, Coopers will also establish procedures for periodic random examinations of the government trading desk, the memorandum said.
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September 27, 1991, New York Times, U.S. Inquiry Into Salomon Is Expanded, by Martin Tolchin,

The Securities and Exchange Commission is investigating whether Salomon Brothers' efforts to corner the government securities market were also an attempt to manipulate foreign exchange rates, Richard C. Breeden, the commission's chairman said today.

"It is possible to manipulate interest rates and seek to profit from that manipulation in the foreign exchange market," Mr. Breeden told the oversight subcommittee of the House Ways and Means Committee. "We're looking at it," he added, "because it would be possible to use one market to attempt to influence the other."

Paul W. Mozer, who was dismissed by Salomon last month, was head of both Salomon's government securities desk and its foreign exchange desk. He is under investigation by both the S.E.C. and the Justice Department.

Robert E. Denham, Salomon's general counsel, whose testimony to the subcommittee today preceded Mr. Breeden's, told the panel "it would be very hard to manipulate the price of a two- or five-year security as a way of making money on the foreign exchange market."

Mr. Breeden also told the subcommittee that "it appeared that there may have been some concerted activity" involving Salomon and other firms or people at the May Treasury auction in which Salomon has already admitted violating trading rules. He said the issue required "a careful assessment of the activity" when the bonds were resold.

Mr. Breeden said further that "it appears that a large number of dealers may have reported deliberately inflated estimates of customer interest" when purchasing the debentures of Government-sponsored enterprises like the Federal National Mortgage Corporation and the Federal Home Loan Mortgage Corporation.

Mr. Breeden and other regulators who testified today, however, warned Congress against taking precipitous action.

"Overreaction or adoption of ill-considered changes could result in significant costs to the Government and ultimately the taxpayers," Mr. Breeden said. "In addition, no system of regulation, however thorough or costly, can totally prevent the determined efforts of persons willing to lie, alter or falsify documents or otherwise conceal abusive activity." Senate Adopts Violation Measure

Meanwhile, by a voice vote Wednesday, the Senate adopted a measure supported by Mr. Breeden that would make it an explicit violation of the Securities Exchange Act of 1934 for any broker, dealer or bidder in government securities to knowingly make false or misleading statements. A similar measure is pending in the House. Under current law a violation of the Securities Exchange Act is subject to civil fines and may be referred to the Justice Department for criminal prosecution.

Senator Christopher J. Dodd, Democrat of Connecticut and co-sponsor of the Senate measure, said that it was needed to insure that regulatory agencies had "the broadest possible authority to prevent, detect and prosecute those who make false or misleading statements" in connection with purchases of government securities.

Deryck C. Maughan, Salomon's newly appointed chief operating officer, told the subcommittee that Salomon had made "millions" from the May auction, and that these profits were translated into bonuses for Salomon's managers and employees.

The subcommittee's chairman, Representative J. J. Pickle, Democrat of Texas, said he suspected that Salomon was not alone in violating the securities laws. "If you were taking advantage of the system, it seems to me that others were doing the same thing," he said. Allusions to Other Violators

Indeed, Victoria Whitenton, director of money markets for the Federal Home Loan Mortgage Corporation, told the subcommittee that "Salomon has not been alone in its manipulation" of the debenture market. She said that 18 of 27 members of Freddie Mac's debenture dealer group "indicated that they had supplied false information" about their purchase of debt instruments. None, including Salomon, has been barred from future purchases.

Similarly, Linda K. Knight, vice president of the Federal National Mortgage Association, said that "several dealers may have engaged in misstatements in the past." None has been barred from future purchases.

"We do not condone it," Ms. Knight said.
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October 1, 1991, New York Times, Business People; New Team of Lawyers For Salomon Defense, by Stephen Labaton,

Salomon Brothers Inc., a lawyer's dream because it is a large and abundantly resourceful corporate client in a lot of legal difficulties, has assembled a new team to help it navigate through its current crisis.

Handling the firm's general work and much of the civil proceedings against it will be Frederick A. O. Schwarz Jr., a partner at Cravath, Swaine & Moore who became a familiar face to some New Yorkers as the guiding light in re-engineering the government of New York City under Mayor Edward I. Koch a couple of years ago.

And tapped to enter into negotiations in the criminal side of the case with the Justice Department and the Securities and Exchange Commission will be Gary P. Naftalis, a partner at Kramer, Levin, Nessen, Kamin & Frankel and one of the leading specialists on white-collar crime in the nation.

The two law firms will assume the work that until recently had been handled by Salomon's longtime outside firm, Wachtell, Lipton, Rosen & Katz, which has been praised privately by some Government officials but criticized strongly by other lawyers for its handling of the case. Salomon's interim chairman, Warren E. Buffett, decided last month to seek a replacement.
Mr. Schwarz, 56 years old, is known to his friends as Fritz. He was the city's corporation counsel from 1982 to 1986, returned to Cravath, and was tapped by Mayor Koch in 1989 to head a panel that drew up a new government for New York City. He is the great-grandson of the founder of the Fifth Avenue toy emporium F. A. O. Schwarz, which has not been controlled by his family for more than 20 years.

Educated at Harvard College and Harvard Law School, Mr. Schwarz served during the 1970's as chief counsel to the Senate Select Committee on Foreign Intelligence, which uncovered evidence of Central Intelligence Agency assassination plots against foreign leaders and other illegal activities of American intelligence agencies at home and abroad.

Mr. Naftalis, 49, is a former assistant United States attorney for the Southern District of New York, who prosecuted a wide variety of white-collar and mob cases. As a defense lawyer, he is perhaps best known on Wall Street for his shrewd plea-bargain with the Government in the criminal proceeding against Kidder, Peabody & Company. Facing possible indictment for the insider trading activities of Martin A. Siegel, who had swapped information with Ivan F. Boesky, the firm avoided even a single criminal count by agreeing in 1987 to a quick settlement and a $25.3 million fine.

More recently, Mr. Naftalis helped win the acquittal of E. Robert Wallach, a close associate of former Attorney General Edwin Meese 3d. Mr. Wallach's conviction on racketeering charges in connection with a Bronx military contractor, the Wedtech Corporation, was overturned by a Federal appeals court last year. Mr. Naftalis received his training at Columbia Law School after doing undergraduate work at Rutgers College and earning a master's degree in diplomatic history at Brown University.
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October 1, 1991, New York Times, World Bank Salomon Move, by Stephen Labaton,

The World Bank, which had suspended its business with Salomon Brothers at least through yesterday, decided to delay a final decision on whether it would continue to suspend its dealings with the firm, which has been rocked since August by a scandal over its bidding practices at some Treasury securities auctions.

By deciding to continue to review Salomon's status, the agency has placed Salomon in a financial limbo, with the original ban apparently continuing past its original time frame, and with no final decision on extending it.

The World Bank's move is one of the most carefully watched developments in the unfolding Salomon scandal. The bluest of the blue-chip clients, the international lending agency could well influence through its final decision the opinions of a number of international clients.

Wall Street executives said some such clients might well follow the World Bank's lead once a final decision was made.

One of Salomon's most prestigious positions is also under review, Federal officials said yesterday. The Resolution Trust Corporation, which oversees the bailout of the nation's savings and loans, is to review its relationship with Salomon today.The review, to take place at an executive session of the agency, focuses on a number of financial contracts it has with Salomon. Salomon provides financial advice to the agency and also underwrites its bonds.

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October 1, 1991, New York Times, Another Strong Quarter for Wall St. Fees, by Kurt Eichenwald,

Despite the recession, American corporations maintained their strong appetite for cash from the stock and bond markets in the third quarter, bringing a healthy flow of fees to Wall Street investment houses.

The quarter also saw a significant change in the rankings of the top securities underwriters, as securities firms apparently dashed to capture market share lost by Salomon Brothers Inc., which has been shaken by the Treasury market scandal since August, and from Goldman, Sachs & Company.

But all of the firms had more business in the quarter than they had a year earlier. Rushing to take advantage of lower interest rates, which reduce borrowing costs, corporations raised $141.6 billion in the third quarter, up 94 percent from the $73 billion raised in the quarter last year, according to the Securities Data Company, a research firm in New York.

The good third-quarter results also brought a strong flow of fees to Wall Street investment houses for the second consecutive quarter. Fees nearly tripled, to $996.9 million, from $352.3 million in the third quarter of 1990.
Salomon also received higher fees, but its piece of the pie was much smaller than in the third quarter of last year. For the quarter, Salomon ranked sixth in fees, compared with second in the third quarter of 1990.

Over all, Salomon slid to sixth place in the rankings of underwriters, with 8.2 percent of the market, down from third place in the preceding quarter. The drop appeared to accentuate a fall that had already been under way at the firm, which was ranked third in the equivalent quarter of 1990 with 12 percent of the market.

The decline hits at a business that has been one of the most important for Salomon. The firm was a perennial leader in the underwriting business through most of the 1980's. It was overtaken by Merrill Lynch & Company in 1988.

Salomon executives attributed the decline partly to the firm's decision to be less aggressive in bidding for competitive deals, extending itself less in the aftermath of the Treasury scandal because of narrow profit margins.

The executives also said that the firm's performance was better than the data indicated because of flaws from improperly counted deals. The methodology of the underwriting rankings has long been attacked by the firms that ranked low, and praised by those with strong showings.

In the first nine months of 1991, corporations issued $408.3 billion in domestic securities, a 71 percent increase over the $238.2 billion raised in the equivalent period of 1990, according to Securities Data.

The growth in underwritings got its biggest push from the drop in interest rates in the third quarter, underwriters said. Many companies that had been holding out for lower rates finally found rates so attractive that they plunged into the marketplace.

"I was thinking the third quarter was going to be soft, but it turned out to be pretty active," said Dave Komansky, executive vice president of global equity markets at Merrill Lynch. "Our view of the fourth quarter looks as though it will continue to be surprisingly strong."

Added Jessica Palmer, managing director and head of capital markets at Salomon, "The rundown in rates we have seen over the last couple of months has brought a fair number of issuers out of the woodwork."

The quarter had the second-highest quarterly volume of stock and bond offerings in history, falling behind only the previous quarter, when a record $154.5 billion of securities were issued.

Merrill Lynch was the biggest underwriter in the third quarter, dealing $24.4 billion in domestic securities, or 17.3 percent of the market, according to Securities Data.

Lehman Brothers captured second place in the rankings, with 12.3 percent of the market, climbing over its fourth-place ranking at the end of the second quarter and its seventh-place spot in the third quarter of last year. Lehman Brothers underwrote $17.5 billion in the third quarter, compared with $4.8 billion in the comparable period of 1990.

The First Boston Corporation was third in the rankings, moving up from sixth place at the end of the second quarter. The firm underwrote $14.9 billion in securities, or 10.5 percent of the market, in the third quarter.

Goldman, Sachs, which had been ranked second in the second quarter, slipped to fourth, underwriting $14.5 billion, for a 10.2 percent share of the market.

Initial public offerings continued to be strong in the quarter, with $6.6 billion in new securities issued. That compares with the anemic $1.6 billion issued in the third quarter of 1990.
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October 1, 1991, New York Times, New Team of Lawyers For Salomon Defense, by Stephen Labaton,

Salomon Brothers Inc., a lawyer's dream because it is a large and abundantly resourceful corporate client in a lot of legal difficulties, has assembled a new team to help it navigate through its current crisis.

Handling the firm's general work and much of the civil proceedings against it will be Frederick A. O. Schwarz Jr., a partner at Cravath, Swaine & Moore who became a familiar face to some New Yorkers as the guiding light in re-engineering the government of New York City under Mayor Edward I. Koch a couple of years ago.

And tapped to enter into negotiations in the criminal side of the case with the Justice Department and the Securities and Exchange Commission will be Gary P. Naftalis, a partner at Kramer, Levin, Nessen, Kamin & Frankel and one of the leading specialists on white-collar crime in the nation.

The two law firms will assume the work that until recently had been handled by Salomon's longtime outside firm, Wachtell, Lipton, Rosen & Katz, which has been praised privately by some Government officials but criticized strongly by other lawyers for its handling of the case. Salomon's interim chairman, Warren E. Buffett, decided last month to seek a replacement.

Mr. Schwarz, 56 years old, is known to his friends as Fritz. He was the city's corporation counsel from 1982 to 1986, returned to Cravath, and was tapped by Mayor Koch in 1989 to head a panel that drew up a new government for New York City. He is the great-grandson of the founder of the Fifth Avenue toy emporium F. A. O. Schwarz, which has not been controlled by his family for more than 20 years.

Educated at Harvard College and Harvard Law School, Mr. Schwarz served during the 1970's as chief counsel to the Senate Select Committee on Foreign Intelligence, which uncovered evidence of Central Intelligence Agency assassination plots against foreign leaders and other illegal activities of American intelligence agencies at home and abroad.

Mr. Naftalis, 49, is a former assistant United States attorney for the Southern District of New York, who prosecuted a wide variety of white-collar and mob cases. As a defense lawyer, he is perhaps best known on Wall Street for his shrewd plea-bargain with the Government in the criminal proceeding against Kidder, Peabody & Company. Facing possible indictment for the insider trading activities of Martin A. Siegel, who had swapped information with Ivan F. Boesky, the firm avoided even a single criminal count by agreeing in 1987 to a quick settlement and a $25.3 million fine.

More recently, Mr. Naftalis helped win the acquittal of E. Robert Wallach, a close associate of former Attorney General Edwin Meese 3d. Mr. Wallach's conviction on racketeering charges in connection with a Bronx military contractor, the Wedtech Corporation, was overturned by a Federal appeals court last year. Mr. Naftalis received his training at Columbia Law School after doing undergraduate work at Rutgers College and earning a master's degree in diplomatic history at Brown University.
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October 1, 1991, New York Times, World Bank Salomon Move, by Stephen Labaton,

The World Bank, which had suspended its business with Salomon Brothers at least through yesterday, decided to delay a final decision on whether it would continue to suspend its dealings with the firm, which has been rocked since August by a scandal over its bidding practices at some Treasury securities auctions.
By deciding to continue to review Salomon's status, the agency has placed Salomon in a financial limbo, with the original ban apparently continuing past its original time frame, and with no final decision on extending it.

The World Bank's move is one of the most carefully watched developments in the unfolding Salomon scandal. The bluest of the blue-chip clients, the international lending agency could well influence through its final decision the opinions of a number of international clients.

Wall Street executives said some such clients might well follow the World Bank's lead once a final decision was made.

One of Salomon's most prestigious positions is also under review, Federal officials said yesterday. The Resolution Trust Corporation, which oversees the bailout of the nation's savings and loans, is to review its relationship with Salomon today.

The review, to take place at an executive session of the agency, focuses on a number of financial contracts it has with Salomon. Salomon provides financial advice to the agency and also underwrites its bonds.
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October 3, 1991, New York Times, Additional Salomon Violation,

Salomon Brothers Inc., plagued since August by the scandal in the Treasuries market, has uncovered evidence of an additional violation of trading rules in that market, the firm announced yesterday.

The additional violation, which occurred in a December auction, involved another instance in which the firm's government bond trading desk submitted a bid in a customer's name without authorization, people working with the firm said.

Salomon, which late last month said it expected more violations to be uncovered in its investigation, announced yesterday that it had completed its internal inquiry. The firm indicated that beyond the newly disclosed December bid and the previously disclosed illegal bids, no other evidence of of illegal bids had been found.

Eight Auctions Involved

While Salomon's announcement involved only a single additional violation, the discovery is certain to lead to new troubles for the firm, which has already lost important customers and faces dozens of lawsuits.

The new violation brings the number of auctions in which Salomon submitted questionable bids to eight. The additional illegal bid, people who work with the firm said, enabled Salomon to retain $200 million of securities that had been bid for in a customer's name.

Paul Mozer, the former head of the government bond trading desk, submitted unauthorized bids in seven other auctions, the firm has disclosed, most often to get more securities than the maximum of 35 percent of an issue allowed to any one purchaser in a single auction. The firm did not surpass the 35 percent limit for the auction in which the newly disclosed violation took place.

People working with the firm said the newly disclosed bid involved a customer whose name had already been disclosed as one that Salomon had used improperly. They declined to offer more details. The customers whose names were used without authorization in other auctions included the S. G. Warburg Group, the Tiger Management Group and the Pacific Investment Management Corporation.


The newly disclosed violation, which Salomon uncovered by comparing its own records with those of the Federal Reserve Bank of New York, occurred in an auction of Treasury notes, lawyers who have seen the results of Salomon's investigation said.

People who work with Salomon said the firm's internal documents indicated that a $2 billion bid had been submitted in the customer's name. But Fed documents showed that a $3 billion bid had been submitted, and $600 million of securities had been awarded. The Salomon records showed, however, that only $400 million of securities had been allocated to the Salomon customer.

In a statement, the firm said it had also uncovered other discrepancies by its government desk involving Treasury rules but added that they did not "suggest any improper motive or result."

Salomon said its internal investigation of the government desk had reviewed 68 Treasury auctions.

The investigation found that the illegal bidding began after June 1990, when the Treasury Department clamped down on Salomon's excessive bidding in the market. It linked the series of violations to rules imposed by the Treasury to limit the amount of securities an individual firm could bid for in an auction.

The firm said it examined about 1,000 auction bids by Salomon and its customers and tens of thousands of trades in the securities that occurred up to 15 days after the auction.

In a statement, Salomon said it "believes that the submission of unauthorized customer bids by its government trading desk did not begin until the Treasury, in late June 1990, raised questions about the size of the bids made by Salomon for its own account."

In July 1990, after Mr. Mozer was said to have bid $15 billion at an auction of $5 billion in securities, Michael E. Basham, a Treasury Department official, revised the rules to restrict bids, as well asd awards, to 35 percent of the overall auction.

In its statement, Salomon also distanced itself from its former trader's aggressive, but legal, bidding. "These pre-July 1990 bids were not in violation of the rules at the time, but nonetheless were inappropriate," the firm said in its statement.
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October 5, 1991, New York Times, Salomon Agrees to Pay Freddie Mac Fine, by Leslie Wayne,

Salomon Brothers Inc. said today that it would pay a penalty imposed by the Federal Home Loan Mortgage Corporation for falsifying bids in the sale of Government-sponsored bonds. But 17 other Wall Street firms have sought more time to decide whether to pay the fines.

The agency, known as Freddie Mac, has given the others until 9 A.M. Monday to pay penalties resulting from the discovery of inflated orders and faked sales confirmations -- or be barred from future sales of Freddie Mac securities. While the total penalty imposed on the group is only $1 million, the Wall Street firms fear the precedent set by the Freddie Mac action and want more time to review their options.

Leland C. Brendsel, the agency's chairman and chief executive, praised Salomon and expressed hope that the remaining firms would quickly follow suit.

Salomon's action "cleans the slate with Freddie Mac and goes a long way to insuring the integrity of the marketplace," Mr. Brendsel said in a statement. "I hope Salomon's decision is quickly followed by the other dealers."

The action today comes at a critical time both for Wall Street firms that are accused of widespread bid-rigging in a number of different markets and for government-sponsored entities, like Freddie Mac, that have been accused of being lax and are trying to fend off attempts in Congress to be more closely supervised. As a result, Freddie Mac's handling of this scandal is being watched by a Congress increasingly skeptical of the agency's ability to monitor its own affairs.

An investigation conducted over the last several weeks by Freddie Mac found that the 18 dealers had lied to the agency to gain a larger share of the agency's debt underwritings. The fine, imposed late Thursday night, was made equal to 20 percent of the commissions paid to the group in the sale of some $3 billion in securiites in the last two years. A total of 25 banks and Wall Street firms sell the agency's debt, which is used to finance home mortgages.

A similar investigation is taking place at the Federal National Mortgage Association, called Fannie Mae, where many of the 55 dealers that sell Fannie Mae securities, which are also used to finance housing, admitted to inflated orders. David Jeffers, a spokesman for Fannie Mae, said the agency would not "hesitate to admit sanctions up to expulsion" when its investigation is finished. Mr. Jeffers would not say when that might be.

In a statement, the Public Securities Association, which represents the dealers, said the 24-hour deadline for the payment of the fine was "not a reasonable amount of time." The association said almost all of the members of the selling group had met in New York to discuss a course of action.

Joseph Sims, an association spokesman, said he had no idea how many firms might ultimately pay the fine and added that the group felt the 24-hour deadline was a dangerous precedent that did allow enough time to analyze the situation.

Cheryl Regan, a spokeswoman for Freddie Mac, said the agency agreed to an extension since "we're trying to work things out with our dealers and it was a practicality." Firms, however, that do not "indicate an intent to comply" by Monday morning would be expelled from sales beginning that day.

Freddie Mac would not identify the 17 firms, nor indicate the size of the penalty Salomon agreed to pay. In a statement, Salomon, which has admitted to submitting false bids in Treasury auctions, said it was paying the fine to maintain continued participation in the sales.

There was speculation on Wall Street today that the 17 dealers might refuse to pay in a show of strength that would force Freddie Mac to sell its securities through only a handful of dealers. Proponents of this view pointed out that the fines were extremely small and that the issue was one of principle. Mr. Sims of the dealer's association said the dealers wanted to "weigh the pros and cons of paying the fine or losing this business relationship."
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October 6, 1991, New York Times, Letter, Speculation and Salomon, by William Spier,

To the Editor:

"When the Regulators Stood Still," (Sept. 22) only partly accounts for Salomon's problems. John Gutfreund was responsible for inculcating in his young traders -- at Phillip Brothers and Salomon -- that to trade successfully one must take enormous speculative positions. For Phillip Brothers, once the largest commodity company in the world, this philosophy led to its demise because of heavy trading losses. For Salomon, taking huge positions in the Treasury auctions led to the present tarnishing of its reputation and a Government investigation.

Further, Paul Mozer was a creature of Mr. Gutfreund's arrogance of power ("The 'Narcotic' of Crime on Wall Street," Market Watch, Sept. 22). Mr. Mozer was given a mandate to dominate the Treasury auctions and while management may not have been aware of his violations, it encouraged his overzealous bidding activity. I hope that the eventual restructuring under new leadership will, in the long term, prove beneficial to Salomon's employees and shareholders. WILLIAM SPIER New York, Sept. 23 The author is retired vice chairman of Phibro-Salomon.
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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.
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October 25, 1991, New York Times, Salomon Estimates Illegal Gain,, by Jonathan Fuerbringer,

Salomon Brothers said yesterday that it had made profits of $17 million to $19.7 million from its illegal bidding in the Treasury securities market and from the one squeeze in the May 22 auction for two-year notes.But the firm contended that only $3.3 million to $4.6 million in profits resulted from illegal bidding in eight auctions. Of that, $3 million to $3.6 million was from the May auction.

The rest of what Salomon argues are legal profits was also from that auction but resulted from the impact of the squeeze, not the illegal bidding. Government regulators now say that investors who needed the two-year notes were "squeezed" in May to pay higher prices because so much of the issue was in the control of a few institutions.

No Official Blame

But no official blame has been put on Salomon, which said it controlled 86.5 percent of the $12.25 billion issue through its own purchases and those for customers.

"We do not accept that we were responsible for profits made on the squeeze," said Frederick A. O. Schwarz Jr., a partner in the law firm of Cravath, Swaine & Moore, which is conducting the internal investigation for Salomon. "That is an issue that turns on the development of all the facts, and all the facts have not been developed."

The disclosure, which was reported to the various government agencies conducting investigations, is the first indication of the profits the investment bank made from these activities. Some lawyers said they looked lower than might be expected. But if Salomon's estimates are near the mark they seem to pale in comparison with the damage to the firm, from the loss of prestige, customers and business to the sharp drop in its stock value.

An Unusual Strategy

These are not official profit estimates, and it is quite unusual for a firm under investigation to make such calculations. But Salomon officials, whose strategy is to cooperate in all ways to try to reduce any penalties, have said they worked with government officials on the complicated methodology for measuring the profits.

The official figures will be determined by the government agencies investigating Salomon, and they could be higher. But these numbers give some indication of the scope of fines Salomon may face.

For example, the Securities and Exchange Commission can force payment of all the illegal profits and then add fines up to the total of the illegal profits, lawyers said yesterday. Using Salomon's numbers, the fines and returned profits could total $6.6 million to $9.2 million if the profits from the squeeze are not included. Figures for Civil Suits

In addition, the Salomon estimates will be used in civil suits against the firm and will make it easier for people to argue their cases for losses.

In a written statement and in interviews Salomon officials and the outside lawyers working on the internal investigation tried to minimize the profits from illegal acts. For comparison they provided profit figures made in auctions where there were no illegal bids, and they were higher. In addition, the officials said that in the auction with the largest amount of illegal bidding -- the Feb. 21 five-year note auction -- Salomon actually lost $5.6 million.

"He did better in the clean auctions than he did in the dirty auctions," Mr. Schwarz said, referring to Paul Mozer, the former head of the Salomon government bond trading desk that Salomon says did the illegal bidding.

"I think everyone would have imagined that the profits on their trading of government securities would have been much larger than $17 million, and the message they may be trying to convey is, 'We may have been foolish but not greedy,' " said Alvin Stein, a securities litigation lawyer with Parker Chapin Flattau & Klimpl.

Two Methods of Calculations

The range of estimates Salomon offered resulted from its use of two methods of calculation. The most difficult task was that of estimating the profits from the May 22 auction, because of calculation of the extra premiums paid as a result of the squeeze. Salomon estimated that 18.8 percent of the profit in that auction was attributable to its illegal bidding.

Salomon also announced that it would sharply reduce its real estate investment banking group and refocus the group's efforts on helping the firm's clients with their real estate needs.

The move was widely expected in the real estate community, in part because J. Steven Manolis, the longtime head of the group who has been with the firm for 18 years, announced last month that he would resign at year-end to form a private real estate investment banking group.

Salomon did not disclose how many professionals were cut, but people familiar with the changes said that about 30 members of the group were let go, leaving the total at roughly 30 worldwide. Of the five managing directors who were in the department only two will remain.
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October 26, 1991, New York Times, Treasury Auctions Opened Up, by Stephen Labaton,

In its latest response to the scandal at Salomon Brothers Inc., the Government announced today that the auctions that raise money to finance the nation's debt would be open to all brokers rather than just Wall Street's largest banks and investment houses.

The decision is intended to encourage greater participation in the auctions and weaken the role of the 39 primary dealers who have long been given special treatment for acting as middlemen between the Government and the secondary market of institutions and customers that buy and sell Treasury instruments.

Most analysts and market participants said the changes would have their most significant impact once traders were able to execute bids electronically, rather than using the current method in which runners drop slips of paper with bids at the Federal Reserve. A new computer system is being developed, and the Treasury Department urged today that it be expanded "to help increase the liquidity and depth of the market."

A Matter of Perception

"There's been a perception that some insiders have enjoyed a competitive advantage," said Jerome H. Powell, an Assistant Treasury Secretary, in an interview today. "This is an attempt to level the playing field for the full range of participants."

The first test of whether the new rules will make a difference will come on Nov. 5, with the auction for three-year notes.

Under the changes, any registered broker will be able to bid competitively in the auctions on behalf of themselves or their customers. The bidders will not have to meet the existing requirement of posting a deposit in advance of the auctions, but they must sign a special agreement approved by a Federal Reserve Bank that authorizes charging the bidders' account at the Fed when the securities are issued.

Individuals have long been able to buy Treasury instruments directly from the Federal Reserve, but only at the average price and yield of all submitted bids and with a maximum of $1 million. Today's changes primarily open the market for the competitive bids. But in a concession to smaller banks, pension funds, municipalities and other institutional investors, the $1 million limit on noncompetitive bids was raised to $5 million.

The close relationship between the primary dealers and the Treasury Department had come under intense Congressional criticism in the wake of disclosures in August that Salomon Brothers, the most powerful dealer, had submitted phony bids and sought to corner the market.

In light of the scandal and calls for even more significant changes in the auction, reaction on Wall Street was generally either resigned or positive, and in many instances tempered by a curiosity about how it would work.

"The objective of increasing competition has got to be a good one," said Heather L. Ruth, president of the Public Securities Association, a trade group of banks and dealers, including the primary dealers, that trade government debt and other securities. "Whether it will work depends upon the details, which we have not seen, and how it will operate in practice."

A Critical Primary Dealer

William Pike, head of government debt trading at Manufacturers Hanover Securities, one of the primary dealers, told the Bloomberg News Service that the changes "will not make any material difference."

Other analysts said today's steps were an important incremental step that might make a significant difference over the longer term, but were not likely to mean much in the near future because of the costs of hiring runners and setting up a system to participate in the auctions.

This fits into the broader movement of eliminating the primary dealer system and gradually eroding their franchise," said Louis v.B. Crandall, chief economist at R. H. Wrightson & Associates. He said the new rules, combined with an automated system for bidding that would disclose prices and other information, would go much further toward ending the domination of the market by the primary dealers.

Representative Edward J. Markey, the Massachusetts Democrat who heads a House subcommittee on securities regulation, said today that he would introduce legislation to give the Securities and Exchange Commission more authority to police the government securities market, "although Treasury is to be applauded for seeking to take some remedial steps in the auction process."

The Government Securities Act of 1986, the main law governing the market, expired at the beginning of this month and has not been extended, leaving in doubt the Treasury's authority to issue regulations. Today's action was done under the Liberty Bond Act of 1917, which authorizes the Treasury to set the auction rules.
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October 27, 1991, New York Times, Letter, The Arrogance of Philipp Brothers, by John F. Lee,

To the Editor:

In "Speculation and Salomon" (Letters, Oct. 6), my former colleague at Phibro-Salomon, William Spier, expresses the hope that new leadership at Salomon will prove beneficial to Salomon's employees and shareholders. Although I am not any longer counted among the former (I left Philipp Brothers in 1984), I am unfortunately a shareholder.

For Mr. Spier to suggest that John Gutfreund was responsible for inculcating young traders at Philipp Brothers with the idea that enormous speculative positions were the answer to successful trading -- is ingenuous to say the least. If anything, Mr. Gutfreund's "philosophy" infected many of the old traders at Philipp Brothers. Long before Mr. Gutfreund came on the scene, the so-called management at Philipp Brothers developed its own brand of arrogance which led, among other things, to a long list of huge speculative positions.

Two illustrations: the silver debacle involving the Hunt brothers and the activities of Cocoa Merchants Ltd. In the former, our genius "management" was able to extract a few dollars from the Hunt brothers' banks, but for the most part, shareholders had to swallow worthless paper in the form of Hunt North Slope oil and gas leases. In the Cocoa caper, we had Tony Weldon, not Paul Mozer.

Mr. Gutfreund may have a lot of faults, but he cannot be accused of having artificially inseminated Philipp Brothers with his brand of arrogance. It was there and generated huge losses. JOHN F. LEE Tampa, Fla., Oct. 9
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November 6, 1991, New York Times, Credit Markets; 3-Year Note Auction Goes Badly, by Kenneth N. Gilpin,

The first Treasury debt sale under new auction guidelines imposed in the wake of the Salomon Brothers bidding scandal went extremely poorly yesterday, as the Government struggled to sell $14 billion worth of new three-year notes.

Traders and analysts cited a number of reasons for the poor auction. But all agreed that it would cost the Treasury -- and the taxpayer -- well over $120 million in higher interest over the life of the securities sold yesterday.

Aside from an adverse reaction by primary dealers in Government securities to the new rules, traders said that the low level of short-term market rates and disappointment that the Federal Reserve Board did not move to cut key interest rates yesterday contributed to the poor results.

Watching Fed Policy

Continued signs of economic weakness had led some traders and analysts to believe that the central bank, whose policy-making Open Market Committee met in Washington yesterday, might decide to lower the overnight Federal funds rate to 4 3/4 percent from its current target of 5 percent before the refunding auctions began.

The auction had a negative impact in the secondary market for Treasury notes and bonds, where prices fell sharply, and interest rates rose after the results were announced.

The new securities were sold at an average yield of 6.00 percent, down from an average yield of 6.92 percent at the last three-year note sale on Aug. 8.

The poor reception given the notes was visible in an unusually wide discrepancy between high and low bids placed for the securities and the total amount of bids placed at the auction.

Less Efficiency Perceived

The spread, or difference, between high and low bids -- an indicator of how efficient the price discovery mechanism has been at the auction -- was an unusually wide 6 basis points, or hundredths of a percentage point. At previous three-year note auctions a spread of 1 or 2 basis points has been the norm.

Moreover, the Treasury received only $21.7 billion worth of bids for the $14 billion worth of securities sold, the lowest total of bids placed at a three-year auction since 1978. In recent three-year note auctions, total bids have amounted to $40 billion or more.

Traders and analysts said the low total was at least partly a protest by primary dealers against the new auction rules.

"This was probably the worst auction in the last 10 years," one government securities trader said. "Low short-term rates probably had a good deal to do with the results. But there may have been a sort of coordinated protest on the part of the dealers, too. And it has cost the taxpayer money."

The new auction guidelines, announced Oct. 26, were intended to open up the bidding process to brokers who have not been designated as primary dealers in Government securities by the Federal Reserve Bank of New York.

The rule changes were made in response to the bidding violations disclosed by Salomon Brothers in August. Previously, firms wishing to place bids at Treasury auctions did so through the primary dealers, a group of 39 securities firms and banks.

"The trend in Washington is to chip away at differences between primary dealers and non-primary dealers," said Louis v.B. Crandall, chief economist at R. H. Wrightson & Associates, an economic consulting firm. "But if you chip away all the differences then the dealers won't be there. These auction results serve as a reminder to the Treasury that something quite specific is gained from the commitment dealers make to backstop Treasury auctions."

Only a Rational Response

Raymond W. Stone, a managing director at Stone & McCarthy Research Associates, a Princeton, N.J., firm that provides research and commentary on developments in the foreign exchange and credit markets, said the reaction by primary dealers was not a protest, but merely a rational reflection of how the rule changes have increased the risk and lowered the reward for primary dealers bidding at the auctions.

"Rather than a protest, I think this is a natural response on the part of primary dealers to the change in incentives," Mr. Stone said.

Jay Powell, the Treasury's Assistant Secretary for domestic finance, said in a telephone interview: "We had an auction that was not as successful as we had hoped, But we find it a little far-fetched that the kind of rule changes we made would have a material effect on an auction."

The debt sale was the first leg of the Treasury's quarterly refunding auctions, which continue today and tomorrow with the sale of a total of $24 billion worth of new 10-year notes and 30-year bonds.

Analysts said the results of the much less speculative three-year note auction cast doubt on how large demand would be for the securities.Late yesterday the new 10-year notes were offered on a when-issued basis at a price to yield 7.53 percent, up sharply from 7.47 percent late Monday.

Traders in the secondary market for Treasury securities responded to yesterday's results by pushing prices of outstanding notes and bonds down sharply.

By late in the day, the 8 1/8 percent 30-year bonds of 2021 were offered at a price of 101 1/8, down more than a point, or more than $10 for each $1,000 face amount of securities, to yield 8.02 percent, compared with 7.95 percent late Monday.

Among note issues, the 6 7/8 percent five-year notes were offered at 100 3/8, down 9/32, to yield 6.78 percent. And the 6 percent two-year notes were offered at 100 18/32, down 1/8 point, to yield 5.69 percent.

Bill Rates Are Up

Late in the day, three-month bills were offered at a discount rate of 4.74 percent, up 2 basis points. And six-month bill rates rose by a basis point, to a late offered rate of 4.79 percent.

Fears that interest rates may have bottomed prompted a number of investment-grade corporations to price new debt issues.

Among the issuers was Sears, Roebuck & Company, which sold a total of $900 million worth 3- 7- and 20-year securities through and underwriting group led by Goldman, Sachs & Company.

Yields on the securities ranged from 7.08 percent on the three-year notes to 9 3/8 percent on the 20-year securities.

The issue is rated A-2 by Moody's Investors Service and A by Standard & Poor's.

Salomon Brothers acted as lead manager for an offering of $542 million worth of securities backed by auto loan receipts from a financing entity of the Chrysler Corporation.

The 6.25 percent securities, which have an average life of 1.8 years, were priced at $99.637 to yield 6.55 percent, 85 basis points over the prevailing yield on the Treasury's 6 percent two-year notes at the time of pricing.

The issue is rated triple-Aby both Moody's and Standard & Poor's.

Popular High-Yield Issue

In the high-yield junk bond market, the Maxxam Group priced a $130 million offering of four-year notes through an underwriting group led by Donaldson, Lufkin & Jenrette.

The 12 3/4 percent notes were priced at $99, to yield 13.08 percent.

Due to strong demand, the size of the issue was increased from $100 million. The securities are rated B-2 by Moody's and B-minus by Standard & Poor's.

The slide in Treasury prices had a negative impact on prices of secondary issues in the investment-grade and tax-exempt municipal bond markets.

Corporate traders said prices of most issues had fallen by anywhere from 1/4 point to 3/8 point.

Meanwhile, prices of widely quoted issues in the secondary municipal bond market slipped by 1/8 point to 1/4 point, market participants said.

Following are the results of yesterday's auction of three-year Treasury notes:

(000 omitted in dollar figures) Average Price . . . 100.00 Average Yield . . . 6.00% Low Price . . . 99.919 High Yield . . . 6.03% High Price . . . 100.081 Low Yield . . . 5.97% Accepted at low price . . . 66% Total applied for . . . $21,766,595 Accepted . . . $14,000,075 N.Y. applied for . . . $20,264,255 N.Y. accepted . . . $12,842,255 Noncompetitive . . . $852,000 Interest set at . . . 6% The three-year notes mature May 15, 1994.
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November 7, 1991, New York Times, Big Shifts at Salomon Bros.; Directors Will Be Replaced, by Kurt Eichenwald,

In a move that underscores the firm's rapidly changing culture, Salomon Brothers announced a large management shake-up yesterday, under which its board would be replaced and power would be spread across more Salomon divisions.

The changes, while broad in nature, may signal that Salomon is preparing to name Deryck C. Maughan, the chief operating officer, as the successor to Warren E. Buffett, the interim chairman who assumed the post after John H. Gutfreund resigned in August.

While the move will not affect the directors of Salomon Inc., the firm's parent, the changes will sharply alter the power structure at Salomon Brothers.

Salomon executives said yesterday that the changes signaled that cuts would come in its equities and investment banking operations.

The changes brought the highest-level defection since Mr. Buffett took over. Stanley B. Shopkorn, the head of the firm's equities division who was one of Salomon's boldest and most aggressive traders, will leave at the end of the year, the firm said.

Wall Street executives said Mr. Shopkorn had decided to leave because he felt more restricted in his trading in recent months and because he disagreed with the changes in Salomon's management structure. Mr. Shopkorn did not return a telephone call yesterday seeking comment.

Salomon said Bruce C. Hackett, a stock trader who had been Mr. Shopkorn's second-in-command, would replace the longtime Salomon executive.

Salomon executives speculated that the changes could result in other defections within Salomon's top ranks, including that of Jay F. Higgins, a senior investment banker, who, until yesterday, served on the firm's top management committee.

Under the changes, a new executive committee composed of nine Salomon executives, including Mr. Maughan, will run the firm's daily operations. For the first time, a Salomon management committee will include executives from virtually all of the firm's businesses, including its sales and research divisions.

Mr. Hackett will also serve on the executive committee, which will replace the office of the chairman, as well as Salomon's board. The Salomon Inc. board will not be affected.

Under the structure, neither Mr. Buffett nor a successor would handle Salomon's day-to-day operations unless the new structure is changed.

Some on Wall Street speculated that the move might signal that Salomon was moving toward keeping its future management in-house and that fueled speculation that Mr. Maughan might be chosen to replace Mr. Buffett.

Mr. Maughan has been overseeing the daily operations since becoming chief operating officer in August.

Since the resignations of Mr. Gutfreund, the firm's former chairman, and two other senior executives, Salomon's management has largely been in the hands of Mr. Maughan; Mr. Shopkorn; Leo I. Higdon Jr., the head of investment banking; Mr. Higgins, the department's former head; Thomas W. Brock, the head of operations, and James L. Massey, the head of Salomon's international division.

With the new committee, Mr. Higgins will be removed and several new members will be added, including Mr. Hackett; Lawrence E. Hilibrand, the head of arbitrage; Martin L. Leibowitz, the head of research, and William A. McIntosh and Eric R. Rosenfeld, the respective heads of sales and trading on Salomon's government bond desk.

Mr. Shopkorn will not leave until after the end of the year, meaning he will be able to participate in Salomon's three-year deferred compensation pool of more than $100 million that will be distributed at the beginning of next year. Mr. Shopkorn was said to have about $3 million of the pool.

With Mr. Shopkorn's departure, Salomon is losing one of its few remaining strong managers with close ties to Mr. Gutfreund's tenure.

The Loss of Shopkorn

The departure of Mr. Shopkorn, perhaps the most influential executive at the firm who was not forced to resign in the wake of the Treasury market scandal, indicates that Salomon is no longer willing to make the huge bets on the market that were part of his style. The bets, sometimes made on what appeared to be little more than a hunch, often proved to be uncannily accurate.

But in the last few months, Wall Street executives said, the equities division has not had a strong performance, losing tens of millions of dollars on some trades.

Mr. Shopkorn joined Salomon in 1973, and became head of the equities division in 1982. His departure has left many questions about the future of Salomon, as well as his own.

When the Treasuries market scandal became public, and clients began defecting from the firm, Mr. Shopkorn was quick to call on almost two decades of relationships with clients to encourage them to funnel business to Salomon in its time of need.
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November 9, 1991, New York Times, Note Sale Activities Questioned, by Kenneth N. Gilpin,

Concerned about the performance of primary dealers at a disappointing auction of three-year Treasury notes earlier this week, Representative Edward J. Markey, chairman of the House Subcommittee on Telecommunications and Finance, has asked all 39 primary dealers to provide information on the firms' actions at that sale.

Mr. Markey, a Massachusetts Democrat, whose committee is looking into illegal practices in the government securities market and the need for legislative reform, asked dealers to provide information on a number of points relating to the auction on Tuesday.

In a letter sent to all primary dealers on Thursday, the day the Treasury conducted a highly successful auction of $12 billion worth of new 30-year bonds, Mr. Markey expressed concern over the low volume of bids placed at the note auction. The bids for the short-term securities were so widely spaced that the Treasury's borrowing costs were pushed higher. 'Troublesome Questions'

In addition, Mr. Markey cited news reports that raise "extremely troublesome questions regarding the conduct of primary dealers."

In the letter, Mr. Markey said, "Indications are that the low bid total may well reflect some type of protest by primary dealers against the Treasury Department's new auction rules."

To help answer these questions, the Congressman asked dealers to deliver an array of information to his subcommittee by next Friday. Included in the request are information relating to the size of the bid placed by each firm at the auction; the factors that contributed to the size of that bid, and whether those bids were in fact a protest against the new rules, and a "summary of any contacts and communications" between traders of one firm with those of another between Oct. 30, when the three-year auction was announced, and Tuesday.

Less Chatter by Dealers

Since Salomon Brothers bidding violations were disclosed in early August, credit market participants have noted that communication between dealers has diminished markedly. Traders have said that the decline in talk has harmed the efficiency of the market's price discovery system.

Various governmental entities, including the Securities and Exchange Commission and the Treasury Department, have been conducting their own investigations and formulating their own plans on how to reform the Treasury securities market in the wake of the Salomon scandal.

Reached yesterday, one Government official, who asked not to be identified, was livid about the nature of Mr. Markey's letter.

"Strong enforcement is one thing, but this goes over the line," one official said. "This looks like a witch hunt, and it could cost the taxpayer money."

Mike Connolly, a spokesman for Representative Markey, said: "This is a fact-finding letter. We are simply trying to understand the facts in the marketplace."

Mr. Connolly did acknowledge that the nature of the request extended beyond the purview of legislation Mr. Markey's subcommittee had drafted. He said legislation was crafted "strictly on securities issues," and does not address auction procedures.

The Markey letter was not a topic of conversation in the secondary market for Treasury securities yesterday, where the positive results of Thursday's bond auction helped to push bond prices higher.

Much of the day's gains were recorded during overnight trading in Asia and then later in Europe. But dealers said that most of the trading that was going on was between themselves; purchases by retail investors have been light, they said.

In the wake of Treasury refundings, dealers often fret about a lack of buying from retail accounts because without it unwanted inventories of new securities remain on their books.

However, some analysts suggested that might not be the case this time. Dealers, who moaned about changes in auction rules before the debt sales, seem to have emerged from this refunding in good shape, they said.

"My guess is that the Street probably doesn't own as much of these issues as it wishes it owned," said Charles Lieberman, a managing director at the Manufacturers Hanover Securities Corporation.

"After the results of the three-year and 10-year auctions were announced, and were seen to be poor, investors came into the market in droves, trying to buy at lower prices. So, instead of being order takers at the auction, the Street became the Treasury's underwriter."

In the wake of the three-year and 10-year auctions some Wall Street analysts estimated the lackluster demand and wide spreads between bids drove up borrowing costs for the Treasury by hundreds of millions of dollars. But yesterday those analysts said the figures were misstated, because of a misplaced decimal point. Instead, the analysts said the figure should be somewhat under $50 million.

By the end of the week, all three issues sold at the refunding were offered at prices solidly above their auction level.Late yesterday the 6 percent three-year notes were offered on a when-issued basis at a price to yield 5.95 percent. The 7.50 percent 10-year notes were offered at a price to yield 7.41 percent. And the new 8 percent 30-year bonds were offered at a price to yield 7.87 percent.

Among secondary Treasury issues, the outstanding 8 1/8 percent 30-year bonds of 2021 were offered at a price of 102 1/2 late yesterday, up 5/32, to yield 7.90 percent, compared with 7.91 percent late Thursday and 7.93 percent on Nov. 1.

Notes Drop in Price

In the Treasury note market, the 6 7/8 percent five-year notes were offered at 100 29/32, down 3/32, to yield 6.65 percent. And the 6 percent two-year notes were offered at 100 23/32, down 1/32, to yield 5.60 percent.

Short-term Treasury bill rates were essentially unchanged.
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November 10, 1991, New York Times, Market Watch; The Treasury Opens Up Its Auctions, by Allen R. Myerson,

"Ruinous competition," said John D. Rockefeller, was the enemy of all his plans. When the founder of the Standard Oil Trust spoke, however quietly and secretly, about the need to avoid "wasteful conditions," he was usually heeded.

Last week, on trading desks at many of the Treasury's 40 primary dealers, the same sort of warnings about the costs of competition could be heard above the din surrounding the most open auctions in memory. Used to be, said one trader, "You would have frank discussions with other dealers" to learn their plans. Now that the Salomon scandal has awakened the regulators, "It's hands off," he said. Discussions are limited to saying "I have interest," or "I don't have interest."

Some dealers said that the resulting uncertainty cost the Government hundreds of millions of dollars at Tuesday's and Wednesday's auctions of 3- and 10-year notes, as buyers bid low enough to compensate for the risk of not knowing what their supposed competitors would do.

Then came Thursday's auction of 30-year bonds, the riskiest by far. And what happened? Standing room only, with strong bidding among the dealers and near-record demand from smaller buyers.

For this, some dealers had a ready explanation: renewed demand for the long bonds in the face of last week's Fed easing and lower yields at shorter maturities. But Thursday's auction also showed that the dealers, like East European entrepreneurs, are finding ways to make money in a free market. By then, some dealers who were afraid to dope out the auction with their buddies at other firms learned what they needed to know by trading more vigorously in the when-issued market, where Treasuries are exchanged in advance of their issuance.

The Government's investigation of possible Treasury market collusion leaves it in the awkward position of Captain Renault closing down Rick's Cafe Americain with the outburst, "I'm shocked, shocked to find that gambling is going on here!"

The market's chumminess is due in part to the prominence of Salomon Alumni Association members on the Street's most powerful trading desks. Last week, Warren E. Buffet, Salomon's interim chairman, intensified his campaign to change its image as a brawler willing to dominate the Treasury market or any other by any means. In came a nine-person management committee, which, like the new pay plan, is meant to forge unity at a ferociously individualistic firm. Out went Stanley B. Shopkorn, the firm's aggressive chief of stock trading.

Yet who should show up on that committee but Lawrence Hilibrand, the firm's arbitrage chief, who earned $23 million last year? Fact is, that after Mr. Buffet explains his devotion to long-term investing, he is willing to play with the arbs -- "but only when we like the odds," he has stated. Given how much Mr. Hilibrand has earned for Salomon, Mr. Buffet evidently likes the odds.
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December 3, 1991, New York Times, World Bank to Let Salomon Handle Its Business Again, by Kurt Eichenwald,

In one of the firm's first signs of recovery from the Treasuries market scandal, Salomon Brothers Inc. has won back the business of the World Bank after three months of suspension, the firm announced yesterday.

The World Bank was one of the first and most prestigious clients to suspend its dealing with Salomon after the bond trading house disclosed in August that it had submitted a number of illegal bids in Treasury market auctions. The loss of business with the World Bank, whose global bond issues Salomon helped manage for the last several years, was the most stinging client rebuke Salomon suffered.

The decision by the World Bank to resume its business dealings comes as a vote of confidence in the sweeping changes made under Warren E. Buffett, the firm's interim chairman. Since taking the post from John H. Gutfreund in August, Mr. Buffett has overseen the establishment of comprehensive rules governing trading, the cutbacks of bonuses and the installation of a new management team led by Deryck Maughan, chief operating officer.

The World Bank's decision was widely seen on Wall Street as an indication that the bank believed Salomon would continue as a primary dealer, a status that allows the firm to deal directly with the Federal Reserve. Salomon's continued status as a primary dealer has been under review by the Government since the scandal began to unfold.

A spokesman for Salomon declined to provide details beyond the firm's one-sentence announcement of the re-established ties. Peter Riddleberger, a spokesman for the World Bank, said of the Salomon statement, "We have no comment, but we are not denying it."

The move by the World Bank, which is the largest borrower of dollars outside of the United States Government, could help Salomon as it tries to recapture business from other large clients. Indeed, some clients who suspended their business with Salomon were also said yesterday to be continuing examinations of their decisions and would soon discuss whether to revise them.

DeWitt Bowman, chief investment officer of the California Public Employee Retirement System, said the giant pension fund was continuing its review of its decision to suspend all trading of Government securities with Salomon. "We have not yet made a decision to rescind that action, but I suspect that we may shortly," he said.

The staff of the California pension fund will likely finish its review before its next board meeting, scheduled for Dec. 18, and make its recommendation then, Mr. Bowman said.

The decisions by clients to suspend their business with Salomon has hurt the firm's prestige as well as costing it business.

Because of its suspension, Salomon was barred from a global bond offering by the World Bank and received none of the international lending institution's huge fixed-income business.

The decision by the World Bank to return to doing business with the firm came after months of indecision. When it first suspended business with Salomon, the World Bank said the punishment would last until the end of September, when it would be reviewed.

When a final decision was expected, however, the World Bank announced that it was continuing its suspension indefinitely, leaving another cloud hanging over the troubled firm.
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December 4, 1991, New York Times, Low-Price Settlement in Big Salomon Scandal,

December 5, 1991, New York Times, Company News; Dividend At Salomon,

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December 7, 1991, New York Times, Appointments at Salomon,

Salomon Brothers, which announced a sweeping retrenchment last month that resulted in the dismissals of about 135 employees, has named 22 new managing directors.

The appointments take effect on Jan. 1, the firm's chief operating officer, Deryck Maughan, said on Thursday.

At least a dozen of the current managing directors are expected to leave at the end of the year. Those who plan to resign are expected to remain at Salomon until they collect their share of a $130 million bonus pool.

The management shake-up stems from the Treasury auction scandals disclosed during the summer. In August, Salomon said it had violated Treasury rules during five auctions.

Salomon named 17 new managing directors in New York, 3 in London and 2 in Tokyo. The following new managing directors were appointed:

Takafumi Aoi, Asian fixed-income trading.
Andrew Barrett, European equity trading.
Joseph Bencivenga, United States equity and high-yield research.
William Bingler, United States equity sales.
Peter Bloom, United States support.
Jay Courage, United States investment banking.
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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.
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December 26, 1991, New York Times, 2d Lawyer for Mozer,
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January 17, 1992, New York Times, S.E.C. Sets $5 Million In Penalties, by Stephen Labaton,

Completing the first leg of its sprawling investigation arising from the scandal at Salomon Brothers Inc., the Securities and Exchange Commission imposed fines today on 98 banks and Wall Street houses. The move came after the institutions acknowledged that they had submitted scores of inflated bids in the debt markets of five Government-created organizations that raise money to lend to home buyers, students, farms and banks.

In bringing this part of the investigation to a prompt conclusion, the S.E.C. fined the banks and brokerages only about $5 million, or an average of $52,000. The roster included many of the world's largest and most powerful financial companies, including all the nation's top banks and most of the key firms on Wall Street, as well as leading European and Japanese firms. Salomon, which has undergone a tumultuous reorganization, remains under investigation by both the S.E.C. and the Justice Department and was not part of today's settlement.

The banks included affiliates of Citicorp, Chemical Banking and BankAmerica and firms like Goldman, Sachs, Bear Stearns and Dean Witter.

Promises to Reform

No penalties exceeded $100,000 and all were based on the size of the offenders' business with the Government enterprises rather than the level of the infractions. The companies also signed agreements to adopt procedures to prevent any recurrence. The fines were cheaper for most of the banks and Wall Street firms than the legal costs they would have incurred if they had had to respond to lawsuits that the commission could have filed.

But in a news conference Richard C. Breeden, the S.E.C. chairman, dismissed questions about the light fines and chose instead to emphasize that the investigation had uncovered consistent lying and phantom records at many institutions. He said the institutions had inflated customer orders in an attempt to persuade the Government organizations to sell them more than their share of debt securities so they could be sure to fill all orders.

Rife With Inflated Bids

The two largest debt sellers, whose markets were rife with inflated bids, are the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, which raise hundreds of billions of dollars of money in their debt markets each year to buy mortgages from banks and savings associations. Fannie Mae and Freddie Mac, as they are known, then hold some of the mortgages, and repackage others into securities that are sold to investors on Wall Street.

The Government began its inquiry into the debt markets of Fannie Mae, Freddie Mac and three other large Government-created enterprises -- the Federal Home Loan Banks, the Federal Farm Credit Banks Funding Corporation and the Student Loan Marketing Association -- after Salomon Brothers disclosed in August that its traders had submitted many inflated bids to these companies and in the Government securities market, which finances the nation's debt.

Before the Salomon case, many market participants and officials at the Government-backed companies that sold the debt were aware of the pervasive amount of inflated bids, but they were treated as the financial equivalent of jaywalking. Since the case has unfolded, however, the commission, the companies and the Treasury have become more serious about the infractions, at least in their pronouncements.

"What was involved here was a corruption of the internal operations of the firms involved," Mr. Breeden said. "We uncovered a practice that was nearly universal in nature. Virtually 100 percent of the firms were involved in hyping and in the creation of crib sheets so that when they lied, they lied consistently."

Practices Called Routine

He said that at least as far back as October 1990, the banks and brokerages had routinely inflated the number and dollar amount of their customer orders and added random amounts to their actual customer orders. They did that, he said, apparently thinking it would increase the chance they would receive enough bonds to completely fill their customer orders. Some, he said, had actually maintained two sets of worksheets -- one with the real orders and one with the inflated orders.

A second aspect of Salomon case is expected to be completed within two weeks, when the Treasury Department, the Federal Reserve and the S.E.C. release their long-awaited recommendations to change the rules and practices of the Government securities market.

It was in this market and the debt markets for the Government-sponsored enterprises that Salomon admitted in August to widespread manipulation and to the submission of inflated bids.

'It's an Exaggeration'

Lawyers for some of the institutions that settled said their clients had merely engaged in salesmanship puffery but had not violated any laws. Defense lawyers also said Mr. Breeden had overstated the magnitude of the offenses.

"It's an exaggeration," said Irvin B. Nathan, a partner at Arnold & Porter. His firm represented several companies that settled. "There was no allegation of fraud or that anyone was misled or deceived or injured. It was a practice that apparently went on for decades." John Olson, a partner at the law firm of Gibson, Dunn & Crutcher, which represented four clients that settled, said the infractions were "a fairly small problem that was handled in an appropriate fashion."

The move by the S.E.C. was the second time that the firms faced financial penalties. In October Freddie Mac fined 17 firms and banks about $1 million. Last month Fannie Mae, the main source of credit for the nation's home buyers, declined to impose any financial penalties on the 53 banks and Wall Street firms that buy its securities.
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January 23, 1992, New York Times, U.S. Discloses Tougher Rules To Revamp Treasury Market, by Jonathan Fuerbringer,

The Treasury will intervene in the Government securities market whenever prices are distorted by a shortage of securities, whether a result of market forces or market manipulation, the three agencies that regulate the market said today.

The new policy for the $2.2 trillion market, where the Government borrows the money for its operations, is the most drastic item in a package of new rules, procedures and legislative changes put together by the Treasury Department, the Securities and Exchange Commission and the Federal Reserve in the wake of the illegal bidding scandal involving Salomon Brothers that was disclosed in August.

The package announced today includes some immediate policy changes, some that will take time to develop and others that require legislation to put in place. These are the main points:

*The auction market will quickly be opened up well beyond the tight-knit group of 38 primary dealers, which included Salomon, that have dominated the market. This rule change will apparently diminish the primary dealers' role and status, but no one could say immediately by how much.

*An open bidding process, in contrast to the secret bidding done now, would be created in early 1993 for Treasury auctions, diminishing the opportunities for market manipulation.

*A surveillance process to be refined over time will coordinate the resources of the three regulatory agencies. Other regulatory initiatives, like the collecting of data and sales practices for traders, are still in dispute or discussion among the three agencies.

*For the first time, the rules for Treasury auctions have been codified. Intervention Would Be Rare

Treasury officials, who said they would intervene in the market by either selling or lending enough securities to end a "squeeze," said they would resort to this cure only rarely. But they were clear that they wanted to convince market participants that significant squeezes, like the one that Salomon Brothers was involved in last May, will not be permitted to take place.

A squeeze occurs when a shortage of any security, either because of market forces or an attempt to corner the market, forces some traders to pay distorted prices. In the May auction of two-year Treasury notes, Salomon Brothers, through its own bids or those of its customers, held more than 90 percent of the auction.

Combined with regulatory changes already ordered in the last several months, the measures announced today would mean vast change in the Government securities market, though the effect will take months to sort out.

Immediate Wall Street reaction to the report was cautious, with most market participants saying they wanted to see more details before they could assess what the changes would mean to the market. There was widespread support from many quarters for the regulators' move to clarify and codify the market rules. But Representative Edward J. Markey, Democrat of Massachusetts, chairman of the House Telecommunications and Finance Subcommittee, complained that the new rules did not go far enough in monitoring market activity.

Public Confidence Shaken

When the Salomon scandal came to light, Treasury Secretary Nicholas F. Brady said that the illegal bidding, which led to the resignation of the firm's top management, did not mean the world's confidence in the market should be shaken. That view was reflected in today's report.

"The agencies do not believe that the Government securities market is flawed or broken in any fundamental economic sense," the report said. "However, serious problems have arisen, and these problems suggest that various aspects of the efficient operation and regulation of this marketplace can be improved."

Referring to Salomon Brothers' illegal bidding and to two squeezes in 1991 that forced many traders to pay millions in higher prices, the report added, "Taken together, these events threatened the public's confidence in this crucial marketplace, which could ultimately result in higher costs for taxpayers in financing the national debt."

The Treasury securities market, in which the Government raised $1.7 trillion in the 1991 fiscal year, is central to the Government's daily operation, providing money to cover the budget deficit and the national debt. It also affects the economy here and abroad by acting as a benchmark for interest rates. Even the smallest disruption in the market or doubt about the market's integrity can raise interest rates and cost the taxpayers hundreds of millions of dollars a year.

The report does not make new judgments about Salomon's conduct or mention any penalties. The decision on punishment will come after the conclusion of investigations now under way by the S.E.C. and the Justice Department. But the report does note that under one new rule, a firm that pleads guilty or no contest to a felony faces suspension as a primary dealer. The newly codified Treasury rules mention no specific punishment, like suspension, for such a felony, but officials said they would take appropriate action in Salomon's case.

Decisions Still Pending

Many aspects of the plan remain to be worked out. While intervention could take place immediately, a new bidding system will not be possible until early in 1993, when the Treasury system is computerized. And on some issues, like sales practice rules and audit trails for trading in the market, the regulators are divided.

William Heyman, director of the S.E.C.'s division of market regulation, acknowledged that the differences that reflect the institutional biases of the agencies "were tough issues before and they probably will continue to be tough issues."

Jerome Powell, the Assistant Secretary for domestic finance, said at a briefing that the intervention policy was "a better way to deal with a prolonged market squeeze than laying on more regulatory procedures." Mr. Powell said this intervention would be used only on "very few and rare occasions," adding, "We are not intending to micromanage" the market. But he said the May squeeze was an example of an opportunity for intervention.

Subcommittee to Meet

Mr. Powell is one of several regulators who will testify at a Senate securities subcommittee hearing on the report on Thursday. The Treasury is considering several ways to intervene. The Treasury apparently would prefer to lend the securities to investors who are squeezed rather than selling them outright. But authority to lend the securities would require new legislation.

Some dealers in the Treasury market have said the uncertainty created by this threat could raise the cost of borrowing. But Mr. Powell argued that this would not be the case.

Under the present system for Treasury auctions, bids are on paper and sealed and the bidders get the rate they bid, so some can bid a higher interest rate than others in the same auction.

The new system will be like an art auction. It will be open and all the securities will be awarded at one interest rate. Mr. Powell said the new system, combined with the threat of intervention, "reduces the possibility and incentives for colluding."

Mechanics of the Auction

The Treasury will begin the auction at an interest rate a little over the expected level and should get far more bids than needed to sell the securities. It will keep moving the interest rate lower, which means the Government pays less, in steps until the total of bids just falls short of what is required. The interest rate paid is set just above the lowest level.

For example, the auction can begin at a rate of 8.03 percent and be oversubscribed down to 8.00 percent. At 7.99 percent it is undersubscribed. The rate is set at 8.00 percent. All those who bid at 7.99 percent get a full share of their bids and those who bid at 8.00 percent get a pro-rated share.

For primary dealers, the Federal Reserve has dropped its requirement that they handle 1 percent of all the customer trades in the secondary market. And the Fed had dropped its direct surveillance of primary dealers in favor of broader market surveillance. This fall, the Government already moved to attract other bidders besides primary dealers to the auctions by allowing non-primary dealers to submit bids for customers.

But while the report says the Fed wants to get rid of the impression that primary dealers have a special status, Fed officials could not say what will happen from here.

"I would expect there to be more primary dealers," said Peter Sternlight, executive vice president of the Federal Reserve Bank of New York. But he could not say what the new mix of primary dealers, now 38, and non-primary dealers might be and whether the primary dealers would really have a lesser status. There are now about 1,650 other dealers in the market.
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January 23, 1992, New York Times, U.S. Discloses Tougher Rules To Revamp Treasury Market, by Jonathan Fuerbringer,

February 7, 2002, New York Times, Quarter's Loss Caps Salomon's Rocky Year,
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March 27, 1992, New York Times, Market Place; Salomon's Error Went Right to Floor, by Floyd Norris,

The erroneous sale of many millions of dollars in stock by Salomon Brothers, which roiled the stock market just before it ended trading on Wednesday, might have been prevented. But the sale, which Salomon said was caused by a clerical error, was not halted even after it was questioned by a New York Stock Exchange official, the Big Board said yesterday.

"A senior floor official talked to the Salomon desk and was told that it was accurate," said Richard Grasso, the president of the stock exchange, speaking of some of the huge sell orders that Salomon sent to the floor at 3:56 P.M., just before trading ended at 4 P.M.

Mr. Grasso did not identify the floor official and said he did not know the person at Salomon that official had spoken to. A Salomon official said he did not know of the call.

The mistaken trade itself, while it could not have happened without computers, was caused by human error when a clerk made a mistake that greatly enlarged the size of a customer's order to sell shares in about 400 companies, Salomon officials said.

The mistake could have been worse. Salomon's biggest incorrect sale orders, ones that could have decimated individual stocks, were not executed because traders at the firm learned of them and did not execute them. But the smaller ones, in hundreds of stocks, were automatically executed just as the New York Stock Exchange was ending trading for the day. And those orders were for up to 99,999 shares in each stock.

The rush of sell orders alarmed traders and pulled the Dow Jones industrial average down about 15 points in late trading. Rectifying the error is likely to cost Salomon at least $1 million, and perhaps more. Those losses will come from repurchasing shares sold by mistake, and from reimbursing the customer because shares were sold for less than they should have been. Salomon did not identify the customer.

The error, according to Salomon officials who spoke on condition of anonymity, came when an institutional investor sent by computer an order to sell shares in about 400 companies. The shares were to be executed on the close of trading, so the seller would get the final price of the day.

The computer program being used provided the number of shares of each stock to be sold, along with the current market price and the amount that would be realized if the shares were sold at that price. All told, the shares were worth $11 million, officials said. Had the customer's computer been able to communicate with Salomon's machines, it is unlikely that anything would have gone wrong.

The error crept in when a clerk at the firm, in translating the order into a format that would be understood by Salomon's computer system, mistakenly put the column showing the total value of the orders into the column showing the number of shares to be sold. An order to sell 100 shares of Exxon at $55, say, would have been translated into an order to sell 5,500 shares -- making it an order worth $302,500 instead of the $5,500 anticipated. An $11 million order became one to sell 11 million shares.

"This was a human error," emphasized Robert Baker, a Salomon spokesman. "It's not the computer running wild."

Just how much the 11 million shares were worth, and how many of them were sold, was not clear yesterday. But if the average price was $30 a share, that would result in orders to sell $330 million worth of stock.

The clerk was supposed to double-check his work, and another clerk who worked with him should have reviewed it, Salomon officials said. Neither clerk is going to be dismissed, the officials said, but neither was doing his normal job yesterday. The clerks' names were not disclosed.

When the clerks completed their work, the orders for New York Stock Exchange issues that were small enough to be traded automatically were sent to the exchange through its automatic small-order system, known as Super Dot, which handles market-on-close trades of up to 99,999 shares. They were executed, driving some prices down.

Other orders, either for orders too large for the Super Dot system, or for stocks not traded on the Big Board, were printed out on order cards to be sent to floor traders or the firm's over-the-counter desk for execution. When traders saw the size of the orders, they were canceled.

But by then, the Super Dot orders had been executed. A Salomon official said that no call from an exchange official had been received by the trading desk before the orders were executed, but that a call might have gone to the clerk who made the error.

Salomon officials said yesterday that they were changing the rules to reinforce the need to review work, and to require officials, not clerks, to verify large orders prior to execution.

Questions about market-on-close orders have arisen in the past in connection with index arbitrage, a type of trading that was not involved in Wednesday's fiasco. Mr. Grasso, the Big Board president, said the exchange had already decided to propose a change requiring all such orders to be in by 3:45 P.M., 15 minutes before the close, but had not announced it. That time lag might have given Salomon enough time to realize its error and halt the trades.

For Salomon, the error comes at an unfortunate time. The firm's new management says that it is committed to the equity trading business, and that equity revenues are running about 50 percent above the pace of a year ago. But there has been substantial turnover in the equity area and Wednesday's error, over and above the direct losses to Salomon that it caused, does not reinforce the image of highly efficient trading that Salomon used to cultivate.

By yesterday morning, Salomon officials said they had no exposure to market swings as a result of the sales, having either repurchased the stocks they sold or taken positions in options and futures markets to offset the exposure. Salomon would officially describe the losses only as not material to the firm. But privately, one official said the total was far less than $5 million and indicated that a $1 million figure was reasonable.

The error might never have happened had not Salomon, like a number of other Wall Street firms, taken steps to reassure customers about "front running." That is the unethical practice in which a broker trades for his own account in advance of a customer order that is likely to move prices.

Working on the theory that traders cannot front-run orders they do not know about, many orders do not go through the trading desks. Some institutional customers even have their own Super Dot computers, which they can use to route orders through Salomon or another brokerage firm to the floor. Others, including the one whose order set off the turmoil on Wednesday, send orders in from their own computer, with clerks then moving the order to the Super Dot system.
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March 28, 1992, New York Times, Warren Buffett's Bad Week at Salomon, by Lawrence Malkin,

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

March 21, 1992, New York Times, The Fed Is Investigating Dealings in U.S. Note, by Kenneth N. Gilpin,


May 7, 1992, New York Times, A Less Aggressive Salomon Sees Its Profits Decline 30%, by Seth Faison Jr,
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May 21, 1992, New York Times, Salomon to Pay Phony-Bid Fine Of $290 Million, by Stephen Labaton,

Salomon Brothers Inc. agreed today to pay $290 million to settle Government charges that the investment house had systematically submitted billions of dollars in phony bids in the Treasury auctions that finance the nation's public debt.

In a victory crucial for Salomon's survival, the Government also agreed not to bring criminal charges against the firm over its millions of dollars of illegal gain. Other large Wall Street firms involved in complex fraud cases, notably E. F. Hutton and Drexel Burnham Lambert, were unable to survive criminal cases. But scores of Salomon's customers -- municipalities, pension funds, mutual funds and states -- now will not have to reassess whether they can do business with an investment house facing criminal charges.

Reaching Crisis Proportions

The agreement ends a tumultuous chapter in the firm's 82-year history that reached crisis proportions last summer. In August, Salomon acknowledged that it had occasionally submitted bogus bids to buy more Treasury securities than Federal regulations permit. It then admitted that its senior executives, including the company's chairman and chief executive, John H. Gutfreund, knew for months about some of the phony bids but never told the public or Government officials.

Mr. Gutfreund, once a powerful figure on Wall Street, resigned as a result of the scandal. He remains under investigation by the Securities and Exchange Commission for possible civil violations, notably the failure to supervise the firm adequately.

Other former senior executives and traders, particularly Paul W. Mozer, the former head of the Government bond trading desk, which executed the fraudulent bids, are under investigation by the commission and by the Justice Department for possible criminal violations. A few smaller firms that may have illegally agreed to coordinate their trading activity may also face criminal or civil charges.

Little Criticism Voiced

There was little criticism of the settlement, even though lawyers and members of Congress were in basic agreement that the Government had been generous to Salomon. The favorable terms reflected the widely held view among Government officials that the firm, after first misleading them, moved quickly to disclose what it knew of the scandal and took steps to prevent it from recurring, including the removal of senior management.

Today's agreement was approved by officials at the highest levels of Government, including the Treasury Secretary, the Attorney General, the chairman of the Federal Reserve Board and the Securities and Exchange C t ever assessed by securities regulators against an investment house, topped only by the $650 million penalties imposed on Drexel. In the Drexel case, that firm's former junk bond financier, Michael R. Milken, who is serving a 10-year prison sentence in California, was also fined $900 million.

The money poses no financial jeopardy to Salomon, which last quarter had a $190 million profit and whose broker-dealer affiliate alone has more than $2 billion in capital. Even before the settlement, the company had put $200 million in reserve against any Government sanctions, and today it announced it would take a further $185 million charge for legal expenses and to fight dozens of other private lawsuits that have arisen from the scandal.

Government officials said the settlement had vindicated the strategy of Warren E. Buffett, who took control of the company as its new chairman and chief executive in the midst of the scandal in August, in large part to save his own substantial investment in it. He quickly agreed to cooperate with the authorities and purged the company of the remaining senior executives who had known of several instances of phony bidding but failed to make it public or disclose it to the Government.

"In those instances where a corporation takes significant steps to right past wrongs, cooperates with the Government and puts in place measures to avoid a recurrence, the Government will look upon that corporation favorably," said Otto G. Obermaier, the United States Attorney in Manhattan. He called the steps taken by the firm following the disclosure of the phony bids unprecedented. "The company certainly revealed enough in its own statements that if one wanted to, there could have been a technically sufficient criminal charge."

Care for Financial System

The settlement was also viewed as a statement that the Government did not want to come down too onerously on an enormous and powerful investment house that had long been a valued customer of the Treasury and whose collapse could be catastrophic for the financial system.

Officials at the commission said they were particularly moved by the firm's pleas that harsher sanctions could spur regulators in Britain, Japan and Germany to take strong steps against large Salomon affiliates in those countries. Senior regulators went out of their way today to emphasize that the accord had provided the firm with what one official called a clean slate and that none of the infractions occurred after Mr. Buffett had taken over.

Of the $290 million, $100 million will go to a new fund for any investors or companies that have lost money as a result of Salomon's practices. William McLucas, director of the S.E.C.'s division of enforcement, said that the fund did not limit Salomon's ultimate liability from private suits to $100 million, and that it would have to pay more out of its own pocket if courts found it owed more. He added that any left over money would be paid to the Treasury.

The Treasury Department will receive $122 million of the settlement and $68 million is in fines and forfeitures for the Justice Department.

Representative John D. Dingell, the Michigan Democrat who heads the House Energy and Commerce Committee, said: "I continue to have concerns about whether the firm failed to supervise its traders and about the extent to which management may have been responsible for holes in their system of internal controls -- in short, whether willful blindness or negligence allowed certain individuals at the firm to run amok. The entire episode points to the glaring need to reform a seriously flawed regulatory system for government securities."

Wall Street viewed the settlement as a big coup for Salomon. The company's shares, which opened at 1:50 P.M. after trading was suspended four hours and 20 minutes pending an announcement, jumped immediately by almost $2, and closed up a substantial $2.875 to $33.50. Summertime Suspension

As part of the settlement, the firm will be suspended beginning in June for two months from doing any business with the Federal Reserve Bank of New York. The suspension comes when there are few important auctions and will allow Salomon back into the process in time for the large quarterly auctions in August.

After the suspension, the Treasury Department said, it will lift the sanctions it imposed on the firm in August that restricted Salomon from submitting bids for customers in all Treasury auctions.

In its complaint today, the commission largely repeated the facts that had been uncovered by the firm's own internal investigation, but added some significant new details. The agency asserted that Salomon had violated anti-fraud and record-keeping provisions of the Federal securities laws by submitting 10 false bids between August 1989 and May 1991 that resulted in the acquisition of more than $9.5 billion in Treasury securities over the legal limit.

Vague About Profits

Officials at the Securities and Exchange Commission would not say how much the firm profited from the acts, saying only that it was more than $5 million but less than $100 million.

But the agency strongly hinted that other investment firms may have wittingly collaborated with Salomon in some violations. In an Aug. 10, 1989, auction of 247-day Treasury bills, the commission said, Salomon persuaded a trader at an unidentified firm to submit a bid for $3.5 billion worth of the securities and then immediately sell them to Salomon for a price one basis point -- one-hundredth of a percentage point -- above its initial costs.

The secret deal enabled Salomon to buy more than 61 percent of the securities, even though the Treasury had long had a rule limiting purchases by any single bidder to 35 percent.

Salomon was accused of failing to supervise the traders who initiated the trades and of issuing a misleading news release in August that did not say senior executives at the firm knew about the phony bids. The commission also implicitly blamed Salomon's former law firm, Wachtell, Lipton, Rosen & Katz, for the misleading news release, saying Salomon had prepared and issued it after consultation with counsel.

Salomon was also accused of submitting false bids in the markets where securities are sold by the large government-backed lenders that provide financing for housing and farming.
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May 28, 1992, New York Times, New Leader at the New Salomon, by Seth Faison Jr,
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June 1, 1992, New York Times, Wall Street Opposing Bond Rules, by Stephen Labaton,

Nervous about the impact of the scandal at Salomon Brothers, the large Wall Street institutions that control the Government securities market have been intensively lobbying Congress as it shapes new controls on the $2.3 trillion market that finances the nation's public debt.

With strong bipartisan support, a bill that would impose regulations on the government securities market is widely expected to clear an important hurdle on Tuesday: approval by the House Energy and Commerce Committee.

The bill would require traders to keep better records and set up procedures to insure compliance with Federal antifraud laws and other rules. It would also give the Securities and Exchange Commission broad authority to police the government securities market.

Lobbying by Wall Street

Wall Street, which staunchly opposed a stronger version of the bill, says it will not oppose the measure for now, hoping instead to weaken it after the House approves it. The Senate approved a much milder bill last summer, and the ensuing conference is likely to be the next battlefield.

The House legislation is warmly endorsed by the largest purchasers of government securities -- states, municipalities and pension funds -- which see it giving them significant protection against fraudulent sales. The legislation would give the National Association of Securities Dealers the authority to set up an entire system of rules governing the selling of government securities.

The lobbying by Wall Street has been coordinated by the Public Securities Association, which represents the primary dealers and other traders of Government securities. Its campaign to shape the legislation included a recent weekend outing for some lawmakers and regulators, all expenses paid, at the Greenbrier resort in White Sulphur Springs, W. Va.

The outing, which was well within the ethics guidelines governing Congress, was billed as an educational conference for members of the association, though participants said that more Washington officials than association members were in attendance and that more time was spent playing golf and tennis or socializing at the bar than in panel discussions.

The Bond Buyer, a trade publication that first wrote about the Greenbrier conference, estimated that the outing had cost the association between $50,000 and $75,000.

The conference occurred four days before the House Energy and Commerce Subcommittee on Telecommunications and Finance completed the drafting of legislation that is expected to be approved by the full committee this week.

Officials of the Public Securities Association defended the conference, saying it promoted uninhibited discussion among its members and the Representatives and their aides. 'Two-Way Communication'

"It's a way to reach toward two-way communication," said Micah S. Green, executive vice president of the association and its top lobbyist. "The only difference from our other conferences is that at this one the press wasn't invited. It's so unfair to call it anything other than an educational conference."

Participants from Congress insisted that their views were unaffected by the wining and dining.

"If they were trying to lobby us to weaken the bill, it certainly didn't work," said a Congressional aide who attended and insisted on anonymity. "Clearly, this legislation is not the industry's preferred position."

But other groups criticized the meeting.

"There is nothing unusual about it, but there is something wrong with it," said Michael McCauley, research director for Congress Watch, the legislative arm of Public Citizen, the group founded by the consumer advocate Ralph Nader. "It offers access for those who can afford it."

Most of the money flowing into Congress in connection with the legislation is not from the Public Securities Association, whose political action committee has less than $100,000 and is small compared with those of other trade groups, but directly from Wall Street firms.

Congressional aides said the heaviest lobbying by individual firms had come from Lehman Brothers, Prudential Securities, Greenwich Capital Markets, Goldman, Sachs, Bear, Stearns, J. P. Morgan and Morgan Stanley. These firms have also collectively given millions of dollars in campaign contributions to House and Senate members.

'Hard to Track'

Experts on political contributions said it was difficult to keep track of Wall Street's contributions because the brokerage industry "bundles" individual contributions from company executives before giving them to members. The tactic enables the investment houses to exert considerable influence while technically complying with restrictions on corporate and individual contributions.

"Wall Street has been hard to track because although they have political action committees, that is not their main source of contributions," said Larry Makinson of the Center for Responsive Politics, a nonpartisan research group.

Mr. Makinson, whose findings will appear in the book "Open Secrets," which will be published at the end of June, says that in the last election, Wall Street firms provided 65 percent of their total contributions of $5.8 million from individuals rather than from the investment houses' political action committees. The measure under consideration by the Energy and Commerce Committee could reach the House floor this summer if a jurisdictional dispute is resolved with the House Banking Committee. If the measure is not approved by the House by early summer, lawmakers say it is likely to die this year because the Congressional session will be abbreviated for the Presidential nominating conventions and Congressional campaigns.

"I have the highest confidence that we will put a bill on the President's desk this year," said Representative Edward J. Markey, the Massachusetts Democrat who heads the Subcommittee on Telecommunications and Finance and who is the main author of the legislation. "He'd be crazy to veto a bill in the wake of Salomon."
On May 20, Salomon Brothers agreed to pay $290 million to settle Government charges that between August 1989 and May 1990 it had systematically submitted phony bids in Treasury auctions in order to buy more securities than Federal regulations permit.

Administration Objections

The Administration has come out against many provisions of the legislation, notably those that take away the authority of the Treasury Department to have the final say on the regulations governing sales practices between brokers and investors.

In a letter on Thursday to Representative John D. Dingell, the Michigan Democrat who is a sponsor of the legislation and heads the Energy and Commerce Committee, senior Treasury and Federal Reserve officials said the bill "would grant new regulatory authority, with its potential costs, that simply is not warranted by the problems that have surfaced."

The letter, which was signed by Jerome H. Powell, Treasury Under Secretary; David W. Mullins Jr., Fed vice chairman, and E. Gerald Corrigan, president of the Federal Reserve Bank of New York, added, "This legislation would open the door to unnecessary regulation that could reduce the efficiency and liquidity of the Government securities market and increase the burden on the taxpayer of financing the public debt."

The Treasury prefers the Senate version, which was approved shortly before the Salomon revelations shook Wall Street last August; the S.E.C. supports provisions in the House measure that increase its authority.

Long before the scandal, investment houses and banks had begun actively lobbying Congress and the Administration because everyone had assumed the lawmakers would complete legislation last fall, when the Government Securities Act of 1986 expired. That law gave the Treasury Department the authority to set rules on the sales of Government securities.
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June 4, 1992, New York Times, Company News; A Surprise In Chairman At Salomon, by Seth Faison,
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June 8, 1992, New York Times, Letter, Wall St. Housecleaning, by John Gutfreund,

To the Editor:

I write to correct a fundamental misstatement of fact in "Rough Justice for Salomon" (Topics of The Times, May 22).

While we in the previous management at the Wall Street securities house of Salomon Brothers have been criticized for acting too slowly, even the Securities and Exchange Commission's complaint against Salomon makes clear that it was the "old" Salomon that fully investigated, found and voluntarily disclosed Paul Mozer's improper bidding practices.

Contrary to your assertion, Warren Buffett did not "purge" senior officials: I suspended Paul Mozer and several others on the trading desk. As Mr. Buffett has confirmed, I asked him to take over when it became clear to me that to save the institution where I spent my entire professional life, I had to sacrifice my own career. This is to take nothing from Mr. Buffett's remarkable stewardship in a traumatic period for the firm. JOHN H. GUTFREUND New York, May 22, 1992
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July 8, 1992, New York Times, New Details About Salomon, by Kurt Eichenwald,

The Government's investigation of the $2.3 trillion Treasury bond market has discovered that Salomon Brothers Inc. and unidentified "co-conspirators" had spoken regularly about efforts to corner the market for two-year notes last year, a Justice Department document released today shows.

The document offers fresh details about the department's investigation of possible collusion among several participants in the huge government securities market, in violation of antitrust laws.

The inquiry was touched off by Salomon's admission last summer that it had placed unauthorized bids and bought more notes than allowed at several Treasury auctions. In May of this year, Salomon agreed to pay $290 million to settle civil charges that it had broken the rules at nine auctions.

As part of the accord, Salomon settled civil antitrust charges involving its dealings with other parties.

According to the department document, "Salomon and its co-conspirators communicated frequently on the subject of their activities or planned activities with respect to May two-year notes." The conspirators "assured each other that they would continue" to hold "substantial long positions" in the notes, which were auctioned in May 1991.
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August 7, 1992, New York Times, A Year Later, Bond Traders Are a Humbler Lot, by Jonathan Fuerbringer,

In the year since the Salomon Brothers Treasury scandal last August, bond traders have lost their swagger. They can still make millions of dollars a year. And the market is still rough and tumble. But in the last 12 months, traders have been on their best behavior, worried about possible Government indictments.

The image of the cowboy trader, averse to following rules, emerged in the aftermath of the Salomon scandal. But today, traders all seem to wear white gloves to the party and observe perfect etiquette. They are filling out more forms, keeping better records and talking less to their competitors before an auction to avoid being accused of collusion.

"In the past, people were cockier about their role in life," said a top executive in a major trading firm, who, like many others in the business, was loath to be identified by name because of the continuing Government investigation of the Treasury market.

How much this more conservative style of operation is affecting borrowing costs, however, is a matter of debate. The auction is the supply spigot for the $2.3 trillion Government securities market. It is the way the Treasury, and the still mostly tightknit group of primary dealers who buy the securities, set interest rates on the bills, notes and bonds that cover the Government's cash flow needs and budget deficit.

What is clear is that the tighter trading procedures embraced by many firms and traders are more in response to Government inquiries into wrongdoing than to sweeping new rules. The Government has asked copious questions and subpoenaed numerous records as part of the investigation of the illegal bidding by Salomon and the possibility of collusion among other trading firms.

"I think people are more conscious," said Junius Peake, a consultant on financial markets. "There are higher levels of supervision. No primary dealer wants to get caught like Solly did."

More sweeping changes in the Treasury market are waiting in the wings, but they may not fly. Legislation that would broadly revise the regulation of sales practices, crack down on fraud and create detailed reporting and compliance procedures is still being fought over in Congress.

And the major regulators of the bond market -- the Treasury Department and the Federal Reserve -- oppose the legislation, arguing that more regulation will make the market less efficient and raise the Government's borrowing costs. They say that what happened at Salomon was an aberration, rather than a sign of a flawed system.

"I don't think fundamental changes in the bond market or in the way traders do business are called for or will happen," said Jerome H. Powell, the Under Secretary of the Treasury for finance.

Even the changes that have been made are not likely to prevent another Salomon-like scandal. "If someone has a devious mind and wants to do it, one can always get around the system," said Joel Kazis, a managing director at UBS Securities in New York.

The Salomon Brothers scandal, which broke on Aug. 9 last year, centered on illegal bidding in the Treasury auction. Salomon repeatedly exceeded the legal limit by bidding on more than 35 percent of the total of securities to be sold.

Salomon's top executives, who had known about the illegal bidding but took no action, were forced to resign.

The scandal sent shock waves through the bond industry. From the giant firms that dominate Wall Street to the much smaller boutique bond houses, traders today have become more religious about time-stamping their trading tickets, allowing discrepancies to be traced more easily. But that's a bore. For the same reason, they must fill out forms accurately -- before they go to lunch. That's a chore. And they say they must watch what they say on the telephone. A snore.

Training the T-Crossers

What was an informal spiral notebook at many firms is now a formal ticket or log. Salomon Brothers now has training classes for traders, who then serve as part-time compliance experts on the trading floor.

A compliance director at a major firm says the office is fielding more questions nowadays because traders are more worried about "dotting their i's and crossing their t's." And the director says that many other firms must be doing likewise because of the number of headhunters calling in their search of fixed-income compliance officers.

"You have had a major Government investigation," said Mr. Powell of the Treasury. "Without question that will have chilled traders and will have made life in the Government bond market much less pleasant over the last year."

Traders say one of the biggest changes for them involves talking: they do a lot less of it.

In the past, before Treasury auctions, dealers would normally talk among themselves by phone to try to find out about another dealer's position without letting on about their own. In this way, they avoided bidding too much while still winning the securities they needed to fill expected orders.

This search for "market color" seems to be conducted much less now. Traders are afraid of suddenly having their conversations played back to them by government lawyers.

What effect all of this has had on the Treasury auction is hard to determine. Some traders said the bidding is not as fine-tuned as in the past. Others say auctions are now riskier for the bidders, who may pay more than they should or may not obtain an adequate supply of securities to fill their order.

But the very aggressive bidding for the five-year note in the auction at the end of July shows that the Treasury, at least, may have benefited by getting a record-low interest rate: 5.56 percent. While some traders attribute this to changes in style, others argue that the auction simply came at the peak of a market that was already ahead of itself.

In any case, another change has not had much discernable effect. New rules and regulations put out by the Treasury and the Federal Reserve have altered the role of the primary dealers -- the core of the Treasury auction process -- by broadening participation in the auction to others. But the change has not seemed to have had a major impact yet because there is only one new primary dealer; in fact, the auction business seems to be even more concentrated than before among the top players in the market.

One significant change in policy was the Treasury Department's decision to brandish a weapon it had previously been reluctant to use: supplying additional securities when a severe shortage is driving up prices, perhaps signaling a squeeze or an illegal manipulation in the market.

In this way, "the Treasury can eliminate any shortage," according to a report to Congress in January by the Treasury, the Securities and Exchange Commission and the Federal Reserve, outlining their major recommendations for regulating the Treasury markets.

There have been occasions this year, traders and the Treasury said, when this weapon might have been used because a shortage had occurred. But the Treasury declined, apparently because they saw no sure sign of an illegal manipulation.

Another factor reducing the chances for collusion is that customers are more careful to avoid placing all their orders for a Treasury auction through one dealer.

"Previously dealers, especially the big dealers, could fairly easily control the auction for a day or two," said a manager of a large bond fund in New York, who insisted that he be identified. "They could know where all the bonds are. But now it is much more difficult."

Dealers have also said that a lot of customers have stopped bidding through them in the Treasury auctions because of the new rules that require the customers' positions to be disclosed and confirmed to the regulators. So they are buying their bills, notes and bonds in the preauction or when-issued market, which is making some of the last-minute bidding decisions by dealers even more hectic and uncertain than before. Pending Legislation

The complete revamping of the auction system that was proposed by the Treasury is many years away, according to Mr. Powell, the Treasury Under Secretary. In the meantime, the Treasury is still considering how much it wants to tinker with the auction system.

So are others. On the legislative front, the S.E.C. and Representative Edward Markey, Democrat of Massachusetts and the chairman of the key Energy and Commerce subcommittee on telecommunications and finance, are squaring off against the Treasury, the Federal Reserve and much of the industry.

So far, this conflict has left the two major pieces of legislation dealing with the Salomon aftermath competing with each other in Congress. One, which has passed the Senate, is supported by those who would do less. The House version, which was approved by the Banking Committee today, would bring much more sweeping regulation to the bond market.

It is unclear whether either will become law before Congress recesses this year.
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September 4, 1992, New York Times, Credit Markets; New Process For Auctions To Be Tested, by Jonathan Fuerbringer,

The Treasury announced yesterday that it would begin a yearlong test of a new auction technique that would award its securities at a single price and yield.

The new process, to begin later this month, is one of the changes proposed in the wake of the Treasury bidding scandal at Salomon Brothers a year ago. The purpose is to try to encourage more participation in the auctions and more aggressive bidding.

Both changes would help save the Government millions of dollars in interest costs, since it borrows billions of dollars a year to cover the Federal budget deficit and provide the cash needed to keep the Government operating smoothly. Grip of the Primary Dealers

In addition, more participation might reduce the grip that the 39 primary dealers have on the auctions. The dealers, who are required to bid in Treasury auctions, now buy most of the securities. Their practice of talking among themselves before bidding has raised questions about the fairness in the market and led to a Justice Department investigation of the possibility of collusion.

But it is not clear yet if the new technique will achieve those goals or is, in fact, any better than the current system, which awards securities at a range of prices based on the bids.

The securities industry greeted the test as a welcome compromise, compared with a much broader revision in the auction process that is still being considered and is opposed by the industry. "It is probably a reasonable middle ground," said William Pike, the vice chairman of the government division of the Public Securities Association and a managing director at Chemical Securities Inc., a primary dealer.

Details of the Changes

Under the proposal, the monthly auctions of two-year notes and five-year notes, set for Sept. 22 and 23, respectively, will use the new procedure. All other auctions will continue under the present system, with awards at several prices and yields.

Bidding is done by yield. The bids for a five-year auction may come in, for example, at 5.43, 5.44, 5.45, 5.46 and 5.47 percent. Under the current procedure, the Treasury begins awarding the notes to the bidders with the lowest yield (which is the highest price, because yields and prices move in opposite directions) and moves up until all the securities are awarded. In this case, one bidder could win with 5.43 percent and another with 5.46 percent, although the cost is lower.

Under the proposed single-price system, the Treasury would allocate the notes up the range of yields bid until all the securities were sold. But then they would all be awarded at the last, or highest, yield.

The idea is to eliminate the "winner's curse." Under the current system, a dealer can find that he ended up paying more than other bidders for the same securities. Some analysts say this makes the bidders less aggressive, which means the Treasury ends up paying more than it should in interest.

In addition, without the fear of bidding too high, more institutions and bond funds might participate in the auction. Now, many institutions and funds do not bid now because they think that the primary dealers have a corner on the speculation before an auction about what the bid level is likely to be and that without this information an outside bidder can make a big mistake. This added participation could also result in lower costs for the Treasury.

Some Trade-Offs

But if all bidders under the system to be tested were to get the securities at the lowest price and highest yield, then the Treasury would lose the money it could save if it could also award the securities to the more aggressive bidders with lower yields.

Also, some traders are worried that if dealers are not concerned about the winner's curse, they may bid too much and end up winning and paying more than they should.

These are some of the trade-offs that the Treasury will have to weigh after the test. Jerome H. Powell, the Under Secretary of the Treasury for finance, said the Treasury would look at the distribution of bids and awards, the number of bidders and the difference between bids in the pre-auction market for two-year and five-year notes and the actual bids in evaluating the new system.

"There really isn't a perfect experiment that you can design here that will give you a perfect answer," Mr. Powell said.

Inconclusive Results

In its report on the Salomon Brothers trading scandal, the Treasury noted that tests of this auction technique were inconclusive in 1973 and 1974. If the test is successful, Mr. Powell said, the Treasury will then decide whether to apply the system to all auctions.

Several traders who bid in the auctions said they did not think the system would have a big impact on the bidding. But "it certainly removes the winner's curse," said Greg Erardi, the senior bond trader at Salomon Brothers, though in the short term it might discourage bidding until dealers saw how it worked. And John Costas, managing director of government bond trading and sales at First Boston, said, "It reduces the risk of participating in the auction process so over time it should save money for the Treasury." Treasury Market
The Treasury market was bounced up and down yesterday but ended little changed ahead of the Government's release of the August employment report this morning.

Most of the action was in short-term bills, where discount rates fell slightly, and on the 7.25 percent 30-year bond, which was offered at 9824/32 in late trading to yield 7.35 percent, down from 7.37 percent Wednesday.

A 1.5 percent jump in the value of the dollar against the German mark did not have much impact.

Traders and analysts say that since economic statistics and the decline in the key supply figures released yesterday still reflected a very weak recovery, there was a chance that the Federal Reserve could ease interest rates another notch, especially if the dollar stabilized. But this decision will depend on the employment report. If the report is not especially weak, some analysts say, there is virtually no chance that the Fed will ease rates further before the Presidential election.
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September 15, 1992, New York Times, Case Is Settled by Salomon,

Salomon Brothers Inc. will pay the Government $27.8 million to settle charges that it violated Federal antitrust law in a Treasury bond auction scandal last year, the Justice Department said today.

The sum, approved by United States District Judge Robert Patterson in Manhattan, is the largest ever paid to the Government for a civil antitrust violation, the department said. The money is part of a $290 million settlement, which was disclosed in May by the Securities and Exchange Commission and the Justice Department.

Salomon Brothers is a subsidiary of Salomon Inc., one of the biggest Wall Street investment houses.

The larger settlement includes $190 million in fines and forfeitures related to Salomon's cheating in Treasury auctions, the process the Government uses to raise money by selling bonds, bills and notes to the public.

Salomon also agreed to set up a $100 million fund to compensate victims who lost money in the securities fraud scheme.
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September 23, 1992, New York Times, Credit Markets; New Treasury Bidding Rule Costly for U.S.,

September 25, 1992, New York Times, Fed Looks Into 'Squeeze' In Treasuries, by Jonathan Fuerbringer,
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September 29, 1992, New York Times, Salomon's Deal With U.S. Is Questioned,

The $290 million that Salomon Brothers Inc. paid to settle the Treasury auction scandal may bring the Government only about $95 million, according to a Congressional panel that will hold a hearing on the issue Tuesday.

Salomon could deduct the settlement, getting a tax benefit of $95 million, a committee staff member said. Further, $100 million of the settlement went not to the Government but to private investors.

The size of the $290 million penalty brought protests from other Wall Street firms, which felt that Salomon should have been fined less in return for its cooperation with the Government investigation.

The oversight subcommittee of the House Committee on Ways and Means was also perplexed by the settlement, but for the opposite reason. Some subcommittee members expressed concerns that Salomon may have paid too little.

In addition, some of them have said the fine, in effect, was only $190 million because lawsuits would probably have forced Salomon to pay private investors about $100 million, anyway.
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December 3, 1992, New York Times, Two Sued by S.E.C. in Bidding Scandal at Salomon Bros., by Kurt Eichenwald,

After more than a year of investigation, the Government yesterday brought its first legal action against former Salomon Brothers executives involved in the firm's illegal bidding in Treasury auctions, charging a series of securities law violations that included insider trading.

The civil suit, brought by the Securities and Exchange Commission, accused two former managing directors, Paul W. Mozer and Thomas F. Murphy, of systematically submitting billions of dollars in phony bids in Treasury auctions held to finance the public debt.

Both men were accused of securities fraud for submitting the false bids and with creating false books and records at Salomon during Treasury auctions from August 1989 to May 1991. Mr. Mozer, the former head of the Government trading desk at Salomon, was also accused of insider trading and engaging in illegal trades to win Salomon phony tax losses.

No Officials Named

The suit, which is being contested by both men, does not name any higher-ranking executives at the firm. John H. Gutfreund, the former chairman and chief executive, and other executives are being investigated by the S.E.C. for failing to supervise their employees. A complaint or a settlement is expected soon.

The scandal involved billions of dollars of illegal bids in the multitrillion-dollar Treasury market. By making such bids, Salomon was able to exert unusual control over the marketplace, even though the profits from those activities were comparatively negligible.

The firm said last year that its profits from the illegal bids were $3.3 million to $4.6 million, less than many of what the firm's traders earned in a single year.

Stanley Arkin, a lawyer for Mr. Mozer, said his client planned to fight the charges vigorously and asserted that the commission had taken the complaint too far.

"Their allegations are overreaching and reflective of the piling on that has characterized this investigation vis-a-vis Mr. Mozer since its inception," he said. "My view is that many of the charges have no substantiation."

Charles Carberry, a lawyer for Mr. Murphy, who was Mr. Mozer's top aide on the government trading desk, did not return a telephone call seeking comment. A spokesman for Salomon said the firm had no comment.

In its suit, the Government is seeking unspecified fines and injunctions that would prohibit the two men from committing further securities law violations. The Government is also seeking the return of about $1.7 million that it contends Mr. Mozer made in profits on the inside trading, as well as other fines. Possible Criminal Indictments

Both former Salomon executives face possible criminal indictments in the case. Mr. Mozer has offered information to the Government, including information that helped lead to the S.E.C.'s charge against him about tax trades, in an effort to avoid indictment and settle the charges. Mr. Arkin declined to comment on the criminal case.

The Treasury market scandal emerged in August 1991, after Salomon Brothers first announced that it was dismissing Mr. Mozer and Mr. Murphy for submitting false bids and bids in the names of customers without authorization in order to buy more than the 35 percent of the securities offered that the firm was allowed to buy.

The admission led Government officials to worry openly that questionable trading practices could discourage investors from participating in the Treasury market, where securities are sold by the Government in part to finance the budget deficit. With fewer investors, the costs of Government borrowing could go up, but those fears have proved unwarranted.

The scandal widened within days of the firm's announcement, when Salomon made a subsequent admission that three senior executives, including Mr. Gutfreund; Thomas W. Strauss, the firm's president, and John W. Meriwether, a vice chairman, had all been informed of one of the illegal bids but had failed to inform the Government.

Led to Resignations

That led to the resignation of the top officers, and the replacement of Mr. Gutfreund by Warren E. Buffett, the Omaha investor who is Salomon's largest shareholder. Since then, Salomon succeeded in settling all charges against it stemming from the scandal by agreeing to pay $290 million in fines and penalties. Mr. Buffett has since turned the reins of the trading house over to Deryck C. Maughan, a longtime Salomon employee, who has worked to rebuild the firm's strength in trading.

After an initial rush at reforming the lightly regulated Treasuries market, Congress failed to adopt changes last year.

While yesterday's charges did not involve new disclosures, some members of Congress said the S.E.C. complaint might nudge Congress to pass legislation next year. The action "once again underscores the need for Congress to pass broad legislation that directly attacks the weakest areas of regulatory oversight," said Representative Edward M. Markey, Democrat of Massachusetts.

The commission is also continuing to investigate a number of others outside of Salomon, including some clients of the firm, regarding their actions in the Treasury market auctions. William R. McLucas, the head of enforcement for the S.E.C., said yesterday that "the investigation is continuing in a whole lot of different directions."

The insider trading charge against Mr. Mozer stemmed from his sale on Aug. 6, 1991, of 46,000 shares of Salomon stock, at prices ranging from $35.75 to $36.125 a share, realizing a total of more than $1.6 million. The first disclosure of Salomon's actions came on Aug. 9, and within two weeks the share price had fallen to $23.75, amid speculation that the scandal might destroy the firm. It has since recovered, and yesterday closed at $37.50, down 12.5 cents.

The S.E.C. said Mr. Mozer knew of the internal investigation into the Treasury bond bidding practices and was thus in possession of "material nonpublic information" that made it illegal for him to trade.

The Government did not specify how much Mr. Mozer saved by selling when he did, but it asked the court to force him to return that money and pay a penalty in addition. Such a penalty would normally be equal to the amount saved as a result of the trade.

After the scandal erupted, Salomon officials noted the trade and froze Mr. Mozer's account. As a result, he has never received the money from the trade.

The charges against Mr. Mozer relating to the tax violation referred to events in 1986 and are related to the Treasury bond scandal only because they came out in the subsequent investigation. Salomon admitted the tax violations in its own settlement.

The charges said that Salomon, as 1986 neared an end, had unrealized losses of $168 million stemming from having sold Treasury securities short. An unrealized loss is a loss on paper and not in actual cash. In this case, the loss was not realized because the short position had not been closed.

Salomon could have realized those losses -- and obtained a tax deduction legally -- by repurchasing the securities and closing out the position.

Instead, the S.E.C. said, Mr. Mozer engaged in pre-arranged trades with other firms to make it appear Salomon had closed the position and then re-established it by shorting the same securities.

Correction: December 4, 1992, Friday A front-page headline in some copies yesterday about the Government's suit against two former executives at Salomon Brothers referred erroneously to the history of the case. The suit filed Wednesday by the Securities and Exchange Commission was the first against individuals involved in the improper bidding for Treasury securities. The Government has already settled its complaints against the firm itself.
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December 4, 1992, New York Times, Low-Price Settlement in Big Salomon Scandal, by Kurt Eichenwald,

John H. Gutfreund, whose aggressive leadership of Salomon Brothers seemed to embody Wall Street in the heady 1980's, agreed yesterday to never again run a securities firm and to pay a $100,000 fine as part of a settlement of civil charges stemming from the firm's illegal bidding in Treasury auctions.

He and two other former senior executives of Salomon settled with the Securities and Exchange Commission one day after the agency charged two other former Salomon employees with a raft of securities law violations involving phony bids in a series of Treasury auctions.

Involved Civil Charges

Mr. Gutfreund and the two other executives who settled yesterday, Thomas W. Strauss, the investment house's former president, and John W. Meriwether, a former vice chairman, were not charged with any illegal actions. Rather, the men settled civil charges that they had failed to properly supervise their employees.

Mr. Strauss, 50 years old, agreed to a fine of $75,000 and suspension from associating with a Wall Street firm for six months. Mr. Meriwether, 45, agreed to a three-month suspension and a fine of $50,000.

Because of the men's wealth, the fines are about the equivalent of a parking ticket for most people: unpleasant, but affordable. All three were paid millions in salary and bonuses in each of many years at Salomon; Mr. Gutfreund and Mr. Strauss left Salomon with multimillion-dollar stakes in the firm.

Criminal investigations are continuing into the activities of Paul W. Mozer and Thomas F. Murphy, the two former Salomon bond traders who were accused by the S.E.C. on Wednesday.

Mr. Gutfreund, 63, once called the "King of Wall Street" by Business Week magazine, was brought down as the bidding scandal unfolded in the summer of 1991. Yesterday he said the resolution of the case confirmed his position that he had made mistakes but had done nothing improper.

"I think the S.E.C. staff report confirms the record of what we said in August 1991," Mr. Gutfreund said in an interview. "That being the case, I believe a cloud has been lifted."

But Mr. Gutfreund still sounded bitter about the abruptness of his fall. "It's been a long time in the closet, it surely has," he said. "Pleased is not a word I would use about the outcome. But I am relieved that this period of inactivity is going to end, and that I can go back to work."

Mr. Gutfreund has been quietly providing business advice to associates for the last year from an office in Manhattan. He was preparing to return to the business world, most likely as a consultant, perhaps providing advice to multilateral development banks about emerging marketplaces in Asia and Europe.

The S.E.C. case against Mr. Gutfreund and the other two senior executives stemmed largely from their failure to inform the Government in 1991 of a false bid that they had learned Mr. Mozer had submitted.

A Picture of Chaos

The S.E.C.'s report painted a picture of relative chaos at a meeting in late April 1991 between the firm's senior executives about the illegal bid the previous Feburary. When Mr. Meriwether told the top officers of Mr. Mozer's actions, Donald Feuerstein, Salomon's general counsel, told the executives that the false bid was "a criminal act" that should be reported to the Government, the S.E.C. report said.

After discussion about which agency to tell, the meeting broke up with each executive thinking either Mr. Gutfreund or Mr. Strauss would make the report, with neither of those two exactly clear which one was responsible.

For almost three months after that meeting, no action was taken. Later, when problems appeared in the May 1991 auction, Mr. Gutfreund failed to mention the illegal February bid when he met with a senior official of the Treasury Department in June 1991. And, when a law firm was subsequently hired to explore the May auction, Salomon executives did not disclose the illegal bid to their lawyers until much later.

The situation worsened when Salomon learned that Mr. Mozer had systematically submitted fraudulent bids in a series of Treasury auctions. When the firm disclosed the illegal bids and subsequently disclosed that its top three officers had known about one of them, the executives resigned and the Government began investigations of them.

Cites Misplaced Trust

Mr. Gutfreund yesterday described the failure to inform the Government as "a lulu" of a mistake and said he had misplaced trust in Mr. Mozer.

"This had been a trusted, reliable person," he said. "We had no reason to think it was anything but an aberrational act."

Salomon Brothers paid $290 million to settle charges arising from the bidding scandal. The firm made comparatively little from the illegal bids, estimating last year that its illegal profits ran between $3.3 million and $4.6 million.

The S.E.C. report criticized the men for not acting swiftly to contain the illegal activities of Mr. Mozer, the former head of the government trading desk. But the S.E.C. apportioned responsibility to the three executives based on both their seniority and on the degree to which they tried to take action.

Mr. Meriwether, the last of the three to resign, complained to friends when the scandal broke that he felt he was unfairly being made a target of the investigation. Yesterday, he received the least criticism of the three executives in the S.E.C. report.

The report concluded that Mr. Meriwether -- the first to learn of Mr. Mozer's illegal bid -- acted reasonably by immediately taking the information to Mr. Strauss and Mr. Gutfreund. But is said he had simply not done enough, apparently because he had failed to insure the information was reported to the Government.

The S.E.C. essentially cleared a fourth Salomon executive, Mr. Feuerstein, the former chief legal officer, of responsibilities for failing to supervise Mr. Mozer because he did not have direct responsibility for the trader. But the lawyer was criticized for not directing that an inquiry be undertaken once he learned of the illegal bid and for not informing Salomon's compliance department.

December 4, 1992, New York Times, Corrections

A front-page headline in some copies yesterday about the Government's suit against two former executives at Salomon Brothers referred erroneously to the history of the case. The suit filed Wednesday by the Securities and Exchange Commission was the first against individuals involved in the improper bidding for Treasury securities. The Government has already settled its complaints against the firm itself.
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December 19, 1992, New York Times, Business Digest,

December 19, 1992, New York Times, Company News; Plea Bargain Cited in Salomon Case,

January 7, 1993, New York Times, Economist Post Filled By Salomon Brothers, by Jonathan Fuerbringer,

January 8, 1993, New York Times, Guilty Plea In Salomon Case Set,
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January 12, 1993, New York Times, Plea Deal For Trader Unravels, by Kenneth N. Gilpin,

A plea agreement between the United States Government and Paul W. Mozer, the central figure in the 1991 Treasury securities scandal at Salomon Brothers, appeared to fall apart yesterday, and Government lawyers said they would now seek to indict him. They did not specify the charges.

But criminal lawyers not involved in the case said Mr. Mozer now ran the risk that the Government could bring more serious charges against him, including wire fraud and insider trading.

After months of negotiation, Mr. Mozer had agreed last Thursday to plead guilty to two counts of making false statements to the Government concerning unauthorized bids he made at an auction of five-year Treasury notes on Feb. 21, 1991.

Scheduled to Plead

Mr. Mozer, former head of the government-bond department at Salomon, was expected to enter that plea at a hearing yesterday before Judge Robert Patterson in Federal court in Manhattan.

But during the hearing, Stanley Arkin, Mr. Mozer's lawyer, clashed with Laurie E. Brecher, the assistant United States attorney prosecuting the case for the Government, over what Mr. Mozer was pleading to.

Mr. Arkin said he was concerned about language in the plea relating to future criminal actions that might be brought by the Government against Mr. Mozer. Mr. Arkin contended that the plea as he understood it would bar the Justice Department, which is still investigating his client on possible antitrust violations, from bringing such charges.

Discussions With U.S.

Mr. Arkin said his belief was based on discussions with members of the United States Attorney's office, whom he did not name, that took place during the plea negotiations  "In the event an antitrust case were brought by the Government against Mr. Mozer, my initial defense would be that an agreement had been reached with the Government," Mr. Arkin said in court.

Mr. Arkin's interpretation was rejected by Ms. Brecher.

"This plea agreement does not intend to bind any other authorities," Ms. Brecher said. "If Mr. Arkin's understanding is any different, we have no agreement," Ms. Brecher said.

In a Nov. 19 letter to Mr. Arkin detailing the agreement, Ms. Brecher said that in return for Mr. Mozer's plea to the two counts, "except for criminal tax violations Paul Mozer will not be further prosecuted by the office for any crimes related to his participation in auctions of the United States Treasury" committed during the period from Aug. 1, 1989, thorough Aug. 9, 1991. Ms. Brecher said the agreement applied only to the United States Attorney's office in New York and not to Justice Department prosecutors in Washington.

Wrangling over language in the plea went on for an hour during the morning, and continued almost an hour more at a lunchtime hearing.

At the end of those arguments, Judge Patterson said he would not accept the plea without both sides coming to "a meeting of the minds."

"I don't like to take a plea from any defendant unless he knows where he stands," Judge Patterson added.

Ms. Brecher then said her office intended to indict Mr. Mozer but refused comment on when an indictment might be forthcoming, or what charges it might contain. The Government's presentation to a grand jury has been completed.

Mr. Arkin, who later called what went on in court "an unfortunate interpretation problem," said he intended to file papers within the next few days that "hopefully will persuade the court that the plea should go forward."

Lawyers outside the case were not so sure. "In light of the Government's disavowal, I cannot imagine anything Mr. Arkin can send the judge that would allow the plea to go forward," said Gerald B. Lefcourt, a partner at Gerald B. Lefcourt P.C., a New York law firm that specializes in criminal and securities law.

John J. Coffee, Jr., a professor at the Columbia University Law School, said the Government "could come back and make an indictment on half a dozen other counts."

"Mozer is the clearest case of anyone I have ever seen of a rogue employee," Mr. Coffee added. "He did this on his own, and you can't compare his culpability in what happened with those who were his bosses."

Dismissed in 1991

Mr. Mozer, who is 37, sat quietly by Mr. Arkin's side during the hearing yesterday. He was dismissed as the head of Salomon's government-bond trading desk in August 1991 after the firm admitted to improper bidding at several Treasury bond auctions between 1989 and 1991.

The scandal involved billions of dollars of illegal bids placed at Treasury auctions. The unauthorized bids were placed in order to buy more than the 35 percent of the securities offered that the firm was allowed to purchase.

As of late yesterday, Mr. Mozer's legal status was unclear. Last week he was released without bail on his own recognizance, pending yesterday's hearing.

Under the terms of the plea agreement that now seems dead, Mr. Mozer faced a maximum 10 years in prison. He had also agreed to pay $500,000 into a special Government escrow account. It is unlikely he would have served the maximum prison term because he cooperated with Government investigators. The risk of indictment and conviction on more serious charges raises the possibility that he may well spend more time in jail.

"I think Mozer has got to settle this case," said one securities lawyer, who asked not to be identified. "And the fact that the Government is not willing to give up on the antitrust part of the case suggests to me they will bring indictments against him."
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January 13, 1993, New York Times, U.S. Indicts Salomon Ex-Trader, by Kenneth N. Gilpin,

Paul W. Mozer, the former head of the government-bond trading desk at Salomon Brothers, was indicted yesterday on four criminal counts for his role in the 1991 Treasury securities bidding scandal.

The indictment by a Federal grand jury in New York came a day after a plea agreement between Mr. Mozer and the Government collapsed.

In the indictment filed yesterday, the Government charged Mr. Mozer with one count of securities fraud, two counts of making false statements about who was bidding for Treasury securities and one count of keeping false books and records at Salomon.

Had Faced 2 Counts

Had the plea agreement been accepted, Mr. Mozer would have been sentenced on two counts of making false statements.

Stanley S. Arkin, Mr. Mozer's lawyer, assailed the Government's decision to pursue an indictment as "outrageous conduct," adding, "We will address it in court."

At the plea hearing on Monday, Mr. Arkin questioned the scope of the agreement reached after months of negotiations with the Government. Specifically, Mr. Arkin interpreted the agreement to mean that his client would not face criminal prosecution on violations of Federal antitrust laws.

Laurie E. Brecher, the assistant United States attorney handling the case, took exception to Mr. Arkin's interpretation of the plea agreement and said Monday that the Government was prepared to indict Mr. Mozer.

If he is convicted on all four of the indictments handed up yesterday, Mr. Mozer faces much stiffer penalties than under the failed plea agreement, including a maximum prison sentence of 30 years and fines that could reach as high as $2.5 million.

Under the terms of the plea agreement, Mr. Mozer would have faced maximum time in prison of 10 years. He had also agreed to pay $500,000 into a special Government escrow account.

In the 12-page indictment filed in Federal court yesterday, Mr. Mozer is charged with breaking Treasury rules that limit the amount of Government securities a buyer can purchase at an auction to 35 percent of the securities sold. The violation occurred at an auction of five-year Treasury notes held on Feb. 21, 1991, the indictment says.

In order to dupe the Treasury into selling him more than 35 percent of the five-year notes, the indictment contends that Mr. Mozer falsely identified Warburg Asset Management and Mercury Asset Management as bidders for the securities, when Salomon was the true bidder.

New Charges Added

Subsequent to that auction, and up to April 1991, the indictment charges Mr. Mozer with keeping false records on Salomon's auction bid ledger sheets, trade tickets and customer confirmations.

In addition to these criminal charges and the potential antitrust action by the Justice Department, Mr. Mozer is accused in a civil lawsuit filed by the Securities and Exchange Commission of falsifying records in eight Treasury auctions from 1989 to 1991. The S.E.C. case also accuses Mr. Mozer of insider trading and making false trades to create tax losses.

As of late yesterday, it was unclear when Mr. Mozer, who is 37 and recently became a father for the first time, will be arraigned. Salomon dismissed him in August 1991.

Characterized as a scapegoat by Mr. Arkin, his lawyer, and a rogue employee by lawyers who have followed the case, Mr. Mozer nevertheless is the only Salomon executive who has thus far been subjected to such harsh treatment for his role in the scandal. Thomas W. Murphy, Mr. Mozer's chief deputy on the trading desk, is still the subject of a criminal investigation.

John H. Gutfreund, Salomon's chief executive; Thomas W. Strauss, the firm's president, and John W. Meriwether, the vice chairman, were forced to resign after Salomon disclosed it made a series of improper bids at several Treasury auctions.

All three executives were told of Mr. Mozer's illegal bids but waited months before they relayed the information to the Treasury Department.

Last month, all three men settled civil charges filed by the Securities and Exchange Commission.

Mr. Gutfreund was fined $100,000 and agreed never to run a securities firm. Mr. Strauss was fined $75,000 and was suspended from Wall Street for six months. Mr. Meriwether, who was Mr. Mozer's immediate superior, was fined $50,000 and was suspended for 90 days.

Last week Salomon settled back pay claims with Mr. Strauss and Mr. Meriwether, doling out about $9 million to Mr. Strauss and some $18 million to Mr. Meriwether.

Moreover, officials at Salomon acknowledge that Mr. Meriwether has been approached about returning to the firm when his suspension is lifted.
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January 16, 1993, New York Times, 2 Key Executives Resign From Salomon Brothers, by Jonathan Fuerbringer,
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February 2, 1993, New York Times, Judge Weighs Salomon Plea,

A Federal judge indicated yesterday that he might still allow a former Salomon Brothers trader, Paul Mozer, who was indicted last month for his role in the 1991 Treasury securities bidding scandal, to plead guilty to lesser charges.

Mr. Mozer, who is 37 and the former head of Salomon's government-bond trading desk, had originally agreed to plead guilty to two counts of making false statements, but the deal fell apart last month during a court hearing when his lawyer disagreed with language in the pact he had already signed.

The United States Attorney's office indicted Mr. Mozer the next day on four criminal counts.

If convicted, Mr. Mozer faces a possible maximum prison term of 30 years and fines of $2.5 million. Under the original plea agreement, the total possible prison time was 10 years and Mozer said he would pay $500,000.

Yesterday, Federal District Judge Robert Patterson said he had to consider whether it was fair to allow the indictment after Mr. Mozer, believing there was an agreement, had begun to cooperate with the government.

"Defendants have a right to know where they stand," the judge said.

But he criticized Mr. Mozer's lawyer, Stanley Arkin, for signing the agreement when he objected to the terms. Mr. Arkin said he would try to meet with prosecutors in an attempt to come up with a new agreement.
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February 13, 1993, New York Times, New Judge For Trader, by Saul Hansell,

A different Federal judge is handling the criminal case of a former Salomon Brothers bond trader, Paul W. Mozer, after a defense lawyer was in a dispute with the original judge.

Judge Robert R. Patterson said this week that he had decided to hand the case over to Judge Pierre N. Leval after Mr. Mozer's lawyer suggested that Judge Patterson might have prejudged the case.

Mr. Mozer, the former head of Salomon's government-bond trading, was prepared to plead guilty last month to two counts of making false statements to the Federal Reserve aobut his bond dealings. But the plea agreement fell apart when Mr. Mozer's lawyer, Stanley S. Arkin, said the agreement could allow him to argue that the United States Justice Department could not prosecute Mr. Mozer on separate antitrust charges.

Judge Patterson rejected the plea agreement last month when the United States Attorney's Office refused to accept Mr. Arkin's interpretation of it. Collapse of the deal cleared the way for a Federal grand jury to indict Mr. Mozer on the more serious charges of securities fraud and keeping false records.

At a Feb. 1 court hearing, Mr. Arkin tried to persaude Judge Patterson to reinstate the plea agreement. Judge Patterson criticized Mr. Arkin for being less than forthcoming about his interpretation of the plea agreement.
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March 25, 1993, New York Times, Company News; 2 Top Bond Traders May Return to Field,

April 5, 1993, New York Times, U.S. Brokers Go Long Traders, by Kevin Murphy,
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April 29, 1993, New York Times, Bond System Delay Asked, by Saul Hansell,

The Treasury should delay the beginning of electronic bond auctions because the new system cannot prevent a scandal like that involving Salomon Brothers in 1991 and would probably not be any more efficient, a Government agency said today.

The start-up of the new system is slated for Thursday.

Faster auctions, which the Government hopes to achieve, could save Uncle Sam and the taxpayer money by encouraging dealers to bid higher prices for the Treasury's bonds. The system will allow big Wall Street dealers to submit bids electronically.

The Treasury sells billions of dollars of bonds every year, borrowing money to run the Government and service the nation's $4 trillion debt.

Under the system used up to now, dealers placed bids at the last possible second over the phone. Government employees scribbled them down by hand at the other end of the line.

The new system's development was speeded up by the Salomon scandal. The Wall Street firm violated bidding rules at nine auctions, placing false and bogus bids.

In its report released today, the General Accounting Office said the new system could neither detect nor identify collusion or fraud, but it could provide a hint of such behavior that could be investigated further.
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June 11, 1993, New York Times, Salomon to Pay $54.5 Million,
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July 23, 1993, New York Times, As Firms Shift Strategies, the Old Order Moves On; Top Trader to Quit; Salomon Net Soars, by Kurt Eichenwald,

The wrenching transformation of Salomon Brothers that began with a huge management shake-up following the 1991 Treasury markets scandal appears far from over. A series of announcements yesterday indicated that the firm might be shifting its emphasis from reliance on in-house trading decisions to business generated by its customers.

The firm said yesterday that Lawrence E. Hilibrand, who earned Salomon hundreds of millions of dollars by using esoteric mathematical formulas to trade for the firm's own account, would be leaving at the end of the year. Mr. Hilibrand will be part of a recent exodus of several of Salomon's most senior and accomplished traders.

Mr. Hilibrand, who is 34, came into public view with his high-tech trading techniques in early 1991 after reports that he had been paid $23 million in salary and bonus in a single year because of the trading success of his arbitrage group. Through a spokesman, Mr. Hilibrand declined an interview request.

Record 2d-Quarter Profits

The Hilibrand announcement came minutes before Salomon released its earnings for the second quarter. Those results showed record profits in the quarter and a marked shift in performance from the proprietary trading business in which Mr. Hilibrand was so influential toward the business derived from taking and filling customer trading orders.

Executives at the firm said that the twinned announcements, which included the first time that Salomon chose to break down the earnings of its proprietary and customer businesses, appeared to be timed to serve as a message to Wall Street that Salomon's profits can continue even without the strength of Mr. Hilibrand's trading prowess. "It just goes to show that the firm is not dependent on him," said one executive at the firm, speaking on condition of anonymity.

The earnings certainly pointed in that direction. For the quarter, Salomon earned a record $433 million, or $3.75 a share, compared with $211 million, or $1.68 a share, in the second quarter of last year. Those results were significantly higher than the previous record of $273 million, reported in the first quarter of 1991.

The earlier record came just a few months before the firm acknowledged submitting false bids in a number of Treasury auctions from 1989 to 1991, an admission that led to the downfall of its senior managers, including John H. Gutfreund, then the firm's chairman and chief executive.

The breakdown of business performance showed that Salomon's customer-driven business has taken off, even as proprietary trading stalled. For the first six months of this year, the firm earned $613 million in the customer business, which include everything from fixed income and equity sales to foreign exchange and investment banking. But Salomon saw only $81 million in profits during the same period in the proprietary business, which includes fixed income and equity arbitrage trading for the firm's own account. In 1992, the firm earned only $276 million in customer business, and $1.4 billion in proprietary trading. Earnings for the quarter alone were not provided.

The shift in income, however, might not indicate a turn in strategy. The proprietary profits were weighed down by significant losses of $303 million before expenses in the first quarter. Moreover, with interest rates at their lowest level in years, every firm on Wall Street has been seeing a flood of business from corporations looking to issue debt and equity, and customers seeking to invest more heavily in the public markets.

Departure a Blow

Even with the record performance, Mr. Hilibrand's departure, which had long been expected, was still seen as something of a blow within the firm. Salomon executives said that Mr. Hilibrand's decision was announced just days after the resignation of one of his chief lieutenants on the trading desk, Gregory Hawkins.

Mr. Hawkins was also one of the firm's most profitable traders, and focused on capturing profits on tiny price discrepancies between different securities in the mortgage bond market. Like Mr. Hilibrand, his trading technique employed rigorous mathematical models.

Earlier this year, two other prominent traders left, Victor Haghani and Eric Rosenfeld, the former co-head of the Government trading desk.

Yesterday, firm executives said they expected Mr. Hilibrand would join John Meriwether, a former vice chairman of the firm who was forced out after the Treasury markets scandal unfolded. Mr. Meriwether and Mr. Rosenfeld are setting up their own money management firm that is expected to start up this year.
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July 29, 1993, New York Times, Former Salomon Trader Wins Legal Round, by Kurt Eichenwald,

In a rebuke of prosecutors' actions, a Federal judge ordered the Government yesterday to reinstate a plea-bargaining agreement it withdrew in January from Paul W. Mozer, a former Salomon Brothers trader who was at the center of the 1991 Treasury markets scandal.

The decision was a bittersweet victory for Mr. Mozer, who won the right to plead guilty to two felonies stemming from his submission of illegal bids in Treasury auctions when he was head of Government bond trading at Salomon. Mr. Mozer would face a maximum prison term of 10 years. 'Without Basis'

But the opinion was a jarring loss for Federal prosecutors. In his decision, Federal District Judge Pierre N. Leval wrote that the Government's position was "altogether without basis." He sharply accused prosecutors of trying to mislead the former presiding judge in the case with false arguments they said required the agreement's withdrawal.

Judge Leval wrote that the prosecutors' motivations seemed largely personal. "Positions taken by the Government were apparently motivated by annoyance at the defendant's unsubmissive independence and not by appropriate law enforcement considerations," he wrote.

In a statement, Matthew E. Fishbein, chief assistant to the United States Attorney in Manhattan, said the decision would not be appealed. "We respectfully disagree with Judge Leval's conclusions regarding the Government's conduct in this matter," he said. John W. Auchincloss 2d, who worked with Laurie Brecher in prosecuting the case, declined to comment. Ms. Brecher did not return a telephone message.

Stanley F. Arkin, Mr. Mozer's lawyer, said, "The judge did what he should have done. The Government made a bargain and he compelled the Government to hold to its bargain."

Mr. Mozer's plea agreement was reached after months of negotiations between prosecutors and Mr. Arkin. The agreement said that Mr. Mozer would plead guilty to two counts of making false statements.

But when the Government filed the charges in January, it said the felonies involved not only false statements, but false writing and a cover-up. All three terms are used in the statute that Mr. Mozer agreed to say he violated.

Mr. Arkin objected to the language of the plea bargain in a hearing before Federal District Judge Robert P. Patterson, who was then hearing the case. During that hearing, Mr. Mozer said several times he was still willing to abide by the plea agreement. The wording of the charges mattered because they would have a significant effect on Mr. Mozer's ability to contest civil lawsuits. Antitrust Charges

The plea agreement broke down when Judge Patterson asked about the possibility of antitrust charges being brought against Mr. Mozer. Mr. Arkin argued the agreement precluded further prosecution. He added that he would call prosecutors to testify that they had transmitted messages from the Justice Department through which Mr. Mozer had reached an immunity agreement with the antitrust division.

Prosecutors argued that the plea agreement precluded calling prosecutors to testify, and that the statement of the defendant's intention to do so meant Mr. Mozer repudiated the agreement. The Government indicted Mr. Mozer the following day.

In his decision, Judge Leval said the Government argument was simply not true. "The agreement is totally devoid of any support of the Government's position," he wrote. "On its face, the agreement clearly and unambiguously supports" Mr. Mozer's position.
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December 11, 1993, New York Times, Trader Cites Cooperation, by Jonathan Fuerbringer,

Court papers say that a former Salomon Brothers bond dealer, Paul W. Mozer, provided the Government with extensive details about the seamy side of the Treasury bond market, leading to investigations of Salomon, Goldman, Sachs, Daiwa Securities and several Japanese investors.

As a result, the Securities and Exchange Commission brought charges against Salomon and Daiwa, according to the papers that Mr. Mozer's lawyers filed this week in Federal court in Manhattan.

Mr. Mozer has pleaded guilty to two counts of lying to securities regulators about $6 billion in illegal bids at Treasury auctions and is to be sentenced on Tuesday by United States District Judge Pierre N. Leval.

Mr. Mozer's lawyers, seeking to keep their client out of prison, provided the most extensive details yet about the bond dealer's cooperation with Government investigators.

One lawyer, Stanley S. Arkin, argued that Mr. Mozer deserved probation and community service instead of a maximum 10-year prison term because of Mr. Mozer's cooperation and what Mr. Arkin called the technical nature of the crime.

Mr. Mozer has already agreed to pay a $500,000 fine after pleading guilty in October to two counts of making false statements to regulators. The charges were in connection with two illegal bids he authorized for five-year Treasury notes on Feb. 21, 1991.

Mr. Mozer's court filings describe 20 debriefing sessions over four months with members of the United States Attorney's Office, the S.E.C., the Internal Revenue Service and the F.B.I.
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December 15, 1993, New York Times, Ex-Salomon Trader Gets 4 Months, by Susan Antilla,

The former head of Salomon Inc.'s Government securities trading was sentenced yesterday to four months in a minimum-security prison for his role in the 1991 Treasury auction scandal.

United States District Judge Pierre N. Leval also fined the former trader, Paul W. Mozer, $30,000. Mr. Mozer had faced a maximum 10 years in prison and a $500,000 fine. The jail term is to begin on Jan. 18.

Mr. Mozer's activities resulted in the Salomon Brothers Treasury auction scandal, which led ultimately to Salomon's paying a $290 million fine and the forced resignations of John Gutfreund, the chief executive, Thomas Strauss, the president, and John Meriwether, the vice chairman.

Mr. Mozer had admitted submitting two false bids in the Treasury's Feb. 21, 1991, auction of $9 billion in five-year notes. Salomon submitted one legitimate bid for $3.15 billion -- the 35 percent limit allowed by a single Government securities dealer. But, at Mr. Mozer's instruction, it also submitted two bids in the names of clients who had not authorized them so it could buy more than its legal share of Treasury securities. Pleaded Guilty in September

Mr. Mozer, 38, pleaded guilty in September to two felony counts of lying to the Federal Reserve Bank of New York by submitting the false bids. Although sentencing guidelines called for a 10-to-16-month term, Judge Leval said Mr. Mozer's "valuable cooperation" in testifying against others would result in a "significant reduction in the sentence that would otherwise have been imposed."

He helped the United States Attorney, the Securities and Exchange Commission and the Internal Revenue Service determine that Salomon had illegally taken $168 million in tax write-offs for "sham" trading losses.

In a letter to Judge Leval last Thursday, the United States Attorney's office noted, however, that Mr. Mozer had declined to enter a standard cooperation agreement. The letter, signed by Acting United States Attorney Matthew E. Fishbein and two assistant United States attorneys, also said the Government had "reservations" about Mr. Mozer's denial of certain misconduct. Little Display of Emotion

Mr. Mozer displayed little emotion at the sentencing, other than to fidget and take a drink of water after the judge said he did not agree with a probation report that recommended probation without jail. Although the report made an assumption that no loss could be determined as a result of Mr. Mozer's two admitted felonies, Judge Leval said he did not find that an acceptable conclusion. Mr. Mozer's crime was an "extremely foolish, arrogant, insouciant offense," he said.

As his wife, parents and siblings looked on, Mr. Mozer said in a brief statement that he was "truly sorry" for having broken the rules. Although his lawyer, Stanley S. Arkin, asked that part of the sentence be served at home, Judge Leval declined.

In explaining why he did not give a sentence of probation, the judge said that "in the world of financial crimes, deterrence of others is an extremely important aspect of sentencing."

A Securities and Exchange Commission civil suit against Mr. Mozer and Thomas Murphy, a fellow Salomon executive, is still pending. It accuses Mr. Mozer of submitting false bids in Treasury auctions and of insider trading of his personal Salomon stock.
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March 31, 1994, New York Times, A Settlement by Salomon, by Susan Antilla,

Salomon Inc. said yesterday that it had settled the remaining class-action lawsuits from the 1991 Treasury auction scandal for $66 million.

Salomon said the settlement, if approved by the Federal District Court in Manhattan, would end the most significant legal challenges caused by the scandal. Salomon Brothers, its brokerage firm subsidiary, admitted in 1991 to violations of Treasury auction rules and other regulations.

Yesterday's settlement, including lawyers' fees, will resolve lawsuits brought by other bond trading firms that say they were injured by Salomon's actions. Salomon expects more than half the total to be reimbursed from funds it already paid into the civil claims fund.

The settlement, in which Salomon denied any legal violations, is separate from the firm's agreement in May 1992 to pay $190 million to the Federal Government and to establish a $100 million civil claims fund in connection with the scandal.

Salomon said last year that it had agreed to settle some of its class-action cases for $54.5 million plus lawyers' fees of as much as $12.5 million. That settlement is under court review.
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May 1, 1994, New York Times, Wall Street; Throwing the Book at the Boss,
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May 13, 1994, New York Times, Sentence in Bond Scheme, by Susan Antilla,

A New York man has been sentenced to almost three and a half years in prison for transporting bonds stolen from Salomon Brothers Inc. as part of a complex international scheme that involved the biggest robbery in British history.

Robert Rosenfeld, 49, of Woodbury, L.I., was sentenced late Wednesday to 41 months in prison, three years of probation and a $25,000 fine for his role in the plot. He had pleaded guilty to transporting almost $7 million in securities stolen from Salomon in New York City to Texas.

The original 1990 indictment against Mr. Rosenfeld and 11 others accused them of participating in a multinational conspiracy to transport and sell $557 million worth of stolen securities, the bulk of which belonged to the Bank of England.

Most of the securities were taken from a messenger at knifepoint on a busy London street.

Prosecutors charged that the scheme began in March 1989 when Mr. Rosenfeld and another defendant tried to collect a gambling debt from a former Salomon employee. The indictment said that the two defendants threatened to kill the man unless he stole the securities from Salomon.
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June 18, 1994, New York Times, Plan Cleared On Salomon

A Federal judge yesterday approved a previously announced $64.1 million settlement of a class-action lawsuit filed by holders of Salomon Inc. common stock and bonds after the 1991 Salomon Brothers Treasury auction-bidding scandal.

United States District Judge Robert P. Patterson Jr. approved the settlement, under which the Salomon Inc. unit will pay $54.5 million to investors who bought Salomon common stock and bonds between March 27, 1991, and Aug. 14, 1991. Plaintiffs' lawyers will receive $9.6 million in fees and expenses. Salomon announced the settlement in 1993.

The class-action suit contended that Salomon violated securities laws by not disclosing until August 1991 that it had submitted false bids at United States Government bond auctions. The bids Salomon made in the names of the firm's unsuspecting clients allowed Salomon to buy more securities than Federal Reserve rules permitted.

The $64.1 million settlement will come from a $100 million reserve that Salomon established when it settled a Securities and Exchange Commission civil lawsuit against the firm. That $100 million restitution fund is in turn part of Salomon's $290 million S.E.C. settlement.

Salomon was not criminally charged and settled the S.E.C. civil suit without admitting or denying wrongdoing.
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July 15, 1994, New York Times, Former Salomon Trader To Pay $1.1 Million Fine, by Keith Bradsher,

A former top trader at Salomon Brothers Inc. has agreed to pay a $1.1 million fine and accepted a permanent ban from the securities industry for his role in a 1991 Treasury bond auction scandal, the Securities and Exchange Commission announced today.

Paul W. Mozer, the former head of Salomon's Government securities trading, has already served four months in jail on criminal charges stemming from the scandal. He agreed to the fine and ban in settling a civil lawsuit filed by the commission.

The civil lawsuit painted a striking picture of Mr. Mozer's activities. It accused him of having arranged the submission of eight false bids totaling $13.5 billion in seven Treasury bond auctions from 1989 to 1991.

The lawsuit also accused Mr. Mozer of illegally avoiding $500,000 in losses by selling his Salomon stock three days before the scandal became public and sent the brokerage firm's share price down sharply. Mr. Mozer neither admitted nor denied wrongdoing in the settlement, which was approved on Wednesday by the United States District Court in Manhattan.

Mr. Mozer's lawyer, Stanley S. Arkin, was traveling in France on business today and did not return telephone calls to his office for comment.

A Government report prepared in connection with Mr. Mozer's sentencing concluded that it was not possible to calculate the effect of the false bids on the financial markets.

Mr. Mozer, 39 years old, was also fined $30,000 after pleading guilty to two felony counts of lying to the Federal Reserve Bank of New York when he filed the false bids. He served four months in a low-security prison in Florida this spring.

The $1.1 million fine announced today effectively forces Mr. Mozer to give up the $500,000 that he reportedly earned from insider trading and to pay a $100,000 fine for each of six false bids that he reportedly submitted. The Federal penalty for false bids was raised to that level several years ago. Two other bids by Mr. Mozer were submitted before fines for such maneuvers were sharply increased, and were not included in calculating the overall fine.

If the S.E.C.'s civil case had gone to trial, Mr. Mozer could have been forced to pay triple damages in the insider trading portion of the case, or $1.5 million.

William McLucas, the commission's director of enforcement, said he was pleased with the fine and particularly the lifetime ban on employment in the securities industry. Mr. Mozer was also permanently banned from submitting bids in Treasury auctions, except on his own behalf or on behalf of his immediate family.

'A Very Good Case'

Kevin O'Rourke, an assistant chief of litigation counsel at the commission who handled Mr. Mozer's case, said, "We felt we had a very good case against him, and undoubtedly he knew that as well."

Officials at Salomon Brothers, which paid a $290 million fine in the Treasury bond scandal, declined to comment today on Mr. Mozer's settlement.

Federal regulations bar any single Government securities dealer from buying more than 35 percent of the securities sold in an auction. The limit is designed to prevent a single company from cornering the market for a Treasury bond. A company that corners the market can reap large profits by charging stiff prices to other brokers who have promised the same bond to their customers but have not obtained any in the initial auction.

The S.E.C. accused Mr. Mozer of arranging for Salomon to bid for 35 percent in several auctions and then preparing unauthorized or partly unauthorized bids in the names of Salomon customers. When these bids were successful, the S.E.C. complaint said, Mr. Mozer kept the securities on Salomon's books to sell at a profit.

"As a result of Mozer's actions, Salomon illegally acquired $9.148 billion in U.S. Treasury securities," the S.E.C. said in a statement today.

Federal law also bars companies and individuals from buying or selling stocks while aware of nonpublic information that might affect the stocks' prices. The S.E.C.'s civil case against Mr. Mozer accused him of exercising stock options at Salomon on Aug. 6, 1993, to obtain 46,000 shares of the company's stock, and then selling those shares later the same day.

Three days later, Salomon announced that it had uncovered irregularities in its Treasury bids, sending its stock price into a steep slide.

In a lesser-known part of its complaint, the S.E.C. also maintained that Mr. Mozer had made trades in 1986 that permitted Salomon to create the false appearance of trading losses, allowing the company to pay less in taxes.
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August 19, 1994, New York Times, Ex-Salomon Chief's Costly Battle,
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April 19, 1995, New York Times, Ex-Head of Salomon Brothers Files Libel Suit Against Time Inc., by Peter Truell,

John H. Gutfreund, the former chairman of Salomon Brothers Inc., filed suit yesterday against Time Inc. in New York State Supreme Court in Manhattan, accusing its Fortune magazine of having libeled him in its May 1, 1995, issue by falsely writing that he was barred from the securities industry for life.

Mr. Gutfreund, who resigned from Salomon in August 1991 and now advises companies on international securities and financial transactions, said that by publishing that false information, Fortune had gravely injured his reputation and severely impaired his ability to retain and attract clients. His suit demands a settlement including damages that are "sufficient to purchase full-page retractions in major business and general-interest publications worldwide." Time Inc. is a unit of Time Warner Inc.

The managing editor of Fortune, John Huey, conceded the reporting error in a statement issued in response, adding that "we should have reported that in 1991, Mr. Gutfreund consented to an order by the Securities and Exchange Commission providing that he wasn't to associate in the future in the capacity of chairman or chief executive officer with any broker, dealer, municipal securities dealer, investment company or investment adviser, regulated by the commission."

"He was also ordered to pay to the U.S. Treasury a civil penalty aggregating $100,000," the statement said.

In his suit, Mr. Gutfreund sets out a chronology of the 1991 scandal at Salomon Brothers that resulted in his agreement with the S.E.C. It began, the suit says, with a series of "fictitious bids by a Salomon managing director, Paul Mozer, in Government Treasury auctions." Mr. Gutfreund was not involved and did not acquiesce in this scheme, the suit says. The S.E.C. found no intentional wrongdoing by Mr. Gutfreund but concluded that Mr. Gutfreund and two other senior executives had "failed reasonably to supervise" Mr. Mozer, Mr. Gutfreund's suit says.
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August 17, 1995, New York Times, A Double Blow to Salomon: Offering Ended, Rating Cut, by Stephanie Strom,

Salomon Brothers Inc. suffered a one-two punch yesterday.

First, Normandy America Inc., a fledgling reinsurance company that Salomon had taken public on Monday, withdrew its $180 million offering, citing "market conditions."

And then, for the second time in nine months, the Standard & Poor's Corporation downgraded its ratings on Salomon's long-term debt and some classes of preferred stock because of the firm's weak earnings and the departure of a number of key investment bankers.

S.& P. lowered its ratings on the firm's preferred shares to below investment grade. The rating change does not apply to the 700,000 preferred shares controlled by the billionaire Warren E. Buffett, a Salomon spokeswoman said. The agency also cut its ratings on $15 billion in debt to a low investment grade, although Salomon said the move would have a "relatively small impact" on its financing costs.

The withdrawal of the Normandy America offering after one day of trading was a further embarrassment for Salomon, the lead manager, especially at a time many initial offerings are being enthusiastically snapped up by investors.

Canceling an initial public offering effectively treats the offering as if it never took place, because no stock certificates have been issued and no money has changed hands. The losses that investors in Normandy America sustained on Tuesday, when the stock price dropped 7 percent, vanished with the company's announcement yesterday morning.

Nonetheless, companies rarely cancel offerings, because doing so casts a shadow over any future public offering they may consider. "It's very unusual for an offering to be pulled, and it's even more unusual for one to be pulled for quote-unquote market conditions," said Robert Natale, who follows initial public offerings for Standard & Poor's. "In the rare event that someone does pull an offering, it's usually pulled for a company-specific reason."

For instance, Celestial Seasonings Inc. pulled its public offering in 1983 a few days after someone became sick after drinking its herbal teas. And in 1992, the Central Garden and Pet Company canceled its offering after only one day of trading because its distribution center burned down. Both companies later went through with their stock offerings.

No such act-of-God event occurred at Normandy America, but the offering seemed ill fated from the start.

Salomon and its co-managers, Alex. Brown & Sons and Schroder Wertheim & Company, marketed the start-up reinsurance company and its 30-year-old chairman and chief investment strategist, Christopher K. Bagdasarian, as the next coming of the hugely successful investment company, Berkshire Hathaway Inc., and its chairman and chief investment strategist, Mr. Buffett.

Mr. Bagdasarian has managed millions of dollars of family money since he was 19. Since 1989, he has been chairman of Criterion Holdings, a private money-management company that realized a 24.7 percent total return on investments last year, compared with the 1.3 percent return that would have been realized from stocks that mirrored the Standard & Poor's 500 index. For the last 10 years, the return on investments managed by Mr. Bagdasarian averaged 29.1 percent, according to the stock offering's prospectus.

But details of how he achieved such success are sketchy. The prospectus did not disclose which stocks performed so well. And none of his investors stepped forward to praise him publicly.

In addition, details of his personal life raised eyebrows. Investors were curious as to why a man whose personal wealth is valued at $400 million by some investment bankers wanted to raise money for a public investment company. And they were uncomfortable that Mr. Bagdasarian's wife and former high-school English teacher, Victoria Briggs, was to be the second-in-command.

"The whole thing was just odd," said one potential investor who attended the company's promotional programs.

Merrill Lynch & Company and Bear, Stearns & Company turned down invitations to co-manage the offering, adding to uneasiness about it, investment bankers familiar with it said. Both Merrill Lynch and Bear, Stearns declined to comment.

With all the outstanding questions, Salomon's investment bankers were divided on whether to go ahead with the offering.

In hindsight, those who proposed calling it off were apparently right. On Friday, Salomon reduced the number of shares to be sold to 7.2 million from 8.4 million.

And when the shares began trading on Tuesday, the first trades were 50 cents lower than the $25 price Salomon had placed on the shares. Almost immediately after the stock began trading, Salomon and its fellow underwriters were forced to buy back at least two million shares. The stock closed Tuesday down $1.75, or 7 percent, at $23.25 a share.

Faced with owning a big part of the offering themselves, the underwriters advised Normandy America to cancel the offering.

Neither Michael Sitrick, a spokesman for Normandy America, nor Salomon had any comment on the withdrawal of the offering.
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September 24, 1997, New York Times, Salomon Soars On Speculation Of a Takeover By Travelers, by Peter Truell,

On an otherwise quiet day for financial stocks, Salomon Inc.'s shares surged 6.6 percent yesterday on seven times their average daily volume in recent months.

Many analysts say traders are wagering that Travelers Group, the huge financial company that sells everything from insurance policies to mutual funds, was preparing to acquire Salomon, the holding company for Salomon Brothers, the big investment bank.

"Clearly acquisition talks have fueled the speculation in many brokerage stocks, which benefited Salomon directly today," said Richard K. Strauss, an analyst with Goldman, Sachs & Company. "The frenzy continues, but there are also strong earnings in these companies."

Sanford I. Weill, chairman of Travelers, is meeting with his directors for a regular board session today, which further encouraged speculation in Salomon's stock. It rose $4.4375, to $71.50, its highest level ever. With nearly 37.5 million shares changing hands, it was among the most-active issues on the New York Stock Exchange.

Spokesmen for both companies declined to comment yesterday on what they termed "market rumors."

This is the third time in recent days that Travelers' apparent interest in a large financial company has sent a share price soaring. Last Thursday, Travelers was, according to a prominent Wall Street bank analyst, preparing to snap up the Bankers Trust New York Corporation. Then a report in Barron's over the weekend mentioning J. P. Morgan Inc. as a potential partner for Travelers, helped Morgan's stock to rise sharply on Monday.

Investment banks, to be sure, can benefit greatly from rumors that cause stock prices to rise and fall. Their traders can take advantage of such price movements to make millions of dollars from such swift changes in market sentiment.

Still, one thing is for certain: the market will have little rest until Mr. Weill, who is armed with ample financial resources, either makes his acquisition or publicly turns his back on such a strategy. Mr. Weill, who seems to enjoy tantalizing an audience, has told analysts recently that he was on the prowl for acquisitions to build Travelers' businesses.

An experienced Wall Streeter, Mr. Weill has made it clear that he wanted acquisitions that would increase Traveler's capital markets, international capabilities and its money management businesses, and he has even indicated that he was prepared to negotiate the changing regulatory hurdles that other acquirers might find daunting.

Unlike Bankers Trust, or Morgan, Salomon would probably pose few regulatory barriers for an established financial acquirer like Travelers. As the market pored over the likelihood of a pending takeover, there was also unusually large turnover in Salomon options in the last two days, according to traders. The activity, they said, was focused on the October contracts that would allow the buyer to purchase Salomon stock at between $65 and $70. The price of the option at $70 jumped to $5.625 yesterday, up from $2.375 on Monday and $1.875 on Friday. Traders said that the volume of 3,399 contracts was well above normal.

This speculation in Salomon's shares and options comes against a period of rapid and continuing consolidation on Wall Street, where banks and big brokerage firms have been scouting around to try to find the right acquisition to improve their competitive position and to take fuller advantage of the bull market in stocks and bonds.

Some investment bankers, however, poured scorn on the notion that Mr. Weill would loosen the purse strings when prices for financial companies are riding so high.

"Strategic buyers are paying wacky prices,'' said an investment banker familiar with the recent string of acquisitions. "If anybody knows not to buy these businesses at this stage in the cycle, it's him," the banker said of Mr. Weill. Investment banks, he declared, have rarely been so pricey.

Salomon Brothers would fill some of Mr. Weill's needs for expanding his businesses. It has a big institutional bond business, a big network of offices worldwide and a significant investment banking business. All would fit well with Smith Barney, Travelers' investment bank, which lacks an international franchise and is in the second league in much of the capital markets business.

But Salomon lacks a money management business, and it is also infamously volatile, as it makes so much of its money through the huge leveraged bets its traders make with the firm's own capital in the international bond markets.

Salomon also lacks a commercial banking business, which seemed to be one of the potential attractions of either Bankers Trust or Morgan. Mr. Weill seems to be prepared to sit down with regulators to find a way to reconcile the difficulties of an insurance concern's owning a bank.

Salomon, however, unlike some of its competitors, is famously available. Warren E. Buffett currently controls about 18 percent of the company through his holdings of common stock and about $420 million of preferred stock. He has said his Salomon shares were "not a core holding."

Mr. Buffett swooped in to save Salomon after it was almost swamped by a scandal in 1991, when one of its managing directors was discovered submitting false bids at Treasury bond auctions. But the rescuer, who for a time even moved to Manhattan to oversee the company, became disillusioned with the rich way that Salomon paid its managing directors.
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September 25, 1997, New York Times, Travelers to Buy Salomon, Making a Wall St. Giant, by Peter Truell,

Travelers Group, the sprawling ensemble of financial companies gathered under the company's trademark umbrella, announced yesterday that it would acquire the Wall Street powerhouse that owns Salomon Brothers for more than $9 billion in stock.

After combining with Salomon Inc., Travelers will rival the likes of Merrill Lynch & Company, the American Express Company and Citicorp, as well as the biggest financial companies in Europe and Japan.

While Travelers has long been involved in insurance and mutual funds and owns Smith Barney, it has lacked overseas muscle as well as heft on Wall Street, two deficiencies that this acquisition is meant to address.

The deal also represents a crowning achievement for Sanford I. Weill, the Travelers chairman who, despite occasional setbacks, has impatiently sought for years to climb to the very top of the greased pole of Wall Street. [Page D1.]

"He's decided to build the greatest financial services company in the history of this country and in the history of the world," said Joseph A. Califano Jr., a member of the Travelers board and a Secretary of Health, Education and Welfare in the Carter Administration.

What Mr. Weill has wrought is likely to touch off another round of heated consolidation as insurance companies, brokerage firms and commercial banks all frantically contemplate mergers that only a few months ago would have been almost unheard of. The stocks of financial firms have been the darlings of investors and these companies are eager to emerge as world-class competitors, able to go head on with financial companies in less regulated markets.

Yesterday's announcement, coming at 8:30 A.M. after a meeting of the Travelers board, ended several days of feverish speculation about Mr. Weill's immediate intentions. He had kept Wall Street guessing and stocks bobbing as successive rumors circulated that Mr. Weil might acquire a big bank like the Bankers Trust New York Corporation or even J. P. Morgan & Company.

Mr. Weill, however, did not get his first choice for an acquisition: Goldman, Sachs & Company, Wall Street's last big partnership.

Intermittent talks earlier this year between Mr. Weill and Jonathan S. Corzine, chairman and chief executive of Goldman, failed to produce the deal he had sought, according to people at both companies.

Many lawyers and bankers predicted that Mr. Weill would have faced significant legal obstacles had he sought to swallow a commercial bank. Washington regulators have traditionally been reluctant to allow the commingling of insurance and banking. The acquisition of Salomon, on the other hand, is not expected to face major regulatory hurdles, though it is expected to lead to significant layoffs.

"Of what we saw that was possible, Salomon Brothers was the best possible fit," Mr. Weill said yesterday, fielding a question about the Goldman contacts at his office on Greenwich Street in Manhattan.

Although this acquisition will take time to digest, Mr. Weill is likely to look for additional takeovers to fill gaps in Travelers' businesses.

The combination of the two firms on paper creates awesome investment banking power. Together, Salomon Smith Barney -- as the new investment bank will be called -- would rank third in equity underwriting in the United States, first in municipal underwriting, fourth in global equity underwriting and second in the underwriting of all American and international debt offerings.

The new firm would have five million customer accounts and 10,400 financial consultants in 438 offices around the country, with operations in another 26 countries.

Its combined research teams would in all likelihood lead the Institutional Investor annual rankings of equity analysts. It also would have $538.1 billion of assets in its client accounts and $156 billion under management.

The Salomon purchase, accomplished though a tax-free exchange of shares, is also noteworthy for giving Warren E. Buffett, one of the world's richest men, an opportunity to exchange his control of almost 20 percent of Salomon for a stake of about 3 percent in Travelers Group.

Robert E. Denham, chairman and chief executive of Salomon Inc., who was installed by Mr. Buffett, said yesterday that the deal achieved his and Mr. Buffett's "objective of providing value for Salomon shareholders." Mr. Denham said that he would personally "turn to other opportunities" once the acquisition was completed.

James Dimon, 41, the chairman and chief executive of Smith Barney, as well as chief operating officer and a director of Travelers and for years Mr. Weill's key lieutenant, and Deryck C. Maughan, 49, the chairman and chief executive of Salomon Brothers, the company's broker-dealer, will become co-chief executives of the new firm.

Mr. Maughan and Mr. Weill met and worked together on the nonprofit board of Carnegie Hall, while Mr. Dimon got to know Mr. Maughan on business engagements.

By buying Salomon, Mr. Weill is making his move as banks and other powerful financial businesses in the United States and around the world are taking advantage of looser regulations and an unprecedented bull market to broaden their lines of business and also to snap up smaller and weaker players.

''This is a period of great consolidation, and if you want to be a player, you have to bring into one place all the different skills that are needed,'' said Robert A. Bernhard, a former partner at Lehman Brothers and later at Salomon Brothers.

Mr. Weill is betting that by combining Salomon's premier bond business, its global network of offices, and its investment banking expertise with Smith Barney's nationwide smaller-company and retail business, and by putting them all alongside Travelers' insurance businesses, he can improve his franchise, using Salomon to expand internationally and to provide Smith Barney with more bond and equity offerings to sell domestically.

There are many real risks in Mr. Weill's ambitious strategy, however. Integrating the two big firms will not be easy, particularly given the different cultures and businesses of Salomon, a big bond trading firm where star traders routinely take home tens of millions of dollars in bonuses, and Smith Barney, which is primarily a retail brokerage operation.

"It seemed an odd deal to me," said Peter C. Davis, a partner at Booz Allen & Hamilton, the management consulting firm. "Logical for Salomon, who probably felt they needed to get bigger and more diverse, and into retail." But not so logical for Smith Barney, he said, because it melds it with Salomon, a company with lower growth prospects.

The acquisition of Salomon, which requires the approval of Salomon's shareholders, calls for Travelers to issue 1.13 shares of its stock for each Salomon share. After the transaction was announced yesterday, Salomon's shares rose $4.75, or 6.6 percent, to $76.25, while Travelers shares declined $2.625, or 3.7 percent, to $69.4375, on a day when the major market indexes fell slightly.

Mr. Maughan, an Englishman who built his career in Salomon's Tokyo office in the 1980's, and Mr. Weill said that they had first met to discuss a possible combination of Salomon and Smith Barney on Aug. 14 over dinner beside the pool at the Four Seasons Hotel in New York.

"Sandy had duck," Mr. Dimon laughed yesterday.

"I ate oysters; I needed strength," Mr. Weill replied.

Both men were immediately taken by the benefits in a prospective merger. After some more discussions in the following days, they agreed to get together after Labor day, meeting again on Sunday, Sept. 7, for a daylong session to hammer out a possible merger.

A select group of top executives from both firms met furtively in New York hotels in the weeks that followed as the two companies planned a Sept. 24 announcement, timed to coincide with Travelers' quarterly board meeting.

"We kept on moving hotel rooms; we went from expensive rooms to cheap rooms," Mr. Denham, said, implying that they went through most of the better hotels.

Nevertheless, the deal is attracting its critics. Mr. Davis and others said yesterday that Mr. Weill was paying a big premium in agreeing to pay more than $9 billion, almost twice Salomon's book value of $4.6 billion as of June 30. Mr. Weill, he said is getting into a business where expected growth would average only about 8 percent, while at Travelers annual growth had been much higher, over 14 percent.

There will also clearly have to be big layoffs, Mr. Davis and other analysts said, as Mr. Weill and his team integrate Salomon's 7,200 employees with Smith Barney's staff of more than 27,000 brokers, bankers and support staff. There are significant overlaps in the firm's bond and equity businesses, and the pressure will be on Mr. Weill and his colleagues to cut quickly even as they search for new benefits from the combined companies.

Travelers said yesterday that it would take a charge of between $400 million and $500 million, after taxes, to cover "severance, leaseholds, systems conversions, etc.," meaning that the pretax charge will be steeper.

Mr. Weill was insistent that the acquisition would add to earnings from the very start, and while conceding there would be overlaps, said "this is a growth story," in which the new company would seek to take advantage of the world's booming securities markets, as more countries seek to privatize their state-held companies and more investors around the globe look to the securities markets to finance their retirement needs.

Some insiders speculated yesterday that as many as 1,500 or 2,000 employees might be laid off as Mr. Weill and Mr. Dimon, among the most skilled acquirers of companies, cut costs.

Mr. Weill would not discuss any such plans. According to one analyst who declined to be identified by name, some of Smith Barney's fixed-income staff were told yesterday that they should be prepared to interview for their own jobs next week.

Wall Street has great faith in Mr. Weill who has been in the brokerage business for 40 years and has built Travelers into one of the most consistently profitable companies in the country.

Mr. Weill's record for consistent profits also has analysts willing to entertain a little more risk in the stock. "This is Sandy Weill," said Richard K. Strauss, an analyst with Goldman, Sachs & Company. "He's never messed up yet, and I don't think he's going to start now."

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February 18, 1998, New York Times, Riding Shotgun for Wall Street; Combative Lawyer for Aggressive Brokers Is in Demand, by Peter Truell,

When prosecutors delve into the financial and securities markets, Stanley S. Arkin never seems to be far away.

A veteran white-collar defense lawyer renowned for his combative tactics both in and out of the courtroom, Mr. Arkin appears to be almost everywhere these days as Federal and state prosecutors in New York expand their investigations of a number of smaller brokerage firms. Along with a select group of other New York defense lawyers, Mr. Arkin is getting a lot of calls from prospective clients.

''The activity by both Federal and local prosecutors has created more cases on a criminal level than even the 1980's cases involving Michael Milken, Ivan Boesky and others,'' said Marvin G. Pickholz, a partner at Hoffman, Pollok & Pickholz, who says that his firm is handling more matters involving accusations of securities fraud than ever.

Indeed, the bull market has not only drawn in millions of new and often naive investors, but it has also produced a bumper crop of fast-buck artists eager to prey on them, according to prosecutors, investors and brokers. As stock prices have risen, so, too, has the number of complaints of abuse and fraud. That is one reason prosecutors are focusing more on people accused of harming individual investors than on those involved in the kinds of large-scale operations that drew attention a decade ago.

Mr. Arkin and his colleagues in the white-collar defense bar -- including Stephen E. Kaufman, Robert Morvillo and Charles Stillman -- have benefited from such trends.

What clients get when they hire Mr. Arkin is a 59-year-old graduate of the University of Southern California and the Harvard Law School. They also get something of a legal pit bull.

"He's got courage," said Roy L. Reardon, a partner at Simpson Thacher & Bartlett, which has referred cases to him. "He's prepared to go to war, if necessary, for his client."

In the late 70's, for example, Mr. Arkin took the case of Vincent Chiarella, a financial printer who had traded on information he came across in his work. Mr. Arkin fought all the way to the Supreme Court, and, there, he had Mr. Chiarella's conviction overturned by securing a narrower definition of insider trading.

These days, Mr. Arkin, a dapper but restless man who actually quivers with intensity, has been representing Alfred S. Palagonia, the star salesman at D. H. Blair & Company, a Wall Street firm that has specialized in smaller, more speculative stocks. Blair is now being investigated by prosecutors and securities regulators who want to know what Mr. Palagonia and the firm told prospective investors.

In affidavits prepared for arbitration hearings scheduled to be heard in the coming months before a New York Stock Exchange panel, six private investors maintain that Mr. Palagonia manipulated stock prices for his own and Blair's benefit. These investors are seeking more than $22 million in damages from Mr. Palagonia and the firm.

"Al Palagonia is a very, very persuasive and aggressive salesman," said Mr. Arkin, who urged Mr. Palagonia to take a leave from his job and not to talk to reporters. Still, Mr. Arkin added, "There is no way he ever participated in a manipulation of stock prices."

Mr. Arkin says that in the past, he has advised J. Morton Davis, Blair's owner. As a longtime friend of Mr. Davis and his family, Mr. Arkin might find that he has a conflict in representing Mr. Palagonia, some lawyers say. Not at all, Mr. Arkin replied. Declining to say who is paying Mr. Palagonia's legal fees, Mr. Arkin said he always represented his client to the best of his abilities.

"There have been times I have had to give up one case for another," Mr. Arkin said, "but there is no significant matter where I have been disqualified."

Nonetheless, questions about a possible conflict have been raised by lawyers in regard to Mr. Arkin's current representation of a former Citibank vice president. The executive, Carlos Gomez, is at least tangentially involved in the case of still another of Mr. Arkin's clients, Raul Salinas de Gortari, the elder brother of the former President of Mexico. Mr. Salinas has been in a high-security prison outside Mexico City, as Mexican, Swiss and American prosecutors try to establish the origins of more than $100 million he secreted in Switzerland in the waning days of his brother's presidency in 1994.

The American investigation of Mr. Salinas has focused on Amy G. Elliott, a Citibank vice president who acted as Mr. Salinas's private banker. Mr. Gomez worked alongside Ms. Elliott in the Mexico section of Citibank's private banking department. Ms. Elliott, and her lawyer, Linda Imes, have declined to comment. A Citibank spokesman said yesterday that Ms. Elliott is a vice president in good standing with the bank.

According to colleagues, Mr. Gomez, on one occasion, carried documents from Ms. Elliott to Mr. Salinas and his brother. A Citibank spokesman, while not disputing that one instance, said Mr. Gomez was not involved in handling the affairs of Raul Salinas.

Mr. Gomez, who left his position at Citibank last November, is being sued in New York State court by the bank, which accuses him of theft amounting to $13 million, including interest due.

In an affidavit filed in New York Supreme Court, Thomas M. Lahiff Jr., a vice president in Citibank's legal affairs department, essentially contends that Mr. Gomez embezzled money from the bank by fraudulently inducing Citibank to issue loans to a fictitious borrower. The United States Attorney's office for the Southern District of New York recently brought criminal charges of embezzlement against Mr. Gomez as well.

Mr. Arkin said that he was reviewing the accusations against Mr. Gomez.

In response to the suggestion that Mr. Gomez might be able to provide evidence in the Salinas case, Mr. Arkin said: ''I very carefully vetted the matter and there is no conflict. Citibank has acknowledged that there is not a link between the cases.''

Mr. Arkin, who now heads his own 12-lawyer firm -- Arkin, Schaffer & Kaplan -- spent four years as a partner at the prestigious firm of Chadbourne & Parke in the early 1990's.

''He realized that the culture of a small firm was more suitable for his personality,'' said Jerome C. Katz, a Chadbourne partner. Chadbourne has continued to work with Mr. Arkin. ''Through grit and brains and determination,'' Mr. Katz said, ''he has risen to have as good a litigation practice as anyone in this area.''

It is certainly among the busiest. Mr. Arkin, for instance, is also representing Adam Lieberman, the former head of Sterling Foster, a brokerage firm no longer in business that is being investigated by the United States Attorney's office in Manhattan. Mr. Arkin also recently represented Brett Hirsch, a broker from A. R. Baron & Company, who last year pleaded guilty to securities fraud charges in the New York courts.

And Mr. Arkin does not limit himself to New York, or even to the United States. He delights, he says with an impish smile, in ''world-class mischief.'' One recent afternoon, he took evident delight in having Mr. Palagonia in one room and Mr. Gomez in another.

Perhaps his most famous international case was his representation of Edmond Safra, the financier who controls the Republic Bank of New York. Without ever going to court, Mr. Arkin pressed the American Express Company to issue an apology to Mr. Safra in July 1989 and to give millions of dollars to charities of his choice, because it had secretly sponsored a smear campaign against Mr. Safra, then a major rival.

A skillful user of the media and lover of the limelight, Mr. Arkin has strongly criticized the Swiss Government for contending that Mr. Salinas's money is drug tainted while refusing to provide specific evidence.

Mr. Arkin has been handling white-collar cases for more than 30 years. A native of Los Angeles, whose father worked as a marketing executive at 20th Century Fox, he started in the early 1960's as an apprentice to Harris B. Steinberg, a legend of the New York bar.

"Harris Steinberg ground up associates like hamburger, but Stanley lasted," said John Horan, who became Mr. Arkin's partner a few months after Mr. Steinberg's sudden death in 1969. For the two young lawyers, "any case was a good case," Mr. Horan recalled, and Mr. Arkin had a knack for making the best of whatever breaks he got.

Unlike most of his peers, Mr. Arkin was never a Federal or state prosecutor. That, his admirers say, may help to explain why he makes such a zealous advocate, never minding for one moment if he infuriates prosecutors as he makes his client's case.

Besides making his name with the Chiarella case, he won a long-running Arizona dispute involving a land deal that turned into a textbook case for law students. He also cultivated connections with some of the most powerful New York firms, like Shearman & Sterling and Sullivan & Cromwell, often getting assignments from them.

Mr. Arkin's reputation grew enough so that by the 1980's he played a role in several of the biggest securities cases of that era. For example, he defended Richard B. Wigton, a Kidder, Peabody broker accused in 1987 of insider trading, against Federal charges that were later dropped. He also successfully defended D. Ronald Yagoda in the "Yuppie Five" insider-trading case.

Except for his four-year stint at Chadbourne, Mr. Arkin has preferred to plow his own furrow, ruling his own small firm. Adept at attracting high-profile business, Mr. Arkin has regularly broadened his practice by representing departing top executives, like Peter Halmos of Safe Card, who need a forceful negotiator, as well as A-list divorce clients, including Johnny Carson and Ronald O. Perelman. Never short of a name to drop, Mr. Arkin likes to mention his work representing Prince Rainier of Monaco. Some years ago, he even managed the career of Debbie Harry, the rock singer.

Mr. Arkin's often-aggressive tactics draw criticism from some, though. In one big case, Mr. Arkin helped to negotiate an agreement between the Government and his client, Paul Mozer, a Salomon bond trader who had submitted false bids in Treasury auctions. Mr. Mozer's plea resulted in a four-month jail sentence and a $30,000 fine, a much lighter sentence than many had expected. But some who worked at Salomon, dismayed that Mr. Mozer drew a prison sentence at all, questioned Mr. Arkin's approach.

Such mixed reviews are not uncommon, given the widespread view that Mr. Arkin has bountiful talent and an ego to match. Sour grapes may also play a role.

"Some think he's arrogant, too smart for his own good," said Harold Tyler, a partner at Patterson, Belknap, Webb & Tyler. "I think that's partly because of his success."

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April 9, 1998, New York Times, Enforcement Chief Named At the S.E.C., by Melody Petersen,

Richard H. Walker, general counsel at the Securities and Exchange Commission, will become the commission's top enforcement officer, Arthur Levitt Jr., the chairman, announced yesterday.

Mr. Walker takes over for William R. McLucas, who is leaving the commission after eight years in the position. Mr. McLucas said yesterday that he had been hired by the prominent Washington law firm of Wilmer, Cutler & Pickering, which has been aggressively courting former Federal regulators for its securities practice.

The job of enforcement director, the person in charge of investigating wrongdoing in the nation's securities markets, is widely considered to be the second most important post at the S.E.C., after that of chairman.

Mr. Walker, 47, said yesterday that he intended to continue the commission's crackdown on insider trading, swindles by brokers selling low-priced stocks, abuses in the issuance of municipal securities and accounting fraud. "Those in the bucket shops, boiler rooms and other fraudulent enterprises which are capitalizing on this bull market ought to think about some other line of business," he said.

The S.E.C. has recently lost many lawyers to private law firms, which can pay the regulators many times their Government salaries. Colleen P. Mahoney, the enforcement division's No. 2 official, said last month that she was also leaving to pursue a job with a private firm. Concerned about the turnover, Mr. Levitt has asked Congress to approve a $7 million package of bonuses for several hundred lawyers and staff members at the commission.

Wilmer, Cutler has long been wooing Federal regulators to its securities practice. Mr. McLucas will join six other former S.E.C. lawyers there, including former top officials in the commission's divisions of enforcement, corporate finance, investment management and market regulation.

"There is almost a shadow S.E.C. at Wilmer, Cutler," said Joseph A. Grundfest, a professor of law and business at Stanford University and a former S.E.C. commissioner. "It's a unique phenomenon in American law."

Robert B. McCaw, a partner at Wilmer, Cutler, said that the firm's hiring of Mr. McLucas "is putting a crown jewel" on the firm's longtime strategy of hiring former regulators from divisions throughout the S.E.C.

"Dozens of law firms would have loved to make McLucas a partner," Mr. McCaw said.

"Our practice is now nearly perfectly positioned for the corporate crisis," he added. "We have the ability to service a problem from A to Z."

Mr. McLucas will become co-chairman of the firm's securities practice, along with Mr. McCaw.

Mr. McLucas said in an interview yesterday that he realized his new job might include defending some companies that he might have been prosecuting if he were still at the S.E.C. But he said he believed that much of his work would include "prevention and making sure companies do things the right way."

"I think you can do this work aggressively and still sleep well," he said.

Mr. McLucas and his successor at the S.E.C. went to law school together at Temple University, and he and Mr. Walker have long been close friends. Lawyers at the commission say that both men are highly regarded by Mr. Levitt.

Before becoming the commission's general counsel in 1995, Mr. Walker was director of the S.E.C.'s Northeast regional office in New York, where he supervised such prominent fraud cases as those the Government brought against the Towers Financial Corporation, the Foundation for New Era Philanthropy and the Bennett Funding Group.

Last year, as the commission's general counsel, he helped coordinate the Government's strategy in a Supreme Court case that affirmed a broad definition of insider trading.

The case involved James H. O'Hagan, a Minneapolis lawyer who bought shares and options in the Pillsbury Company after he learned that another company his law firm represented planned a hostile takeover bid for Pillsbury, driving up the share price. Mr. O'Hagan ultimately made a $4.3 million profit but contended that he was not an insider; the Supreme Court disagreed.

Mr. Walker, who grew up in Delaware, said he considered himself a New Yorker. Before joining the S.E.C. in 1991, he was a partner in the New York office of the law firm of Cadwalader, Wickersham & Taft. He owns a weekend house in Connecticut, where he keeps a small boat that he takes out on Long Island Sound.

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May 3, 1998, New York Times, The New Salomon: A Smaller Fish in a Bigger Pond, by Peter Truell,

JUST last summer, Salomon Brothers was an independent investment banking firm struggling to broaden its core bond-market franchise into equity markets and investment banking -- and to put memories of the Treasury scandal behind it.

All that has changed, thanks to a pair of breathtaking mergers. Salomon -- whose bond dealers, dubbed ''masters of the universe,'' once epitomized smart and daring risk taking on behalf of the world's biggest companies -- will soon be a relatively small brand within a huge monolith, the new Citigroup financial supermarket.

In exchange for its independence, Salomon's executives have received the financial backing to command a seat at the table with the world's top investment banks. But Sallie L. Krawcheck, who analyzes brokerage firms for Sanford C. Bernstein & Company, said ''they have to make it work,'' especially by building Salomon's franchise in equities and merger advice.

The leaders of the investment bank had long worried that it was just not big enough, or profitable enough, to match the might of Merrill Lynch, Morgan Stanley and Goldman, Sachs. Then came the opportunity last year to hitch Salomon's wagon to Sanford I. Weill's Travelers Group and its Smith Barney brokerage firm.

Word was out on Wall Street that Mr. Weill was looking for partners, and ''we took the initiative to contact Sandy,'' said Deryck C. Maughan, then Salomon's chairman and chief executive and now co-chief executive of Salomon Smith Barney.

Warren E. Buffett, Salomon's controlling shareholder, was only too ready to sell. The predatory habits of Salomon's bankers and traders -- and their insistence on huge annual bonuses -- had tried Mr. Buffett's Midwestern patience and parsimony. Travelers bought Salomon in December for more than $9 billion, a price described at the time as high, but in the range of similar deals.

''The shareholders were very pleased'' with the sale, Mr. Maughan said. ''It gave the firm stability, a bigger platform, and gave the employees some measure of financial security.''

Of course, the deal that created Salomon Smith Barney looks limp next to Mr. Weill's $85 billion proposed merger with Citicorp. Ms. Krawcheck says that combination ''gives the Salomon Smith Barney merger a better chance of succeeding,'' and Salomon's leaders agree.

Mr. Maughan said the new Citigroup would have the scale to succeed as a leading provider of virtually every type of financial service in almost every country on the map.

Some, though, see the transaction differently. John H. Gutfreund, the former chairman and chief executive of Salomon, speaking on April 6, the day that the deal was announced, confessed to being unnerved at the towering financial conglomerate that Citigroup would represent.

''As a consumer of financial products, I was disheartened,'' he said. ''I now see my relationship as being with the machine, the Internet, Big Brother -- even worse, the telephone company. It's like being forced into a giant H.M.O. You're very apprehensive.''

EVEN before the Citigroup deal, Salomon Smith Barney was moving up the rankings of investment banks. In the first four months of this year, it ranked first for the number of issues it managed in several debt markets, including mortgage-backed securities, and second over all to Merrill Lynch in underwriting American debt and equity issues, according to the Securities Data Company, the research concern.

In some of the most profitable investment banking businesses -- like advising on domestic mergers -- it ranked somewhat lower, placing third to Merrill and Goldman for the period.
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September 25, 1998, New York Times, Fallen Star: The Managers -- An Alchemist Who Turned Gold Into Lead; Financial Wizard Done In By His Smoke and Mirrors, by Peter Truell,

When Salomon Brothers, the swashbuckling Wall Street firm of the 1980's, was raking in the money -- hundreds of millions, even billions, of dollars -- investors would grin at one another and say, "J. M.'s done it again."

"J. M." is John W. Meriwether, who, with a small and intensely loyal band of colleagues, turned vast profits by using complex trading strategies and huge amounts of capital to exploit price discrepancies in the world's bond markets.

Now, in perhaps the clearest sign to date of the current fragile state of global financial markets, Mr. Meriwether's latest bubble has burst. No longer at Salomon, he -- still pursuing his secretive strategies -- is at the center of a $90 billion storm, a storm that led to this week's $3.5 billion bailout of his hedge fund orchestrated by the Federal Reserve Bank of New York.

Those who put up the cash for this bailout -- a roll-call of Wall Street names like Merrill Lynch, J. P. Morgan, Morgan Stanley Dean Witter, Goldman, Sachs and Chase Manhattan -- in return got 90 percent of Mr. Meriwether's company, Long-Term Capital Management of Greenwich, Conn.

Hardest hit are those at the eye of the storm: Mr. Meriwether, 51, and his colleagues. At the end of last year, the nearly 200 employees of Long-Term Capital held some 30 percent -- or $690 million -- of the hedge fund's $2.3 billion in capital, said Peter Rosenthal, a spokesman for the firm. And the bulk of that was held by Mr. Meriwether and his dozen or so partners.

With their stake slashed to about 3 percent of the newly capitalized company, the employees have seen their holdings shrivel to, at best, a little more than $100 million -- but even that could dwindle quickly unless the markets turn in their favor. According to some people familiar with the company, several junior employees had borrowed to finance their holdings.

It wasn't long ago that Mr. Meriwether and his colleagues were among the most fabled managers of hedge funds, those unregulated pools of capital that seek to offer rich investors rates of return undreamed of by small investors. The elite partners of Long-Term Capital include Myron S. Scholes, 57, and Robert C. Merton, 54, both Nobel laureates in economics; David W. Mullins Jr., 52, a former vice chairman of the Federal Reserve Board, and Eric R. Rosenfeld and Lawrence E. Hilibrand, former Salomon bond experts. Mr. Mullins, when he was a Harvard professor, even served on the panel that investigated the October 1987 stock market collapse with an eye to preventing such events in the future. Now regulators will spend the coming months debating how to protect the markets from hedge funds.

In early 1994, Mr. Meriwether -- who had left Salomon after one of his traders submitted false bids at Treasury auctions -- turned to raising capital for his new venture. Many of the world's richest and supposedly smartest investors flocked to his doors, giving him $1.25 billion, then a record sum for a new hedge fund. The list of investors -- minimum stake: $10 million -- included such well-known investors as Banque Julius Baer, the private Swiss bank, a Paine Webber management compensation plan and the Bank of China.

Several of Mr. Meriwether's investors complained vociferously when, at the end of 1997, he and his partners insisted on paying back about $2.7 billion of their capital, saying the markets had gotten trickier. They returned all the money that had been invested after Dec. 31, 1994, and all investment profits made before that date.

Those investors, of course, "are feeling extraordinarily lucky and happy" now, said Antoine Bernheim, president of Dome Capital Management, a New York company that compiles data on hedge funds. "Those who received preferential treatment by getting less of their investment returned last year must be feeling very unhappy."

So how did this meltdown happen? How could some of the world's best-known bond investors, and some of its most famous economists and mathematicians, get crushed, and so quickly? The partners themselves are not talking publicly, but, sifting through the wreckage, a familiar theme emerges. It is a story as old as the history of financial debacles: a gradual loss of confidence, eventually cascading into a full-scale rout.

As the summer wore on, the financial markets became increasingly concerned about risk, particularly in mid-August, after Russia defaulted on billions of dollars of its obligations. The financial institutions involved with Long-Term Capital -- whether lending it money, investing in it, or clearing its trades -- started getting nervous. They gradually came to believe that the ambitious financiers at Long-Term Capital might not have enough money to support their complex network of obligations in the world's markets, mainly in three areas: mortgage bonds, European government bonds and bonds issued by Russia and other developing countries. The hedge fund also bet that interest rates would rise in the Treasury market.

Events were playing havoc with Long-Term's strategies, causing the world's nervous investors to rush to buy the highest-quality securities, like Treasury bonds and German Government bonds.

But Long-Term Capital, according to those on Wall Street familiar with aspects of its business, had made heavy bets that interest rates throughout Europe would move closer together as many of its nations moved toward monetary union. And now, with investors suddenly more eager to buy Deutsche mark bonds, the ''spread'' between German and, say, Italian Government bonds widened rapidly -- precisely what the firm had bet against.

"There was a perception that there was not enough of an equity cushion underneath the positions," said a person familiar with the fund's business, who declined to be identified. "Very often in these markets perception becomes reality."

And the perception has gotten worse. Yesterday, one of Mr. Meriwether's oldest colleagues even asked whether the stories of personal bankruptcies at Long-Term Capital were true. Mr. Rosenthal, the spokesman, dismissed such questions.

Still, Mr. Meriwether and his colleagues have seen most of their wealth evaporate in a few frantic weeks, and this week they were forced to accept the terms imposed on them by their rescuers. Many on Wall Street also predicted that the fiasco at Long-Term Capital would probably mark the end of Mr. Meriwether's financial prominence, and that of many of his colleagues.

In the past, Mr. Meriwether has made some remarkable returns for his investors and for himself. In 1995, for example, the fund returned almost 43 percent after allowing for its 2 percent annual management fee and the fund managers' taking 25 percent of all profits under their agreement with investors. It is not clear how much Mr. Meriwether took out in profits over the years and how much of his wealth he kept in the fund.

Astonishingly, perhaps, some investors in Long-Term Capital may not have lost money even after this meltdown, Mr. Rosenthal, the fund's spokesman, said. Assuming an investor put in money only at the fund's birth, in early 1994, and took all the profits paid out through the end of last year, that investor would still have made a return of some 17 percent, he said, citing calculations by executives at the fund's offices.

Despite this record, many doubt whether Mr. Meriwether can bounce back for a second time after such a spectacular fall. In 1991, he lost his job as vice chairman -- and heir apparent -- at Salomon Brothers when it became clear that Paul Mozer, one of his subordinates, had submitted false bids at Treasury bond auctions. That scandal threatened to end his career, but Mr. Meriwether survived to bring his talent to Long-Term Capital.

The very scale of this latest fiasco is also likely to make it harder for Mr. Meriwether and other hedge fund managers to pursue such aggressive strategies again.

"Situations like this could have the adverse effect of regulators beginning to scrutinize hedge funds," said Holland West, a partner at Shearman & Sterling who specializes in derivatives and hedge funds. "Some of the financial institutions that are involved are going to be doing more and more scrutinizing and credit analysis."
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June 24, 1998, New York Times, Salomon Buys Morgan's Australian Investment Unit,

Salomon Smith Barney Inc. has become the latest United States investment bank to increase its operations in the rapidly expanding fund-management industry in Australia, buying the local investment operations of J. P. Morgan & Company. Salomon Smith Barney, a unit of Travelers Group, did not disclose what it paid for J. P. Morgan Investment Management Australia Ltd., which has about $4.8 billion in funds under management. Australia is the fifth-largest pension fund market in the world. Salomon Smith Barney estimates the local investment market will grow by 22 percent a year for the next four years, then slow to 16 percent, fueled by compulsory retirement contribution laws introduced in 1992.
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October 2, 1998, New York Times, Billion-Dollar Better: A special report A special report -- The Man Behind the Curtain; Hedge Fund Wizard or Wall St. Gambler Run Amok?, by Gretchen Morgenson,

John William Meriwether was the consummate trader. He knew when to hold, he knew when to fold. But as the chairman of Long-Term Capital Management L.P., he failed to recognize that his luck and his money were fast running out.

Last week they did, as a consortium of big international banks and brokerage firms agreed to inject $3.6 billion into Long-Term Capital, the giant hedge fund that Alan Greenspan, chairman of the Federal Reserve, worried would disrupt the global financial markets if it failed.

A quiet, introverted man with a head for numbers and a love of chance, Mr. Meriwether by all accounts was deemed most likely to succeed by those who worked with him over the years. A student of the bond markets, he knew their anomalies -- and how to play them -- better than anyone. But in his previous work as a bond trading star at Salomon Brothers, Mr. Meriwether had something he would sorely come to need at Long-Term Capital: the backing of a big firm with the deep pockets that can let a trader ride out almost any market storm.

Throughout the very public bailout of recent weeks, Mr. Meriwether has remained a man of mystery. He has given only a couple of interviews over the years and is rarely seen on the celebrity charity circuit in New York, unlike other men and women of fortune on Wall Street. He has even bought up most of the photographs taken of him in recent years.

So what kind of a man is Mr. Meriwether? And how could such a reputedly brilliant trader who had chalked up so many successes over the last 25 years wind up decimating his partners and nearly bankrupting his firm?

Mr. Meriwether is not talking about his past, present or future. But conversations with people who have worked with him in his years on Wall Street reveal a man, revered by those around him, who nonetheless remained remote, even lonely. A man always hunting for the edge that would make his bets -- whether in bonds, at the race track or on a Chicago Cubs game -- more calculated than wild.

A man co-workers describe as scrupulously honest, yet who has been associated with two of the biggest disasters in Wall Street history: the 1991 attempt by a Meriwether underling to rig the market in two-year Treasury notes and now the fall of Long-Term Capital Management.

People who have never met Mr. Meriwether may remember him as the man featured at the start of Michael Lewis's book, "Liar's Poker." As recounted there, Mr. Meriwether supposedly challenged John H. Gutfreund, then the chairman of Salomon Brothers, to up the ante from $1 million to $10 million in a game of "I dare you" played with serial numbers on a dollar bill. Mr. Gutfreund, no pansy himself, walked away, according to the book.

This story almost certainly helped forge the romantic view of Mr. Meriwether as a Wall Street cowboy, willing to make a bet that even his rich boss shrank from. Only trouble is, it never happened. According to people who were there, it was not Mr. Meriwether who made the challenge. It was John O'Grady, a gregarious and blustery Salomon partner who ran technical support for the traders. Mr. O'Grady died in 1989. (Mr. Lewis was traveling and not available for comment.)

According to those who know him well, the story is also out of character, because Mr. Meriwether only made the most calculated of bets, both personally and for the firm. He loved to bet on Chicago Cubs games, for example, but would not do so until he had first received the weather report to see which way and how hard the wind was blowing at Wrigley Field. That way he could better guess how the Cubs home-run hitters might do against the opposing pitchers. "These weren't big bets," said a person who had knowledge of them at the time. "He just liked to have a lot of things he could analyze." More often than not, he came away a winner.

From Golf Caddie To Club Owner

Born in Chicago in 1947, Mr. Meriwether grew up on the city's South Side. Like another famed money manager -- Peter Lynch of Fidelity -- Mr. Meriwether caddied at a nearby golf course to earn money. Friends believe Mr. Meriwether is an only child.

In 1969, he received a bachelor's degree in business from Northwestern University. He earned an M.B.A. from the University of Chicago in 1973.

The next year he came to New York, a 27-year-old recruit in Salomon Brothers' vaunted management training program. Another member of that program recalls that Mr. Meriwether was friendless in New York and roomed at a Manhattan athletic club. His first assignment was on the desk that arranged financing for the firm's customers, called the repurchase or repo department.

It was there that Mr. Meriwether first made his mark. The desk was a fairly limited operation and acted as a service function for the Government bond desk. ''It had never been a money-making proposition,'' said a person who was there at the time. ''But John Meriwether turned it into that.''

Mr. Meriwether's second assignment was to trade short-term agency securities, such as those backed by the Federal Intermediate Credit Bank. Aided by what people who worked alongside him called a near-photographic memory, Mr. Meriwether took this backwater of the bond market and made it spectacularly profitable. He understood better than others the proper differences, or spreads, between the yields on agencies and those on Treasuries, which are backed by the full faith and credit of the Government.

In a precursor to this summer's events, spreads on agency securities began to widen dramatically in the mid-1970's. What caused the change? A near-bankrupt New York City propelled investors out of anything that looked at all risky for the relative safety of Treasuries. Mr. Meriwether knew two things: that the widening in the spreads was an aberration and that the agency securities he traded, while not formally backed by the Government, were still good.

He was right. "He bought every single one he could, with the acknowledgment of the senior partners," recalled a former associate. "He rode out the bad bumps. Boy, did it work well."

Then, in the late 1970's, Mr. Meriwether had an even better idea. Through dealing with Salomon Brothers' customers, he saw the beginnings of a business that would prove extremely profitable for the firm. It was the bond arbitrage business, the ability to capitalize on small discrepancies in prices between specific bonds and the newly developed futures contracts that were based on them. The business was in the infant stages -- a bank in Cleveland was good at it and some of the Wall Street dealers were getting better. Why not Salomon Brothers?

He approached the firm's partners -- it was still a partnership, not yet a public company. "Why should we be executing these trades for some of these new arb firms when we can do them ourselves?" he asked. Mr. Meriwether was given the go-ahead.

Deja Vu, of Sorts, But Different

The story of Mr. Meriwether's first home run on the arbitrage desk is eerily similar to the Long-Term Capital story now unfolding. But there is a big difference: Mr. Meriwether did the bailing out then and he, as the banks and Wall Street firms that poured billions into Long-Term Capital now hope to do, later capitalized on the comeback of a troubled portfolio.

A big player in the Treasury futures market was a firm called J. F. Eckstein & Company, which had made a big bet that a disparity in prices between Treasury bill futures and the underlying security would converge. But in a brief two weeks, the prices of the bills rocketed. Mr. Eckstein, who expected prices to fall, was quickly depleting capital, struggling to meet margin calls.

"It was the first real period of turmoil in the fledgling financial futures markets and Meriwether understood it," Mr. Eckstein recalled yesterday. Almost alone in the market as a willing buyer, Mr. Meriwether took over a good part of Mr. Eckstein's portfolio. "The Treasury bills loosened up and the prices converged," one trader said. "Meriwether made a fortune."

Eighteen years later, Mr. Meriwether finds himself in a similiar position. Unlike Mr. Eckstein, however, Mr. Meriwether is still running his firm.

Looking back, it is easy to see how Mr. Meriwether might later have been felled by thinking that when spreads widen, they always come back. After all, with spreads on emerging market debt, junk bonds and mortgage-backed securities much wider this spring than in years, they had to narrow, didn't they? Once they did, anyone willing to take the gamble would generate a windfall.

There is one big difference, however. At Salomon Brothers, when Mr. Meriwether asked for the necessary capital to make a huge trade or additional money to cover it when it temporarily lost value he always got it. At Long-Term Capital Management he was not so lucky.

Indeed, when he went to his clients in early September with hat in hand, he did so still a staunch believer that his money-losing trades would come back. Never mind that the paper losses in these roughly $90 billion in positions had eroded his capital to just $600 million from $4.8 billion at the start of 1998. Convinced the trades would work out in the end, he asked for more money to shore up his capital and allow him to keep the positions. Salomon Brothers might have given it to him. But this time, he was turned down.

Back at Salomon Brothers, Mr. Meriwether made partner in 1980. As his prominence in the firm grew, so did his ability to take greater risk. Indeed, he thrived on it, former colleagues say. "He liked to be involved with chance," one said. "But it was always calculated."

A Natural Gambler, But a Careful One

Mr. Meriwether was a natural gambler. He would take his group to Atlantic City roughly twice a year. Department meetings would sometimes be held at the Meadowlands race track in nearby New Jersey.

Mr. Meriwether's love of horses extends beyond the track. He houses several thoroughbreds on his property in the northern reaches of Westchester County. And he is a trustee of the New York Racing Association, which operates Belmont Park, Aqueduct and Saratoga. Mr. Meriwether's wife, the former Mimi Murray, is a rider who trained for the Olympic team.

In 1982, Salomon Brothers was bought by Philipp Brothers, a commodity trading firm known on the Street as Phibro. Some sources who were at Salomon Brothers at the time say that one reason it took place was that top partners worried about what might happen if Mr. Meriwether's big trades went bad, wiping out the partnership. With the takeover, their own money was no longer on the line backing his bets.

Yet Mr. Meriwether's bigger and bigger bets kept paying off during the 1980's, generating bigger and bigger profits for the firm.

By today's standards, Mr. Meriwether did not earn an outsized paycheck at Salomon Brothers. In 1989 he took home roughly $8 million; the next year he received $10 million.

But in 1991, disaster struck. A trader on Mr. Meriwether's desk, Paul Mozer, tried to corner the market in an issue of two-year United States Treasury notes. While Mr. Meriwether reported the infractions to his superiors, the violations were not reported to the Treasury until much later.

The scandal shook Salomon Brothers to its core. Mr. Gutfreund and Thomas W. Strauss, the president, left when Warren E. Buffett, a big owner of Salomon stock, took over to help clean up the mess. Mr. Meriwether resigned. He later settled an administrative proceeding with the Securities and Exchange Commission in which he neither admitted nor denied that he had been negligent as a supervisor. He agreed to a three-month suspension and a $50,000 fine.

By this time, Mr. Meriwether was wealthy. But it was his investment in his new firm, Long-Term Capital Management, that brought him true riches. Although his net worth is a secret, former colleagues estimate that at the peak, he was probably worth more than $200 million.

One Calculation Left Undone

For years, Mr. Meriwether lived humbly. From 1981 until 1993, home was the same small apartment on York Avenue, on Manhattan's Upper East Side.

While he lived relatively modestly, he had expensive tastes in golf clubs, joining three of the most prestigious in America: Shinnecock Hills on eastern Long Island, Winged Foot Golf Club in Westchester and Cypress Point, near Pebble Beach, Calif. He is said to shoot in the 70's. He even owns a golf course in Waterville, Ireland, with some partners.

Mr. Meriwether is a deeply private man who lets in only a handful of people. These people are, in return, very protective. "He is a very quiet person, even introverted," one former Salomon partner said.

At Salomon, he was known to be always available to people who wanted to bounce an idea off him. "One of the reasons he inspired the loyalty he did was that he would not try to take the credit," said Stephen Modzelewski, a former colleague of Mr. Meriwether's who now runs a hedge fund. "Usually the managers would steal the ideas of subordinates."

Among his colleagues, his integrity was never in doubt. He would suddenly remember, on occasion, to pay up on a bet long since forgotten by everyone else.

Stunned by the recent unfolding of events at Long-Term Capital Management, former colleagues cannot help but wonder how such a bad thing could have happened to such a brilliant person. Apparently neither Mr. Meriwether nor any of his associates, including two Nobel laureates in economics, had bothered to do a worst-case scenario on their trades. If they had, these people believe, the firm would never have been leveraged to the degree that it was.

At Salomon, recalled a former trader there who worked with Mr. Meriwether, "we would always do what we called the 'yield-to-worst' calculation, which took into effect the world going down."

Apparently, yield-to-worst was one calculation Mr. Meriwether either ignored or forgot to do.
_____________________________________________________________________________


January 24, 1999, New York Times, How the Eggheads Cracked, by Michael Lewis,

Correction Appended

A lot of unusual things have happened in the four months since Long-Term Capital Management announced that it lost more than $4 billion in a bizarre six-week financial panic late last summer, but nothing nearly so unusual as what hasn't happened. None of the 180 employees of the hedge fund have stood up to explain, to fess up or to excuse themselves from the table. Even the two Nobel Laureates on staff, who could very easily have slipped back into their caps and gowns in the dead of night and pretended none of this ever happened, have stayed and worked, quietly. The man in charge, John Meriwether, has shown a genius for lying low. Photographers in helicopters circle his house, and journalists bang on his front door at odd hours and frighten his wife. Yet whenever the question "Who is John Meriwether?" has demanded an answer, it has been supplied not by those who know him and work with him but by a self-appointed cast of casual acquaintances and perfect strangers. They have described Meriwether and his colleagues as reliable Wall Street stereotypes: the overreaching, self-deluded speculators. In doing so they have missed pretty much everything interesting about them.

Not long ago, I visited the hedge fund's offices in Greenwich, Conn., to see if its collapse made any more sense from the inside than it did from the outside. So many different activities take place in enterprises called "hedge funds" that the term is perhaps more confusing than helpful. In general, hedge funds attract money from rich people and big institutions and, as a result, are somewhat less stringently regulated than ordinary money managers. Long-Term Capital was an especially odd case, less a conventional money manager than a sophisticated Wall Street bond-trading firm. The floor it had constructed in Greenwich was a smaller version of a Wall Street trading floor, with subtle differences. The old wall between the trading floor and the research department had been pulled down, for instance. For most of Wall Street the trading floor is a separate room, distinct from research. The people who pick up the phone and place the bets (the traders) are the highly paid risk takers, while the people who analyze and explain the more complicated securities (the researchers) are glorified clerks. Back in 1993, when Meriwether established Long-Term Capital, he also created a new status system. The title "trader" would no longer exist. At Long-Term Capital, anyone who had anything to do with thinking about how to make money in financial markets would be called a "strategist."

The strategists spent several days with me going over the details of their collapse. They began with a six-hour presentation they had just put together for the investors whose money they had lost, because, as one of the fund's partners puts it: "Virtually no one has called and asked us for the facts. They just believe what they read in the papers." Then I was shown the bets that had cost the strategists their fortunes and their reputations as the smartest traders on or off Wall Street. The guided tour of the spectacular ruin concluded with a conversation with John Meriwether. He, and they, offered a neat illustration of the limits of reason in human affairs.

Riding the Crash of '87 With Meriwether and His Young Professors

"The first time I saw a market panic up close was also the last time I had seen John Meriwether -- the stock-market crash of Oct. 19, 1987. I was working at Salomon Brothers, then the leading trading firm on Wall Street. A few yards to one side of me sat Salomon's C.E.O., John Gutfreund; a few yards to the other side sat Meriwether, the firm's most beguiling character. The stock market plummeted and the bond market soared that day as they had never done in anyone's experience, and the two men did extraordinary things.

I didn't appreciate what they had done until much later. You cannot really see a thing unless you know what you are looking for, and I did not know what I was looking for. I was so slow to grasp the importance of the scene that I failed to make use of it later in "Liar's Poker," the memoir I wrote about my Wall Street experience. But the events of those few hours were in many ways the most important I ever saw on Wall Street.

What happened in the stock-market crash was one of those transfers of authority that seem to occur in the financial marketplace every decade or so. The markets in a panic are like a country during a coup, and seen in retrospect that is how they were that day. One small group of people with its old, established way of looking at the world was hustled from its seat of power. Another small group of people with a new way of looking at the world was rising up to claim the throne. And it was all happening in a few thousand square feet at the top of a tall office building at the bottom of Manhattan.

John Gutfreund moved back and forth between his desk and the long, narrow row of government-bond traders, where he huddled with Craig Coats Jr., Salomon's head of government-bond trading. Together they decided that the world was coming to an end, as it came to an end in the Crash of 1929. The end of the world is good news for the bond market -- which is why it was soaring. Gutfreund and Coats decided to buy $2 billion worth of the newly issued 30-year United States Treasury bond. They were marvelous to watch, a pair of lions in their jungle. They did not stop to ask themselves, Why do we of all people on the planet enjoy the privilege of knowing what will happen next? They believed in their instincts. They had the nerve, the guts or whatever it was that distinguished a winner from a loser on a Wall Street trading floor in 1987.

And in truth they had been the winners of the 80's boom. Business Week had anointed Gutfreund the King of Wall Street. Coats was believed by many to be the model for the main character in a book then just published called "The Bonfire of the Vanities." Coats was tall and handsome and charismatic. He was everything that a bond trader in the 80's was supposed to be.

Except that he was wrong. The world was not coming to an end. Bond prices were not about to keep rising. The world would pretty much ignore the stock-market crash. Soon, Coats would arrive at work and find that his $2 billion of Treasury bonds had acquired a new name: the Whale. Traders near Coats started asking him about the Whale. As in, "How's that Whale today, Craig?" Or, "That Whale still beached?" In the end, the gut decision to buy the Whale cost Salomon Brothers $75 million.

Meanwhile, 20 yards away was Meriwether. When I think of people in American life who might have been like him, I think not of financial types but creative ones -- Harold Ross of the old New Yorker, say, or Quentin Tarantino. Meriwether was like a gifted editor or a brilliant director: he had a nose for unusual people and the ability to persuade them to run with their talents. Right beside him were his first protgs, four young men fresh from graduate schools -- Eric Rosenfeld, Larry Hilibrand, Greg Hawkins and Victor Haghani. Meriwether had taken it upon himself to set up a sort of underground railroad that ran from the finest graduate finance and math programs directly onto the Salomon trading floor. Robert Merton, the economist who himself would later become a consultant to Salomon Brothers and, later still, a partner at Long-Term Capital, complained that Meriwether was stealing an entire generation of academic talent.

No one back then really knew what to make of the "young professors." They were nothing like the others on the trading floor. They were physically unintimidating, their bodies merely life-support systems for their brains, which were in turn extensions of their computers. They were polite and mild-mannered and hesitant. When you asked them a simple question, they thought about it for eight months before they answered, and then their answer was so complicated you wished you had never asked. This was especially true if you asked a simple question about their business. Something as straightforward as "Why is this bond cheaper than that bond?" elicited a dissertation. They didn't think the same way about the markets as Craig Coats did or, for that matter, as anyone else on Wall Street did.

It turned out that there was a reason for this. On the surface, American finance was losing its mystique, what with ordinary people leaping into mutual funds, mortgage products and credit-card debt. But below the surface, a new and wider gap was opening between high finance and low finance. The old high finance was merely a bit mysterious; the new high finance was incomprehensible. The financial markets were spawning vastly complicated new instruments -- options, futures, swaps, mortgage bonds and more. Their complexity baffled laypeople, and still does, but created opportunities for those who could parse it. At the behest of John Meriwether, the young professors were reinventing finance, and redefining what it meant to be a bond trader. Their presence on the trading floor marked the end of anti-intellectualism in American financial life.

But at that moment of panic, the young professors did not fully appreciate their own powers. All their well-thought-out strategies, which had yielded them profits of perhaps $200 million over the first 10 months of 1987, wilted that October day in the heat of other people's madness. They lost at least $120 million, which was sufficient to ruin the quarterly earnings of the entire firm. Two years before, they were being paid $29,000 to teach Finance 101 to undergraduates. Now they had lost $120 million! And not just anybody's $120 million! One hundred twenty million dollars that belonged in part to some very large, very hairy men. They were unnerved, as you can imagine, until Meriwether convinced them that they should not be unnerved but energized. He told them to pick their two or three most promising trades and triple them.

They did it, of course. They paid special attention to one big trade. They sold short the newly issued 30-year U.S. Treasury bond of which Craig Coats had just purchased $2 billion and bought identical amounts of the 30-year bond the Treasury had issued three months before -- that is, a 29-year bond. (To "short" a stock or bond means to bet that its price will fall.) The young professors were not the first to see that the two bonds were nearly identical. But they were the first to have studied so meticulously the relationship between them. Newly issued Treasury bonds change hands more frequently than older ones. They acquire what is called a "liquidity premium," which is to say that professional bond traders pay a bit more for them because they are a bit easier to resell. In the panic, the premium on the 30-year bond became grotesquely large, and the young professors, or at any rate their computers, noticed. They laid a bet that the premium would shrink when the panic subsided.

But there was something else going on that had nothing to do with computers. The young professors weren't happy making money unless they could explain to themselves why they were making money. And if they couldn't find the reason for a market inefficiency they became suspicious and declined to bet on it. But when they stood up on Oct. 19, 1987, and peered out over their computers, they discovered the reason: everyone else was confused. Salomon's own long-bond trader, the very best in the business, was lost. Here was the guy who was meant to be the soul of reason in the government-bond markets, and he looked like a lab rat that had become lost in a maze. This brute with razor instincts, it turned out, relied on a cheat sheet that laid out the prices of old long bonds as the market moved. The move in the bond market during the panic had blown all these bonds right off his sheet. "He's moved beyond his intuition," one of the young professors thought. "He doesn't have the tools to cope. And if he doesn't have the tools, who does?" His confusion was an opportunity for the young professors to exploit.

Years later it would be difficult for them to recapture the thrill of this moment, and dozens of others like it. It was as if they had been granted a more evolved set of senses, and a sixth one to boot. And they had nerve: they were willing to put money where their theory was. Three weeks after the 1987 crash, when the markets calmed down, they cashed out of the Treasury bonds with a profit of $50 million. All in all, the bets they placed in the teeth of one of the greatest panics Wall Street had ever seen eventually made them more money than any bets they had ever made, perhaps $150 million altogether. By comparison, all of Merrill Lynch generated $391 million in profits that year. The lesson in this was not lost on the young professors: panic was good for business. The stupid things people did with money when they were frightened was an opportunity for more reasonable people to exploit. The young professors knew that in theory already; now they knew it in practice. It was a lesson they would regret during the next big panic, far bigger and more mysterious than the Crash of October 1987 -- the panic of August 1998. They would still be working together, but at Long-Term Capital Management.

What Long-Term Capital Was and Wasn't About

I was a tad uneasy about meeting these people again. All those pregnant pauses! All those explanations! Even more than 10 years later, I can recall the dreadful minutes after I had asked them to walk me through one of their trades, when my brain felt like a beaten cornerback watching the receiver dancing into the end zone. On top of it all was their Spock-like analytical detachment, which still hung heavy in the air in Greenwich and overshadowed any larger consideration, like shrewd management of the press. "If everything had gone well," one of the young professors said not long after I stepped off the elevator, "we wouldn't be talking to you." But everything did not go well, and they had decided to explain themselves to someone they had practice explaining things to.

When I heard that Long-Term Capital had collapsed, my initial reaction was a sneaky relief: Hans Hufschmid was no longer worth $50 million. Anyone who has quit one life for another will understand the importance of insuring that none of the people you leave behind do so well for themselves as to suggest that you have made a truly colossal mistake. Since I left Salomon Brothers in 1988 to make a living as a writer, I had remained curious about how rich I would have become if I had stayed on Wall Street. There were several people whose fortunes I considered fair proxies for my own, and whom I tagged for further observation, like wolves released in a wildlife experiment.

Hans was one of them. Back in 1986, Hans and I left the same New York training program for the same London trading floor, where we were ultimately supervised by John Meriwether. Although neither of us was a young professor, we had gone into the same arcane line of work. We both spent half of our time flying around Europe trying to coax innocent investors into complicated new American-born financial instruments and the other half seeking out speculations for those who needed no coaxing. But those were just our surface similarities. Deep down, Hans and I shared a dirty little secret: we couldn't keep up with the young professors. We belonged to a new semi-informed breed who could "pass" as experts on the new financial complexity without possessing true understanding.

In any case, Hans was one of those people I might have become had I remained on Wall Street. And so, at the end of 1993, after I heard that Salomon Brothers had paid Hans a bonus of $28 million, I spent at least three hours wondering why I hadn't done so. Twenty-eight million dollars was just the original insult. At the end of 1994, Hans left Salomon to become a partner in Long-Term Capital's London office. It gives you an idea just how desirable it was to work for John Meriwether that to do so people quit jobs at the finest Wall Street firms, which paid them bonuses of $28 million. Word came that Hans had sunk not merely his $28 million bonus into the fund but also $15 million he had borrowed from some bank.

The fund rose by 43 percent in 1995, by 41 percent in 1996 and by 17 percent in 1997. At the end of each year, Hans reinvested his profits in the fund. That was another odd thing about the people at Long-Term Capital. They did not define themselves in the usual Wall Street way, by their material possessions. Their hundreds of millions of dollars didn't lead inexorably to private jets and new life styles. (They would be better off now if that had been the case.) Their favorite form of conspicuous consumption was to buy more and more of their own investment genius. As a result, before their demise, Long-Term Capital's 16 partners had invested roughly $1.9 billion of their own money in their fund. Making some fairly conservative assumptions about Hans and his effective tax rate, $50 million of that pile belonged to him. This, to my way of thinking, made it a bit more expensive than it should have been not to be Hans Hufschmid.

And then . . . poof . . . it was not so very expensive at all. Not being Hans was positively joyous. By the end of September 1998, the same friends from Salomon Brothers who had informed me how rich Hans was becoming in late 1997 were telling me that he and all his partners were wiped out. As Hans himself had borrowed to invest in himself, it was at least conceivable that he was worth less than zero.

That did it for me: I demanded no further reparations. I was once again satisfied to be paid by the word. But it turned out that I was alone in this sentiment. A lot of people wanted not only Hans's money but also his hide, along with the hides of Larry Hilibrand, Victor Haghani, Eric Rosenfeld, Greg Hawkins and John Meriwether. Plus those of Robert Merton and Myron Scholes, Nobel Prize-winning economists who had joined Meriwether. (They won the 1997 Nobel Prize for their work on risk management of options.) Hans and his partners were accused by all sorts of people of behaving recklessly, succumbing to hubris and jeopardizing the economic health of the West.

One number that kept popping up in the papers was the "$1.2 trillion" that Hans and the young professors had supposedly wagered. The $1.2 trillion represented what are known as the open trading positions of the fund. Anyone who works on Wall Street knows that a firm's open trading positions contain all sorts of things that offset one another. At any given time, Goldman, Sachs or Shearson Lehman, which had only about twice as much capital available as Long-Term, might carry $7 trillion or $8 trillion in positions on their books. What was important was not the gross amount of the positions but the amount of risk in them.

That's where "leverage" came into the newspaper accounts. Leverage means borrowing to buy things you otherwise could not afford, and many of the public accounts invariably equated it with "risk." "At L.T.C.M.," wrote Carol J. Loomis in Fortune, "the best minds were destroyed by the oldest and most famously addictive drug in finance, leverage." Possibly there was once a time when leverage was a good measure of risk. But one consequence of the new complexity in financial markets has been to make any such simple calculation impossible. A portfolio might be leveraged 50 times and have almost no risk. A portfolio might be leveraged five times and be perfectly mad. Long-Term Capital had been in pretty much the same line of work as a Wall Street investment bank, and Wall Street investment banks were leveraged the same amounts, about 25 times (although a Wall Street investment bank can lay its hands on capital more quickly than a hedge fund can).

The important number in any portfolio is not its leverage but its volatility: how much do its net assets rise and fall each day? By that measure, to which no one paid much attention, Long-Term Capital was running a fund that looked to all of Wall Street a bit less risky than if it had taken its capital and simply invested all of it, unleveraged, in a diversified portfolio of U.S. stocks.

Then there was the inevitable search for True Character. One of the stories I had told in 1989 about Meriwether had been twisted beyond recognition into evidence that he was indeed a madman. The story ran as follows: John Gutfreund, who routinely dropped tens of thousands of dollars to the young professors playing liar's poker, a game of both chance and skill using the serial numbers on dollar bills, challenged Meriwether to one hand for $1 million. ("One hand, $1 million, no tears" was what he supposedly said.) Meriwether replied that he would play only for $10 million. Gutfreund walked away. End of story. All sorts of people, Gutfreund included, later denied that the incident ever occurred, but in any case the point of the episode was just the opposite of the interpretation now placed on it. The point of the story was that in a world where you weren't supposed to flinch from financial risk, Meriwether had found a clever way to avoid what was clearly an act of lunacy.

But even without knowing much about what Meriwether did, or how he did it, or what sort of man he was, you could see that the public accounts of the collapse of Long-Term Capital were, at the very least, incomplete. From the mid-80's right up until last summer, the young professors had been the most widely imitated men on Wall Street. If they were so wildly irresponsible, why had every big Wall Street firm copied them? Even after Long-Term's collapse, a lot of smart people were sniffing acquisitively around their portfolio. If that portfolio was so recklessly speculative, why was Warren Buffett, among others, trying to buy it?

Between the lines of the stories were hints of a more complicated one. The most remarkable gurgling noises from last summer's panic came from the inner sanctums of finance. Treasury Secretary Robert Rubin said then that "the world is now experiencing its worst financial crisis in 50 years." That was something coming from a man who specialized in soothing investors and who had been on a trading desk at Goldman, Sachs during the Crash of 1987. Alan Greenspan, the Federal Reserve Chairman, said that he had never seen anything in his lifetime that compared to the terror of August 1998. From one end of Wall Street to the other, firms were announcing record bond-trading losses. Goldman, Sachs, which worked harder than any other firm to copy Meriwether's success, explained its own disaster by saying that "our risk model did not take into account enough the copycat problem." That statement was true but inadequate. It failed to mention the name of the original cat.

How Meriwether and the Young Professors Lost Control

If you didn't know who John Meriwether was, you wouldn't have the slightest curiosity about him. He has small, even features, a shock of cowlicky brown hair that droops boyishly down over his forehead and a blank expression that could mean nothing or everything. His movements are quick, however, and so is his talk. He speaks in fragments and moves rapidly from one idea to the next, leaving behind a trail of untidy thoughts. He shapes other people more completely than he does himself. His discomfort with the first person occasionally makes him difficult to follow, especially when he is supposed to be talking about himself. When he says, "If anyone wants to focus on anybody and wants to take them apart, he can,'' he means, ''I believe that people set out to destroy me, and succeeded."

When I arrived, he was hunched over at his desk on the trading floor, but by the time I got to him he was in his office. It was a token office, big and empty and conspicuously unused. It had a nice view of some trees, which I'm sure no one had glanced at in months. A tall stack of books and a large basket of shiny apples crowded the area beside his desk. Meriwether offered me one of each.

The book was "Miracle on the 17th Green," a fantasy for adults about a regular middle-aged man who one day is blessed with the talent of a golf champion. "Extraordinary things happen to ordinary people," said the back of the dust jacket. It was soon clear that this reflects Meriwether's own sense of himself and his current situation. About the first thing he said after we sat down across from his coffee table was, "I don't want this story to be about me."

To insure that it was not, he would not allow me to quote him much. And for good measure, he insisted that Richard Leahy, who hired me onto the Salomon trading floor and who is Meriwether's oldest business partner, sit in on our conversation.

My own guess is that Meriwether would rather people think him a bit weird than know the real reason he avoids publicity, which is that he is deeply uncomfortable with the attention. He has a phobia about public speaking, for instance. When you passed him on the Salomon trading floor, you could see him force himself to meet your eye. In conversations in which he might be expected to take control -- say over drinks with a couple of new employees -- he would shrink from the responsibility. He was one of those people whose desire in conversation was for everyone to be "equal." Oddly, the adjective he often chooses to describe the people he most admires is "shy." He means this as a compliment, as in "shy and polite." Shy and polite was a bizarre combination in the testosterone tank of the Salomon trading floor. It was a handicap, at least for someone seeking power in its usual corporate form, through control over large numbers of people. Meriwether sought power in a different form, through the markets.

In the five years after the 1987 crash, Meriwether and the young professors made billions for Salomon and tens of millions for themselves. They started out as oddballs but became the heart of the firm. From the mid-80's through the early 90's the rest of Wall Street, and Goldman, Sachs in particular, poached bond-trading talent from every major bond department at Salomon -- corporates, governments, mortgages. Jon Corzine, who was co-C.E.O. of Goldman, Sachs until a shake-up earlier this month, rose in the firm in part by buying the right people off the Salomon trading floor.

The single exception to this diaspora was John Meriwether's group: it wasn't for sale. In the end, it was broken up by force. A government-bond trader at Salomon Brothers named Paul Mozer, who replaced Craig Coats in 1988 and who reported to Meriwether, tried to corner the U.S. Treasury-bond market. In 1990 and 1991, he submitted phony bids at the Treasury's quarterly auctions that enabled him to buy more than his legal share. Meriwether found out, and went to his superiors, including Gutfreund, and Gutfreund agreed that the Treasury should be informed. For whatever reason, Gutfreund failed to follow up immediately, and it was several months before Salomon informed the Government.

The fate of the firm hung in the balance until Warren Buffett, Salomon's biggest shareholder, stepped in and cut a deal with the Treasury. Salomon would survive if Buffett would oversee the reform of its culture, and Gutfreund was encouraged to resign. And though everyone including Buffett acknowledged that Meriwether had done nothing wrong, Meriwether was encouraged to resign, too. He quit and created a new firm.

In many ways, Long-Term Capital was better designed for the young professors than Salomon Brothers was. There was only one noticeable disadvantage. Other Wall Street firms might have sensed how well Salomon's young professors and their strategy was paying off and sought to mimic their subtle workings. But they could not actually see these workings. When the young professors left Salomon Brothers, they opened themselves and their bets up for inspection by Wall Street. In exchange for lending Long-Term Capital the money to make its trades, the big firms -- Morgan Stanley, Merrill Lynch, Goldman, Sachs -- demanded to know what it was up to. This in turn led to higher-fidelity imitation.

"Everyone else started catching up to us," Eric Rosenfeld says. "We'd go to put on a trade, but when we started to nibble the opportunity would vanish." Every time they took action, others noticed and copied them, and eliminated whatever slight irrationality had crept into the markets.

At some point, Meriwether lost control of his esoteric markets. In our conversation, I asked him how that experience had changed his ideas about making money. He replied that his old ideas, which worked so well for 15 years, have been in some sense consumed, and that he needs to find new ones. Then he proceeded to explain why.

In its broad outlines, the Long-Term Capital story could be described by a couple of pie charts. The first pie chart would lay out its losses. Of the $4.4 billion lost, $1.9 belonged to the partners personally, $700 million to Union Bank of Switzerland and $1.8 billion to other investors, half of them European banks. But as original investments had long ago been paid back to most of the banks, the losses came mainly out of their profits. The second and more interesting pie chart would describe how the money was lost. The public accounts have suggested that it was lost in all manner of exotic speculations that the young professors had irresponsibly digressed into. The speculations were exotic enough, but they were hardly digressions. When I paged through their trades, the only thing I hadn't expected to find was a taste for betting on corporate takeovers. One hundred fifty million dollars vanished from Long-Term Capital when a company called Tellabs failed to complete its acquisition of a company called Ciena, and the price of Ciena stock, which Long-Term owned, dropped from 56 to 31 1/4. ("This trade was by far the most controversial in our partnership," Rosenfeld says. "A lot of people felt we shouldn't be in the risk arb business because it is so information sensitive and we weren't trying to trade in an information-sensitive way.") Of course, Long-Term had some complicated notion of its advantage in risk arbitrage, but that notion now looked silly. Still, even taking account of the $150 million loss in Ciena shares, its stock-market trading was profitable.

The big losses that destroyed Long-Term Capital occurred in the areas the young professors had for years been masters of. The killer blows -- a good $3 billion of the $4.4 billion -- came from two bets that Meriwether and his team had been making for at least a decade: interest-rate swaps and long-term options in the stock market. Now there is no reason anyone should feel obliged to understand interest-rate-swap arbitrage. The important point about it is the degree of risk it typically involves.

Like most of Long-Term Capital's trades, these bets required the strategists to buy one thing and sell short another, so that they maintained a Swiss-like neutrality in the market. Like most of their trades, the thing they bought was similar to the thing they sold. (Their gift was for mathematical metaphor: they noticed similarities where others saw nothing but differences.) But like only some of their trades, the thing they bought became -- or was supposed to become, after a period of time, and under certain conditions -- identical to the thing they sold.

One way to understand this, and to see how bizarre was the panic of August 1998, is to imagine a world with two kinds of dollars, blue dollars and red dollars. The blue dollar and the red dollar are both worth a dollar, but you can't spend them for five years. In five years, you can turn them both in for green dollars. But for all sorts of reasons -- a mania for blue, a nasty article about red -- the blue dollar becomes more expensive than the red dollar. The blue dollar is selling for $1.05 and the red dollar is selling for 95 cents.

If you are an ordinary sane person who holds blue dollars, you simply trade them in for more red dollars. If you are Long-Term Capital, or any large Wall Street firm for that matter, and are able to borrow money cheaply, you borrow against your capital and buy a lot of red dollars and sell the same number of blue dollars. The effect is to force the price of red dollars and blue dollars back together again. In any case, you wait for blue dollars and red dollars to converge to their ultimate value of a dollar apiece.

At best, the odd passions that drove the red and the blue dollar apart subside quickly, and you reap your profits now. At worst, you must wait five years to collect your profits. The ''model'' tells you that you will one day make at least a nickel for every red dollar you buy for 95 cents and another nickel for every blue dollar you sell at $1.05. But as Ayman Hindy, a Long-Term Capital strategist, puts it: "The models tell you where things will be in five years. But they don't tell you what happens before you get to the moment of certainty."

Which brings us to the case of Long-Term Capital in August 1998, when the red dollar and the blue dollar were driven apart in value to ridiculous extremes. Actually, when you look at the young professors' books, you can see that the first sign of trouble came earlier, on July 17, when Salomon Brothers announced that it was liquidating all of its red dollar-blue dollar trades, which turned out to be the same trades Long-Term Capital had made. For the rest of that month, the fund dropped about 10 percent because Salomon Brothers was selling all the things that Long-Term owned.

Then, on Aug. 17, Russia defaulted on its debt. At that moment the heads of the other big financial firms recanted their beliefs about red dollars and blue dollars. Their fear overruled their reason. Once enough people gave into their fear, fear became reasonable. Fairly rapidly the other big financial firms unwound their own trades, which, having been made in the spirit of Long-Term Capital, were virtually identical to the trades of Long-Term Capital. The red dollar was suddenly worth 25 cents and the blue dollar $3. The history of red dollars and blue dollars made the statistical probability of that happening 1 in 50 million.

"What we did is rely on experience," Victor Haghani says. "And all science is based on experience. And if you're not willing to draw any conclusions from experience, you might as well sit on your hands and do nothing."

Aug. 21, 1998, was the worst day in the young history of scientific finance. On that day alone, Long-Term Capital lost $550 million.

The young professors' attachment to higher reason was a great advantage only as long as there was a limit to the market's unreason. Suddenly there was no limit. Alan Greenspan and Robert Rubin said they had never seen such a crisis, and neither had anyone else. It was one thing for the average stock-market investor to panic. It was another for the world's biggest financial firms to panic. The world's financial institutions created a bank run on a huge, global scale. "We put very little emphasis on what other leveraged players were doing," Haghani says, "because I think we thought they would behave very similarly to ourselves."

Long-Term Capital had worked on the assumption that there was a pool of professional money around that would see that red dollars and blue dollars were both dollars and therefore should maintain some reasonable relation to each other. But in the crisis, the young professors were the only ones who clung to such reasoning.

Did Long-Term Capital Die or Was It Killed?

By the end of August, Long-Term Capital had run through $2 billion of its $4.8 billion in capital. Even so, the fund might well have survived and prospered. But what started as a run on the markets, at least from Long-Term Capital's point of view, turned into a run on Long-Term Capital. "It was as if there was someone out there with our exact portfolio," Haghani says, "only it was three times as large as ours, and they were liquidating all at once."

For nearly 15 years, Meriwether and the young professors had been engaged in an experiment to determine how far human reason alone could take them. They failed to appreciate that their fabulous success had made them, quite unreasonably, part of the experiment. No longer were they the creatures of higher reason who could remain detached and aloof. They were the lab rats lost in the maze.

Inside Long-Term Capital, the collapse is understood as a two-stage affair. First came the market panic by big Wall Street firms that made many of the same bets as Long-Term Capital. Then came a kind of social panic. Word spread that Long-Term was weakened. That weakness, Meriwether and the others say, very quickly became an opportunity for others to prey upon.

"The few things we had on that the market didn't know about came back quickly," Meriwether says. "It was the trades that the market knew we had on that caused us trouble." Richard Leahy, the Long-Term partner, says: "It ceased to feel like people were liquidating positions similar to ours. All of a sudden they were liquidating our positions."

It was this second stage of his demise that clearly ate at Meriwether. As our conversation drifted toward the subject his unease turned to bitterness and his phrasing became so tortured as to be as useless to me as he hoped it would be.

By the end of August, Long-Term Capital badly needed $1.5 billion. The trades that the strategists had made lost money, but they would recover their losses if they could obtain the capital to finance them. If Long-Term Capital could ride out the panic, Meriwether figured, it would make more money than ever. "We dreamed of the day when we'd have opportunities like this," Eric Rosenfeld says.

Meriwether called people rich enough to pony up the entire sum Long-Term Capital needed, among them one of America's richest men, Warren Buffett. Buffett was interested in the portfolio but not in Meriwether. "Buffett cares about one thing," one of the fund's partners says. "His reputation. Because of the Salomon scandal he couldn't be seen to be in business with J.M."

Meriwether also called Jon Corzine at Goldman, Sachs. Goldman, Sachs agreed to find the capital but in exchange wanted more than a fee. It wanted to own half of Long-Term Capital. Meriwether and Corzine had been aware of each other's existence since the late 60's, when they studied together at the University of Chicago. For 15 years, Corzine had done his best to figure out what Meriwether was up to. This was his chance to know for all time.

What neither man realized was that the game of saving Long-Term Capital was over before it began. First came the rumors. Traders at other firms began to use ''Long-Term'' the way weathermen used El Nio -- to justify whatever they needed to justify. Lou Dobbs appeared on CNN to explain that certain stocks were falling because Long-Term Capital was selling them. The young professors, who had not been selling stocks or anything else, watched in wonder. International Financing Review, the most widely read trade sheet in the bond markets, wrote that Long-Term Capital was sitting on $10 billion of floating rate notes. The young professors say they owned no such things.

The rumors that contained some truth were more damaging, of course, and now the truth was out there, available to Goldman, Sachs and others. Every day someone would publish something about them that left them more exposed than ever to those who might prey on them. "Every rumor about the size of our positions was always double the truth,'' Richard Leahy says. ''Except the rumor about our position in Danish mortgages. That was 10 times what we actually had."

Banks that called up to bid on Long-Term Capital's positions would say things like, "We can't buy all of what we've heard you've got, but we'd like a piece." They would then ask to buy twice what Long-Term actually owned. According to the young professors, Wall Street firms began to get out in front of the fund's positions: if a trader elsewhere knew Long-Term Capital owned a lot of interest-rate swap, for instance, he sold interest-rate swaps, and further weakened Long-Term's hand. The idea was that if you put enough pressure on Long-Term Capital, Long-Term Capital would be forced to sell in a panic and you would reap the profits. And even if Long-Term didn't break, the mere rumor that it had problems might lead to a windfall for you. A Goldman, Sachs partner had been heard to brag that the firm had made a fortune in this manner. A spokesman for Goldman, Sachs said that the idea that the firm had made money from Long-Term Capital's distress was "absurd" in light of how much Goldman, Sachs had lost making exactly the same bets.

When one player in any market is sufficiently big and weak, its size and weakness are reason enough for the market to destroy it. The rumors about Long-Term Capital led to further losses, which in turn led to more rumors. The losses mounted, but strangely. The losses in August were part of a market rout. The losses that continued into September were part of a rout of Long-Term Capital.

The trouble led the New York Federal Reserve to help bring together a consortium of Wall Street banks and brokerage houses to come to the rescue. Goldman, Sachs, a consortium member, was dissatisfied to find itself one of many. It had hoped to control Long-Term, and to acquire the wisdom of the young professors. And so before the consortium finalized its plans, Goldman, Sachs turned up with Warren Buffet and about $4 billion in an attempt to buy the firm.

Long-Term Capital was caught in a squeeze -- for that's what it's called, and that's what it felt like to Meriwether and the young professors. On the very day, Sept. 21, that Warren Buffett and Goldman, Sachs turned up, Long-Term Capital, for the second time in its history, lost more than $500 million in one day. Half of that was lost in its second disastrous trade, a short position in five-year equity options. Essentially, it had sold insurance against violent movement in the stock market. The price it received for the insurance was so high that the bet would almost certainly be hugely profitable -- in the long run. But on Sept. 21, the short run took over, in a new and more venal fashion. Meriwether received phone calls from J.P. Morgan and Union Bank of Switzerland telling him that the options he had sold short were rocketing up in thin markets thanks to bids from American International Group, the U.S. insurance company. The brokers were outraged on Meriwether's behalf, as they assumed that A.I.G. was trying to profit from Long-Term's weakness. A spokesman for A.I.G. declined to comment.

But what the people who called Meriwether did not know was that at just that moment, A.I.G. was, along with Warren Buffett and Goldman, Sachs, negotiating to purchase Long-Term Capital's portfolio. But one consequence of A.I.G.'s activities was to pressure Meriwether to sell his company and its portfolio cheaply. Meriwether is convinced that A.I.G. was trying to put him out of business, a contention A.I.G. would also not comment on.

It is interesting to look over the clippings and see the role played by the media in this stage of Long-Term Capital's demise. After the firm entered negotiations to sell its portfolio through Goldman, Sachs, rumors about its holdings trickled out in the financial press, exposing Long-Term Capital's trading positions to outside attack. After negotiations among the fund and Goldman, Sachs and Warren Buffett broke down, a new wave of articles appeared. Carol Loomis wrote in Fortune, ''Warren Buffett is a longtime friend of this writer,'' and then went on to tell the following tale -- that Long-Term Capital had refused his bid because John Meriwether didn't like his terms. The story played down the fact that William McDonough, president of the New York Fed, came to the same conclusions as Meriwether -- different from Buffett's -- that the fund could not legally sell without consulting its investors, which Buffett had given them less than an hour to do. Buffett declined to comment.

The Fortune story and others like it, the Long-Term strategists maintain, created even more pressure on Meriwether to sell the next time someone made a low bid. Meriwether also says that the A.I.G. trade was "minor compared to some of the things we saw." But he declined to say what these things were, and no wonder. On Sept. 23, a consortium of 14 Wall Street banks and brokerage houses gave Long-Term $3.6 billion, in exchange for 90 percent of the firm. Some of the things Meriwether "saw" could well have been perpetrated by some of the very Wall Street firms that now own his firm, and that he now works for.

Meriwether did say this about his treatment at the hands of the big Wall Street firms: "I like the way Victor" -- Haghani, one of the young professors --"put it: The hurricane is not more or less likely to hit because more hurricane insurance has been written. In the financial markets this is not true. The more people write financial insurance, the more likely it is that a disaster will happen, because the people who know you have sold the insurance can make it happen. So you have to monitor what other people are doing."

The End of the World as Long-Term Capital Knew It

In October 1987, the markets took power from people who traded with their intuition and bestowed it upon people who traded with their formulas. In August 1998, the markets took power away from people with formulas who hoped to remain detached from the marketplace and bestowed it upon the large Wall Street firms that oversee the marketplace. These firms will do pretty much exactly the same complicated trading as Long-Term Capital, perhaps in a slightly watered down form, once the whiff of scandal vanishes from the activity. Indeed, the global economy now expects it of them. Without it, risk would be poorly priced and capital poorly distributed. And in any case, Long-Term Capital's portfolio has already turned around, rising almost 10 percent by year's end.

The events of August and September 1998 have left Meriwether and the young professors exactly where they did not want to be, working for the large Wall Street firms. Back is the messy company politics they thought they had left behind. In place of the hundreds of millions they made each year for themselves they are now paid salaries of $250,000, or the wage of a beginning bond trader without a bonus. In the best-case scenario, their portfolio will make the fortune they predicted for it, they will convince the money culture that they are still worth having around and they will find other rich people to replace their current owners. In the worst and more likely case, they are finished as a group.

It is interesting to see how people respond when the assumptions that get them out of bed in the morning are declared ridiculous by the wider world. There is obviously now a very great social pressure on the young professors to abandon the thing they cherish most, their hyperrational view of the world. In the coming months, they could very well be hauled before some Congressional committee to explain their role in jeopardizing the free world. Oddly, the question that occupies them is not whether to push on with their models of financial behavior but how to improve the models in light of what has happened to them. "The solution," Robert Merton says, "is not to go back to the old, simple methods. That never works. You can't go back. The world has changed. And the solution is greater complexity."

"It's like there are two businesses here," Eric Rosenfeld says, "the old business, which works fine under normal conditions, and this stand-by business, when the world goes mad. And for that, you either need to buy insurance or have a pool of stand-by capital to take advantage of these opportunities."

The money culture has never been very good at distinguishing bad character from bad judgment and bad judgment from bad luck, and in the complex case of Long-Term Capital it has been worse than usual. Reputations are ruined, fortunes lost and precious ideas simultaneously ridiculed and stolen. So maybe the most interesting thing to happen since Long-Term got itself into trouble is what has not happened. There have been none of the venal self-preservatory acts that often accompany great financial collapse. No one has pointed a finger at his partners. Already several partners have declined offers to work for other fund managers or big Wall Street firms.

Yet for the first time in 15 years, John Meriwether and his young professors cannot steer toward some moment of certainty in the distant future. What they hope will happen next is no longer the same as what they think will happen next. Which is to say that they are, for the first time in 15 years, just like everyone else.

Michael Lewis is a contributing writer for The New York Times Magazine. He is working on a book about Silicon Valley.

Correction: January 24, 1999, Sunday Because of a picture agency's production error, a photograph in a collage on page 25 of The Times Magazine today, showing John Meriwether of Long-Term Capital Management, is printed in mirror image. His hair should appear parted on the right.
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March 18, 2002, New York Times, Market Place; Some Lessons For Andersen From Scandal At Salomon, by Floyd Norris,

Perhaps, if Arthur Andersen had a Warren E. Buffett, things would be different.

Eleven years ago, the scandal that was dominating the financial pages involved Salomon Brothers, which had infuriated important parts of the federal government by its handling of a bond trader who had violated the rules for Treasury security auctions. Senior executives of the firm had not acted quickly when they learned of the problem.

There was talk then that the Federal Reserve would suspend Salomon as a primary dealer in Treasury securities and that felony charges would be filed against the firm. There were forecasts that Salomon could not survive if that happened.

In the end, there were no felony charges brought against the firm. Salomon survived, eventually to be acquired. A few mergers later, Salomon Smith Barney is a subsidiary of Citigroup.

The chairman of the Securities and Exchange Commission back then was Richard C. Breeden. When he looks at the scandal surrounding Andersen, the accounting firm the Justice Department indicted last week on an obstruction of justice charge, Mr. Breeden sees the case differently than do some other former S.E.C. chairmen. Others have been impressed by Andersen's promises to reform. Mr. Breeden's reaction is that Andersen did too little, too late.

"I think they deserve to be indicted," he said in an interview last week.

To Mr. Breeden, Andersen failed to clean house in the aftermath of the Enron document-shredding episode by Andersen last fall, which clearly showed, at best, that controls within the firm were inadequate.

"The first thing they needed to do was to change the people," he said. "They needed a new general counsel, a new chief executive, a new head of auditing -- people who had no connection with what went wrong."

That, he recalled, was what Mr. Buffett did at Salomon in 1991. The top four officials of Salomon were all shoved aside quickly after the Treasury scandal broke, and Mr. Buffett, an outside director of Salomon and an investor in it, became the chairman and chief executive. He brought in a general counsel from outside and eventually turned over the firm to an executive who had been based overseas when the problems arose.

Before that, Mr. Breeden recalled, Mr. Buffett had essentially thrown Salomon on the mercy of the government, offering to make whatever reforms the government wanted. "He told me that if I wanted an S.E.C. enforcement lawyer to sit next to him in his office," that would be acceptable, Mr. Breeden said.

Mr. Buffett, he said, told him that Salomon was determined to prove to the government that it had put in honest people and effective controls and would do what was required. If the government wanted to file a felony charge, he said Mr. Buffett told officials, Salomon would plead guilty.

There are huge differences in the Andersen and Salomon cases. At Salomon, the top officials had somehow failed to notify Treasury officials after they learned of misbehavior by subordinates, and thus were more directly involved in what the government saw as misconduct than are Joseph Berardino, the Andersen chief executive, and other top officers.

But to Mr. Breeden, that is not important. "Berardino may be the nicest guy in the world," he said, "but he should have gone. He needed to say, 'Someone has to take responsibility, and it is me.' Otherwise, it is all public relations."

He said Andersen should have brought in a trusted outsider like Mr. Buffett -- perhaps Arthur Levitt, another former S.E.C. chairman -- as the interim boss. Such a new leader would have had the credibility that Mr. Buffett had in negotiating to save Salomon. Then the new boss could have chosen an accountant, perhaps someone who had been running a regional office well removed from the scandal, to direct the firm.

In fact, Mr. Berardino seems to have been prepared to step aside if need be. He did not bring in a new chief, but he did set up an oversight committee led by a former Federal Reserve chairman, Paul A. Volcker. Mr. Berardino gave the committee the power to mandate changes in management, as well as changes in personnel. But the Volcker committee has not yet done that, and in the interim the former management has remained in control.

There are other differences in the two cases that may help to explain the differing behaviors of the two firms, Andersen and Salomon, and of the federal officials negotiating with them.

Salomon was a publicly traded company, with a board that included outsiders like Mr. Buffett, who had a large investment in the company. It was clearly the board's duty to decide if a management change was needed. Andersen is a partnership, without any outside directors. Mr. Breeden argues that all accounting firms should have such directors, in part to deal with issues of whether management needs to be changed.

Another difference is the relation of the firm to regulators. Salomon, like any other brokerage house, accepted that it was regulated by the S.E.C. and knew that life would be very miserable if the regulators were angry. And Salomon officials knew that if the Treasury and the S.E.C. were very mad at it, it would be very hard for the firm to survive and prosper.

The accounting industry, on the other hand, as recently as two years ago was arguing whether the S.E.C. had any right to try to regulate it. The S.E.C.'s authority is indirect, based on its ability to accept or reject audited financial statements.

And considerable ill will grew between the commission and the industry when the Levitt S.E.C. pushed for restrictions on consulting services that accounting firms could provide to their auditing clients. Andersen was one of the three firms that bitterly fought the rules, though it played a role in eventually working out a settlement.

Moreover, the history of auditing scandals has been that the only real penalty suffered by accounting firms has been the financial one produced by shareholder suits. Government regulators may have been more resented than feared.

Unfortunately for Andersen, the last major auditing scandal, in the eyes of regulators, was one that involved the same firm. When Andersen settled charges filed by the S.E.C. in the Waste Management case last year, it became the first large accounting firm in decades to face a civil fraud accusation by the S.E.C.

Andersen appeared to survive the Waste Management case very well. But government officials took note of the fact that even some accountants who were penalized by the S.E.C. in that case were allowed to keep their jobs, and that there was no sign of internal reform by the firm. Andersen may have learned from that case that scandals could be endured; regulators may have learned that Andersen could not be trusted to reform itself.

It was with those divergent views that Andersen leaders and Justice Department officials met in this case. The result was an indictment that Andersen could not believe would come -- and that may help put the firm out of business.
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May 17, 2002, New York Times, Bond Broker Inquiry,

BrokerTec, an electronic bond broker that is a major participant in the market for Treasury bonds and bills, said on Wednesday that the Justice Department was investigating allegations that it had engaged in anticompetitive practices.

BrokerTec became one of the largest firms in Treasury trading last year. It said in a statement that it was one of several electronic trading firms that have been questioned by the Justice Department. The company released the statement late Wednesday and said it was cooperating with the investigation.

BrokerTec, based in Jersey City, is owned by major banks that control 85 percent of the global interdealer Treasury market. In a four-month period last year, the firm nearly doubled its share of the interdealer market, in which dealers trade with each other, to nearly 40 percent. BrokerTec says it executes trades more quickly and cheaply than telephone-based brokers.
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July 13, 2002, New York Times, Citigroup Trims Bond Unit,

The money-management unit of Citigroup laid off 12 people in its taxable bond department this week, including the fund managers James Conroy and John Bianchi, to cut costs, a company spokeswoman said. The 12 managed about $7 billion in 14 Smith Barney mutual funds, the company said. A team led by Peter Wilby, formerly of Salomon Brothers, will manage the funds. Asset Management employs managers from Salomon Brothers and Smith Barney, which merged in 1997 to form the Salomon Smith Barney unit of Citigroup.

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October 14, 2002, New York Times, Rumsfeld Favors Forceful Actions to Foil an Attack, by Thom Shanker,

Defense Secretary Donald H. Rumsfeld, in a personal set of guidelines for committing forces to combat, wrote that America's leaders must quickly judge when diplomacy has failed, then "act forcefully, early, during the precrisis period" to foil an attack on the nation.

If those actions fall short, America must be "willing and prepared to act decisively to use the force necessary to prevail, plus some," he wrote.

Mr. Rumsfeld's memorandum, written in March 2001 but updated as recently as this weekend, said the nation's leaders must never "dumb down" a mission to gain support from the public, Congress, the United Nations or allies.

In particular, he wrote, leaders must avoid "promising not to do things (i.e., not to use ground forces, not to bomb below 20,000 feet, not to risk U.S. lives, not to permit collateral damage, not to bomb during Ramadan, etc.)."

Such pledges simplify planning for a foe, he wrote, just as artificial deadlines for American withdrawal allow an enemy to "simply wait us out." [Excerpts, Page A9.]

The Rumsfeld guidelines both echo and refine military thinking set down in past years by Caspar Weinberger, President Ronald Reagan's defense secretary, and by Colin L. Powell, chairman of the Joint Chiefs of Staff for the first President Bush and secretary of state for the second.

For example, Mr. Rumsfeld wrote that American lives should be risked only when a clear national interest is at stake, when the mission is achievable, when all required resources are committed for the duration of combat -- and only after the nation's leadership has marshaled public support.

But the Rumsfeld guidelines can be read as diverging from eight years of Clinton administration policy. During those years, the armed forces were assigned a number of missions -- from Haiti to Somalia to Bosnia to Kosovo -- that critics, often Republicans, said risked American lives for humanitarian assistance, peacekeeping and democracy-building efforts that had less clear benefit for American national security.

An early draft of the memo was obtained over the summer, but under strict ground rules set by the person who provided the memo, it was meant for informational purposes only and could not be published. Repeated requests for Mr. Rumsfeld to discuss his thinking were made in the intervening months, and he agreed this weekend to provide the current version of his guidelines.

The two-page memorandum said that before committing military forces, the nation must consider how it might affect American interests around the world "if we prevail, if we fail, or if we decide not to act."

"Just as the risks of taking action must be carefully considered, so, too, the risk of inaction needs to be weighed," he wrote.

Shortly after being sworn in as defense secretary for President Bush, "I sat down and I said, 'You better have a damn good reason if you're going to put somebody's life at risk. What ought we be thinking about?'" Mr. Rumsfeld said in an interview this weekend. "So I started writing."

Mr. Rumsfeld regularly reviews the memo, he said. "I pick it up and read it every couple of months when something comes up." He said the memo shaped his thinking for the war in Afghanistan and today is guiding his advice to Mr. Bush as the administration ponders war with Iraq.

One of the memo's passages on public confidence rings loudly at a time when President Bush is moving to use a vote in Congress supporting an attack on Iraq as leverage to push for a tough United Nations resolution forcing President Saddam Hussein to disarm.

"If public support is weak at the outset, U.S. leadership must be willing to invest the political capital to marshal support to sustain the effort for whatever period of time may be required," Mr. Rumsfeld wrote. "If there is a risk of casualties, that fact should be acknowledged at the outset, rather than allowing the public to believe an engagement can be executed antiseptically, on the cheap, with few casualties."

A senior Defense Department official said that in releasing the memo, Mr. Rumsfeld was responding at least in part to urgings from his civilian and military advisers, who said the public should have insight into the thinking of President Bush's principal adviser on national defense as the nation girds for possible war with Iraq.

"This is how the senior civilian in the Department of Defense is thinking before Pfc. Pace goes in harm's way," said Gen. Peter Pace, vice chairman of the Joint Chiefs of Staff. "This document really makes you feel very, very comfortable and very good that these are 'tick points' that he's using for those kinds of decisions."

The guidelines do not represent official policy that has passed through the national security process, although Mr. Rumsfeld has shared the memo with a small circle, including President Bush, Secretary of State Powell, Deputy Defense Secretary Paul D. Wolfowitz, General Pace, and Gen. Richard B. Myers, the chairman of the Joint Chiefs of Staff.

The memo is thought to be the first public restatement by a defense secretary of guidelines for the use of force since the Reagan administration, when Mr. Weinberger similarly defined when to use combat forces.

In a November 1984 speech, Mr. Weinberger said the American military should only be sent into action when a vital national interest was at stake, when decisive force was brought to bear in a wholehearted effort to win, and when support from Congress and the public was reasonably assured.

At the time, that message was seen as a counterpoint to Secretary of State George P. Shultz and his senior diplomats, who were said to argue that diplomacy would suffer if the threat of military action could not be used for a far broader range of issues that might not involve supreme national interest.

The doctrine was later restated by Secretary Powell when he was chairman of Joint Chiefs of Staff. He argued that when a clear national interest had been defined -- and if the objective could be achieved through combat -- then overwhelming military force should be deployed.
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November 10, 2002, New York Times, Falling From Grace, Often to the A-List, by Leslie Wayne,

(Harvey L. Pitt as chairman of the Securities and Exchange Commission)

FOR anyone in the private sector, the rise and very public fall of Harvey L. Pitt as chairman of the Securities and Exchange Commission would appear to be a career-stopping performance. Mr. Pitt had earned a stellar reputation in Washington as a securities lawyer with ample blue-chip corporate ties. Then, after a stormy 15 months laden with missteps, he made an election-night resignation that appeared as if he wanted to sneak out of town while no one was looking.

Who would hire someone who failed so publicly, who was excoriated by the same business publications that once sang his praises?

But if history is any indication, the outlook for Mr. Pitt may not be so bleak. Many in business -- as well as old Washington hands -- who have had their names tarnished and reputations sullied have discovered that there is life in the private sector after public disgrace, and a potentially profitable one at that.

Members of Congress who have resigned or who have been forced out are making money as lobbyists for Fortune 500 companies. Wall Street executives who went to the White House and were caught up in the Clinton scandal machine have bounced back, more successful and richer than ever. Cabinet secretaries and other politicians whose lurid sexcapades were grist for the tabloids are active in major corporations. Even nannygate dust-ups that scuttled cabinet appointments in both the Clinton administration and the first Bush administration are now distant memories for the businesswomen involved.

Just last Thursday night, at a glittery black-tie dinner in New York sponsored by the Aspen Institute, a study group, talk turned to Mr. Pitt. During predinner cocktails, one prominent New York lawyer said Mr. Pitt had a promising future, made even stronger by his S.E.C. tenure and the insights he picked up there.

"Harvey Pitt is going to be the hottest ticket coming out of Washington," said the lawyer, Robert A. Profusek, a partner at Jones, Day, Reavis & Pogue, sipping from his drink. "I know his phone is ringing off the hook with law firms trying to hire him. He's an excellent lawyer, and a lot of people think he is a victim. People don't look at him here the way they do in Washington. I also think, from his point of view, he's going to want to prove that he is not damaged goods."

Others may disagree. In fact, there is no clear picture of life after a public tumble; the future is often determined by what caused the fall, like simple poor performance and a political tin ear, as in the case of Mr. Pitt, or more serious mistakes, as in the cases of disgraced politicians and executives who faced criminal charges. A person's network of contacts is also a factor, not to mention sheer likability.

Even professional headhunters have a hard time divining that line.

"Life diminishes when you go to Washington and you stumble," said E. Pendleton James, a senior adviser at Whitehead Mann, an executive recruitment firm, and a former head of personnel in the Reagan White House. "There is a diminution in the value of your acumen to corporate America. But, having said that, it depends on how one falls or fails."

In dozens and dozens of cases, Americans have been a forgiving lot. The half-life of a scandal can be short, redemption can be swift and the main lingering effect of a public downfall is often the celebrity it brings.

"Washington has a long and honored history of forgiving and forgetting when it comes to getting knocked around in public positions," said Kenneth A. Gross, a partner in the Washington office of Skadden Arps Meagher Slate & Flom, who has represented many prominent politicians. "Short of being actually convicted, after a period of time in which there is some delicacy on the issue, all that people remember is that you are famous. Then they want you at all the A-list cocktail parties."

That may shock some people, who believe that malfeasance or mistakes in public service should not be overlooked so easily, let alone rewarded. They bemoan the cavalier way in which people are often welcomed back with open arms and minimal consequences.

Of course, Mr. Pitt, or anyone else in his position, is unlikely to receive an invitation to rejoin an administration. Washington is too much the fishbowl for that.

"The vetting process for top government jobs is getting extremely complicated," said James J. Albertine, president of the American League of Lobbyists. "You are talking about basically standing naked in front of the world and having every blemish you ever dealt with shown to the world. And that increases the higher the job is. It's becoming a real issue because no one is perfect and even if they are a perfect person, they often get killed by the scrutiny anyway."

But the private sector often shrugs off Washington's scandals and bungling.

The Clinton scandals caught two prominent Wall Streeters, who incurred only minor bruises. One was Roger C. Altman, who was forced to resign as deputy Treasury secretary in 1994 amid a cloud of criticism over his inaccurate testimony in Congressional hearings about the Whitewater scandal. After leaving Washington, Mr. Altman founded Evercore Partners, a boutique investment bank that had no trouble lining up clients like CBS, Dow Jones, NBC and AOL Time Warner. And though Mr. Altman cited the news media as a cause of his problems, Evercore later bought American Media Inc., publisher of The National Enquirer, the splashy tabloid.

Mr. Altman declined to be interviewed.

The other big Wall Streeter was Bernard W. Nussbaum, a veteran corporate lawyer, who resigned as the Clinton White House counsel after questions were raised about his role in Whitewater. He was later cleared of any wrongdoing.

"Life hereafter is fine," said Mr. Nussbaum, who returned to his desk as a partner at Wachtell Lipton Rosen & Katz. By the accounts of many who know Mr. Nussbaum, his business has only grown since leaving Washington. Mr. Nussbaum, too, agrees that memories are short when it comes to Washington headlines.

"People get driven out over public relations things," he said. "Things are twisted to make them seem egregious when it is really nothing. That is why other areas around the country are not like Washington. People in New York, Los Angeles and San Francisco are sophisticated" and quickly forget, he added.

OBVIOUSLY, executives flame out within the corporate world, as well, sometimes almost as publicly. The last year has produced a bumper crop of chief executives who have been charged with running afoul of the law. And hardly anyone expects the likes of Samuel D. Waksal, the former chief executive of ImClone Systems, L. Dennis Kozlowski, the former chief of Tyco International, or Andrew S. Fastow, the former chief financial officer of Enron -- all indicted -- to find jobs in public companies anytime soon, if ever.

Albert J. Dunlap, the former chief of Sunbeam who was despised by many and nicknamed Chainsaw Al for his slash-and-burn treatment of employees, is probably equally unemployable.

Still, corporate America has often been forgiving of its own. Several executives who have left in disgrace, even after civil charges, have been rehabilitated. After a time in purgatory, when they set themselves up as consultants or investors, people like John H. Gutfreund, the former chairman of Salomon Brothers who was forced out after failing to inform the authorities about illegal bidding at the firm, and Lawrence Kudlow, who had worked as chief economist at Bear, Stearns and in economic posts in Washington before his troubles with illegal drugs were revealed, have rebounded. Mr. Gutfreund now works as senior managing partner at C. E. Unterberg, Towbin, while Mr. Kudlow is co-host of "Kudlow & Cramer" on CNBC.

Who knows what will happen to Martha Stewart over the long haul? It's unclear whether her legal problems will force her out or taint her brand.

Though incompetence or disagreement with management have also caused the public fall of many top executives, oddly their fate is less predictable. Jacques A. Nasser, forced out of the top post at Ford Motor in October 2001, by the Ford family, has yet to land a new job. Nor has Jill E. Barad, who was drummed out of Mattel's top job, nor Robert W. Pittman of AOL Time Warner.
In fact, some of these executives may be treated more harshly by their brethren than those who have tripped up in the capital. "There is more understanding for someone who has stumbled in Washington than for someone who has taken a company and driven it downhill," said Gerard R. Roche, senior chairman at Heidrick & Struggles, an executive search firm.

UNLIKE Mr. Pitt and other public servants, most of these ousted executives can find comfort in their overstuffed golden handshakes, which can run into the tens of millions; they don't need to work. But Washington awards a trump card -- lasting access to power. Many corporations are willing to overlook an ethical lapse or a subpar performance and put those with Washington expertise on their boards, to use them as lobbyists or to make them partners in business deals.

Consider Robert L. Livingston, a Louisiana Republican who was on the verge of becoming the House speaker but who resigned from Congress in 1998 after confessing to adultery. Today, he is one of Washington's most sought-after lobbyists, heading the Livingston Group, which took in $3 million in 2000, the most recent data available, with a client roster that has included General Electric, Lockheed Martin, Raytheon, Oracle and 44 others.

"I was almost speaker of the House and I could have been if I had chosen to stay," Mr. Livingston said. "I was in demand then, and I've been in demand ever since I've left."

The same is true for Bob Packwood, a Republican from Oregon who resigned in disgrace in 1995 after an ethics committee unanimously found he had forced himself on nearly two dozen women in his office, including a 17-year old intern. Mr. Packwood reported lobbying income of $1.4 million in 2000 and his client list includes Northwest Airlines, United Airlines and Verizon Communications.

"It takes a while," Mr. Packwood said. Reflecting on the process, he added: "In the real world, they're not going to touch you if you go about moaning and complaining. But if you just go about your life, the real world is pretty forgiving."

So forgiving, in fact, that former Representative Dan Rostenkowski, a Chicago Democrat who served time in prison for misuse of public funds (he was later pardoned by President Clinton), was even appointed to a corporate board. His opinions on tax issues -- drawn from his long tenure as chairman of the House Ways and Means Committee -- appear on the op-ed pages of major newspapers, including The Wall Street Journal.

Last year, when Mr. Rostenkowski was named to the board of American Ecology, a radioactive- and hazardous waste services company, where he served until last April. In announcing Mr. Rostenkowski's selection, the company made it clear that it was looking to capitalize on his connections in the capital.

"We look forward to Mr. Rostenkowski's contributions based on his 36 years of outstanding Congressional service," said Jack K. Lemley, the company's chief executive at the time. "His knowledge and expertise is particularly valuable to American Ecology's efforts to further penetrate the expanding federal government services market."

Henry G. Cisneros, a former Clinton cabinet secretary, pleaded guilty in 1999 to lying to the Federal Bureau of Investigation about payments to a former mistress, but he has decidedly recovered from charges that could have resulted in a 90-year prison term.

First, Mr. Cisneros became president and chief operating officer at Univision, the nation's largest Spanish-language television broadcaster. In August, he formed a partnership with the Kaufman & Broad Home Corporation, one of the largest homebuilders in the United States, to develop low-cost housing in San Antonio.

Many other examples date from earlier years.

Tony Coelho, who resigned from Congress in 1989 over a controversial junk-bond investment, has made millions as a businessman and even returned to politics when Al Gore hired him to be his campaign chairman before the 2000 election. After resurrecting himself with a brief stint on Wall Street, Mr. Coelho has held positions on 11 corporate boards, the most prominent being Kistler Aerospace.

Michael K. Deaver, who was chief of staff in the Reagan White House, is now one of Washington's most powerful public relations executives; he heads the Washington office of Edelman Public Relations. His conviction on felony perjury charges in 1987 for lying to Congress and to a federal grand jury, and a suspended prison sentence, matter not at all.

Michael P. Castine, who also worked in the Reagan inner circle and is now a managing partner in TMP Worldwide, an executive recruiting firm, recalls the day he brought an old friend -- one caught up in a Washington scandal -- to the Senate dining room. "Six or seven senators of both parties came up to him," Mr. Castine recalled. "Rather than avoiding him, they embraced him." The man simply had too much influence and too many connections to ignore.

Of course, someone who is tainted, yet has successfully regained footing as a lobbyist or by starting a business, hasn't necessarily gained full redemption. Cracking A-list corporate boards is a taller order, and is likely to be even more so now that the spate of corporate scandals has made all boards more sensitive to public opinion.

"With the enormous scrutiny taking place, corporations only want people who are squeaky clean on their board," said Mr. Roche, the executive recruiter. "It used to be that boards could wink at some of these folks. Not any more. And if you want to put someone on the audit committee, they've got to be up for sainthood. We do work for the AT&T's and the Alcoas of the world. They are not looking for the Bob Packwoods."

Some people applaud the trend. Charles Lewis, executive director of the Center for Public Integrity, bemoans America's forgetfulness about transgressions by public officials. "They have a public trust, and if they violate it, they should be on the hook," he said. "It's a privilege and a magnificent opportunity to serve the public in these important positions. If they can't cut the mustard, then goodbye."

Editors' Note: November 14, 2002, Thursday An article in Money & Business on Sunday described the careers of officials and executives after they were fired or forced to resign. It said the corporate world was sometimes less forgiving than the political one. The article cited, as examples of those who had yet to land jobs, Jacques A. Nasser, former chief executive of Ford; Jill E. Barad, former chief of Mattel; and Robert W. Pittman, former chief executive of America Online. Although the article also said that many such executives do not need jobs, the three should have been invited to comment. On Monday Mr. Nasser said he was joining Bank One's leveraged buyout arm. Mr. Pittman said through a spokeswoman for AOL Time Warner that he was not seeking a job at this time. Although messages were left with Mattel and other organizations with which Ms. Barad is or has been associated, she did not return telephone calls this week.
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April 13, 2004, New York Times, The Uncertainty Factor, by David Brooks,

Twenty years ago, Secretary of State George Shultz went to the Park Avenue Synagogue in New York to give a speech about terrorism. Fighting a war on terrorism, he emphasized, means coping with uncertainty.

Terrorists operate outside the normal rules, Shultz observed. Because an attack is so hard to anticipate, he said, "our responses should go beyond passive defense to consider means of active prevention, pre-emption and retaliation. Our goal must be to prevent and deter future terrorist acts."

We can't wait for the sort of conclusive evidence that would stand up in a court of law. "We cannot allow ourselves to become the Hamlet of nations, worrying endlessly over whether and how to respond." We have to take the battle to the terrorists so we can at least control the time and place of the confrontation.

And we have to plan these counteroffensives aware of how little we know for sure.

Facing such great uncertainties, Shultz continued, the president has to take extra care to prepare the electorate: "The public must understand before the fact that some will seek to cast any pre-emptive or retaliatory action by us in the worst light and will attempt to make our military and our policy makers -- rather than the terrorists -- appear to be the culprits. The public must understand before the fact that occasions will come when their government must act before each and every fact is known."

The Shultz speech opened a rift within the Reagan administration. Shultz's argument was that uncertainty forces us to be aggressive. Secretary of Defense Caspar Weinberger, on the other hand, argued that uncertainty should make us cautious. As one Weinberger aide told The Times, ''The Pentagon is more aware of the downside of military operations and therefore is cautious about undertaking operations where the results are as unpredictable as in pre-emptive strikes against terrorists.''

Shultz and Weinberger were clear and mature. Both understood there is no perfect answer to terror and both understood the downsides of their respective positions.

Two decades and a national tragedy later, it is hard to find anybody that consistent.

If you follow the 9/11 commission, you find yourself in a crowd of Shultzians. The critics savage the Clinton and Bush administrations for not moving aggressively enough against terror. Al Qaeda facilities should have been dismantled before 9/11, the critics say.

Then you look at the debate over Iraq and suddenly you see the same second-guessers posing as Weinbergerians. The U.S. should have been more cautious. We should have had concrete evidence about W.M.D.'s before invading Iraq.

Step back and you see millions of people who will pick up any stick they can to beat the administration. They're perfectly aware of the cruel uncertainties that confront policy makers, but, opportunistically, they ignore them.

Nor has the administration itself demonstrated that it can operate as intelligently as Shultz in a world of uncertainty. The administration war plan called for a lean, high-tech invasion. That's fine if you know who your enemies are and where you can hit them. But if you don't have that information, you probably have to hang around, feeling your way through the neighborhoods. For that you need boots on the ground -- enough to cope with the unexpected. You need heavy armor, because it's likely your enemies will strike first before you know where they are.

The Bush administration sent too few troops into Iraq, and they stuck them in Humvees that couldn't withstand a semi-serious terrorist attack.

Worse yet, the administration never bothered to educate the American people on the nature of war amid uncertainty. The president did not stress beforehand that it was necessary to act, even though some of his suppositions would inevitably prove to be incorrect.

When you read the Shultz speech, you get the impression the country is aging backward. Twenty years ago we had a leader who treated us like adults, mature enough to cope with harsh uncertainties. Now we're talked to as if we're children, which, if you look at the hypocrisy-laden terror debate, is about what we deserve.
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August 7, 2005, New York Times, Was Someone Squeezing Treasuries?, by Gretchen Morgenson,

A STORM swept through the United States Treasury market in June, creating big losses at banks and brokerage firms and bringing back memories of the infamous short squeeze by Salomon Brothers in 1991 that ultimately brought the firm to its knees.

The recent turmoil is a troubling sign that the pools of capital at hedge funds and investment firms have grown so enormous that they can easily swamp the government securities market, one of the world's deepest, most liquid and heavily used financial markets. The upheaval also involved a short squeeze - financial-speak for what happens to short-sellers when they are forced to stanch their losses in a buying spree that sends prices higher and higher.

Back in 1991, remember, a trader at Salomon Brothers propelled the price of Treasury securities skyward by illegally buying more than the firm's allotted share at auction. That squeeze created significant losses for many other players in the market and enraged regulators. The government punished the trader, Paul W. Mozer, and the firm, which paid $290 million in fines and penalties to settle the matter. John H. Gutfreund, Salomon Brothers' chief executive at the time, resigned as a result of the mess.

This time around, the market upheaval centered on a 10-year Treasury security issued in February 2002 that pays an interest rate of 4.875 percent. The notes generated about $25 billion for the government when they were issued, but the amount of bonds changing hands regularly, known as the float, is significantly smaller than that.

It's not known who was behind the recent short squeeze and there is no indication that the activity was illegal.

But by far and away the largest holder of the 10-year Treasury in question, and therefore the one that would benefit the most from the action, is the Pacific Investment Management Company, or Pimco, the $500 billion money management firm specializing in fixed-income investments and overseen by William H. Gross.

As of June, according to data from Bloomberg News, Pimco held more than 45 percent of the outstanding 10-year security in its various funds. Pimco's percent of the daily float was unknown but would have been far larger.

James M. Keller, a managing director at Pimco and director of its government/derivatives desk, said that the company as a policy does not comment on its trades.

This particular 10-year note was also the security underlying a Treasury futures contract that expired in June. Such contracts are crucial hedging vehicles for investors and traders in mortgage-backed securities, corporate bonds and other fixed-income investments.

Problems began emerging in late May, when traders who had sold the 10-year note short suddenly found that they could no longer go into the open market and borrow the securities for delivery to their purchasers. If sellers of a security cannot deliver it to buyers, the trades cannot settle. In Wall Street parlance, this is called a "fail."

ACCORDING to traders, beginning in late May and extending into June, billions of dollars of the 10-year Treasury were failing each day. It was clear that one or more holders of the securities had stopped lending them, setting up what appeared to be a perfect short squeeze. As sellers scrambled to buy back the securities to cover their short positions, the price of the Treasury rose, creating losses for anyone who still had a short position.

Holders of securities often agree to lend them, for a fee, to traders who are short the security. If no securities are available to be borrowed, anyone who is short the security must pay the amount of the coupon or interest rate to the people who have bought them. So, those who were short this particular Treasury were losing twice: once on the coupon, and again as the security's price rose.

The June turmoil was not limited to the Treasury market, however. It also created problems for the throngs of traders at brokerage firms, hedge funds and banks that use the futures market to hedge their positions in other fixed-income securities. At one point, positions taken by investors in the Treasury futures contract that had the unborrowable 10-year note as its underlying security reached $200 billion.

Under the terms of a futures contract, any trader who has sold one must supply the underlying security to the contract's owner when it expires. If a trader fails to make the delivery, he or she may face a penalty from the Chicago Board of Trade, where Treasury futures change hands.

The disruption of the Treasury market in June seemed to have prompted the Chicago Board of Trade to institute limits on the number of Treasury futures contracts a trader can buy or sell in the last 10 trading days of its cycle. For example, traders in the futures contract that corresponds to a 10-year Treasury will be limited to 50,000 contracts. The limits, announced on June 29, go into effect with the December contracts. The last limit on the 10-year Treasury was 7,500 contracts; it was in place from 1990 to 1992.

Officials at the Chicago Board of Trade declined to discuss why the changes were made. But a notice explaining the new limits said the exchange's action furthered its "interest in providing deep, liquid and transparent markets and underscores our commitment to protecting the integrity of these contracts."

And last week, Treasury officials discussed the problem of large capital pools possibly overwhelming the government securities market. In a meeting last Tuesday of the Treasury Borrowing Advisory Committee of the Bond Market Association, which meets with Treasury officials four times a year to discuss matters relating to the financial markets, Timothy S. Bitsberger, assistant secretary for financial markets at the Treasury, said it was considering creating a securities lending facility to provide an extra supply of Treasuries in emergencies when large numbers of settlement failures occur.

According to the minutes of the meeting, some people in attendance expressed support for the lending facility. Others, the minutes reported, were opposed. As is customary, the minutes did not identify which members were for or against the emergency lending facility.

The advisory committee's members are executives at brokerage firms, banks and hedge funds. One member is Mr. Keller, the Pimco managing director. He declined to discuss his view on the emergency lending facility.

In an interview on Friday, Mr. Bitsberger said that a proposal outlining how an emergency facility would work could emerge in the next six months. He said the Treasury is concerned that, as fails increase, some market participants may re-examine their reliance on government securities.

There is no doubt that supply and demand in the government securities market is becoming increasingly imbalanced. And such imbalances almost guarantee greater volatility in Treasuries and, therefore, interest rates.

From 1981 to 2004, according to government figures, Treasury securities outstanding grew 8 percent each year, on average, while annual trading volume increased 16 percent, on average. And from 2000 to 2004, Treasuries outstanding increased 4 percent a year, on average, while average trading volume rocketed 22 percent.

The futures contract expiring in September is based on a Treasury issue that is even smaller - $19.5 billion - than the $25 billion 10-year underlying the expired June contract.

In other words, fasten your seat belt. More gyrations in this market almost certainly lie ahead.
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September 24, 2008, New York Times, Warren Buffett and the Salomon Saga,

Warren E. Buffett’s $5 billion investment in Goldman Sachs is being hailed as a major vote of confidence in Wall Street’s prospects. Since the credit crunch began last year, financial firms have gone cap in hand to many investors, including Mr. Buffett, seeking capital to shore up their tattered balance sheets.

Until now, Mr. Buffett has kept his wallet closed. His reluctance to jump into the financial crisis early on seems prescient. But his hesitation may have had something to do with bad memories lingering from his last major foray into Wall Street: a $700 million investment in onetime bond-trading powerhouse Salomon Brothers during the market crisis of 1987.

That investment, a long relationship full of ups and downs, must have weighed heavily on Mr. Buffett’s mind during the recent turmoil.

Two decades ago, Wall Street investment banks were going around trying to raise capital to shore up their balance sheets that were damaged from investments in junk bonds. (Sound familiar?) Most went to foreign sources, like Japan, for their cash, but Mr. Buffett came to the rescue of Salomon.

It was a classic Buffett play, or so he thought. He invested in what appeared to be a solid company with a good reputation that was getting its stock slapped around by a fearful market. “Be fearful when others are greedy; be greedy when others are fearful,” Mr. Buffett has famously said.

However, Wall Street is a turbulent place. Weeks after Mr. Buffett made his investment, Salomon disclosed a surprise $70 million write-down from bad bets made by trading junk bonds. That set off a series of events culminating in the market crash of 1987, which wiped out one-third of Mr. Buffett’s investment.

But that wasn’t the worst of it. In 1991, Salomon was caught up in a bond trading scandal that nearly forced the firm to file for bankruptcy. In order to protect his investment, Mr. Buffett went from being a passive investor to chairman of the firm. He found that every dollar of shareholder equity was supporting $37 of assets. That’s even higher than the 30-to-1 leverage ratio at Lehman Brothers when it collapsed last week.

Mr. Buffett ran the firm for nine months, distracting him from his other business dealings. He called his time there “far from fun” in a letter to investors in hisBerkshire Hathaway holding company. But he was successful in steering the firm back from the brink.


In 1997, Salomon was sold to Travelers for $9 billion. The sigh of relief could be heard all the way from Mr. Buffett’s hometown of Omaha. His $700 million investment was now worth $1.7 billion. But the experience seemed to sour him on Wall Street deals. By 2001, he had exited his investment in the firm.

Now Mr. Buffett is getting back into the Wall Street game. Asked about the Salomon saga in a CNBC interview Wednesday, he laughed and replied, “The pain has worn off.”

His investment in Goldman is a bet that the firm will be able to work through the bad investments it made in connection with the housing market over the years and stay profitable.

Goldman’s stock rose Wednesday after the firm announced Mr. Buffett’s infusion as well as a $5 billion stock offering, which will be highly dilutive to its current shareholders. That’s a pretty good sign from the market.

But as Mr. Buffett knows all too well, fortunes on Wall Street can change on a dime.

Go to Press Release from Goldman Sachs »
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October 23, 2008, New York Times, Op-Ed, From Beirut to 9/11, by Robert C. McFarlane,

IN the summer of 1983, I became President Ronald Reagan’s special representative to the Middle East, with the mission of restoring a measure of calm to Israel’s relations with her neighbors, starting with Lebanon. At the time, Lebanon was occupied by Syrian and Israeli forces — Syria since shortly after Lebanon’s civil war began in 1975, and Israel since its invasion in June of the previous year.

Scarcely three months into that assignment, however, I was recalled to Washington and named the president’s national security adviser. Just after midnight on Friday, Oct. 21, I was awakened by a call from Vice President George H. W. Bush, who reported that several East Caribbean states had asked the United States to send forces to the Caribbean island of Grenada to prevent the Soviet Union and Cuba from establishing a base there. I called the president and Secretary of State George Shultz, who were on a golfing trip in Augusta, Ga., and received approval to have our forces prepare to land within 72 hours.

Then, less than 24 hours later I was awakened again, this time by the duty officer at the White House situation room, who reported that United States Marine barracks in Lebanon had been attacked by Iranian-trained Hezbollah terrorists with heavy losses. Again, I called the president, and he prepared for an immediate return to Washington to deal with both crises.

Today is the 25th anniversary of that bombing, which killed 241 Americans who were part of a multinational peacekeeping force (a simultaneous attack on the French base killed 58 paratroopers). The attack was planned over several months at Hezbollah’s training camp in the Bekaa Valley in central Lebanon. Once American intelligence confirmed who was responsible and where the attack had been planned, President Reagan approved a joint French-American air assault on the camp — only to have the mission aborted just before launching by the secretary of defense, Caspar Weinberger. Four months later, all the marines were withdrawn, capping one of the most tragic and costly policy defeats in the brief modern history of American counterterrorism operations.

One could draw several conclusions from this episode. To me the most telling was the one reached by Middle Eastern terrorists, that the United States had neither the will nor the means to respond effectively to a terrorist attack, a conclusion seemingly borne out by our fecklessness toward terrorist attacks in the 1990s: in 1993 on the World Trade Center; on Air Force troops at Khobar Towers in Saudi Arabia in 1996; on our embassies in Tanzania and Kenya in 1998; on the destroyer Cole in 2000.

There was no effective response from the United States to any of these. It was not until the attacks of Sept. 11, 2001, that our country decided to go to war against radical Islam.

A second conclusion concerns the age-old maxim never to deploy a force without giving it a clear military mission. In 1983, the Marine battalion positioned at the Beirut Airport was assigned the mission of “presence”; that is, to lend moral support to the fragile Lebanese government. Secretary of State Shultz and I urged the president to give the marines their traditional role — to deploy, at the invitation of the Lebanese government, into the mountains alongside the newly established Lebanese Army in an effort to secure the evacuation of Syrian and Israeli forces from Lebanon.

Secretary Weinberger disagreed. He felt strongly that American interests in the Middle East lay primarily in the region’s oil, and that to assure access to that oil we ought never to undertake military operations that might result in Muslim casualties and put at risk Muslim goodwill.

Cabinet officers often disagree, and rigorous debate and refinement often lead to better policy. What is intolerable, however, is irresolution. In this case the president allowed the refusal by his secretary of defense to carry out a direct order to go by without comment — an event which could have seemed to Mr. Weinberger only a vindication of his judgment. Faced with the persistent refusal of his secretary of defense to countenance a more active role for the marines, the president withdrew them, sending the terrorists a powerful signal of paralysis within our government and missing an early opportunity to counter the Islamist terrorist threat in its infancy.

Since 9/11 we have learned a lot about the threat from radical Islam and how to defeat it. Our commitment to Iraq is now being vindicated and, if sustained, will enable us to establish an example of pluralism in a Muslim state with a flourishing economy.

First, however, we must win in Afghanistan — truly the decisive battleground in this global struggle. Never has there been a greater need for experience and judgment in the White House. Unless our next president understands the complexity of the challenge as well as what it will take to succeed, and can lead his cabinet and our country in resolute execution of that strategy, we will lose this war.

Robert C. McFarlane was the national security adviser from 1983 to 1985.
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August 11, 2009, New York Times, More Firms Pan F.D.I.C.'s Bank Takeover Rules,

Lone Star Funds joined other big private equity names in opposing proposed United States rules for investments in failed banks, as a designated period for public comment on the draft regulations comes to an end on Monday, Reuters writes.

The Federal Deposit Insurance Corporation kicked up a storm last month when it proposed tough guidelines for private investors seeking to buy failed banks, suggesting such groups should have to maintain higher capital levels and support the banks they buy.

The proposed guidelines have drawn critical comments from many investors who argue that they unfairly place an onerous burden on them and warn that the rules, if finalized as they are, would chill private investments in banks.

Firms like the Blackstone Group and Corsair Capital, and legal and financial advisers like Skadden, Arps, Slate, Meagher & Flom, Jones Day and FBR Capital Markets have opposed parts of the proposed guidelines, according to letters posted on the F.D.I.C. Web site.

Wilbur Ross Jr., a private equity investor whose firm joined with the Carlyle Group and Blackstone to acquire Florida's BankUnited earlier this year, said in his letter to the agency that "my firm will never again bid if the proposed policy statement is adopted in its present form."

But the regulator's proposed policy has also drawn some support. Three U.S. Senators — Susan Collins, Carl Levin and Daniel Akaka — have urged the F.D.I.C. to strengthen its policy related to use of offshore structures.

In its letter on Monday, Lone Star, which has invested more than $60 billion in buying nonperforming loans and related securities from financial institutions, also highlighted a proposal on the type of deal structures that can be used in bank takeovers, Reuters said.

Lone Star said regulators should prefer the "silo" structures in bank takeovers, where an investor wants to take a controlling stake, rather than “club deals,” where several investors take smaller bits of the company.

"'Club' or 'consortium' arrangements necessarily reduce the number of potential bidders for a given institution," Len Allen, a senior managing director at the firm, wrote in the letter.

In a separate letter, Kohlberg Kravis Roberts said there was a case for engaging private equity firms to buy failed banks.

"If we succeed, there is an understandable public concern that we may make too much money too quickly," Deryck Maughan of Kohlberg Kravis wrote. "There is no easy way around this concern." But he added the auction process resulted in lower cost to the taxpayer, and the F.D.I.C. could retain an interest in the bank so that it gets a piece of the recovery.

Go to Article from Reuters via The New York Times »
Go to Comment Letters via the F.D.I.C. »
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