The Spectacular Rise And Fall of Salomon Brothers

Salomon

Photo: Photoshopped by Business Insider, Photos from Wikimedia Commons and AP

As we anxiously await the film adaptation of Michael Lewis’ seminal Wall Street book, “Liar’s Poker,” we figured we’d take a few moments to re-familiarise ourselves with the rise and fall of the book’s most infamous subject: Salomon Brothers Inc.A Wall Street fortress for most of the twentieth century, Salomon Brothers fell from grace when it found itself tangled in a chain of scandals in the early 1990s,¬†which led to the firm’s emergency takeover by Warren Buffett and eventual integration into Citigroup.

While Salomon’s infamously reckless behaviour is now a thing of the past, what remains today is a cult-like loyalty to the firm and, of course, a great story.¬†

Salomon Brothers was founded in 1910

By--you guessed it--brothers Arthur, Herbert and Percy Salomon.

The brothers began with $5,000 and some help from their father's (a broker himself) clerk and opened their first money brokerage office on Broadway near Wall Street.

Source: Funding Universe

By the end of WWI, the brothers ruled the market for government bonds

Thanks to the Liberty Loan Act of 1917, the brothers capitalised on the newly-created government bond market.

By the 1930s, the Salomon brothers had set up shop in six cities around the Northeast and Midwestern United States.

Source: Funding Universe

The Great Depression hit hard, but the Salomon name survived

By remaining bearish in the years leading up to the Great Depression, Salomon Brothers was able to weather the market crash of 1929, its largest struggles between family members as to whom should take over the business.

Source: Funding Universe

The firm continued to grow in the following decades

Under the leadership of the family's golden boy heir--William (Billy) Salomon--the firm expanded its operations in the 1960s, adding a research department (hiring the infamous Henry Kaufman a.k.a. Dr. Gloom) and growing its block trading and underwriting activities.

By the end of the 1960s, Salomon joined Lehman Brothers, Blythe, and Merril Lynch to become the 'Fearsome Foursome.'

Source: Funding Universe

Then came the era of John Gutfreund...

John Gutfreund joined Salomon as a statistics trainee in the mid-1950s, per request of Billy Salomon, his golf partner.

Gutfreund quickly climbed the Salomon ranks and was named partner at the young age of 34.

And at 49, he was named CEO.

Source: New York Magazine

And if you've read Liar's Poker, you know what these guys called themselves

'Big swinging dicks.'

Source: Liar's Poker via Google Books

This was all a part of what many have described as a 'frat boy' culture

Where practical jokes, pranks and hazing were commonplace.

Source: Time Magazine

Despite the practical jokes, the firm was known as an innovator in the bond market

In fact, Salomon developed the first private mortgage backed security in the late 1980s.

Bonus Fact: now-celebrities Michael Lewis and Mayor Mike Bloomberg were also at Salomon at this time.

Source: Businessweek

But it was under Gutfreund's watch that everything started to fall apart

Here's how the first scandal went down:

  • Trader Paul Mozer submitted illegal bids for U.S. treasury securities in August of 1990, attempting to corner the market by purchasing more than the 35% share allowed per individual transaction
  • Mozer's supervisor, John Meriwether, chastised the bid when it came to his attention, but let Mozer stick around

Sources: Nightmare on Wall Street and The New York Times

And continued to fall apart...

This time with real consequences:

  • In May 1991, the firm cornered the treasury securities market a second time
  • This time, the SEC noticed.
  • Mozer was suspended and Salomon was fined the highest fine ever leveraged against a bank at the time, $290 million.
  • Gutfreund was forced to resign in August.
  • And the company was on the brink of bankruptcy

Source: The New York Times

Then Warren Buffet saved the day

Warren Buffett had invested $700 million in Salomon Brothers in 1987 and proved to be the best choice for assuming the position of chairman in the 9-months following Gutfreund's forced resignation.

Buffett didn't like spending time away from Berkshire Hathaway and sent his investors a letter saying his new position was 'far from fun.'

Source: New York Times

And he gave the best quotation ever:

'Lose money for the firm and I will be understanding, lose a shred of reputation for the firm and I will be ruthless' said Buffett in a 1991 hearing in front of the House committee on Energy & Commerce.

Source: C-Span

Gutfreund wasn't the only senior official to leave

In fact, John Meriwether (former vice-chairman of Salomon) and Myron Scholes (co-head of Salomon's fixed-income derivative group) went on to start Long-term Capital Management.

We know how that turned out.

(If you don't, you can read about their $4.6 billion loss in Roger Lowenstein's 'When Genius Failed')

Source: When Genius Failed


After Buffett left Salomon, things were never really the same

Salomon was acquired by travellers in 1997 for $9 billion (Buffet walked away with $1.7 billion).

travellers and Salomon never really saw eye-to-eye on the way Salomon conducted business, leaving travellers to disband most of Salomon's infamously volatile trading activity shortly after the acquisition.

Source: The New York Times

But the Salomon name stuck around, even after travellers merged with Citi

While Salomon now lives deep within the Citigroup empire, there's still a curious loyalty to the former Wall Street giant. According to the Wall Street Journal, investors (as late as 2009) would call Citi and ask for 'Salomon.'

Source: Wall Street Journal

And now, the fabulous life of a former Salomon bond salesman

NOW WATCH: Money & Markets videos

Want to read a more in-depth view on the trends influencing Australian business and the global economy? BI / Research is designed to help executives and industry leaders understand the major challenges and opportunities for industry, technology, strategy and the economy in the future. Sign up for free at research.businessinsider.com.au.