Salomon Brothers

Founded in 1910 by Arthur, Herbert and Percy Salomon and a clerk named Ben Levy, it remained a partnership until the early 1980s. William Salomon, the son of Percy Salomon, became a managing partner and the head of the company in 1963.[13] In 1978, John Gutfreund became a managing partner, and succeeded William Salomon as head of the company.[14] In 1981, it was acquired by the commodity trading firm Phibro Corporation and became Salomon Inc. It was with the reverse merger which enabled Gutfreund to take the company public. Gutfreund became the CEO of the company following the reverse merger.[15][16]

During the 1980s, Salomon was noted for its innovation in the bond market, selling the first mortgage-backed security, a hitherto obscure species of financial instrument created by Ginnie Mae.[17] Shortly thereafter, Salomon purchased home mortgages from thrifts throughout the United States and packaged them into mortgage-backed securities, which it sold to local and international investors. Later, it moved away from traditional investment banking (helping companies raise funds in the capital market and negotiating mergers and acquisitions) to almost exclusively proprietary trading (the buying and selling of stocks, bonds, options, etc. for the profit of the company itself). Salomon had expertise in fixed income securities and trading based on daily swings in the bond market.[18]

During this period, the upper management became dissatisfied with the firm's performance. Profits were small and the company's traders were paid in a way that was disconnected from true profitability. There were debates as to which direction the firm should head, whether it should prune down its activities to focus on certain areas. For example, the commercial paper business unit (providing short-term day-to-day financing for large companies) was apparently unprofitable, although some in the firm argued that it was a good activity because it kept the company in constant contact with other businesses' key financial personnel.[19]

Finally, the firm decided to imitate Drexel Burnham Lambert, using its investment bankers and its own money to urge companies to restructure or engage in leveraged buyouts. As a result, the firm competed for the leveraged buyout of RJR Nabisco and the leveraged buyout of Revco stores (which ended in failure).[20][21]

Salomon Brothers' success in the 1980s is documented in Michael Lewis' 1989 book, Liar's Poker. Lewis went through Salomon's training program and then became a bond salesman at Salomon Brothers in London. Lewis presented an insider description of life at Salomon Brothers, and his book became a seminal work in terms of understanding the corporate culture at Salomon Brothers in the 1980s.

Lewis on the concept of a "Big Swinging Dick":

A new employee, once he reached the trading floor, was handed a pair of telephones. He went on-line almost immediately. If he could make millions of dollars come out of those phones, he became that most revered of all species: a Big Swinging Dick. After the sale of a big block of bonds and the deposit of a few hundred thousand dollars into the Salomon till, a managing director called whoever was responsible to confirm his identity: "Hey, you Big Swinging Dick, way to be."[22]

Lewis describing the trading floor at Salomon:

Because the forty-first floor was the chosen home of the firm's most ambitious people, and because there were no rules governing the pursuit of profit and glory, the men who worked there, including the more bloodthirsty, had a hunted look about them. The place was governed by the simple understanding that the unbridled pursuit of perceived self interest was healthy. Eat or be eaten. The men of 41 worked with one eye cast over their shoulders to see whether someone was trying to do them in, for there was no telling what manner of man had levered himself to the rung below you and was now hungry for your job. The limit of acceptable conduct within Salomon Brothers was wide indeed. It said something about the ability of the free marketplace to mold people's behavior into a socially acceptable pattern. For this was capitalism at its most raw, and it was self-destructive...[23]

In 1991, U.S. Treasury Deputy Assistant Secretary Mike Basham learned that Salomon trader Paul Mozer had been submitting false bids in an attempt to purchase more treasury bonds than permitted by one buyer during the period between December 1990 and May 1991. Salomon was fined $190 million for this infraction, and required to set aside $100 million in a restitution fund for any injured parties. CEO Gutfreund left the company in August 1991 and a U.S. Securities and Exchange Commission (SEC) settlement resulted in a fine of $100,000 and him being barred from serving as a chief executive of a brokerage firm.[24] The scandal was then documented in the 1993 book Nightmare on Wall Street. The firm was weakened by the scandal, which led to its acquisition by Travelers Group in 1998.

While not definitive, it is likely that the corporate culture of Salomon Brothers created the environment for the U.S treasury bonds scandal. While Salomon Smith Barney became notorious by the early 1990s for a collective "alpha male" mentality present among its employees and "a cutthroat corporate culture that rewarded risk-taking with massive bonuses, punishing poor results with a swift boot."[25] The firm's top bond traders called themselves "Big Swinging Dicks," and were the inspiration for the book The Bonfire of the Vanities, by Tom Wolfe. The expression "Big Swinging Dick(s)" itself was used to refer to the Salomon bankers who dominated the game of extraordinary profit-making.[26][27]

Some members of the Salomon Brothers' bond arbitrage, such as John Meriwether, Myron Scholes and Eric Rosenfeld later became involved with Long-Term Capital Management, a hedge fund that collapsed in 1998.[28] The last years of Salomon Brothers, culminating in its involvement with Long-Term Capital Management, is chronicled in the 2007 book A Demon of Our Own Design.

Salomon (NYSE:SB) was acquired by Travelers Group in 1998; and, following the latter's merger with Citicorp that same year, Salomon became part of Citigroup. The combined investment banking operations became known as "Salomon Smith Barney"[29] After the acquisition, the parent company (Travelers Group, and later Citigroup) proved culturally averse to the volatile profits and losses caused by proprietary trading, instead preferring slower and more steady growth. Salomon suffered a $100 million loss when it incorrectly positioned itself for the merger of MCI Communications with British Telecom which never occurred. Subsequently, most of its proprietary trading business was disbanded.

Although the Salomon name carried on as Salomon Smith Barney, the investment banking operations of Citigroup, the division was renamed on 7 April 2003 to "Citigroup Global Markets Inc." [30] The name change from Salomon Smith Barney Holdings Inc. to Citigroup Global Markets Holdings Inc was done in order to replace the tarnished Salomon Smith Barney name with Citigroup branding. This was done with the hope of presenting a sense of unity among Citigroup's various business divisions. In addition, Citigroup wanted to separate Citigroup Global Markets from its Salomon Smith Barney past. Today, the Salomon Brothers and Smith Barney names remain as service marks belonging to Citigroup Global Markets.[31]