Salomon Brothers
Encyclopedia
- This article deals with Salomon Brothers. For other uses of the name Salomon, see SalomonSalomonSalomon is a form of the given name Solomon. It can refer to:People* Salomon, King of Brittany * Salomon Companies* Salomon Brothers, a former investment bank, now a part of Citigroup...
.
Salomon Brothers was a bulge bracket
Bulge bracket
The bulge bracket comprises the "big banks," the world's largest and most profitable multi-national investment banks.- Technical meaning :The term 'bulge bracket' refers to the first group of investment banks listed on the "tombstone" notifying the public of a financial transaction or deal...
, Wall Street
Wall Street
Wall Street refers to the financial district of New York City, named after and centered on the eight-block-long street running from Broadway to South Street on the East River in Lower Manhattan. Over time, the term has become a metonym for the financial markets of the United States as a whole, or...
investment bank. Founded in 1910 by three brothers (Arthur, Herbert and Percy) along with a clerk named Ben Levy, it remained a partnership
Partnership
A partnership is an arrangement where parties agree to cooperate to advance their mutual interests.Since humans are social beings, partnerships between individuals, businesses, interest-based organizations, schools, governments, and varied combinations thereof, have always been and remain commonplace...
until the early 1980s, when it was acquired by the commodity trading firm Phibro Corporation and then became Salomon Inc. Eventually 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
Citigroup
Citigroup Inc. or Citi is an American multinational financial services corporation headquartered in Manhattan, New York City, New York, United States. Citigroup was formed from one of the world's largest mergers in history by combining the banking giant Citicorp and financial conglomerate...
. Although the Salomon name carried on as Salomon Smith Barney, which were the investment banking operations of Citigroup, the name was ultimately abandoned in October 2003 after a series of financial scandals
Global settlement
The Global Settlement was an enforcement agreement reached on April 28, 2003 between the SEC, NASD, NYSE, and ten of the United States's largest investment firms to address issues of conflict of interest within their businesses-Settlement Decision:...
that tarnished the bank's reputation.
Early History
In this period the firm used its own capital and did not have fee-paying clients. The private company entered equities in the mid-1960s and investment banking in the early 1970s.John Gutfreund
John Gutfreund
John H. Gutfreund is the former CEO of Salomon Brothers Inc, an investment bank that gained notoriety in the 1980s. Gutfreund turned Salomon Brothers from a private partnership into a publicly traded corporation which started a trend in Wall Street for investment companies to go public. He became...
became the managing partner in 1978, taking the company public, staying on as CEO. During the 1980s, Salomon was noted for its innovation in the bond
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
market, selling the first mortgage-backed security
Mortgage-backed security
A mortgage-backed security is an asset-backed security that represents a claim on the cash flows from mortgage loans through a process known as securitization.-Securitization:...
, a hitherto obscure species of financial instrument created by Ginnie Mae
Government National Mortgage Association
The Government National Mortgage Association , or Ginnie Mae, was established in the United States in 1968 to promote home ownership. As a wholly owned government corporation within the Department of Housing and Urban Development , Ginnie Mae’s mission is to expand affordable housing in the U.S. by...
. 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
Capital market
A capital market is a market for securities , where business enterprises and governments can raise long-term funds. It is defined as a market in which money is provided for periods longer than a year, as the raising of short-term funds takes place on other markets...
and negotiating mergers and acquisitions
Mergers and acquisitions
Mergers and acquisitions refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or...
) to almost exclusively proprietary trading
Proprietary trading
Proprietary trading occurs when a firm trades stocks, bonds, currencies, commodities, their derivatives, or other financial instruments, with the firm's own money as opposed to its customers' money, so as to make a profit for itself...
(the buying and selling of stock
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
s, bonds, option
Option (finance)
In finance, an option is a derivative financial instrument that specifies a contract between two parties for a future transaction on an asset at a reference price. The buyer of the option gains the right, but not the obligation, to engage in that transaction, while the seller incurs the...
s, etc. for the profit of the company). Salomon had expertise in fixed income
Fixed income
Fixed income refers to any type of investment that is not equity, which obligates the borrower/issuer to make payments on a fixed schedule, even if the number of the payments may be variable....
securities and trading based on daily swings in the bond market
Bond market
The bond market is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the Secondary market, usually in the form of bonds. The primary goal of the bond market is to provide a mechanism for long term funding of public and...
.
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
Commercial paper
In the global money market, commercial paper is an unsecured promissory note with a fixed maturity of 1 to 270 days. Commercial Paper is a money-market security issued by large banks and corporations to get money to meet short term debt obligations , and is only backed by an issuing bank or...
business (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.
Finally, the firm decided to imitate Drexel Burnham Lambert
Drexel Burnham Lambert
Drexel Burnham Lambert was a major Wall Street investment banking firm, which first rose to prominence and then was forced into bankruptcy in February 1990 by its involvement in illegal activities in the junk bond market, driven by Drexel employee Michael Milken. At its height, it was the...
, using its investment bankers and its own money to urge companies to restructure or engage in leveraged buyout
Leveraged buyout
A leveraged buyout occurs when an investor, typically financial sponsor, acquires a controlling interest in a company's equity and where a significant percentage of the purchase price is financed through leverage...
s. As a result the firm competed for the leveraged buyout of RJR Nabisco
RJR Nabisco
RJR Nabisco, Inc., was an American conglomerate formed in 1985 by the merger of Nabisco Brands and R.J. Reynolds Tobacco Company. RJR Nabisco was purchased in 1988 by Kohlberg Kravis Roberts & Co...
and the leveraged buyout of Revco
Revco
Revco Discount Drug Stores , once based in Twinsburg, Ohio, was a major drug store chain operating through the Ohio Valley, the Mid-Atlantic states, and the Southeastern United States. The chain's stock was traded on the New York Stock Exchange under the ticker RXR...
stores (which ended in failure).
1990s Treasury bond scandal
In 1991, U.S. Treasury Deputy Assistant Secretary Mike Basham learned that Salomon trader Paul MozerPaul Mozer
Paul William Mozer is an American former Treasury bond trader for Salomon Brothers who was convicted in an illegal bidding scandal.- Early life and career :...
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 $290 million for this infraction, the largest fine ever levied on an investment bank at the time. The firm was weakened by the scandal, which led to its acquisition by Travelers Group. 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 his being barred from serving as a chief executive of a brokerage firm. The scandal was then documented in the 1993 book Nightmare on Wall Street.
After the acquisition, the parent company (Travelers Group, and later Citigroup
Citigroup
Citigroup Inc. or Citi is an American multinational financial services corporation headquartered in Manhattan, New York City, New York, United States. Citigroup was formed from one of the world's largest mergers in history by combining the banking giant Citicorp and financial conglomerate...
) 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
MCI Communications
MCI Communications Corp. was an American telecommunications company that was instrumental in legal and regulatory changes that led to the breakup of the AT&T monopoly of American telephony and ushered in the competitive long-distance telephone industry. It was headquartered in Washington,...
with British Telecom which never occurred. Subsequently, most of its proprietary trading business was disbanded.
The combined investment banking operations became known as "Salomon Smith Barney" and was renamed "Citigroup Global Markets Inc." after the reorganization, because the Salomon Brothers and Smith Barney names were a division and service mark of Citigroup Global Markets.
Two members of the Salomon Brothers' bond arbitrage
Fixed income arbitrage
Fixed-income arbitrage is an investment strategy generally associated with hedge funds, which consists of the discovery and exploitation of inefficiencies in the pricing of bonds, i.e...
, John Meriwether
John Meriwether
John William Meriwether is an American hedge fund executive, seen as a pioneer of fixed income arbitrage.-Education:...
and Myron Scholes
Myron Scholes
Myron Samuel Scholes is a Canadian-born American financial economist who is best known as one of the authors of the Black–Scholes equation. In 1997 he was awarded the Nobel Memorial Prize in Economic Sciences for a method to determine the value of derivatives...
, later became a founder and a consultant for Long-Term Capital Management
Long-Term Capital Management
Long-Term Capital Management L.P. was a speculative hedge fund based in Greenwich, Connecticut that utilized absolute-return trading strategies combined with high leverage...
, a hedge fund that collapsed in 1998.
The firm's top bond traders called themselves "Big Swinging Dicks," and were the inspiration for the book The Bonfire of the Vanities
The Bonfire of the Vanities
The Bonfire of the Vanities is a 1987 novel by Tom Wolfe. The story is a drama about ambition, racism, social class, politics, and greed in 1980s New York City and centers on four main characters: WASP bond trader Sherman McCoy, Jewish assistant district attorney Larry Kramer, British expatriate...
, by Tom Wolfe
Tom Wolfe
Thomas Kennerly "Tom" Wolfe, Jr. is a best-selling American author and journalist. He is one of the founders of the New Journalism movement of the 1960s and 1970s.-Early life and education:...
. Salomon Brothers' success and decline in the 1980s is documented in Michael Lewis
Michael Lewis (author)
Michael Lewis is an American non-fiction author and financial journalist. His bestselling books include The Big Short: Inside the Doomsday Machine, Liar's Poker, The New New Thing, Moneyball: The Art of Winning an Unfair Game, The Blind Side: Evolution of a Game, Panic and Home Game: An...
' 1989 book, Liar's Poker
Liar's Poker
Liar's Poker is a non-fiction, semi-autobiographical book by Michael Lewis describing the author's experiences as a bond salesman on Wall Street during the late 1980s...
. Lewis went through Salomon's training program and then became a bond salesman at Salomon Brothers in London
London
London is the capital city of :England and the :United Kingdom, the largest metropolitan area in the United Kingdom, and the largest urban zone in the European Union by most measures. Located on the River Thames, London has been a major settlement for two millennia, its history going back to its...
.
Notable former staff
- Warren Buffet
- Michael BloombergMichael BloombergMichael Rubens Bloomberg is the current Mayor of New York City. With a net worth of $19.5 billion in 2011, he is also the 12th-richest person in the United States...
, Mayor of New York CityMayor of New York CityThe Mayor of the City of New York is head of the executive branch of New York City's government. The mayor's office administers all city services, public property, police and fire protection, most public agencies, and enforces all city and state laws within New York City.The budget overseen by the...
and business magnate - Michael LewisMichael Lewis (author)Michael Lewis is an American non-fiction author and financial journalist. His bestselling books include The Big Short: Inside the Doomsday Machine, Liar's Poker, The New New Thing, Moneyball: The Art of Winning an Unfair Game, The Blind Side: Evolution of a Game, Panic and Home Game: An...
, investigative journalist - John LipskyJohn LipskyJohn Phillip Lipsky is an American economist. He was the acting Managing Director of the International Monetary Fund from May to July 2011. He assumed the post of Acting Managing Director after Dominique Strauss-Kahn was arrested in May 2011 accused of sexual assault...
, acting Managing Director of the IMF - Lewis RanieriLewis RanieriLewis S. Ranieri is a former bond trader and former vice chairman of Salomon Brothers. He is considered the "godfather" of mortgage finance for his role in pioneering securitization and mortgage-backed securities...
, former bond trader and early promotor of mortgage-backed securities