Salomon Brothers

Salomon Brothers, Inc., was an American multinational bulge bracket investment bank headquartered in New York. It was one of the five largest investment banking enterprises in the United States[2] and the most profitable firm on Wall Street during the 1980s and 1990s. Its CEO and chairman at that time, John Gutfreund, was nicknamed "the King of Wall Street".[3][4][5][6]

Salomon Brothers, Inc.
TypeAcquired
IndustryFinancial services
Founded1910
FounderArthur Salomon,
Herbert Salomon,
Percy Salomon
Defunct2003 (name dropped by Citigroup)
FateAcquired by Travelers Group in 1998
SuccessorSalomon Smith Barney (1998–2004), Smith Barney (2003–2009), Morgan Stanley Smith Barney (2009–2012), Morgan Stanley Wealth Management (since 2012)
Headquarters250 Greenwich Street
New York, NY 10006
U.S.
Key people
John Gutfreund
(Chairman 1978–1991)
Warren Buffett
(Chairman 1991–1997)
Deryck Maughan
(CEO 1992–1997)
ProductsSales and trading, Investment banking
RevenueIncrease US$9.046 billion (1996)[1]
Increase US$617 million (1996)[1]
Total assetsIncrease US$194.881 billion (1996)[1]
Number of employees
Increase 7,100 (1996)[1]

Founded in 1910 by Arthur, Herbert, and Percy Salomon and a clerk named Ben Levy, it remained a partnership until the early 1980s. In 1981, it was acquired by the commodity trading firm Phibro Corporation and became Salomon Inc.[7][8] Eventually, Salomon was acquired by Travelers Group in 1998; and, following the latter's merger with Citicorp that same year, Salomon became part of Citigroup.[9] Although the Salomon name carried on as Salomon Smith Barney, which were the investment banking operations of Citigroup, the name was abandoned in October 2003 after a series of financial scandals that tarnished the bank's reputation.[10]

The bank was famed for its "alpha male" encouragement and "a cutthroat corporate culture that rewarded risk-taking with massive bonuses, punishing poor results with a swift boot."[11] In Michael Lewis' 1989 book Liar's Poker, the insider descriptions of life at Salomon gave way to the popular view of banking in the 1980s and '90s as a money-focused and work-intense environment. The expression "Big Swinging Dick" was born at the bank, and was used to refer to the Salomon bankers who dominated the game of extraordinary profit-making.[12]

HistoryEdit

FoundingEdit

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.[7][8]

Salomon Brothers during the 1980sEdit

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.[15] 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.[16]

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.[17]

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).[18][19]

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."[20]

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...[21]

1990s treasury bonds scandalEdit

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.[citation needed] 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.[22] 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."[23] 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.[24][12]

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.[25] 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.

Acquisition by CitigroupEdit

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"[9] 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.[citation needed] 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."[26] 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.[10] 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. Eventually, Citigroup dropped the Salomon Brothers and Smith Barney trademarks completely after they expired in 2015. As of 2020, Citigroup no longer owns the Salomon Brothers trademark, according to the records provided by the United States Patent and Trademark Office. [27][28]

Salomon Brothers and the September 11th attacksEdit

At the time of the September 11, 2001, attacks, Salomon Smith Barney was by far the largest tenant in 7 World Trade Center, occupying 1,202,900 sq ft (111,750 m2) (64 percent of the building) which included floors 28–45.[29][30]

Notable employeesEdit

ReferencesEdit

  1. ^ a b c d Travelers Group SEC Form 8-K Filing September 2007
  2. ^ "Warren Buffett's Wild Ride at Salomon (Fortune, 1997)". Fortune. Retrieved 2021-06-21.
  3. ^ Collins, Denis (1992). Lewis, Michael (ed.). "An Ethical Analysis of Organizational Power at Salomon Brothers". Business Ethics Quarterly. 2 (3): 367–377. doi:10.2307/3857539. ISSN 1052-150X.
  4. ^ Tablang, Kristin. "'King of Wall Street' John Gutfreund's $120 Million Fifth Avenue Duplex Crowned New York's Priciest Home Listing". Forbes. Retrieved 2021-06-21.
  5. ^ Fox, Emily Jane. ""King of Wall Street" John Gutfreund Dies at 86". Vanity Fair. Retrieved 2021-06-21.
  6. ^ Kandell, Jonathan (2016-03-10). "John Gutfreund, 86, Dies; Ran Wall Street Investment Firm at Its Apex". The New York Times. ISSN 0362-4331. Retrieved 2021-06-21.
  7. ^ a b "History of Salomon Inc. – FundingUniverse". www.fundinguniverse.com. Retrieved 2021-06-21.
  8. ^ a b Lewis, Michael (1989). Liar's Poker: Rising Through the Wreckage on Wall Street. New York: W. W. Norton. p. 228.
  9. ^ a b "A timeline of Salomon brothers". Business Insider. Retrieved 16 July 2018.
  10. ^ a b Deep Within Citi, the Death of Salomon. Wall Street Journal, September 29, 2009
  11. ^ Chen, Full Bio Follow Linkedin Follow Twitter James; CMT; Investing, Is the Former Director of; trader, trading content at Investopedia He is an expert; Adviser, Investment; Chen, global market strategist Learn about our editorial policies James. "Salomon Brothers". Investopedia. Retrieved 2021-06-21.
  12. ^ a b Gross, Daniel (2008-09-25). "The end of the BSD". Slate Magazine. Retrieved 2021-06-21.
  13. ^ Company Profiles – FundingUniverse 1992">"History of Salomon Inc. – FundingUniverse". Search Thousands of Company Profiles – FundingUniverse. November 23, 1992. Retrieved January 11, 2018.
  14. ^ Michael Lewis, The End, Portfolio.com, 11 November 2008
  15. ^ Hojnicki, Carrie. "The Spectacular Rise And Fall of Salomon Brothers". Business Insider. Retrieved 11 November 2020.
  16. ^ Sterngold, James (January 10, 1988). "TOO FAR, TOO FAST; Salomon Brothers' John Gutfreund". The New York Times.
  17. ^ Hojnicki, Carrie (July 3, 2012). "The Spectacular Rise And Fall of Salomon Brothers". Business Insider.
  18. ^ "History of the RJR Nabisco Takeover". The New York Times. December 2, 1988.
  19. ^ Eichenwald, Kurt (October 31, 1991). "Rite Aid Seeks to Buy Revco As Salomon Settles Lawsuit". The New York Times.
  20. ^ Lewis, p. 46
  21. ^ Lewis, pp. 69–70
  22. ^ Ex-Salomon Chief's Costly Battle, The New York Times, August 19, 1994
  23. ^ "Salomon Brothers". Investopedia.
  24. ^ Conversations with Tom Wolfe. Scura, Dorothy McInnis. Jackson: University Press of Mississippi. 1990. pp. 262. ISBN 087805426X. OCLC 20630163.CS1 maint: others (link)
  25. ^ When Genius Failed: The Rise and Fall of Long-Term Capital Management
  26. ^ [1]
  27. ^ "Citigroup to Drop Salomon Name To Streamline Its Multiple Brands". The Wall Street Journal.
  28. ^ "Trademark Electronic Search System (TESS)". United States Patent and Trademark Office.
  29. ^ Gilsanz, Ramon; Edward M. DePaola; Christopher Marrion; Harold "Bud" Nelson (May 2002). "WTC7 (Chapter 5)". World Trade Center Building Performance Study (PDF). FEMA. Archived (PDF) from the original on March 5, 2008. Retrieved February 17, 2008.
  30. ^ "Building: 7 World Trade Center". CNN. 2001. Archived from the original on October 13, 2007. Retrieved September 12, 2007.
  31. ^ a b c d e f g Du, Lisa. "Salomon Brothers Alums: Where Are They Now?". Business Insider. Retrieved 2020-07-17.
  32. ^ Nasar, Sylvia (1994-05-13). "A Top Executive's Puzzling Death". The New York Times. ISSN 0362-4331. Retrieved 2020-07-17.

Further readingEdit

  • Liar’s Poker: Rising Through the Wreckage on Wall Street by Michael Lewis. Penguin Books