Salomon Brothers

Salomon Brothers was a Wall Street investment bank. Founded in 1910, it remained a partnership until the early 1980s, when it was acquired by the commodity trading firm then known as Phibro Corporation. This proved a "wag the dog" type merger as the parent company became first Phibro-Salomon and then Salomon Inc.[citation needed] and the commodity operations were sold. Eventually Salomon was acquired by Travelers Group (now Citigroup) in 1998.

It eventually became the largest issuer and trader of bonds in the United States, its PR man defining a liquid bond as any bond traded by Salomon Brothers.

During its time of greatest prominence in the 1980s, Salomon became noted for its innovation in the bond market, creating the first mortgage-backed security. 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).

Salomon had an expertise in fixed income trading, betting large amounts of money on certain swings in the bond market on a daily basis. The top bond traders called themselves "Big Swinging Dicks", and were the inspiration for the books The Bonfire of the Vanities and Liar's Poker (see below).

During this period however the performance of the firm was not to the satisfaction of its upper management. The amount of money being made relative to the amount being invested in all the markets Salomon was in was small, and the company's traders were paid in a flawed way which was disconnected from their true profitability (fully accounting for both the amount of money they used and the risk they took). There were debates as to which direction the firm should head in, whether it should prune down its activities to focus on certain areas. For example, the commercial paper 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. It was decided that the firm should try to imitate Drexel Burnham Lambert, using its Investment Bankers and its own money to urge companies to restructure or engage in leveraged buyouts which would result in financing business for Salomon Brothers. The first moves in this direction were for the firm to compete on the leveraged buyout of RJR Nabisco, followed by the leveraged buyout of Revco stores (which ended in failure).

In 1991, Salomon was caught submitting false bids to the U.S. Treasury by Deputy Assistant Secretary Mike Basham, in an attempt to purchase more Treasury bonds than permitted by one buyer between December 1990 and May 1991. It was fined 290 million dollars, the largest fine ever levied on an investment bank at the time, weakening it and eventually leading to its acquisition by Travelers Group. The scandal is covered extensively in the book Nightmare on Wallstreet.

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 more slow and steady growth. Salomon suffered a $100 million dollar loss when it incorrectly bet that MCI Communications would merge with Sprint instead of Worldcom. Subsequently, most of its proprietary trading business was disbanded.

For some time after the mergers the combined investment banking operations were known as Salomon Smith Barney, but reorganization has renamed this entity as Citigroup Global Markets Inc. The Salomon Brothers name, like the Smith Barney name, is now a division and service mark of Citigroup Global Markets.

Anyone interested in reading about Salomon Brothers' spectacular success and then decline in the 1980s should refer to Michael Lewis' Liar's Poker. Lewis went through Salomons' training program and then became a bond salesman at Salomon Brothers in London. Lewis portrays the 1980s as an era where government deregulation allowed less-than-scrupulous people on Wall Street to take advantage of others' ignorance, and thus grow extremely wealthy.

He traces the rise of Salomon Brothers through mortgage trading, when deregulation by the U.S. Congress suddenly allowed Savings and Loans managers to start selling mortgages as bonds. Lewie Ranieri, a Salomon Brothers' employee, had created the only viable mortgage trading section, so when the law passed, it became a windfall for the firm. However, Lewis believed that Salomon Brothers became too complacent in their newly-found wealth and took to unwise expansion and massive displays of conspicuous consumption. When the rest of Wall Street wised up to the market, the firm lost its advantage.

Likewise, Lewis argued that Salomon Brothers improperly tried to "professionalize" itself. As he notes, Ranieri and his fellow traders lacked college degrees; one of the traders only had an eighth-grade education. Despite this lack of credentials, the group was extremely successful financially. However, the firm, in order to improve its "image," began to hire graduates of prestigious business and economics programs (a group which included Lewis himself). Because of his uncouth manners, Ranieri (along with many of his Italian colleagues) was eventually fired. By relying more on diplomas than on raw trading skill, Lewis argued that Salomon crumbled.

After mortgage bonds, Lewis examined junk bonds and how Michael Milken built junk bonds from nothing to a multi-trillion-dollar market. Because the demand for junk bonds was higher than its supply, Lewis argues that corporate raiders began to attack otherwise sound companies in order to create more junk bonds.

In conclusion, Lewis remarked that the 1980s marked a time where anyone could make millions, provided they were at the right place at the right time, as exemplified by Ranieri's success.


We currently have the following pieces in our inventory that were issued to this historic firm:





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