In our unified opinion, the Salomon Brothers case was the least worst compared to the rest. Salomon Brothers was a Wall Street investment bank founded in 1910 by three brothers, Arthur Salomon, Herbert Salomon, and Percy Salomon. Their company became one of the largest and most successful of the twentieth century in Wall Street. This all came to an end when Salomon Brothers was caught in a series of scandals in the early 1990s. The string of illegal behavior led to an emergency take over by Warren Buffett and the integration of Salomon Brothers into Citigroup. Arthur, Herbert and Percy began with $5,000 and their father’s helpful clerk. They opened their money brokerage office near Wall Street. In 1917, in an attempt to help the government cover war expenses, the Liberty Loan Act was established.
This allowed for average citizens to give loans to the U.S. government in the form of bonds, repaid by the government with interest in the future. The brothers took advantage of this new bond market and as a result, their company grew tremendously.
By 1930, Salomon Brothers had office locations in six cities around the Northeast and Midwestern states. Black Tuesday, or the Stock Market Crash of 1929, was the most catastrophic stock market crash in U.S. history. Luckily, Salomon Brothers was able to survive the market crash. In the years leading up to the Great Depression, the brothers were having family issues regarding who would take over the business. After that dispute, in the 1960s, the firm expanded by adding a research department and growing its block trading and underwriting activities. Salomon Brothers later joined Lehman Brothers, Blythe, and Merril Lynch and became known as the “Fearsome Foursome”.
The company received a new CEO, John Gutfreund, who ran the business a little differently. He was a very intimidating CEO and many people described the company to have an aggressive culture. In the late 1980s, the company developed the first private mortgage backed security. It was under Gutfreund’s watch when the first scandal arose. Paul Mozer, a trader, submitted illegal bids for the U.S. treasury securities in 1990.
He attempted to corner the market by purchasing more than the allotted 35% share per individual transaction. Mozer’s supervisor found out about this and disciplined Mozer, but allowed him to stay at the company. In 1991, the firm cornered the market a second time, but this time the SEC noticed. Mozer was suspended and Salomon Brothers was fined the highest fine ever given against a bank at the time, $290 million. The Treasury Department also suspended Salomon Brothers form bidding in Treasury auctions.
Gutfreund was forced to resign and the company was near bankruptcy. This is where Warren Buffett came in. Shortly before the scandal, he had invested $700 million into Salomon Brothers in 1987.
In an attempt to save the company, he became the interim chairman and chief executive of the scandal-torn firm after Gutfreund’s resignation. He appealed to the Tresury Secretary, but it did not succeed. However, this appeal did stop the department from completely eliminating Salomon from auctions until the scandal was fully investigated. Salomon was allowed to bid in the auctions for itself, but they were not allowed to place bids for clients. This drove business away and led to Buffett selling off the company to Travelers Company Inc.
Buffett sold the company for $9 billion. Of that $9 billion, Buffett left with $1.7 billion, more than double what he had originally invested. Travelers conducted their business in a much different way than Salomon did. This caused a lot of tension between the two and led to Travelers disbanding most of Salomon’s unethical and illegal trading activity soon after the acquisition. Salomon Brothers and Travelers eventually merged with Citigroup and that is where the company is at now.
There were many mistakes that were made by the company, all of which could have been avoided if they were not greedy. When Mozer was first caught trying to corner the market, he should have been reported to the SEC and fired immediately. His supervisor should have acted in the interest of the company, and not personal greed, and should not have allowed Mozer to stay at the company. Mozer was lucky enough to get a free pass the first time he submitted false bids, he should not have done this again. His personal actions caused a $290 billion issue for so many people. If we were in Mozer’s shoes, we would have never attempted to corner the market in the first place.
He was dealing directly with the Treasury Department’s market and should have known that he would have gotten caught. In this case, as with many others, ethics clearly outweigh financial benefit. If we were Mozer’s boss, we would have fired Mozer the second we noticed that he was illegally bidding.
We would have also reported him to the proper authorities. The company’s well-being is much more important than Mozer’s get rich quick scheme. As a group, we decided that this scandal was the least worst because no one actually did any jail time, besides Mozer. We do believe that this was a serious offense, but considering that the only punishment for the illegal activity was a fine, we think that it was not as bad compared to the other cases. Another reason we believe that this case was the least worst is because the company still exists. Even though it had to merge, the company never we bankrupt. In the other cases, multiple people went to prison, companies closed, and/or fines were paid.
This was not the case for Salomon Brothers. No one went to prison and their company did not shut down, they just had to pay their fines. The actions of a few people here led to the demise of the great company that was Salomon Brothers. The entire company was not corrupt, only Mozer and his supervisor.