The Spectacular Rise And Fall of Salomon Brothers

Salomon
Photoshopped by Business Insider, Photos from Wikimedia Commons and AP

As we anxiously await the film adaptation of Michael Lewis' seminal Wall Street book, "Liar's Poker," we figured we'd take a few moments to re-familiarize ourselves with the rise and fall of the book's most infamous subject: Salomon Brothers Inc.

Advertisement

A Wall Street fortress for most of the twentieth century, Salomon Brothers fell from grace when it found itself tangled in a chain of scandals in the early 1990s, which led to the firm's emergency takeover by Warren Buffett and eventual integration into Citigroup.

While Salomon's infamously reckless behavior is now a thing of the past, what remains today is a cult-like loyalty to the firm and, of course, a great story. 

Advertisement

Salomon Brothers was founded in 1910

wall street
Wikimedia Commons

By—you guessed it—brothers Arthur, Herbert and Percy Salomon. 

The brothers began with $5,000 and some help from their father's (a broker himself) clerk and opened their first money brokerage office on Broadway near Wall Street. 

Source: Funding Universe

Advertisement

By the end of WWI, the brothers ruled the market for government bonds

liberty bonds
Wikimedia Commons

Thanks to the Liberty Loan Act of 1917, the brothers capitalized on the newly-created government bond market. 

By the 1930s, the Salomon brothers had set up shop in six cities around the Northeast and Midwestern United States.

Source: Funding Universe 

Advertisement

The Great Depression hit hard, but the Salomon name survived

man great depression
WikiMedia Commons

By remaining bearish in the years leading up to the Great Depression, Salomon Brothers was able to weather the market crash of 1929, its largest struggles between family members as to whom should take over the business.

Source: Funding Universe

Advertisement

The firm continued to grow in the following decades

trading

Under the leadership of the family's golden boy heir—William (Billy) Salomon—the firm expanded its operations in the 1960s, adding a research department (hiring the infamous Henry Kaufman a.k.a. Dr. Gloom) and growing its block trading and underwriting activities. 

By the end of the 1960s, Salomon joined Lehman Brothers, Blythe, and Merril Lynch to become the 'Fearsome Foursome.'

Source: Funding Universe

Advertisement

Then came the era of John Gutfreund...

John Gutfreund
AP

John Gutfreund joined Salomon as a statistics trainee in the mid-1950s, per request of Billy Salomon, his golf partner. 

Gutfreund quickly climbed the Salomon ranks and was named partner at the young age of 34. 

And at 49, he was named CEO. 

Source: New York Magazine

Advertisement

Which Michael Lewis chronicled so nicely in "Liar's Poker"

bear
Daisyree Bakker / Flickr

According to Lewis, Gutfreund was known to tell his employees that “a trader needs to wake up every morning ready to bite the ass of a bear.”

That should give you an idea of how things went down under Gutfreund's watch. 

Source: Liar's Poker via Google Books

Advertisement

And if you've read Liar's Poker, you know what these guys called themselves

Best wall street books liars poker michael lewis

"Big swinging dicks." 

Source: Liar's Poker via Google Books

Advertisement

This was all a part of what many have described as a 'frat boy' culture

belushi animal house

Where practical jokes, pranks and hazing were commonplace.

Source: Time Magazine

Advertisement

Despite the practical jokes, the firm was known as an innovator in the bond market

savings bond
government bond

In fact, Salomon developed the first private mortgage backed security in the late 1980s.

Bonus Fact: now-celebrities Michael Lewis and Mayor Mike Bloomberg were also at Salomon at this time. 

Source: Businessweek

Advertisement

But it was under Gutfreund's watch that everything started to fall apart

Paul Mozer
AP

Here's how the first scandal went down:

  • Trader Paul Mozer submitted illegal bids for U.S. treasury securities in August of 1990, attempting to corner the market by purchasing more than the 35% share allowed per individual transaction
  • Mozer's supervisor, John Meriwether, chastised the bid when it came to his attention, but let Mozer stick around

Sources: Nightmare on Wall Street and The New York Times 

Advertisement

And continued to fall apart...

Salomon SEC
C-Span
This time with real consequences:
  • In May 1991, the firm cornered the treasury securities market a second time
  • This time, the SEC noticed.
  • Mozer was suspended and Salomon was fined the highest fine ever leveraged against a bank at the time, $290 million.
  • Gutfreund was forced to resign in August.
  • And the company was on the brink of bankruptcy

Source: The New York Times

Advertisement

Then Warren Buffet saved the day

Berkshire Hathaway
BloombergTV

Warren Buffett had invested $700 million in Salomon Brothers in 1987 and proved to be the best choice for assuming the position of chairman in the 9-months following Gutfreund's forced resignation. 

Buffett didn't like spending time away from Berkshire Hathaway and sent his investors a letter saying his new position was "far from fun."

Source: New York Times

Advertisement

And he gave the best quotation ever:

Warren buffett
C-Span

"Lose money for the firm and I will be understanding, lose a shred of reputation for the firm and I will be ruthless" said Buffett in a 1991 hearing in front of the House committee on Energy & Commerce. 

Source: C-Span

Advertisement

Gutfreund wasn't the only senior official to leave

LTCM meltdown

In fact, John Meriwether (former vice-chairman of Salomon) and Myron Scholes (co-head of Salomon's fixed-income derivative group) went on to start Long-term Capital Management.

We know how that turned out. 

(If you don't, you can read about their $4.6 billion loss in Roger Lowenstein's 'When Genius Failed')

Source: When Genius Failed


Advertisement

After Buffett left Salomon, things were never really the same

travelers companies
Glassdoor

Salomon was acquired by Travelers in 1997 for $9 billion (Buffet walked away with $1.7 billion).

Travelers and Salomon never really saw eye-to-eye on the way Salomon conducted business, leaving Travelers to disband most of Salomon's infamously volatile trading activity shortly after the acquisition. 

Source: The New York Times

Advertisement

But the Salomon name stuck around, even after Travelers merged with Citi

citi
flickr/huangjiahui

While Salomon now lives deep within the Citigroup empire, there's still a curious loyalty to the former Wall Street giant. According to the Wall Street Journal, investors (as late as 2009) would call Citi and ask for "Salomon."

Source: Wall Street Journal

Advertisement

And now, the fabulous life of a former Salomon bond salesman

Michael Lewis
Bloomberg Risk Takers

The Life of Wall Street's Favorite Writer, Michael Lewis>

Wall Street Warren Buffett
Advertisement
Close icon Two crossed lines that form an 'X'. It indicates a way to close an interaction, or dismiss a notification.