The Rise and Fall of Salomon Brothers

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  • Topic: Salomon Brothers, Citigroup, Liar's Poker
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  • Published : June 14, 2011
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The Rise and Fall of Salomon Brothers
Treasury Bond Scandal- 1991

Executive Summary
Salomon Brothers was at one time, the largest bulge bracket firm on Wall Street. Although it offered a number of financial services, it had established its name through the legacy of bond trading. Its bond trading department boasted of iconic traders of 1980’s era- John Meriwether and Myron Sholes. Salomon Brothers can be considered as the founder father of mortgaged back securities trading on the Wall Street, an area in which it was a near monopolist for a long time with not much competition from other firms. In 1981, Salomon Brothers which operated as partnership was taken over by Phibro Corporation and became known as Phibro-Salomon. With a lot of ups and downs in its fortune during the late 1980’s and early 1990’s, finally in 1997, it merged with Citigroup and became their Investment Banking arm called Salomon Smith Barney. Finally the existence of the name of “Salomon” ceased when Citigroup decided to drop the name in 2003 and branded its investment bank and underwriters as Citigroup Global Markets. We chose to work on the topic “The Rise and Fall of Salomon Brothers” as this topic offers an insight into the development of a particular securities market- the Mortgaged backed securities, the dominance of the market player, the culture of the firm and finally the scandal which served as the turning point of fortunes of ‘once the market leader’ or metaphorically- the final nail in the coffin. Background

Salomon Brothers was founded in New York City in 1910 when three brothers-Arthur, Herbert, and Percy Salomon broke away from their father Ferdinand's money-brokerage operation and went into business for themselves. The company was primarily a bond trading firm. The private company entered equities in the mid-1960s and between 1962 and 1964, Salomon more than tripled its underwriting business, from $276 million to $873 million. They entered investment banking in the early 1970s and established themselves with Pepsi-ICI merger among others. Since till 1981, the firm operated as a partnership, it had a close-knit culture and partners put the firm’s interest before their own. There were no issues over compensation or credit for work and slowly but surely Salomon was climbing the ladder of being a bulge bracket firm of Wall Street. As Salomon partner Abraham Eller once explained, “. . . what helped make Salomon Brothers was not only the partners, but that the men they hired were hungry.… We weren’t the sons of rich men.” However, in 1981, it was taken over by the Phibro Corporation and became a corporation with the name Phibro-Salomon Inc. until 1986, when Salomon gained control and changed the name of the parent company to Salomon Inc.

In 1980’s under the leadership of John Gutfreund, Salomon participated in the leveraged-buyout boom of the 1980s and did deals like Xerox's acquisition of Crum & Foster and was also the adviser by AT&T. In 1985, the firm’s peak year, Salomon brought in $760 million in pre-tax profits. In 1987, the company’s capital reached $3.4 billion.

Legislations which fuelled growth
The following changes in legislation led to a conducive environment for bond trading and the development of the mortgage backed securities market which in turn impacted the fortunes of Salomon Brothers:

* In 1979, the Federal Reserve announced that that the money supply would cease to fluctuate with the business cycle. Bond prices moved inversely with interest rates. Bonds became the means of “creating wealth rather than merely storing it.” The industry’s revenues rose from $16 billion in 1980 to $51.8 billion in 1988. * In 1981, Congress passed a tax break which allowed thrifts to sell all their mortgage loans in order to put their money to work for higher returns. Subsequently, the volume of outstanding mortgage loans increased from $700 billion in 1976 to $1.2 trillion in 1981, and the mortgage market surpassed the...
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