Salomon Brothers - 1990s Treasury Bond Scandal

1990s Treasury Bond Scandal

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. Salomon was fined $290 million for this infraction, the largest fine ever levied on an investment bank at the time. The firm was weakened by the scandal, which led to its acquisition by Travelers Group. 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 his being barred from serving as a chief executive of a brokerage firm. The scandal was then documented in the 1993 book Nightmare on Wall Street.

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. Subsequently, most of its proprietary trading business was disbanded.

The combined investment banking operations became known as "Salomon Smith Barney" and was renamed "Citigroup Global Markets Inc." after the reorganization, because the Salomon Brothers and Smith Barney names were a division and service mark of Citigroup Global Markets.

Two members of the Salomon Brothers' bond arbitrage, John Meriwether and Myron Scholes, later became a founder and a consultant for Long-Term Capital Management, a hedge fund that collapsed in 1998.

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. Salomon Brothers' success and decline 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.