Salomon Brothers: The IBM Coup, Mortgage Bonds and a Treasury Bid Scandal

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Salomon Brothers was founded in 1910 by brothers Arthur, Herbert and Percy Salomon with clerk Ben Levy; the brothers descended from Haym Salomon, a primary financier of the American Revolution. For decades it was a quiet bond brokerage. Percy's son William Salomon became managing partner in 1963, and in 1967 the firm sponsored Muriel Siebert as the first woman to hold a trading license on the New York Stock Exchange floor. By 1975 it was a bulge bracket firm and, with Morgan Guaranty Trust, organized a $1 billion bond sale to rescue New York City from insolvency. In 1979 Morgan Stanley walked away from IBM's $1 billion debt offering rather than share billing, and Salomon took top billing with Merrill Lynch. John Gutfreund, in charge from 1978, made the firm public through a 1981 reverse merger with Phibro and moved it into proprietary trading, while Lewis Ranieri pioneered the mortgage-backed security.

The 41st-floor trading culture described by Michael Lewis was ruthless and enormously profitable. In 1987 the firm took municipal bond losses, Ranieri was forced out, and Revlon owner Ronald Perelman, backed by junk bond financing, sought a 14 percent stake, so Warren Buffett's Berkshire Hathaway bought $700 million of preferred stock with two board seats. Between December 1990 and May 1991, trader Paul Mozer broke the Treasury's 35 percent auction limit with unauthorized bids in clients' names, and management knew for months without reporting it. Salomon paid a $190 million fine and set up a $100 million restitution fund, Mozer was sentenced to federal prison, and Gutfreund resigned in August 1991 and was barred by the SEC from running a brokerage. Buffett served as chairman and CEO before handing over to Deryck Maughan.

• Salomon pooled thousands of local home mortgages from across the U.S. and sold shares of the pools to global investors as bonds.
• Travelers Group bought Salomon for $9 billion in 1997, and the 1998 merger with Citicorp created Citigroup and Salomon Smith Barney.
• By 2003 the Salomon name was gone, replaced by Citigroup Global Markets.
• Former fixed income chief John Meriwether and economist Myron Scholes went on to Long-Term Capital Management, which collapsed in 1998.
• Former employees and executives later announced plans to revive Salomon Brothers as a full-service investment bank.