Clients May Leave Salomon Because of Wrongdoings
The Wall Street securities brokerage Salomon Bros. confirmed Thursday that several of its large institutional customers may curtail doing business with the firm because of its admitted wrongdoing in government securities trading.
Salomon late Wednesday made public a series of company violations of the rules that limit purchases of government notes and bonds at Treasury auctions. The disclosure was the firm’s second in less than a week and prompted a call Thursday by some government officials for much tighter regulation of the government securities market.
The admissions also seemed to substantially increase the likelihood of severe punishment of Salomon, even though it is the leading primary dealer of Treasury securities. Primary lenders are designated by the New York Federal Reserve Bank to deal directly with the Fed in trading of Treasury securities.
Salomon’s disclosures clearly alarmed its shareholders. Trading of Salomon shares on the New York Stock Exchange opened almost two hours late Thursday because of a heavy volume of sell orders. The stock then plummeted $4.75, closing at $26.875, a 15% drop. Salomon’s stock was the most actively traded Thursday on the Big Board, with 7.8 million shares changing hands.
Unease over the fate of Salomon, a major force on Wall Street, was also cited by traders as part of the reason the Dow Jones Industrial Average declined 6.94 to close at 2,998.43.
In addition, the rating agency Moody’s said that in the wake of the disclosures it has put Salomon’s debt securities under review for possible downgrading.
And the New York law firm Sirota & Sirota said it filed a class-action civil suit Thursday against Salomon and some of its executives, accusing them of securities fraud and racketeering. The suit was filed on behalf of all Treasury note buyers since December, 1990.
Treasury auctions of securities are the way that the government finances the national debt. The government securities market typically involves trading worth $100 billion a day. Most of the securities are purchased by banks and other large institutions.
Robert F. Baker Jr., a Salomon spokesman, said several large institutions that are regular customers of the firm notified it that they were evaluating whether to continue doing business with Salomon because of the wrongdoing. “Several have told us that they want to take a look at things,” Baker said.
He declined to identify them or to elaborate. But Baker said the firm remains strongly capitalized and is in no danger.
“Liquidity is excellent,” he said. The firm denied rumors that circulated early Thursday that it was selling large quantities of mortgage-backed securities to raise capital.
Traders and securities industry analysts said the most damaging part of Salomon’s disclosure Wednesday was that its three top executives knew of the wrongdoing for months before notifying regulators.
The firm has admitted a series of incidents in which it violated Treasury regulations forbidding any firm to buy more than 35% of the securities sold at a Treasury auction. Traders have characterized Salomon’s activities as attempts to corner the market. The firm also admitted that it inadvertently bought $1 billion worth of 30-year bonds in February because a “practical joke” by one of its managing directors went awry.
Officials at the Securities and Exchange Commission, Treasury Department and Federal Reserve have declined to comment on what action, if any, they might take against Salomon, although the firm has said it may face criminal prosecution and possible debarment as a primary dealer.
Salomon Chairman and Chief Executive John Gutfreund and other top executives may face SEC charges of failing to adequately supervise the firm.
Peter Bakstansky, a vice president at the New York Federal Reserve Bank, said he believes that no primary dealer has ever been suspended for wrongdoing, although several have been debarred for failing to meet minimum capital requirements. There are 40 primary dealers.
But several congressional committees said they are stepping up inquiries into regulation of the government securities market, one of the most lightly supervised securities markets. Senate securities subcommittee Chairman Christopher J. Dodd (D-Conn.) on Thursday asked Treasury Secretary Nicholas F. Brady to report on the adequacy of current regulations.
Meanwhile, experts on the government securities markets said that if Salomon is suspended as a primary dealer, there probably would be slight impact on the market--and little if any additional cost to taxpayers in the interest rate the government pays on new Treasury issues. That rate is determined in the Treasury auctions.
“There currently is enough excess capacity in the bond market with the recent influx of players over the last couple of years that if Salomon were not a participant, it wouldn’t have a lasting effect,” said Lawrence N. Leuzzi, co-head of S. G. Warburg & Co.'s primary dealership in New York.