Salomon Bros., long a venerated titan among Wall Street securities firms, said Friday that its chairman and president will resign in the wake of a scandal involving U.S. Treasury auctions, and it announced that widely respected investor Warren Buffett will step in as interim chairman.
The move follows a week of admissions by Salomon that shook the investment community. In two public announcements, Salomon admitted illegally manipulating several auctions of U.S. government securities. Analysts said the actions amounted to attempts to corner the market for the notes and bonds. The firm admitted also that its top executives knew about the wrongdoing for months before notifying regulators.
In a one-page statement, Salomon said that John H. Gutfreund, 62, chairman and chief executive, and Thomas W. Strauss, 49, president, will tender their resignations at a special meeting of Salomon's board called for Sunday.
Buffett, 60, chairman of Berkshire Hathaway Inc., is expected to be confirmed as Salomon's interim chairman and chief executive at the meeting. Buffett, one of the wealthiest men in America, is known for his Midas touch in making long-term investments in companies. In the 1980s, he won admiration for helping big companies, including Salomon, fend off hostile takeovers.
Buffett currently is a Salomon director and controls about 14% of the firm's stock.
Analysts interpreted the move as an attempt by Salomon to stem a wave of defections by clients, as well as an effort to mollify angry federal regulators. The firm has said it may face criminal prosecution and suspension or "debarment" as a primary dealer of government securities.
In remarks attributed to Gutfreund and Strauss, the statement said: "We cannot allow our unfortunate mistake of not taking prompt action, when in April we learned of one unauthorized bid at a February Treasury auction, to harm the firm. We are taking this action to protect the firm, its 9,000 people and its clients."
Many senior bond traders on Wall Street, as well as clients, seemed to turn against Salomon after its disclosure Wednesday of additional incidents in which it violated rules limiting individual firms to buying no more than 35% of Treasury notes or bonds in government-run auctions.
Salomon also admitted making unauthorized bids in the name of clients. And it said it inadvertently bought an extra $1-billion worth of 30-year bonds in a February auction because a "practical joke" by one of its managing directors went awry. The firm said Friday that "we are not aware of any problems other than those already disclosed."
Salomon's admissions have prompted calls for much tighter regulation of the government securities market. Currently, the market is one of the least regulated in the United States. Analysts have said that it is unclear whether taxpayers were harmed by Salomon's misdeeds. The open auctions are held to ensure that the Treasury pays the lowest possible interest rate on notes and bonds issued to finance the national debt.
But other government securities dealers have said that Salomon's actions, which enabled the firm to control the market for certain securities after the auctions were held, may have forced other firms and customers to pay more.
Experts on the $2.2-trillion market for government securities said it is by no means clear that Salomon's announcement Friday will head off serious consequences for the firm.
"They knew they had to take some fairly drastic step," said Steven Wood, director of money market research at the Bank of America. But he said it is unlikely to prevent significant further loss of business for Salomon. "They're clearly going to lose a lot of customer business because of this, and it's going to take a long time to win that back."
In recent days, a number of large institutional investors, including state pension funds, have said they were suspending dealings with Salomon. Among them is the Wisconsin Investment Board, a state pension fund. Its spokeswoman said Friday that "we have not reversed our position," despite the announcement of the resignations.
The California Public Employees Retirement System, one of the nation's biggest pension funds, said that its staff will meet Monday to consider whether to limit the fund's dealings with Salomon.
However, Robert F. Baker Jr., Salomon's spokesman, asserted that "the reaction to the management changes has been very positive among clients." He refused to give details and said that he does not know how many clients have suspended dealings with the firm.
Neither Salomon nor the Federal Reserve Bank of New York would comment on whether federal regulators had pressured the firm to oust Gutfreund and Strauss. The New York Federal Reserve Bank oversees the 40 primary dealers of government securities.
In a statement Friday, it said that it "has been closely reviewing developments at Salomon Bros." and has demanded "a written explanation of the irregularities, violations and oversights committed by the firm."
The statement said that, because of the changes in senior management, it will now allow Salomon more time to make its report. But a government official, who asked not to be identified by name, said that the bank's decision to allow Salomon more time should not be interpreted as a sign that the Fed or the Treasury Department will go easier on Salomon in the wake of the resignations.
William McLucas, the Securities and Exchange Commission's enforcement chief, has publicly characterized Salomon's violations as "very serious."
Jim Grant, editor of Grant's Interest Rate Monitor, said that Salomon "is in about as much regulatory trouble as you can get in the government bond market."
Salomon has long been considered the most powerful of the primary dealers, firms authorized to do business directly with the Fed in daily government securities transactions. But Grant and other experts said that, if Salomon is suspended as a primary dealer, the direct effect on the market for Treasury securities probably will be minimal. Many other large firms are prepared, and eager, to take up the slack.
But Grant said that the Salomon scandal, coming on top of other enormous financial scandals in recent months, may erode investor confidence in big firms and financial markets in general. Recent scandals involved the Bank of Credit & Commerce International debacle, admissions by Nomura, Japan's largest investment house, of major improprieties, and a scandal involving the giant Industrial Bank of Japan.
"Taken all together, these tend to subvert the confidence that underscored the great financial prosperity of the '80s," he said.
Trading in Salomon's stock opened about five hours late Friday because of the pending announcement. The market's initial reaction to the news was positive. Salomon's stock closed up $1 at $27.875 in trading on the New York Stock Exchange. After Salomon announced additional wrongdoing late Wednesday, its stock on Thursday plunged $4.75, or 15%.
Analysts said that, despite the defection of clients and concerns about possible prosecution and punishment, Salomon does not appear to be in any immediate financial danger. The firm has had strong earnings in recent quarters, and it has an ample cushion of capital. In its statement, the firm said: "Salomon's business is excellent, and we have been looking forward to a record year."
Traders reported that Salomon was taking the unusual step of buying up its own "commercial paper," or short-term debt securities, in the open market in a move to assuage investor anxiety.
Buffett is expected to lend his prestige to the firm, but experts said it is unlikely he will take a major role in the day-to-day running of Salomon's affairs. He has no experience running a large securities firm. Buffett became associated with Salomon when he came to Gutfreund's aid in 1987, buying a big chunk of the firm's stock to foil a hostile takeover attempt by Ronald O. Perelman's Revlon Inc.
Gutfreund, an often flamboyant character who oversaw the firm from a desk on Salomon's football-field-sized trading floor, has been both chairman and chief executive of Salomon since 1986.
He had been head of the firm since 1978, originally as managing partner before the company went public. Gutfreund pursued aggressive expansion of the firm, branching out into other businesses from its core franchise of bond trading. However, his efforts to turn Salomon into a major investment bank, aiding companies in mergers and acquisitions, had only limited success.
The firm lately was making a strong financial comeback, based on trading profits, after major setbacks following the Oct. 1987, stock market crash and defections of some of Salomon's top traders.
Salomon left unresolved the fate of John W. Meriwether, its vice chairman and a legendary trader on Wall Street. Salomon had said that Meriwether as well as Gutfreund and Strauss had known of the firm's wrongdoing in April, months before regulators were first notified on Aug. 9. In its statement Friday, Salomon said only that "the board will also consider the status of" Meriwether during its meeting on Sunday.
Salomon said it will hold a press conference shortly after the board meeting.
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