Moody’s Trims Debt Ratings for Salomon Bros. : Scandal: The drop isn’t expected to harm the firm’s liquidity. Also, Salomon says it is paying the legal fees of four top executives who resigned.
The rating agency Moody’s Investors Service downgraded its rating of Salomon Bros.’ commercial paper and senior debt Wednesday, possibly forcing the beleaguered Wall Street firm to rely longer than expected on an emergency plan for financing its daily operations.
Salomon, however, said the ratings drop poses no threat to the firm’s liquidity, and securities industry analysts said they saw no immediate cause for alarm. Investors took Moody’s move in stride. Salomon’s stock closed Wednesday at $25.375 a share, up 12.5 cents.
In a separate development, a Salomon spokesman confirmed that the firm is paying the legal fees of four top executives who resigned after Salomon admitted major wrongdoing in the government securities market.
But the spokesman, Robert F. Baker Jr., declined to give any details on the reportedly generous package of severence pay and other compensation the executives may receive. Baker said a decision on compensation for former Chairman and Chief Executive John H. Gutfreund and the three others who resigned will be delayed “until Salomon has completed its own fact-finding analysis” of their role in the wrongdoing.
In addition to Gutfreund, the executives include former President Thomas W. Strauss, ex-Vice Chairman John W. Meriwether and former Chief Counsel Donald Feuerstein. Baker confirmed that Salomon is continuing to provide offices for the four executives in the Manhattan building that until recently housed the firm’s headquarters. But Baker said none of the four has any of their former perks, such as cars and drivers or access to messenger services.
Baker said the office space was being provided “principally to facilitate their review of documents in the various pending investigations and lawsuits.” He said the payment of legal fees was provided for in the firm’s charter. Baker said the fees were being paid on an “interim basis” until a review of their conduct is completed.
Strauss, Meriwether and Feuerstein reportedly may be eligible for a share of a $100-million deferred compensation plan established for senior executives in 1988. But Baker said a decision on their eligibility will be made later.
The spokesman said the firm isn’t paying legal fees and won’t give any other compensation to Paul Mozer and Tom Murphy, former managing directors who were fired for what the firm said was their direct role in the scandal.
Salomon admitted covertly buying more than the maximum permitted 35% share of notes and bonds sold in recent Treasury auctions. It also admitted making bids in the names of clients who hadn’t authorized them.
Moody’s on Wednesday said it lowered its rating on Salomon’s $6.6 billion of commercial paper, or short-term IOUs, to Prime-2 from its highest rating, Prime-1.
It also lowered its ratings on several issues of senior long-term debt. Moody’s said: “These actions reflect concerns regarding the possible legal, financial and business consequences arising from recent revelations of wrongdoing” in the government securities market.
Salomon Chief Financial Officer Donald S. Howard confirmed that several money market mutual funds that hold large quantities of Salomon commercial paper will now have to sell part of their holdings because of a new Securities and Exchange Commission rule. The rule limits the percentage of less-than-top-rated commercial paper the funds may hold.
But Howard said Salomon has no plans to issue any new commercial paper, which accounted for 5% of the firm’s total funding sources. And he said the firm can rely indefinitely on its main alternative method of short-term financing--pledging securities the firm owns as collateral for very short-term loans through what is known as the “repo” market. “We have no reason to think we will have any significant problems in doing repo business,” Howard said.
In reality, the securities are sold under agreements to repurchase them a short time later, often the next day. Howard said relying exclusively on the repo market will slightly increase the firm’s cost of borrowing by five to 10 basis points.
A basis point is one one-hundredth of a percentage point.
In another development, Salomon officials said Wednesday that Paul Mozer, the fired head of the firm’s government bond trading desk, sold about $1.7 million worth of Salomon stock shortly before the scandal became public.
The proceeds of the sale of 46,000 shares were frozen in Mozer’s account in Salomon’s private investment division, which handles all securities transactions for the firm’s managing directors, a Salomon spokesman said. The sale was discovered after the firm’s Aug. 9 announcement of illegal bond trading.
Mozer offered to reverse the sale after the scandal was disclosed. Mozer’s lawyer, Lee Richards, denied that the sale was based on inside information.