‘Practical Joke’ Led to $870-Million Bond-Buying Mistake

In the rarefied world of government bond trading, mind-boggling sums of money can get tossed around as a mere prank. Just ask Salomon Bros, which last month acknowledged that its government securities traders mistakenly made a $1-billion bid in a Treasury auction because a “practical joke” between executives went awry.

If anyone laughed, it was at Salomon’s expense: The investment firm said Wednesday that it spent $870 million as a result of the misguided bid before recovering part of the sum by selling off securities.

In a 55-page report Salomon released in conjunction with congressional testimony by its chairman, Warren E. Buffett, the firm discussed the failed attempt at levity.

Salomon said the practical joke was meant to rile one of its government securities “salespersons” on the day before she retired. (According to Salomon sources, the former sales staffer is a woman.) The perpetrator of the joke, Salomon said, was Paul Mozer, head of the government securities desk, who was fired for his alleged role in the firm’s improper trading.

The report says Mozer contacted an employee at one of the saleswoman’s client firms, Pacific Investment Management Co. He allegedly persuaded the Pimco employee to participate in the joke by placing a false bid with the Salomon saleswoman for $1 billion worth of the 30-year bonds that were to be auctioned last Feb. 7.

Pimco had no desire to purchase the bonds, and Mozer assured the Pimco employee that the order wouldn’t be executed.

The purpose of the joke: The saleswoman would put through the order on the day of the auction. Mozer would surreptitiously prevent it from being executed. Then the Pimco employee would call to complain that the $1-billion bid wasn’t filled. Mozer would give the saleswoman a memorable last day of work by pretending to blame her.

The joke ended up being on Mozer. Although he crossed out the Pimco bid at the last moment on the work sheet given to the clerk responsible for phoning in Salomon’s bids to the Federal Reserve, the clerk “apparently did not understand the significance of the cross-out” and put it through anyway, the report states.

As a result, Salomon purchased $870 million worth of bonds it didn’t want. (Because demand exceeded supply in the auction, bids were prorated, so that a bidder seeking $1 billion in bonds actually got only $870 million.)

Salomon employees scrambled to hide the mistake, placing the bonds in another customer’s account before eventually selling them off. Salomon has said this violated Treasury rules because it amounted to making an unauthorized bid in the name of a customer.

A lawyer for Mozer didn’t return phone calls seeking comment.