Salomon to Set Aside Funds for Fines, Legal Fees
Salomon Inc., in the latest blow from the U.S. Treasury auction scandal, said Tuesday that it will take a large, one-time charge against its third-quarter earnings because of its role in the affair.
Wall Street analysts put the amount of the charge at $250 million--big enough to wipe out all of the Wall Street trading house’s third-quarter profit and part of its record first-half profit of $451 million.
Salomon said it expects to take a “substantial” charge against its third-quarter earnings to establish a reserve for expected expenses.
The scandal around Salomon Bros., its brokerage unit, erupted in August, when it revealed that it violated rules by making unauthorized and excessive bids in several government auctions.
The firm, a premier player in the $2.2-trillion Treasury securities market, also said that its top management knew of the violations for several months before alerting regulators. Four top executives, including Chairman John Gutfreund, have been forced to resign in disgrace.
And the scandal continues to grow, costing Salomon clients who are shying away from dealing with the tainted firm. Just last week, the company said it found what appeared to be two more instances of unauthorized bids and said there may be more.
Salomon’s new chairman, billionaire investor Warren Buffett, and other executives discussed the anticipated charge with a group of clients Monday, the firm said in a statement.
The company’s stock closed up 75 cents at $22.50 on the New York Stock Exchange on Tuesday but is down about 40% from its high of $37 the year before the scandal broke.
News of the reserve plans did not come as a surprise.
“Somewhere along the line Salomon has to take some charges because they know they will incur them over and above normal expenses,” said Perrin Long of First of Michigan Corp.
Before the reserve announcement, Wall Street had expected Salomon to earn from 25 cents to $1.25 a share in the third quarter, according to the financial firm of Lynch, Jones and Ryan.
