Major Clients Returning to Humbled Salomon Bros. : * Scandal: Five months after admitting widespread Treasury bond cheating, some defectors give the reformed firm another chance. But Wall Street isn’t sure.
Salomon Brothers Inc. is regaining big clients who defected after the firm’s Treasury bond scandal, but the effects of a corporate makeover under chairman Warren Buffett are still playing out on Wall Street.
In the nearly five months since it admitted widespread wrongdoing in the government bond market, Salomon has laid off scores of executives, slashed employee bonuses, restructured management and refocused business lines.
Salomon’s stock price has rebounded, a flood of negative publicity has diminished and major investors such as the World Bank and California’s large pension fund have restored relations with the firm.
But some Wall Street executives believe the death of the old Salomon--a brash, adventuresome risk-taker--and its replacement by a leaner, more cautious firm means Salomon could lack the tools to remain a Wall Street power.
“They’ve gained some confidence in the last months with clients coming back,” Gary Goldstein, president of the Whitney Group, an executive search firm, said Thursday. “But I don’t think it’s enough to overcome the concerns at the firm that most people have about what’s going to happen in the next couple years.”
For starters, Salomon in early 1992 is expected to receive its punishment for submitting unauthorized bids for Treasury securities at least eight times. The firm also admitted exceeding limits on securities purchases at a single auction. Salomon is cooperating with federal investigators.
Salomon has set aside $200 million to pay settlements, fines and other costs of the scandal, and the announcement of penalties once again will bathe the firm in bad publicity. Former Salomon executives who resigned in disgrace also are expected to face criminal and civil charges.
Despite the imminent penalties, Buffett, the multibillionaire Nebraska investor, has worked to reform Salomon’s internal operations and distance it from old leaders, especially former chairman John Gutfreund.
A new management committee shunned executives close to the old regime, including the longtime head of equities, Stanley Shopkorn. The appointment of 22 new managing directors--a senior post--underscored a focus on Salomon’s bond business.
The two main targets of the realignment have been stocks and investment banking. Salomon has laid off about 140 bankers, stock traders and analysts in recent weeks, mostly because of poor profitability at the departments.
Salomon officials concede the loss of senior executives could hurt the firm’s relationship with clients. In addition, the scandal has reduced its effectiveness in underwriting corporate stocks and bonds, a major business.
Before the scandal, Salomon was No. 3 among Wall Street firms in underwriting. Since then it has fallen to No. 7. This month, Salomon has garnered a measly 1.6% of the underwriting market.
“The bankers I’ve talked to are concerned they are not going to have enough products, capital or tools to compete as effectively with some big firms,” Goldstein said.
But Salomon spokesman Robert Baker denied the firm is focusing on its core bond business. He said Salomon hoped to overcome the loss of senior banking executives--which could hurt the firm’s stature and deal-generating capacity--with its reputation and talent, and by treating customers well.
“We have an obligation to ourselves and to our clients to do our business profitably,” he said.
Buffett’s performance has instilled some confidence. Salomon’s stock has rebounded from a low of $21.75 in late September to $28.87 1/2 at Thursday’s close on the New York Stock Exchange. The stock remains more than 20% below pre-scandal levels above $36.
Buffett has pledged to change Salomon’s corporate culture. He removed $110 million from the year-end bonus pool and reformed Salomon’s pay structure. Average bonuses dropped 25%.
It’s still unclear whether such changes will reduce the firm’s effectiveness.
“We do have some concerns,” said DeWitt Bowman, chief investment officer for California’s Public Employees’ Retirement System, which lifted a ban on Salomon’s government bond business last week. “(Any time) you go through a change of a climate . . . you wonder what it’s going to do to the organization,”
“Time will tell,” he said. “There certainly is some potential for it to change. Salomon . . . did some things quite well. We certainly hope they retain those abilities.”
Changes in auditing and operational structure of the government bond unit persuaded the California fund, known as CalPERS, which has assets of about $65 billion, to rescind its ban.
But Salomon also lobbied CalPERS, the biggest and most influential state pension fund. Buffett appeared before its board, and he and new Salomon chief operating officer Deryck Maughan repeatedly spoke with top CalPERS executives.
Before it lifted the ban, CalPERS received assurances from the Securities and Exchange Commission there were no reasons not to.
Massachusetts’ employee and teacher pension fund resumed doing business with Salomon in all areas except government securities.
