Too Light? Or Just Right?

A little housecleaning on Wall Street goes a long way. Ask the new management at Salomon Bros., the scandal-ridden, 82-year-old investment firm that has been clamoring to regain respectability. Salomon cooperated with the government in a major securities fraud investigation. The New York firm thus escaped criminal charges but agreed to pay the government $290 million in penalties and fines.

Is there a lesson here for Wall Street?

Salomon at first misled the government when irregularities in the firm’s trading of government securities surfaced. Then it did a quick about-face and admitted falsifying customer orders and buying more bonds than the government allowed in a series of Treasury auctions. After Salomon ousted senior managers including Chairman John Gutfreund, investor Warren E. Buffet was brought in to remake the rough and rowdy batch of Salomon traders, whose appalling practices were depicted in the best-selling book “Liar’s Poker.”

Salomon’s cooperation was critical to maintaining confidence in U.S. government securities. Still, a question remains whether the penalty was stiff enough to signal to the rest of Wall Street that cooperation alone does not sanction wrongdoing. One could argue that $290 million was cheap compared to the prospect of criminal charges. But the question of criminal culpability of individual senior management figures remains to be answered.

The Salomon settlement is topped only by the $650 million that the firm once known as Drexel Burnham Lambert agreed to pay in 1989 in a federal case against its junk bond operation. Drexel’s junk bond king, Michael R. Milken, is now in prison.

Salomon is not the first Wall Street firm to avoid criminal charges by cooperating. Kidder, Peabody & Co. did so in a 1987 securities investigation and settled the case by paying fines of $25.3 million, then a precedent-setting enforcement action.

Perhaps the market will be the best judge of the retooled Salomon.