The resignations came after a whirlwind week in which the trading scandal grew to menace the health, and possibly the very existence, of the 81-year-old firm. The trouble began Aug. 9, when Salomon said it had suspended managing directors Paul Mozer and Thomas Murphy and two other employees. Their major misdeed: violating federal rules against acquiring more than 35% of Treasury notes and bonds at a government auction. The ceiling is designed to prevent large firms like Salomon from purchasing enough of an issue to dictate the price of the securities when they resell them to smaller buyers.
Had Salomon's infractions stopped there, the firm might have contained the damage. But Salomon dropped a bombshell last Wednesday when it admitted that Gutfreund, Strauss and Meriwether had learned last April of a trading violation but had failed to report it "due to a lack of sufficient attention" to the matter. The firm later found still more irregularities but apparently did not disclose them until faced with a government investigation. "The fact that they believed they didn't have to obey the rules is shocking," said Stephen Miller, a Philadelphia securities lawyer. "To be seen to have violated the rules and to have people at the highest levels of the company know about it -- and possibly even wink at it -- is also shocking."
The Justice Department and federal regulators launched investigations of the firm. Shareholders feared Salomon could even be barred from dealing in Treasury securities, a devastating penalty that could dry up most of the firm's profits. Such concerns caused the price of Salomon stock to plunge Thursday from 31 5/8 to 26 7/8. Buoyed by news of the imminent departure of Gutfreund, 61, and Strauss, 49, the stock finished the week at 28.
The resignation of Gutfreund puts an end to one of Wall Street's most fabled careers. A gruff-talking, cigar-chomping bond trader, Gutfreund became chairman of Salomon in 1978. According to Liar's Poker, a 1989 best seller by Michael Lewis that described Salomon as a sort of financial Animal House, Gutfreund exhorted traders to come to work each morning "ready to bite the ass off a bear." When the traders were not executing centimillion-dollar deals, they delighted in such pranks as dumping garbage on one another's desks and replacing the contents of a male colleague's suitcase with lingerie.
Ironically, it was a practical joke gone awry that helped bring Salomon down. In an elaborate form of hazing, Mozer reportedly persuaded a Salomon customer last February to submit a bogus $1 billion order for 30-year Treasury bonds. The idea was to shock the novice trader who received the order. But the prank backfired: the deal went through, and the unauthorized purchase landed on Salomon's books.
Salomon rigged bids to exceed the 35% trading ceiling in at least three Treasury auctions during the past nine months. In December the firm bought 35% of an $8.5 billion, four-year-note sale and also submitted a $1 billion bid that was ostensibly for a customer but was really for its own account. The combined transactions gave Salomon a 46% share of the overall deal.
In Washington lawmakers called for tighter regulation of the $2.2 trillion government securities market. Declared Congressman Edward Markey, a Massachusetts Democrat who chairs a subcommittee that oversees Treasury bond trading: "The issue is the integrity of the most important financial marketplace in the world." Markey blamed lax regulation for permitting Salomon to display "a cavalier disregard for the rules." Democratic Senator Christopher Dodd of Connecticut demanded that Treasury Secretary Nicholas Brady conduct a "full review" of the department's auction rules. With a $300 billion federal budget deficit to finance, Washington cannot afford to scare any bond buyers away.