NEW YORK -- The disclosure that Salomon Bros.' three top officials had known for several months about illegal bidding by the firm in the government securities market has moved an unfolding scandal from an embarrassment to a serious threat to the future direction of the investment house.
The view of traders and analysts on Wall Street seemed to turn markedly against Salomon after the firm's disclosure Wednesday that John H. Gutfreund, chairman and chief executive, as well as Thomas W. Strauss, the firm's president, and John W. Meriwether, a vice chairman, knew in April about an illegal bid made by the firm.
Some of the growing disenchantment was reflected in the precipitous drop in the firm's stock yesterday. Trading was delayed almost half an hour on the New York Stock Exchange, and the stock closed down $4.75 at $26.875.
The embarrassment strikes at the very heart of Salomon -- the $2.2 trillion government securities business where it forged its reputation and where it is one of the three largest firms. As a result of its actions, the firm faces not only possible fines and sanctions, but also possible debarment as a primary dealer in Treasury securities.
Government regulators expressed a degree of amazement about the magnitude of the violations Salomon had admitted.
"The matters disclosed are obviously very serious," said William R. McLucas, head of the enforcement division for the Securities and Exchange Commission. "There were clearly some matters that will have to bear scrutiny."
After Wednesday's announcement, there was a growing sense on Wall Street and in Washington that regulators would have to punish Salomon severely to maintain their credibility as a strict enforcer of the rules in its own market. Otherwise, one former government official said, U.S. regulators could not continue to criticize lax enforcement by Japanese officials in their own growing securities and bank scandals.
Talk throughout Salomon and on Wall Street centered on which senior executives might have to resign for the firm to recover.
"People are very concerned about the stability of the organization with senior management in question, and whether these guys are going to be" able to stay, said Gary Goldstein, president of the Whitney Group, a Wall Street recruiter and consulting firm. "It has got to be a real problem for Salomon Bros."
The Salomon scandal began to unfold last Friday, when the firm disclosed that in several recent Treasury auctions, it had improperly purchased substantially more than the 35 percent of a government securities issue that any one firm is allowed to buy.
The firm admitted submitting bids in the names of customers who had not authorized it to do so in some of the auctions.
At first, Salomon said the improper purchases had been made without the knowledge of the firm's senior managers. Rather, it suspended three traders and a clerk in the department. By Wednesday, the story appeared to change. The firm said that Mr. Gutfreund and the other executives had been informed four months ago that the firm had made an unauthorized customer order in the February auction of five-year Treasury notes.
While all three men decided that the problem should be brought to the attention of the government, no one did, it said.