The Unwisdom of Salomon

September 04, 1991

Beware of Salomon Brothers spokesmen who dismiss their firm's failure to report manipulations of the U.S. government securities market as "dumb" and "inexplicable." It was part and parcel of a larger scheme and a flawed corporate culture.

By buying more bonds at Treasury auctions than the 35 percent legal limit allowed, sometimes through the use of clients' names without their permission, Salomon was following a procedure that "smacks of a possible attempt to corner the market," according to Business Week magazine.

This latest example of high-roller greed cannot be tolerated. The $2.3 trillion Treasury market must retain the confidence of millions of investors, domestic and foreign, for this is the way the federal government finances its debt. Virtually every pension fund, mutual fund, financial institution, business and ordinary citizen has a stake in minute changes in Treasury interest rates.

The Treasury has suspended Salomon from purchasing bonds on behalf of its customers but has allowed it to remain one of the nation's 40 primary dealers for its own account. This was partly a show of indulgence for Omaha's billionaire Warren Buffett, who has taken over as Salomon's temporary chairman to protect his $700 million investment in the firm. But it also reflected Treasury's reliance on Salomon as a major player in making the bond auctions work. In the February auction, Salomon grabbed 57 percent of the issue.

There is no evidence yet that the government lost money through Salomon's operations. Indeed, its aggressive purchasing might have yielded lower interest rates for Uncle Sam. But this cannot excuse the firm's failure to notify the Federal Reserve Board of improprieties; nor does it do away with possible infringements of anti-trust and other laws. Four separate government agencies are probing.

Salomon is suffering -- in the loss of reputation, the forced resignation of top executives, the drifting away of big customers (especially state pension funds), the down-rating of its own assets and the drop in its share price. Yet we agree with former Fed chairman Paul A. Volcker that Treasury's slap on the wrist is too light a penalty. "This is such a nice test case," he told the Wall Street Journal. "I'd hate to see it not carry the right lesson."

One lesson the government itself should learn is that it should tighten and coordinate oversight functions now split among four agencies. Another is making the government bond market more visible to the investing public. There are too many dark corners, too many hidden commissions, too many temptations for manipulation in a market that is absolutely essential to U.S. financial well-being.

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