I Will Be Ruthless'

Warren Buffett opted for tennis metaphors last week. "I don't want anybody playing close to the line," the interim chairman of scandal-battered Salomon Brothers Inc. told 300 employees at the firm's Monday-morning sales conference. "You can do very well hitting down the middle of the court." Buffett's 15-minute pep talk was beamed to Salomon offices around the world, the opening shot in the 61-year-old billionaire's campaign to polish the tarnished firm. But did Salomon Brothers staffers get the message? Within hours, some were dubbing the lecture "Quotations From Chairman Warren."

How will the folksy Buffett style mesh with Salomon's culture of intensity? Certainly the new chairman has gone to great lengths to keep the lines of communication open. Buffett has held several meetings with Salomon employees to answer questions and restore confidence; many staffers who couldn't attend watched the proceedings on closed-circuit-TV screens. He has also set up a hot line to allow deskbound workers to listen in via telephone. Buffett's message: "If you lose money for the firm by bad decisions, I will be very understanding. If you lose reputation for the firm, I will be ruthless."

That's not the sort of thing you often hear on Wall Street. It's gone down well with many at Salomon, who are embarrassed by last month's revelations. "He gives credibility to the firm," says one trader. Yet some question whether the message will sink in. "You totally live for the bonus," says a government bond trader. "For a lot of people the reaction is, 'You gotta be kidding me'." Others say that Buffett's warning rings hollow, citing his own reputation as an aggressive investor in sales-driven companies like American Express. " 'Sales first' is how he made his money," says one Salomon bond salesman. "Putting sales first is how we'll continue to make our money."

Buffett's address came at the beginning of one of the most turbulent weeks in Salomon's history. Already, three top executives-chairman John Gutfreund, president Thomas Strauss and vice chairman John Meriwether--had resigned after admitting they had known about illegal bidding by Salomon traders in two Treasury-note auctions in 1991. The firm waited more than three months to report the infractions. (A fourth exec-general counsel Donald Feuerstein--later left the firm at Buffett's request.) Salomon acknowledged that its traders bid for more than the allowable 35 percent of government securities issued at both auctions. That squeezed competitors who had promised to sell the notes to customers but found them hard to obtain at the expected price. As a result of the scandal, six state-pension funds suspended their bond-trading business with Salomon. And the Securities and Exchange Commission broadened its inquiry into the $2.2 trillion Treasury-securities market, investigating whether price fixing and collusion are widespread.

Buffett is now trying to salvage public confidence in the firm. The failure of Gutfreund and his top executives to act has caused some to wonder whether the improper behavior was sanctioned from on high-especially since Salomon violated the 35 percent rule at a May auction, the month after top executives had been informed of the first "squeeze." Some competitors charge that Salomon may have habitually used its clout and its cash to drive prices up or down. "I can't tell you how many times one of them said to me, 'We are the market'," says one money manager. (Salomon spokesman Robert Baker calls the accusations "nonsense.") If cornering markets was the goal, the strategy wasn't risk-free; Salomon's huge holdings of the May Treasury-note issue could have plummeted in value had interest rates gone up.

For now, the scandal doesn't threaten Salomon Brothers' financial health. Moody's Investors Service Inc. last week slightly lowered the credit ratings on billions of dollars' worth of Salomon's debt, which will make it more expensive for the firm to borrow money. Yet Moody's said that the company's credit-worthiness was still strong, citing its strong financial management and adequate capital base. Most of Salomon's customers continue to show confidence in both the firm and the government securities market. Last week's auctions of two-year and fiveyear Treasury notes went off without a hitch. "The results of the auction bear out that when investors want to put their money to work, it doesn't matter who the intermediary is," said the head of a rival bond dealer. Still, the latest scandal has spread a sense of gloom in the securities business. Said one Merrill Lynch trader, "It's the worst thing to happen to Wall Street since [the 1990 fall of] Drexel. It fosters the [impression] that Wall Street is overly greedy, overly profitable."

Washington may now step in with its own efforts at reform. Buffett is scheduled to testify at a congressional hearing this week, and many expect that the Treasury will soon lower the maximum share of government bonds allowed a single dealer in an auction from 35 to 25 percent. But even without tighter regulations, Salomon faces intense pressure to rein itself in. Wall Street has already seen the collapse of E.F. Hutton and Drexel Burnham Lambert following revelations about ethics violations; Salomon can't afford even a hint of further scandal.

I Will Be Ruthless' | News