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Nightmare on Wall Street: Salomon Brothers and the Corruption of the Marketplace
In the 1980s Salomon Brothers was the epitome of modern Wall Street. Traders became bankers, wielding the trader's weapons of guts, merit and luck, and broke through all the traditional barriers and built a financial giant. In the summer of 1991, Salomon was a world power with $170 billion in assets, a force in London and Tokyo as well as New York, and by far the largest dealer in US government securities. But Salomon had also become the self-indulgent corporate bully skewered in "Bonfire of the Vanities" and "Liar's Poker", hated for its arrogance and feared for its clout. Its top executives began to think they could write their own rules. When the firm manipulated the government bond market in a $10 billion scandal, they destroyed not only careers but the reputation of their house in a business where reputation is everything. This book looks at Salomon Brothers' influence and power.
Hardcover
First published June 1, 1993
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February 9, 2019
Martin Mayer's contemptuous of Salomon Brothers and of Wall Street generally. His book is a case for why readers should side with him.
I was struck by the irony that so many smart traders at Salomon dumbly agreed to sell their firm in 1981 at the bottom of its cyclical valuation to Phibro at the height of its valuation. Michael Bloomberg, then a young partner, recollects:
Ah, yes. Those were the days, extraordinarily profitable because "there was no price dissemination," akin to how realtors today use the multiple listing service (MLS) to preclude wide dissemination of price & transaction fee info from the general public.
I thought it odd that Mayer makes a half-dozen comments about partners' wives. He chides a New York Times reporter for swallowing "hook, line, and sinker" Salomon's self-exculpatory claim that Paul Mozer "was a mad dog loose in its trading department." But I found the NYT's account warrantably true. Read it here: https://www.nytimes.com/1991/08/25/bu...
Noteworthy excerpts from Nightmare on Wall Street:
In the early 1950s the average partner [at Salomon Brothers] in the average year took home between $70,000 and $100,000 a year, which was an extremely good income. The youngsters, by contrast, were poorly paid. Gedale Horowitz, who would become executive vice-president of Salomon and chairman of the Securities Industries Association, came to work for the firm in 1955 out of Columbia Law School, for $55 a week, "less than my wife made as a schoolteacher, which is probably the way the world ought to be." (35)
{Note: $100k in 1955 = almost $1 million in 2019.}
Mrs. Smutny, moreover, had offended Mrs. Brown, whose control over her husband was legendary in the firm. ({Harry Brown} went straight home from work, ate an early dinner at home every night and was in bed by 9:15. “She wouldn’t,” one of his partners said some years later, “let him take his cock out of his pants in the washroom.”) (37)
For better or worse—and there are arguments on both sides—the world financial structure of the 1990s was created by Billy Salomon and his traders and salesmen in the 1960s and 1970s, then magnified and gold-plated by John Gutfreund and his pinwheel of talents in the 1980s. They entered and then dominated the various kingdoms of finance because they could employ the strengths Salomon drew from its daily contact with the earth of trading. Because the dominating Salomon knew the buyers but not the issuers of investments, underwriting became increasingly a game of selling stocks and bonds rather than a venture in financing economic activity. Because the value of these pieces of paper was increasingly a function of the price of other pieces of paper, not of real production and consumption, a new financial culture grew that fed on itself. Because what Salomon could offer was a price for a piece of paper, the emphasis in finance shifted perceptibly from the long-standing relationship to the individual transaction—and then to the “product” being bought and sold. In the 1980s, while Billy Salomon watched from the sidelines with mounting distaste, an apprenticeship and judgment business became a business of quick mathematical insights by people who might or might not understand the significance of what they were doing. Salomon was not, like Drexel Burnham Lambert, a house of fraud, where strengths in traditional banking skills were perverted to “create value” in a flimflam of private manipulated markets.... (p. 45)
External events, especially the growth of giant institutions as the primary lenders to and investors in the modern capitalist economy, provided the force that propelled finance through Salomon’s channels. Academic theorizing separated the financial and the real economy, building the walls of abstraction within which only logic mattered, frightening the merely practical men who might otherwise have asked whether so large a piece of the gross national product should really be spent for financial engineering. Salomon’s people were not the inventors of markets—Leo Melamed at the Chicago Mercantile Exchange and Richard Sandor at the Chicago Board of Trade created the futures contracts that would expand all the playing fields—but they were the designers of the instruments by which these markets could be tilted. Brilliant kids who knew only what they had been taught were recruited for such purposes, first by Salomon and then by its competitors. When those competitors mastered the trick of these designs and poured their own cleverness into the complicated systems that Salomon had built to funnel profits out of the new markets, it turned out that the youngsters who succeeded to the Salomon name had never learned why there rules against cheating. (p. 46.)
When the bell rang in August 1991, Salomon was carrying $155 billion of assets and something approaching $600 billion of off-balance sheet contracts on a capital base of less than $4 billion. Presumably the quants had hedged the exposure, but the credit quality of those who sold the hedge, their capacity to live up to their part of the bargain in hard times, was beyond the competence of quants who knew only what their computers told them. (96)
The essence of probability math, which nobody wants to talk about, is that the normal curve of distribution has a long tail in both directions, and the things that as a practical matter "can't" happen in fact probably will happen at some time—such as a 508-point drop in the Dow Industrials in a single day's trading. (98)
The salaries of the men who had been partners rose to an average of well over $300,000 a year. By 1986 there were more than five hundred officers of Salomon Brothers who made more than half a million dollars a year. (113)
Gutfreund acquired the world’s most extravagant wife. (114)
Bob Scully said it would be wrong to blame {Gutfreund for Salomon’s eventual decline}, that what now seems most distressing resulted from “an evolution that customers demanded and competition compelled.” (143)
{Robert} Scully was right that the moral disaster at Salomon had causes larger than the greed of a few people on Wall Street. In the 1980s the practice of all professions in the United States —banking, law, medicine, accountancy, advertising, athletics—moved from a context of relationships to a context of transactions. The new generation of businessmen was taught in school to manage by objectives, that after each transaction one can draw a bottom line and then proceed to the next transaction as if the last one had never happened. This is not the real world, and if it were the real world, one would wish to change it. But there was money to be made that way, for a while—and even more money if you took the further step from transactions to products, from the organized market where the recognized players enforce codes of conduct to the primitive market where the buyer must beware. In perspective that was the step Salomon’s treasuries dealers took in 1990-91 when all their fellow traders who were not in their loop became just customers, and it was okay {permissible} to fuck customers. (145)
And the fourth quarter of 1986 had been a miracle trimester for the rest of the investment banking community, the best it would know until the Federal Reserve made the profitability of financial intermediaries its major policy objective in 1991. Solly’s bad fourth-quarter for 1986 was a turning point in the history of the firm. Salomon was leveraged more than forty to one—that is, its inventory of financial assets was more than forty times its capital. The most basic immediate reason Salomon made money was not the talents of its traders or the inventiveness of its brains but its ability to borrow from banks and in the commercial paper market at rates below what the banks and the markets charged other borrowers. (167)
I was struck by the irony that so many smart traders at Salomon dumbly agreed to sell their firm in 1981 at the bottom of its cyclical valuation to Phibro at the height of its valuation. Michael Bloomberg, then a young partner, recollects:
Yes, we were presented with a fait accompli. But, make no mistake. There was 100 percent approval from the rest of the general partners. Nobody in that meeting gave a moment’s thought to rejecting the sale, including me. It was such a lucrative deal for us, as owners. By the time we sat down to eat, everything was said and done. (Bloomberg by Bloomberg, 2019, revised.)The Financial Times reports (Feb. 2, 2015):
In 1979-80, when crude prices doubled following the fall of the Shah of Iran, Phibro made $1bn trading oil, said Al Kaplan, former president of Phibro’s energy unit. "We basically controlled the oil world," said Mr. Kaplan. "It was quite amazing. We had very good people. There was no price dissemination, so we used to tell people what the price was.” [my emphasis.]https://www.ft.com/content/92f86602-a...
Ah, yes. Those were the days, extraordinarily profitable because "there was no price dissemination," akin to how realtors today use the multiple listing service (MLS) to preclude wide dissemination of price & transaction fee info from the general public.
I thought it odd that Mayer makes a half-dozen comments about partners' wives. He chides a New York Times reporter for swallowing "hook, line, and sinker" Salomon's self-exculpatory claim that Paul Mozer "was a mad dog loose in its trading department." But I found the NYT's account warrantably true. Read it here: https://www.nytimes.com/1991/08/25/bu...
Noteworthy excerpts from Nightmare on Wall Street:
In the early 1950s the average partner [at Salomon Brothers] in the average year took home between $70,000 and $100,000 a year, which was an extremely good income. The youngsters, by contrast, were poorly paid. Gedale Horowitz, who would become executive vice-president of Salomon and chairman of the Securities Industries Association, came to work for the firm in 1955 out of Columbia Law School, for $55 a week, "less than my wife made as a schoolteacher, which is probably the way the world ought to be." (35)
{Note: $100k in 1955 = almost $1 million in 2019.}
Mrs. Smutny, moreover, had offended Mrs. Brown, whose control over her husband was legendary in the firm. ({Harry Brown} went straight home from work, ate an early dinner at home every night and was in bed by 9:15. “She wouldn’t,” one of his partners said some years later, “let him take his cock out of his pants in the washroom.”) (37)
For better or worse—and there are arguments on both sides—the world financial structure of the 1990s was created by Billy Salomon and his traders and salesmen in the 1960s and 1970s, then magnified and gold-plated by John Gutfreund and his pinwheel of talents in the 1980s. They entered and then dominated the various kingdoms of finance because they could employ the strengths Salomon drew from its daily contact with the earth of trading. Because the dominating Salomon knew the buyers but not the issuers of investments, underwriting became increasingly a game of selling stocks and bonds rather than a venture in financing economic activity. Because the value of these pieces of paper was increasingly a function of the price of other pieces of paper, not of real production and consumption, a new financial culture grew that fed on itself. Because what Salomon could offer was a price for a piece of paper, the emphasis in finance shifted perceptibly from the long-standing relationship to the individual transaction—and then to the “product” being bought and sold. In the 1980s, while Billy Salomon watched from the sidelines with mounting distaste, an apprenticeship and judgment business became a business of quick mathematical insights by people who might or might not understand the significance of what they were doing. Salomon was not, like Drexel Burnham Lambert, a house of fraud, where strengths in traditional banking skills were perverted to “create value” in a flimflam of private manipulated markets.... (p. 45)
External events, especially the growth of giant institutions as the primary lenders to and investors in the modern capitalist economy, provided the force that propelled finance through Salomon’s channels. Academic theorizing separated the financial and the real economy, building the walls of abstraction within which only logic mattered, frightening the merely practical men who might otherwise have asked whether so large a piece of the gross national product should really be spent for financial engineering. Salomon’s people were not the inventors of markets—Leo Melamed at the Chicago Mercantile Exchange and Richard Sandor at the Chicago Board of Trade created the futures contracts that would expand all the playing fields—but they were the designers of the instruments by which these markets could be tilted. Brilliant kids who knew only what they had been taught were recruited for such purposes, first by Salomon and then by its competitors. When those competitors mastered the trick of these designs and poured their own cleverness into the complicated systems that Salomon had built to funnel profits out of the new markets, it turned out that the youngsters who succeeded to the Salomon name had never learned why there rules against cheating. (p. 46.)
When the bell rang in August 1991, Salomon was carrying $155 billion of assets and something approaching $600 billion of off-balance sheet contracts on a capital base of less than $4 billion. Presumably the quants had hedged the exposure, but the credit quality of those who sold the hedge, their capacity to live up to their part of the bargain in hard times, was beyond the competence of quants who knew only what their computers told them. (96)
The essence of probability math, which nobody wants to talk about, is that the normal curve of distribution has a long tail in both directions, and the things that as a practical matter "can't" happen in fact probably will happen at some time—such as a 508-point drop in the Dow Industrials in a single day's trading. (98)
The salaries of the men who had been partners rose to an average of well over $300,000 a year. By 1986 there were more than five hundred officers of Salomon Brothers who made more than half a million dollars a year. (113)
Gutfreund acquired the world’s most extravagant wife. (114)
Bob Scully said it would be wrong to blame {Gutfreund for Salomon’s eventual decline}, that what now seems most distressing resulted from “an evolution that customers demanded and competition compelled.” (143)
{Robert} Scully was right that the moral disaster at Salomon had causes larger than the greed of a few people on Wall Street. In the 1980s the practice of all professions in the United States —banking, law, medicine, accountancy, advertising, athletics—moved from a context of relationships to a context of transactions. The new generation of businessmen was taught in school to manage by objectives, that after each transaction one can draw a bottom line and then proceed to the next transaction as if the last one had never happened. This is not the real world, and if it were the real world, one would wish to change it. But there was money to be made that way, for a while—and even more money if you took the further step from transactions to products, from the organized market where the recognized players enforce codes of conduct to the primitive market where the buyer must beware. In perspective that was the step Salomon’s treasuries dealers took in 1990-91 when all their fellow traders who were not in their loop became just customers, and it was okay {permissible} to fuck customers. (145)
And the fourth quarter of 1986 had been a miracle trimester for the rest of the investment banking community, the best it would know until the Federal Reserve made the profitability of financial intermediaries its major policy objective in 1991. Solly’s bad fourth-quarter for 1986 was a turning point in the history of the firm. Salomon was leveraged more than forty to one—that is, its inventory of financial assets was more than forty times its capital. The most basic immediate reason Salomon made money was not the talents of its traders or the inventiveness of its brains but its ability to borrow from banks and in the commercial paper market at rates below what the banks and the markets charged other borrowers. (167)
July 22, 2024
THE STORY OF THE DEMISE OF THE SALOMON BROTHERS INVESTMENT BANK
Martin Mayer is also the author of books such as 'The Greatest Ever Bank Robbery: The Collapse of the Savings and Loan Industry,' 'The Bankers: The Next Generation,' 'The New Worlds Money Credit Banking Electronic Age,' 'The Fed: The Inside Story How World's Most Powerful Financial Institution Drives Markets,' etc.
In the 1980s, Salomon Brothers was the largest dealer in government bonds, the largest underwriter of corporate securities, the largest nongovernmental packager of home mortgages for sale as securities, the largest trader of blocks of American stock, and the largest investment house in Britain and Japan (Pg. 10). Mayer notes, however, that "the youngsters who succeeded to the Salomon name had never learned why there were rules against cheating." (Pg. 46)
He notes, "in Ronald Reagan's and George Bush's administrations, nobody much wanted to regulate anything that was making money. Greed was good; more greed was better. Fraud was undesirable but only a frictional inefficiency, and, after all, the best people were doing it." (Pg. 71) He observes, "By 1986 there were more than five hundred officers of Salomon Brothers who made more than half a million dollars a year." (Pg. 113)
Salomon became a public corporation, rather than a partnership; "Employees could not be expected to have the same lifelong loyalty that partners had." (Pg. 117) Mayer adds, "In Salomon's partnership-turned-corporation, the attitude became one of every man for himself, and the seeds were sown for the bitter crop of 1991." (Pg. 121) He concludes, "that was the step Salomon's Treasuries dealers took in 1990-1991 when all their fellow traders who were not in their loop became just customers, and it was okay to f___ customers." (Pg. 145)
In 1991, their CEO John Guttfreund resigned as the scandals began to break, and investor Warren Buffett temporarily took the helm; Mayer notes, "If Warren Buffet had not been available to lead Salomon Brothers in August 1991, the firm would have gone under that fall. Foreign banks had already begun to cancel their credit lines to Salomon." (Pg. 221)
Along with Michael Lewis's 'Liar's Poker,this book is an excellent treatment of the story of this now-defunct investment bank.
Martin Mayer is also the author of books such as 'The Greatest Ever Bank Robbery: The Collapse of the Savings and Loan Industry,' 'The Bankers: The Next Generation,' 'The New Worlds Money Credit Banking Electronic Age,' 'The Fed: The Inside Story How World's Most Powerful Financial Institution Drives Markets,' etc.
In the 1980s, Salomon Brothers was the largest dealer in government bonds, the largest underwriter of corporate securities, the largest nongovernmental packager of home mortgages for sale as securities, the largest trader of blocks of American stock, and the largest investment house in Britain and Japan (Pg. 10). Mayer notes, however, that "the youngsters who succeeded to the Salomon name had never learned why there were rules against cheating." (Pg. 46)
He notes, "in Ronald Reagan's and George Bush's administrations, nobody much wanted to regulate anything that was making money. Greed was good; more greed was better. Fraud was undesirable but only a frictional inefficiency, and, after all, the best people were doing it." (Pg. 71) He observes, "By 1986 there were more than five hundred officers of Salomon Brothers who made more than half a million dollars a year." (Pg. 113)
Salomon became a public corporation, rather than a partnership; "Employees could not be expected to have the same lifelong loyalty that partners had." (Pg. 117) Mayer adds, "In Salomon's partnership-turned-corporation, the attitude became one of every man for himself, and the seeds were sown for the bitter crop of 1991." (Pg. 121) He concludes, "that was the step Salomon's Treasuries dealers took in 1990-1991 when all their fellow traders who were not in their loop became just customers, and it was okay to f___ customers." (Pg. 145)
In 1991, their CEO John Guttfreund resigned as the scandals began to break, and investor Warren Buffett temporarily took the helm; Mayer notes, "If Warren Buffet had not been available to lead Salomon Brothers in August 1991, the firm would have gone under that fall. Foreign banks had already begun to cancel their credit lines to Salomon." (Pg. 221)
Along with Michael Lewis's 'Liar's Poker,this book is an excellent treatment of the story of this now-defunct investment bank.
January 3, 2026
read for research lol
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