The Rise and Fall of Salomon Brothers Essay Example

The Rise and Fall of Salomon Brothers Paper The Rise and Fall of Salomon Brothers Treasury Bond Scandal- 1991 Executive Summary Salomon Brothers was at one time, the largest bulge bracket firm on Wall Street. Although it offered a number of financial services, it had established its name through the legacy of bond trading. Its bond trading department boasted of iconic traders of 1980’s era- John Meriwether and Myron Sholes. Salomon Brothers can be considered as the founder father of mortgaged back securities trading on the Wall Street, an area in which it was a near monopolist for a long time with not much competition from other firms. In 1981, Salomon Brothers which operated as partnership was taken over by Phibro Corporation and became known as Phibro-Salomon. With a lot of ups and downs in its fortune during the late 1980’s and early 1990’s, finally in 1997, it merged with Citigroup and became their Investment Banking arm called Salomon Smith Barney. Finally the existence of the name of â€Å"Salomon† ceased when Citigroup decided to drop the name in 2003 and branded its investment bank and underwriters as Citigroup Global Markets. We chose to work on the topic â€Å"The Rise and Fall of Salomon Brothers† as this topic offers an insight into the development of a particular securities market- the Mortgaged backed securities, the dominance of the market player, the culture of the firm and finally the scandal which served as the turning point of fortunes of ‘once the market leader’ or metaphorically- the final nail in the coffin. Background Salomon Brothers was founded in New York City in 1910 when three brothers-Arthur, Herbert, and Percy Salomon broke away from their father Ferdinands money-brokerage operation and went into business for themselves. We will write a custom essay sample on The Rise and Fall of Salomon Brothers specifically for you for only $16.38 $13.9/page Order now We will write a custom essay sample on The Rise and Fall of Salomon Brothers specifically for you FOR ONLY $16.38 $13.9/page Hire Writer We will write a custom essay sample on The Rise and Fall of Salomon Brothers specifically for you FOR ONLY $16.38 $13.9/page Hire Writer The company was primarily a bond trading firm. The private company entered equities in the mid-1960s and between 1962 and 1964, Salomon more than tripled its underwriting business, from $276 million to $873 million. They entered investment banking in the early 1970s and established themselves with Pepsi-ICI merger among others. Since till 1981, the firm operated as a partnership, it had a close-knit culture and partners put the firm’s interest before their own. There were no issues over compensation or credit for work and slowly but surely Salomon was climbing the ladder of being a bulge bracket firm of Wall Street. As Salomon partner Abraham Eller once explained, â€Å". . . what helped make Salomon Brothers was not only the partners, but that the men they hired were hungry. †¦ We weren’t the sons of rich men. † However, in 1981, it was taken over by the Phibro Corporation and became a corporation with the name Phibro-Salomon Inc. until 1986, when Salomon gained control and changed the name of the parent company to Salomon Inc. In 1980’s under the leadership of John Gutfreund, Salomon participated in the leveraged-buyout boom of the 1980s and did deals like Xeroxs acquisition of Crum Foster and was also the adviser by ATT. In 1985, the firm’s peak year, Salomon brought in $760 million in pre-tax profits. In 1987, the company’s capital reached $3. 4 billion. Legislations which fuelled growth The following changes in legislation led to a conducive environment for bond trading and the development of the mortgage backed securities market which in turn impacted the fortunes of Salomon Brothers: * In 1979, the Federal Reserve announced that that the money supply would cease to fluctuate with the business cycle. Bond prices moved inversely with interest rates. Bonds became the means of â€Å"creating wealth rather than merely storing it. † The industry’s revenues rose from $16 billion in 1980 to $51. 8 billion in 1988. * In 1981, Congress passed a tax break which allowed thrifts to sell all their mortgage loans in order to put their money to work for higher returns. Subsequently, the volume of outstanding mortgage loans increased from $700 billion in 1976 to $1. 2 trillion in 1981, and the mortgage market surpassed the combined U. S. stock markets as the largest capital market in the world. The SEC’s Rule 415, enacted in 1982, where corporations were allowed to register in advance all the securities they intended to issue over the next two-year span (â€Å"shelf registrations†) and Salomon Brothers was the industry’s leader. * The protection of the Glass-Steagall Act, which stopped commercial banks to underwrite and distribute most securities ended and the competition intensified. Overall, the beginning o f the 1980’s decade led to an explosive growth in the bond markets and Salomon was ready to jump on the opportunity as it was one of the few Wall Street firms to have a proper mortgage trading department. Culture of the firm In order to understand the culture of the firm, we read the book Liar’s Poker written by Michael Lewis who was a bond salesman in Salomon Brothers and gives an inside account of the culture prevalent in the firm. Bond Traders and Salesmen: The two major classes of people at Salomon were the bond traders and salesmen. More than any other firm on the Wall Street, Salomon was run by bond traders who kept an eye on the market and made most of arbitrage opportunities while the salesmen gave information to the traders about the sentiments in market. The CEO of the company John Gutfreund also started off as a trader and spent his time at a large desk over seeing one end of Salomon’s bond trading room. The trading floor—the 41st floor, which was known as â€Å"Power Central†Ã¢â‚¬â€was actually the power centre of the firm. He promoted an environment of risk-taking and agility and the Salomon Trading floor had minimal supervision, minimal controls and no position limits. That is, a trader could buy or sell as many bonds as he thought appropriate without asking. With an increase in business, the firm recruited widely. The firm, which had employed 2,000 people in 1982, tripled to 6,000 people by 1987. † Due to excessive focus on generating revenues, one insider put it as, â€Å"competing fiefdoms replaced interconnected businesses. † and â€Å"Making money was mostly what mattered. † Also, the mortgage department which made the maximum money had a culture of its own promoted by Ranieri (head of the department) which alienated it even more. According to Ranieri, â€Å"The reason everything was separate was because no one in the firm would help us. They wanted us to fail. † The Scandal This scandal was unique in itself as it shook the foundation of the sacrosanct $2. trillion government securities market which was considered too big to rig. The conventional wisdom was shaken to a great extent and regulations tightened for all the 40 primary designated dealers of T-bills and government bonds. Orchestration of the fraud: Paul Mozer, Managing Director of Salomon Inc. ’s government securities trading desk, submitted three separate bids for the U. S. Treasury’s $9 billion 5-year treasury note auction on Feb. 21,1991. Each of the bids was for $3. 15 billion, or 35% of the total bond offering, the maximum bid the Treasury would recognize from any individual buyer. Since two of the bids were submitted under the names of outside firms who were Salomon customers, Warburg and Quantum, the Treasury accepted all three bids. The Treasury was unaware that only Mozer’s bid in Salomon’s name was legal. The other two were unauthorized customer bids placed by Mozer trying to get Salomon a larger share of the auction. However, what Mozer did not know was that Warburg had taken part in the auction with a $100mn bid and with combined bid of more than 35% in name of Warburg; Treasury started an investigation which uncovered the plot of Mozer. This scandal led to the firing of Mozer, resignation of the top brass including Gutfreund and a loss of reputation of Salomon Brothers which they never recovered. Aftermath: This scandal shook the confidence of participants in the government securities market and led to investigations by Federal Reserve Bank, the Justice Department and the Securities and Exchange Commission. The Treasury Department re-examined the records of every auction since 1986, a total of more than 200, searching for evidence of collusion with customers to violate the 35% rule. Salomon was fined $290 million as damages but it escaped criminal charges. The Treasury however, banned Salomon from bidding in Government Securities market. After the resignation of John Gutfreund, majority stakeholder Warren Buffet was made the chairman to revamp the organisation. He also convinced the Treasury to lift the ban as it would lead to Salomon towards bankruptcy. The firm became a victim of its own culture and finally the name of Salomon ceased to exist on the Wall Street which it had once dominated. Joining the dots Having done a course on Ethics, analysed case studies of Enron, WorldCom etc, made us realise that the frauds/scandals do not germinate over night; rather they are fruits of greed which is perpetrated by the Top management either directly or indirectly. As mentioned earlier, the culture of Salomon Brothers was such that traders were given a free hand as long as they generated revenues and were never questioned. This led to the audacity of Mozer wherein he submitted false bids not just the time when he was caught but in other auctions as well and had landed in trouble with the Treasury before. Had a proper system of reporting and accountability existed, the previous instances would have been known to top management and the entire scandal could have been averted which tarnished the reputation of the firm. At the same time, we believe, Treasury department should have been more vigilant as market participants i. e the 40 primary dealers could always collude and try to take the maximum out of the pie of the auction. Having a system which was transparent such that the bids could have been monitored by all the participants would have lead to detection of anomaly of bids in much short period of time without any extensive examination. The main learning that we can derive out of this study is twofold- * Promotion of Ethics and fair dealing as a part of corporate culture of the organisation following a top-down approach such that lower level employees get motivated from the conduct of senior levels * No matter who the participant is and the financial market in question, the regulator has to be vigilant at all times and have a stringent set of rules and regulations as well as penalties in place which deters market participants from erring. References: http://www. fundinguniverse. com/company-histories/Salomon-Inc-Company-History. html http://en. wikipedia. org/wiki/Salomon_Brothers#Long_Term_Capital_Management http://www. time. com/time/magazine/article/0,9171,973726-2,00. html http://www. answers. com/topic/salomon-brothers Robert Sobel, Salomon Brothers 1910-85: Advancing to Leadership Michael Lewis, Liar’s Poker Salomon Brothers: â€Å"Apologies are Bullshit†- pdf

body modification essays

body modification essays Dictionary definitions are always helpful in making things more clear. The definition of mutilate is: to make imperfect by excising or altering parts. Mutilation is making imperfect. There are a few listed definitions of art. The first is: human effort to imitate, supplement, alter, or counteract the work of nature. The second definition is: the conscious production or arrangement of sounds, colors, forms, movements, or other elements in a manner that affects the sense of beauty, specifically the production of the beautiful in a graphic or plastic medium (American Heritage...). Here is the loophole. Altering what is natural is part of a definition for both mutilate and art. Therefore, mutilation is art. However, art is not making imperfect. Why is body mutilation viewed so differently than many other art forms? Body mutilation is a form of art that should be accepted, as so many others are. Before one can make a judgment on this subject, a good bit of knowledge is needed. Fear of the unknown can sometimes lead people to form harsh opinions, or to even hold them back from doing things they really want to do. Here is a clear explanation of how these basic types of body modification are actually done, and how the human body is transformed into a beautiful work of art. Tattoos: A Tattoo is a body modification in which the skin is permanently colored by ink being placed under the skin in a desired pattern. Traditionally, tattoos were merely done with a small sharp object that had been placed in ink and then pierced into the skin. This method is commonly used by amateur tattoo artists and often only used on themselves and their close friends. Professional tattoo guns are built on the same concept except that they are normally powered by a small motor and controlled by a foot pedal (Tattoo Information). Tattooing is an expressive, dramatic, and diverse art, whose only limitation is imagination. Tattoos can take up to any amount of tim...

The causes of drug abuse Essay Example | Topics and Well Written Essays - 500 words

The causes of drug abuse - Essay Example al abuse, and emotional abuse/neglect in childhood, is a significant risk factor for many psychiatric disorders later in life, such as substance abuse†(Wang et al., p.1). Bitter life experiences are the major motivating factor for drug abuse. It is not necessary that a person starts drug abuse immediately after he suffers a painful experience. In many cases, bitter childhood experiences such as sexual abuse, lack of parental care etc can generate drug abuse like antisocial behaviors later in the life of a person. Physical as well as psychological problems can cause drug abuse. People with chronic diseases such as cancer, HIV, etc quite often take shelter in drug abuse to forget about the physical and mental pain caused by their diseases. Strained relationships and destruction of love affairs or dating relationships can also cause drug abuse like behavioral problems. Some people believe that drug uses can stimulate sexual energy. People, who are sexually impotent, often try to make use of drugs to improve their sexual energy or capabilities. Narcotic drugs create good feelings. There is the initial euphoric sensation that comes with taking the drug, and then there is the secondary effect associated with the type of drug used. If it is a stimulant, the initial euphoria is followed by inflated feelings of self-confidence and abundant energy; if it is a depressant, then the initial euphoria is followed by satisfaction and relaxation† (Ho). Unemployment, poverty and lack of living standards etc are other reasons for drug abuse. Nobody likes to lead a life in poverty. Everybody wants to lead a lavish life. Failure to get proper employment or raising the living standard often generates frustrations in the minds of the people. These frustrations often lead them towards drug abuse like behaviors. Improper knowledge about certain medicines or drugs often causes drug abuse. For example, marijuana is a controversial drug because of the arguments in favor and against it

Impact National Culture on Leadership Traits and Behaviors Essay

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Bussiness Accounting Assignment Example | Topics and Well Written Essays - 3000 words

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Rose For Emily Essay -- essays research papers

A Rose for Emily by William Faulkner Emily was a woman that cannot be described without a the words â€Å" not quite normal†, and â€Å"extra ordinary.† The story, â€Å"A Rose for Emily† by William Faulkner is about one woman’s life, from her being a teen to her death in her house. The town’s people did not like her, her family did not like her, but when she died, everybody showed up to Miss Emily’s Funeral. The only person to see Emily was her old manservant, a black man that was the cook and the gardener. The only time that the town would see him was when her went to the grocery store to shop. He would never talk to anybody while he was there. The end of her life never saw Emily out of her house. The town questioned this, but Emily soon just became another story with the town. Miss Emily was not always alone. When she was younger, her father lived at the house with her. He was a man without his sanity. When ever a male would come to the house to see Emily, he would great them at the door, and see them off before Emily could even say hello. The town used this excuse for Emily when her father died. He was dead for three days before she would let the coroner to take him out of the house. This can be seen as the beginning of Emily’s decent to madness. Emily was not always without a man. The town was getting sidewalks put in, and a group of colored men from the north was called in to build them. Their Foreman went by the ...

The Human Experience

The Human Experience is a very touching movie. Throughout the movie we encounter all kinds of problems. There are many themes of forgiveness and healing in the movie. This movie is not only full of emotions, but it also helps you reflect on your life, and the actions we make as a humans. We find forgiveness and healing in our life’s by reflecting in our actions, and by taking action and actually trying to be better persons. In the movie we see all kinds of people in need of healing in their hearts. The two most common themes of healing we see in the movie are emotional and relational healing.Jeffrey Azize is in need of both emotional and relationship healing. When he was little his relationship with his father was not good. Jeffrey father was an alcoholic. Jeffrey remembers seeing his father more under the influence than sober. Jeffrey is in need of that love of his father. Jeffrey needs to learn how to forgive his father in order to have a better relationship with his father. At the end of the movie, we hear Jeffrey saying â€Å"Have you ever had a moment where you feel like everything is just right in the world? Time stops, and the stars are in line.It was the first time in a long time I could feel peace in my heart†. He felt at peace after going through all those experiences. He witnessed a lot, which made him forgive his father. He was able to heal. The Human Experience made me realize that there are bigger problems in our world. It taught me that I shouldn’t take anything for granted. Just like the homeless guy said â€Å"One day you might have a home, but the next day you might be on the streets†. This made me reflect on my life, it made me realize that I’m also in need of healing.It made me think of how ungrateful I am and how I never say thank you for the smallest thing. This movie taught me that I could make a difference, by doing something small like donating my time or donating things I don’t need to those wh o are in need. Overall this movie was amazing. I could watch it a million times, and every time it would have the same or bigger impact in my life. In my life I personally need a lot of healing. I’m in need of both emotional and relation healing. I’m one of those persons, who don’t forgive others.If you hurt me in some way I might say I forgive you but at the end I really won’t. I also have a lot of trust issues. It’s hard for me to trust someone, especially if they’ve hurt me before. For me trust is like a paper, once it’s crumble it can’t be perfect. I know that everything happens for a reason, but sometimes I wish I knew what that reason was. I guess that I need to learn how to forgive others, and to trust people. I need to open up more. Overall our society needs a lot of healing. Our society is really not acceptable.It makes me sad to see the way society is structured. Our society is truly ugly. The ugly truth about our soc iety is that no one cares unless you’re pretty or dying. Every day I ask myself what’s wrong with the world? We see that a lot of people are victims of our society, but we don’t do anything to change. Every 40 seconds, someone dies from suicide. Suicide is mostly seen among teens because they are being bullied for not looking or acting a certain way. Society no longer knows the meaning of beauty.It’s hard to grow up in a world where you never feel like you’re pretty enough. In this society you need to have designer clothing, you need to be size 0, you need to have a clean face, you need to wear makeup, you need to have perfect eye vision and perfect teeth; if you don’t then you’re automatically called ugly. We are the ones that are destroying our world. We are the ones bringing all that sin into this world. We all need emotional healing. We are in need of that love. Another kind of healing this society needs is that they need to accep t the way they are.Everyone is unique in this world. 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It’s not only me, but millions of others that are in need of healing.If you are not content with yourself, it’s obvious you need some kind of healing. If you can’t accept yourself, what makes you think that you can accept others? If you criticize yourself what makes you think that you won’t criticize others. In order for society to heal, we need to heal our soul firsts. By helping others, you realize your needs, It’s all a big circle. You need to help others, one you help them you see where you need healing, after healing yourself you realize that society needs healing, once you heal yourself you’re able to help society become better.