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Taming the Bond Buccaneers at Salomon Brothers : How Warren Buffet and friends swept up after the Salomon scandal, possible saving the firm from federal regulators furious after a decade of skuldggery on Wall Street.

February 16, 1992|LINDA GRANT | Linda Grant, a contributing editor to this magazine, profiled Warren E. Buffett last year.

THE 12 EXHAUSTED SALOMON BROTHers officers sitting around the oval burled-walnut table in the 45th-floor boardroom of their New York World Trade Center headquarters confronted a reality that one week before would have seemed absurd: Their firm was in danger of collapsing.

On this Friday afternoon, Aug. 16, a week after news broke that Salomon's chief trader of U.S. debt securities had cheated in an attempt to skirt federal regulations governing Treasury auctions, Washington officials were preparing to close the firm's doors.

Smarting from public fury over an avalanche of financial scandals ranging from Wall Street's insider-trading disgrace to the S & L bailout and the Bank of Credit and Commerce International fraud, Treasury Secretary Nicholas F. Brady, backed by Federal Reserve Board Chairman Alan Greenspan, was poised to yank Salomon's privileged status as the biggest buyer and seller of U.S. debt. Such a censure had never before been imposed, and its ripple effects could destroy the firm.

"Salomon was like an airplane that had suddenly lost all its forward motion. Everything stopped," recalls then co-head of investment banking Deryck C. Maughan. Chairman John H. Gutfreund and President Thomas W. Strauss had resigned earlier that day. Vice Chairman John W. Meriwether was under a cloud of suspicion that would lead to his resignation two days later. The stock had been suspended from trading, after losing a market value of $1.3 billion in one week. Jittery bankers were threatening to cut back loans. Investors were boycotting Salomon's commercial paper. Prestigious customers, primarily public institutions such as the World Bank and the California Public Employees Retirement System, had suspended certain business dealings. The Justice Department's antitrust division and the Securities and Exchange Commission had launched investigations.

Salomon's management committee had learned only that morning that their biggest shareholder and most powerful board member, Warren E. Buffett, was arriving to take over as interim chairman and chief executive. Fresh off a private jet from his home in Omaha, Buffett was meeting some of the Salomon executives for the first time.

His down-home Midwestern manner helped ease some of the tension. Buffett, the 61-year-old chairman of holding company Berkshire Hathaway Inc., whose strategy of long-term investing has earned him a net worth of more than $4 billion, appeared unruffled to the officers, though he was under no illusions about Salomon's situation. He made a few lighthearted comments about the "little problem we have to solve" and sent the group home for some rest.

The next morning, Buffett announced, "I think I should decide who will run the firm." Says Maughan: "There was a massive intake of breath. All the oxygen left the room."

With Gutfreund and his officers out or suspect, no natural succession suggested itself. Salomon executives feared that few inside the company would have sufficient credibility until all questions were answered. Buffett quickly determined his procedure. He would interview each executive for 10 minutes in an adjoining room; the contenders could devise their own batting order.

Their breathing restored, the executives arranged an impromptu parade in the order they sat. One by one, they marched off to answer Buffett's key question: "Who do you think should run the firm?" Ten out of 12 named Deryck Maughan, the 44-year-old son of a British coal miner, who had toiled for 10 years as a United Kingdom Treasury official before he was recruited in London by Wall Street's Goldman, Sachs in 1979.

Maughan moved to Salomon four years later and established a reputation as a crackerjack administrator by building Salomon's Tokyo operation into a money-making showcase. Destined for bigger responsibilities, he had been transferred to New York in spring, 1990. Throughout the preceding tumultuous week, Maughan had been besieged by colleagues urging him to play a leading role in Salomon's reorganization. His resigned response to Buffett: "I'm afraid it may have to be me."

As new chief operating officer, Maughan would run the firm day by day, overseeing implementation of new systems of control and compliance with industry regulations. He would also minister to skittish customers and a stressed-out staff, with Buffett pitching in where he could. Finally, Maughan would orchestrate a lifesaving contingency plan to liquidate assets that would provide operating cash while investors shunned Salomon's commercial paper, the firm's own IOUs.

Buffett would concentrate on such constituencies as regulators, politicians and shareholders. He would also map the strategic course required to downsize and restructure Salomon. In the process, he would try to tame the buccaneer attitudes that Washington held responsible for the Salomon mess.

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