Wikipedia Deep Dive

Salomon Brothers

13 min read

The Trading Floor Where Capitalism Went Feral

Imagine a room on the forty-first floor of a Manhattan skyscraper where the men—and they were almost all men—walked with a hunted look in their eyes. Not because they were failing. Because they were winning. And in a place with no rules governing the pursuit of profit and glory, winning meant someone else was losing, and that someone might be the person at the desk next to you.

This was Salomon Brothers in the nineteen eighties.

Michael Lewis, who would later write "The Big Short" and become one of America's most celebrated financial journalists, worked there as a young bond salesman. He described it this way: "The place was governed by the simple understanding that the unbridled pursuit of perceived self-interest was healthy. Eat or be eaten."

The firm's top traders had a name for themselves. They called themselves "Big Swinging Dicks." This wasn't locker room bravado hidden from public view—it was the openly celebrated identity of the men who dominated what had become, by the mid-eighties, one of the most powerful investment banks in the world. Tom Wolfe used them as inspiration for "The Bonfire of the Vanities," his savage novel about Wall Street excess.

How did a partnership founded by three brothers and a clerk in nineteen ten become synonymous with capitalism at its most raw? And what happens when a firm built on aggressive risk-taking finally takes the wrong risk?

From Family Partnership to Wall Street Royalty

The Salomon family had money in their blood going back to the American Revolution. Arthur, Herbert, and Percy Salomon were descendants of Haym Salomon, who had been the primary financier of the Revolutionary War and a childhood friend of Robert Morris, the Founding Father who served as Superintendent of Finance of the United States. When you come from a family that helped bankroll a revolution, perhaps a certain boldness with other people's money runs in the genes.

The three brothers started their firm in nineteen ten with Ben Levy, a clerk. For seventy years, it remained a partnership—meaning the partners' own money was on the line with every trade. This created a natural check on reckless behavior. When you're gambling with your own fortune, you tend to think twice.

William Salomon, Percy's son, took the helm in nineteen sixty-three. Under his leadership, the firm grew steadily but remained essentially conservative. The real transformation came in nineteen seventy-eight when John Gutfreund became managing partner.

Gutfreund would eventually earn a nickname: "the King of Wall Street."

The Innovation That Changed Everything

To understand what made Salomon Brothers special, you need to understand bonds. Most people think of Wall Street as a stock market story—buying shares in companies, hoping they go up. But the bond market is actually much larger. When governments, cities, or corporations need to borrow money, they issue bonds. An investor buys the bond, essentially lending money, and gets paid interest until the bond matures and the principal is returned.

For most of the twentieth century, bonds were boring. You bought them, you held them, you collected your interest. Safe and dull.

Salomon Brothers made bonds exciting.

In the nineteen eighties, the firm pioneered something called mortgage-backed securities. Here's how they work: thousands of Americans take out home mortgages. Each mortgage is a promise to pay a certain amount each month for thirty years. Salomon figured out you could bundle thousands of these mortgages together, slice the bundle into pieces, and sell those pieces to investors around the world.

The person who led this innovation was Lewis Ranieri, who ran the mortgage bonds desk and rose to become vice chairman. Ranieri is sometimes called the "father of mortgage-backed securities"—a paternity claim that would look considerably less flattering after the two thousand eight financial crisis, when these same instruments would help crash the global economy.

But in the eighties, it looked like pure genius. Salomon was buying mortgages from savings and loan banks across America, packaging them up, and selling them to investors in Tokyo, London, and Frankfurt. The profits were enormous.

How They Became "Bulge Bracket"

In investment banking, there's a hierarchy. When a company issues stock or bonds, multiple banks often work together on the deal, and the way their names appear on the official documents tells you who matters. The banks at the top—whose names appear in larger type, bulging out above the rest—are called "bulge bracket" firms. It's the major leagues.

Salomon Brothers officially joined this elite club in nineteen seventy-five. The same year, they helped save New York City.

New York was on the verge of bankruptcy. The city had been spending more than it took in for years, and suddenly nobody wanted to buy its bonds. Without bond buyers, the city couldn't borrow money, and without borrowed money, it couldn't pay its bills. Salomon Brothers and Morgan Guaranty Trust organized syndicates to sell one billion dollars in bonds for the Municipal Assistance Corporation, the emergency entity created to rescue the city. They pulled it off.

Then came nineteen seventy-nine and the IBM coup. International Business Machines, then the most prestigious corporation in America, wanted to issue a billion dollars in debt to fund a new generation of computers. They chose Morgan Stanley and Salomon Brothers as co-managers. Morgan Stanley, accustomed to running deals alone, demanded sole management. IBM refused. Morgan Stanley then refused to participate at all rather than share billing.

IBM gave the entire deal to Salomon Brothers and Merrill Lynch.

This was like a young boxer knocking out the reigning champion. It announced to Wall Street that the old order was changing.

Going Public and Losing the Leash

In nineteen eighty-one, Salomon Brothers merged with Phibro Corporation, a commodity trading firm. The deal was structured as what's called a reverse merger, which allowed Gutfreund to take the company public—meaning ordinary investors could now buy shares in Salomon.

This seems like a technical detail, but it changed everything.

When Salomon was a partnership, the partners were gambling with their own money. When Salomon became a public company, they were gambling with shareholders' money. The psychology shifts. The potential rewards of winning big stay roughly the same—huge bonuses—but the personal cost of losing drops dramatically. You might get fired, but you won't go bankrupt.

The firm's culture, already aggressive, became something wilder. The cutthroat atmosphere that rewarded risk-taking with massive bonuses and punished failure with "a swift boot" intensified. Traders competed not just against other firms but against each other. The forty-first floor became a Darwinian experiment in what happens when you remove most constraints on human greed.

The Warren Buffett Rescue

By nineteen eighty-seven, cracks were showing. Lewis Ranieri, the mortgage bond king, was forced out in July. The firm's stock dropped more than nine percent due to trading losses. Their largest shareholder, a Bermuda-based company called Minorco controlled by the mining magnate Harry Oppenheimer, wanted to sell its fourteen percent stake.

Then Ronald Perelman showed up.

Perelman had recently bought Revlon and was backed by Michael Milken, the infamous "junk bond king" at Drexel Burnham Lambert. He expressed interest in buying Minorco's twenty-one million shares, worth around eight hundred million dollars.

Gutfreund and his team were terrified. They suspected Perelman didn't just want Minorco's stake—he wanted the whole company. A hostile takeover would mean new ownership, and probably new management. Their jobs were at risk.

So they called Warren Buffett.

Buffett, already legendary as the "Oracle of Omaha," agreed to invest seven hundred million dollars through his company Berkshire Hathaway, buying convertible preferred stock and getting two seats on the Salomon board. This blocked Perelman's path. The firm was saved.

Or rather, it was postponed from disaster.

The Treasury Scandal

The United States Treasury regularly auctions off bonds to finance the federal government's debt. These auctions have rules. One important rule: no single buyer can purchase more than thirty-five percent of any issue. This prevents any one firm from cornering the market and manipulating prices.

Paul Mozer was a trader at Salomon Brothers who found this rule inconvenient.

Between December nineteen ninety and May nineteen ninety-one, Mozer submitted false bids. He used unauthorized customer accounts to buy Treasury notes, and when combined with purchases Salomon made in its own name, the firm exceeded the thirty-five percent limit. Mozer was trying to dominate the Treasury market.

When the government found out, the scandal nearly destroyed the firm.

Salomon was fined one hundred ninety million dollars and required to set aside another hundred million for any injured parties. Gutfreund, the King of Wall Street, was forced out in August nineteen ninety-one. The Securities and Exchange Commission fined him personally and barred him from ever again serving as chief executive of a brokerage firm.

Warren Buffett had to step in as temporary chairman and chief executive to save his investment and the firm's reputation. He promoted Deryck Maughan to take over leadership.

Mozer got four months in minimum-security prison and a thirty thousand dollar fine.

Martin Mayer chronicled the debacle in his nineteen ninety-three book, "Nightmare on Wall Street: Salomon Brothers and the Corruption of the Marketplace."

The Long-Term Capital Connection

Some of the most talented people at Salomon Brothers went on to create something even more spectacular—and spectacularly destructive.

John Meriwether had run fixed-income trading at Salomon and was promoted to vice chairman in nineteen eighty-eight. He left after the Treasury scandal and in nineteen ninety-four founded a hedge fund called Long-Term Capital Management, known as LTCM.

He brought along some brilliant colleagues. Myron Scholes had helped invent something called the Black-Scholes model, a mathematical formula for pricing options that was so important he would win the Nobel Memorial Prize in Economic Sciences in nineteen ninety-seven. Eric Rosenfeld came from Salomon's bond arbitrage desk.

For four years, LTCM seemed to have discovered a money machine. They used complex mathematical models to find tiny price differences between bonds and bet huge amounts of money that these differences would disappear. It worked. The returns were extraordinary.

Then in nineteen ninety-eight, Russia defaulted on its debt, markets panicked, and LTCM's models broke. The fund lost billions so fast that the Federal Reserve had to organize a bailout by major banks to prevent a wider financial crisis.

Richard Bookstaber told the full story in his two thousand seven book, "A Demon of Our Own Design." The title captures something important: the financial industry had created instruments so complex that even their inventors couldn't fully understand or control them.

The End, and the Beginning Again

In nineteen ninety-seven, Travelers Group bought Salomon Brothers for nine billion dollars. The next year, Travelers merged with Citicorp to form Citigroup, one of the largest financial institutions in the world. The combined investment banking operations were called Salomon Smith Barney.

The firm's headquarters had been at Seven World Trade Center in lower Manhattan. After the merger, they kept using it. That building would collapse on September eleventh, two thousand one, struck by debris from the falling Twin Towers.

By two thousand three, Citigroup had renamed the division "Citigroup Global Markets." The Salomon name faded from daily use. By two thousand twenty, according to the United States Patent and Trademark Office, Citigroup no longer even owned the Salomon Brothers trademark.

And then, in February two thousand twenty-two, came an unexpected announcement: a group of former Salomon employees and executives planned to revive the brand and operate as a full-service investment bank again.

Whether they'll recreate the aggressive culture that made Salomon famous remains to be seen. Whether anyone should want to recreate that culture is a different question.

The Graduates

Michael Lewis turned his years at Salomon into "Liar's Poker," published in nineteen eighty-nine. He meant it as a warning about Wall Street excess. Many young people read it as a how-to guide and immediately applied to investment banks.

Michael Bloomberg ran equity trading and systems development at Salomon in the nineteen seventies before being pushed out. He used his severance to start a company selling financial data terminals. That company made him one of the richest people in the world and funded his three terms as mayor of New York City.

Myron Scholes won the Nobel Prize, then helped blow up Long-Term Capital Management.

Michael Corbat started in Salomon's mortgage department in nineteen eighty-three. He rose through the ranks at Citigroup and became its chief executive in two thousand twelve, running the company until two thousand twenty-one.

Bill Browder went from Salomon to founding Hermitage Capital Management, which became the largest foreign investor in Russia. After his lawyer Sergei Magnitsky was killed in Russian custody, Browder became a human rights activist and helped pass the Magnitsky Act, which sanctions human rights abusers around the world.

The Woman Who Got In

In nineteen sixty-seven, Salomon Brothers sponsored Muriel Siebert to become the first woman to obtain a trading license on the floor of the New York Stock Exchange.

This was not an act of progressive corporate policy. Siebert had to find a firm willing to sponsor her application, and she was turned down by nine other companies before Salomon said yes. She also had to buy a seat on the exchange—at a cost of four hundred forty-five thousand dollars—and find a bank willing to lend her the money, which required even more rejections before Chase Manhattan agreed.

For the first decade of her career on the floor, the exchange didn't even have a women's bathroom she could use.

Salomon's decision to sponsor her was unusual for its time. But the story also illustrates just how unusual. One woman, facing rejection after rejection, finally squeaking through in nineteen sixty-seven—the same decade that astronauts walked on the moon.

What Salomon Meant

Salomon Brothers matters because it was a laboratory. It showed what happens when you take extremely intelligent, extremely ambitious people, remove most constraints on their behavior, and reward whoever makes the most money.

What happens is innovation. They invented mortgage-backed securities. They pioneered new trading strategies. They made their clients enormous amounts of money and made themselves even more.

What also happens is disaster. The Treasury scandal. The Long-Term Capital Management collapse. And eventually, in two thousand eight, the financial crisis triggered in part by those same mortgage-backed securities, now grown into a monster their creators never imagined.

Michael Lewis described the trading floor as "capitalism at its most raw, and it was self-destructive." That last phrase is important. Not self-destructive for the individual traders, most of whom walked away rich. Self-destructive for the system. For the idea that markets work best when left alone. For the assumption that smart people acting in their own self-interest will naturally produce good outcomes for everyone.

The men on the forty-first floor didn't worry about what they were building. They were too busy watching for the colleague who might be hungry for their job. Eat or be eaten.

In that environment, nobody was thinking about what would happen when everyone ate.