Scandals Salomon's Minefields

Though it reigned over the freewheeling government-securities market, once mighty Salomon Brothers now finds itself on terrain every bit as treacherous as Wall Street. Last week the firm's interim chief executive, Warren Buffett, was summoned along with financial regulators to Capitol Hill for the first public hearings on illegal bond-bidding practices revealed last month. Inquiring congressional committee members had nothing but praise for Buffett's efforts at reform. Beyond firing or suspending top executives, Salomon departed from past practices and decided against paying them compensation, severance or their future legal expenses. Buffett also revealed during testimony that Salomon's loose trading practices allowed the firm to grab more than 90% of the Treasury notes during an auction last May. (The law prohibits any single company from acquiring more than 35%.)

After applauding Buffett for his changes, Congress focused its anger on regulators. House members, seeking a new image of toughness after being stung by the savings and loan debacle, blasted the Securities and Exchange Commission, the Treasury and the Federal Reserve for failing to detect Salomon's fraudulent bids fast enough. Congressional leaders accused regulators of being too cozy with Wall Street firms and warned that Congress would move quickly to overhaul the $2.2 trillion government-securities market to prevent similar abuses in the future.

While regulators admitted that new rules may ultimately be needed, they argued strenuously against any knee-jerk changes. The Treasury Department, anxious to regain its authority over a market it relies on to raise capital, announced that it was reopening its investigation to see if Salomon and one of its clients, Mercury Asset Management, worked together to cover up a bogus bid last February. Treasury's renewed interest may have been prompted in part by a Justice Department announcement that it was widening its probe of unauthorized bidding practices in search of violators in other Wall Street firms.

As if these burdens weren't enough, Salomon's list of clients shrank further last week. The British government canceled plans for the embattled securities firm to act as London's key underwriter in the U.S. on the sale of $7 billion in British Telecommunications shares.