Salomon Misconduct Threatens World Financial Markets

Article excerpt

The Salomon Brothers' misconduct in the Treasuries market _ coming after such scandals as the fall and bailout of hundreds of savings and loans, the drug and money-laundering and bribing activities of the Bank of Credit and Commerce International, the junk bond debacle of Drexel Burnham Lambert and the assorted frauds in the Japanese stock market _ has further stirred anxieties about the integrity of financial markets. Unless they are quelled, such anxieties could hurt saving and investment all around the world.

In cracking down hard on Salomon Brothers for exceeding the 35 percent quota for primary dealers in the auction markets for government securities, the Treasury was sending a message to the other 39 primary dealers in that market that conduct like Salomon's would be dealt with harshly.

With $2.3 trillion in federal debt to be marketed and rolled over ad infinitum _ a debt total that is expected to increase by $279 billion in the fiscal year 1991 and by $362 billion in 1992 _ any loss of faith in the integrity of the government securities market might be extremely costly.

Treasury Secretary Nicholas F. Brady, in an interview on Tuesday, said he did not know how "deep" the problems in the government securities market went.

The Treasury, he said, was not an investigative agency; the SEC and the Federal Reserve, on which the Treasury depends, are now "collecting information." But Brady is clearly warning every house that might be acting as Salomon was to clean up its act fast.

He was asked why the Treasury, having first announced, at 10:30 Sunday morning, that Salomon had been barred from bidding in the primary Treasury auction market, said five hours later, following a telephone conversation between Brady and Warren E. Buffett, the firm's new chairman, that Salomon could bid for its own account but not for its customers.

Brady replied, "In substance, that changed the situation only marginally."

At the time of the first announcement Sunday morning, he said, there had been only "a lot of talk about what might happen," but no concrete action. By the time of the second announcement, said a Treasury official, who requested anonymity, the Salomon board had taken four actions:

Dismissed the top three executives _ John H. Gutfreund, the chairman; Thomas W. Strauss, president, and John W. Meriwether, vice chairman.

Discharged the head of the government trading desk, Paul Mozer, and his No. 2, Thomas Murphy.

Announced other administrative and management changes.

Pledged, through Buffett, to cooperate fully with the Treasury, SEC and Fed, to "right the wrongs. …