Salomon Brothers - Early History

Early History

In this period the firm used its own capital and did not have fee-paying clients. The private company entered equities in the mid-1960s and investment banking in the early 1970s.

John Gutfreund became the managing partner in 1978, taking the company public, staying on as CEO. During the 1980s, Salomon was noted for its innovation in the bond market, selling the first mortgage-backed security, a hitherto obscure species of financial instrument created by Ginnie Mae. Shortly thereafter, Salomon purchased home mortgages from thrifts throughout the United States and packaged them into mortgage-backed securities, which it sold to local and international investors. Later, it moved away from traditional investment banking (helping companies raise funds in the capital market and negotiating mergers and acquisitions) to almost exclusively proprietary trading (the buying and selling of stocks, bonds, options, etc. for the profit of the company). Salomon had expertise in fixed income securities and trading based on daily swings in the bond market.

During this period, the upper management became dissatisfied with the firm's performance. Profits were small and the company's traders were paid in a way that was disconnected from true profitability. There were debates as to which direction the firm should head, whether it should prune down its activities to focus on certain areas. For example, the commercial paper business (providing short term day-to-day financing for large companies) was apparently unprofitable, although some in the firm argued that it was a good activity because it kept the company in constant contact with other businesses' key financial personnel.

Finally, the firm decided to imitate Drexel Burnham Lambert, using its investment bankers and its own money to urge companies to restructure or engage in leveraged buyouts. As a result the firm competed for the leveraged buyout of RJR Nabisco and the leveraged buyout of Revco stores (which ended in failure).