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The Salomon case study is fascinating because it is probably the most significant failure of Warren Buffett’s career. That’s not to say he didn’t make some money on it – so the failure does not lie there. This is a failure of analysis of the culture he bought into. Buffett invested in a sector he had long criticised for its profligate ways, for its socially useless game-playing, for its incentives which sometimes encourage integrity to be put to the side. He placed one-quarter of Berkshire’s net worth into Salomon largely on the strength of his assessment of the character of one man. It was presented to Berkshire shareholders as a low-risk deal providing a solid income flow with the potential to share in the upside should the investment bankers perform well.
In the event, he very nearly lost everything put into it. And it was not only money at stake. Buffett’s reputation was flying high in the 1980s, but by the early 1990s, because of unethical behaviour at Salomon he had to step into the breach, scrabbling around trying to save a business he had backed with his name. He had allowed himself to fall into the trap of becoming closely associated with Salomon, only to find pockets of ethical rottenness within its walls. The behaviour of some of its Wall Street traders was highly questionable at a minimum and downright illegal at worst.
Following public revelation of laxity in control from the top and venality of its deal makers Salomon found its business evaporating as clients simply avoided it for fear that it may not survive the scandal.
Buffett and Munger’s original intention was to buy securities allowing them to sleep well at night through a period of market turmoil. As it turned out they both lost a great deal of sleep, worrying whether there would be anything left standing the next day.
Salomon in 1987
Salomon (Brothers or Inc) was a creature of, and helped create, modern Wall Street. Indeed, so typically of the breed and so dominant did it become in the 1980s that if Hollywood wanted a model of hard-bitten, tough-trading scene, with floors of Masters of the Universe, take-no-prisoners deal-makers then Salomon was the place to go.
It had always been a deal-maker, but the early days were much more about steadily building long-term relationships and a reputation for integrity. Before the First World War it had a modest business
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