Salomon Brothers Chairman John Gutfreund and President Thomas Strauss said Friday they were prepared to submit their resignations at a special board meeting called for yesterday.
Responding to the growing scandal surrounding the firm's admission of Treasury bidding rule violations, two other Salomon officials said they were ready to assume the mantle of leadership: Warren E. Buffett, a director and major shareholder in the firm, and John Meriwether, a vice chairman.
In 1987, Mr. Buffett invested $700 million in the firm, garnering a 12% share, as part of a deal to fend off a hostile takeover. Mr. Meriwether's status with the firm is still uncertain and was expected to be a topic at yesterday's board meeting.
Salomon admitted last week that at several recent Treasury auctions the firm broke bidding rules by acquiring more than 35% of a given auction, in some cases bidding on securities in the name of clients who had not authorized the purchases.
The firm suspended two managing directors and two other employees in connection with the announcement, and later revealed that top management knew of the infractions as early as April without reporting them.
"We cannot allow our unfortunate mistake of not taking prompt action, when in April we learned of one unauthorized bid at a February Treasury auction, to harm the firm," a statement from Mr. Gutfreund and Mr. Strauss says.
Company officials said Friday that all of the infractions had now been reported. "We are not aware of any problems other than those already disclosed," a statement says.
Analysts say Salomon's disclosure could lead to wide changes in government regulation of the $2.2 trillion U.S. government securities market, which is currently considered one of the least regulated of the nation's financial markets. Sen. Christopher Dodd, D-Conn., last week called on the Treasury Department to review the adequacy of government regulation of the market and report by early next month on whether legislative or regulatory steps need to be taken to tighten oversight.
Both the Treasury Department and the Securities and Exchange Commission are continuing investigations into the violations admitted by Salomon. On Friday, a Treasury spokesman said the government and the Federal Reserve" "are reviewing our relationship with the firm." Salomon said last week that fallout from the revelations could include a suspension or revocation of its status as one of 40 primary dealers in government securities.
The impact such a move would have on the firm's future business potential as well as the general uncertainty surrounding Salomon prompted Standard & Poor's on Friday to place $15 billion of debt and preferred stock on CreditWatch with negative implications.
The agency's moves affect Salomon's A-plus senior debt, A subordinated debt, A1 commercial paper, and A-minus preferred stock ratings.
"S&P is concerned over the impact that these irregularities could have on the firm as a result of potential litigation, regulatory action,
Treasury Market Yields
Friday Week Month
3-Month Bill 5.37 5.46 5.73
6-Month Bill 5.50 5.60 5.97
1-Year Bill 5.59 5.76 6.22
2-Year Note 6.25 6.44 6.82
3-Year Note 6.66 6.84 7.26
4-Year Note 6.81 6.97 7.43
5-Year Note 7.30 7.48 7.89
7-Year Note 7.62 7.80 8.13
10-Year Note 7.82 7.96 8.26
20-Year Bond 8.04 8.20 8.42
30-Year Bond 8.08 8.22 8.47
Source: Cantor, Fitzgerald/Telerate
and the direction of future business strategy," the rating agency said.
Moody's Investors Service on Thursday placed its various Salomon ratings on negative review, and Duff & Phelps took similar action Friday.
Trading in most high-grade Salomon bonds along with the company's stock was halted on the New York Stock Exchange for most of the day Friday, in anticipation of news from the firm regarding management changes.
The bonds involved were the 8% bonds due in 1996 and 1997, 11 3/4% bonds of 2005, and 11 5/8% bonds of 2015.
When equity trading resumed late Friday, Salomon was reported up 7/8, at 27 3/4, after the release of its statement regarding proposed resignations.
Although market participants continue trying to figure out what impact the Salomon scandal might have on the markets, more run-of-the-mill concerns are occupying most of their time.
Economic indicators, for example, continue to present a mixed view of the economy, leaving economists unsure what the Federal Reserve's next move will be. But after last week's barrage of data, this week looks to be fairly tame in comparison.
The most significant event will be tomorrow's meeting of the Federal Open Market Committee. A few market participants are still holding out hope that the Federal Reserve will use the opportunity to cut the fed funds and discount rates, to liven up the recovery.
Most analysts, however, say they believe the Fed will only decide on an easing bias tomorrow and hold off on a full-fledged rate cut until after August's employment report is released on Sept. 6.
Last week's numerous economic indicators bolstered the position of analysts predicting a delay.
Friday's industrial production and capacity utilization, for example, showed the economy is continuing to register signs of strength despite weak employment reports.
Industrial production jumped 0.5% in July on the strength of higher automobile, construction supplies, and factory materials output. It was the fourth straight monthly increase.
Also registering an increase for the fourth month in a row, industrial capacity utilization advanced 0.2%, to 79.7%, in July, the Federal Reserve Board of New York said Friday.
And the Federal Reserve Board of Philadelphia's business outlook survey last week confirmed increased manufacturing activity. Like Friday's other major indicators, the Fed report registered its fourth monthly increase.
But the gains in manufacturing have not yet translated into employment growth. Sixty-three percent of those surveyed in the Philadelphia Fed report said they had no changes in employment levels over the past month, and those indicating declines outnumbered increases.
Several analysts have pointed out, however, that employment is a lagging indicator, as manufacturers gearing up for increased output hedge their bets by deferring commensurate staff increases.
Last week's strong economic reports are "a signal to some in the markets that they ought to focus less on the employment report and focus on other indicators," said Joan Schneider, a money market analyst at Continental Bank.
In the futures market, the September contract closed up 1/16 Friday, at 97 16/32.
In the cash market, the bellwether 30-year bond was up 1/32 late in the day, to yield 8.08%.
The 7 7/8% 10-year note rose 1/8, to 100 10/32-100 14/32, to yield 7.81%, and the three-year 6 7/8% note was 3/32 higher at 100 16/32-100 18/32, to yield 6.66%.
Rates on Treasury bills were lower, with the three-month bill down five basis points at 5.24%, the six-month bill four basis points lower at 5.29%, and the year bill two basis points lower at 5.31%.
In the corporate market, both investment-grade and junk-bond securities ended the day Friday mostly unchanged.