Salomon Inc

Salomon Inc was the investment banking firm in which Buffett made a significant investment in the late 1980s—and which nearly destroyed itself through a scandal involving fraud against the U.S. Treasury. Buffett's emergency intervention as interim chairman was one of the most dramatic moments of his career.

The Investment

Buffett invested approximately $700 million in Salomon in 1987, becoming its largest shareholder. At the time, Salomon was one of the premier Wall Street firms, with strong positions in municipal bonds, government securities, and investment banking.

The Moat

Salomon's competitive advantages included:

• Dominant position in the Treasury auction market
• Deep expertise in fixed income trading
• Strong relationships with institutional clients
• Talented traders and bankers

The Crisis: May 1991

In May 1991, it emerged that Salomon had committed fraud by submitting false bids in Treasury auctions—an activity known as "cornering the market." The scandal threatened to destroy the firm:

• Criminal charges were possible
• The U.S. government barred Salomon from Treasury auctions
• Clients fled
• The firm's existence was at risk

Buffett's Intervention

Buffett took an extraordinary step: he became interim chairman of Salomon to save the firm.

"I will not permit a firm that is an important part of the American financial system to be destroyed by the misconduct of its employees, regardless of what short-term consequences that may have for Berkshire."

His intervention was decisive:

• He replaced the top management immediately
• He communicated transparently with regulators and the public
• He imposed a culture of integrity that the firm had lacked
• He returned the firm to profitability

The Aftermath

Salomon was eventually acquired by Travelers Group in 1997 for approximately $9 billion. Buffett's investment was profitable, though less so than it might have been had the crisis not occurred.

The Salomon episode taught several lessons:

1. Culture matters: A firm with strong ethical foundations can survive crises; one without them cannot
2. Leadership matters: Without Buffett's intervention, Salomon would have been destroyed
3. Risk management matters: The fraud at Salomon reflected a culture of excessive risk-taking and inadequate internal controls

The Legacy

The Salomon crisis hardened Buffett's views on derivatives, leverage, and risk management. It also demonstrated that even sophisticated financial institutions can self-destruct through misconduct.

Most importantly, it showed that integrity is not a luxury—it is a prerequisite for sustainable business success.