Melanie Schoen

1
Organizational Pathologies Salomon Brothers
Investment Bank

• Melanie Schoen
• PAD 706
• Bureaupathology
• December 11, 2001

2
The Investment Banking Industry

• Investment Banks underwrite securities (Stocks
  and Bonds)
• Insurance Companies, Savings and Loans,
  commercial banks and the government are some of
  the customers investment banks serve
• Borrowing and Home ownership, American
  Traditions
  

3
The History Of Salomon Brothers

• 1910 Arthur, Herbert and Percy Salomon
• start own business in NYC with 5,000
• 1970 Salomon is one of the top bond trading
• investment banks on Wall Street
• 1978 Salomon creates the first mortgage bond
• trading department in financial world

4
Salomon History

• 1981 Congress passes tax break for Savings
• and Loan industry
• 1981-1985 Salomon Brothers monopolizes
• mortgage bond trading
• 1986 Salomon suffers its first loses
• 1987 A few months prior to the stock market
• crash Salomon is almost bought out by
• a raiding firm

5
Main Areas of Dysfunction

• Leadership
• Culture
• Policy

6
John Guterfreund The King of Wall Street

• Replaces William Salomon as Managing Partner in
  1978
• Sells Salomon partnership to the
• Phillips Brothers corporation in 1981
• Rapacious investment banker with no
• management skills

7
Lewie Ranieri and The Old School Salomon
Brotherhood

• In 1968 Ranieri starts working at Salomon
  Brothers as a nighttime mailroom clerk
• Encounters financial problems, Salomon bails him
  out
• Loyalty, firm identity, and common mission,
  culture of old school band of brothers
• Hard work and innovation pay off, Ranieri is
  promoted and promoted. In 1974 he is a utility
  bonds trader
• In 1984, Ranieri becomes head of mortgage bond
  trading department

8
The New School Culture

• 1981 tax break an increase in the volume of
  mortgage bond trading
• No loyalty to the firm
• Treat customers poorly
• Traders lie and cheat each other
• Intimidating treatment of new traders

9
Performance Without Consequence

• No matter how much a trader made for the firm he
  was paid (including bonus) according to a ridged
  pay schedule
• Trainees were chosen for departments based on
  irrational value system, not on actual
  performance
• No institutional reward system to acknowledge
  work well done
• Senior management ignorant of department
  activities

10

Management Decisions

• Relocation Expansion of London trading floor
  during firm downturn
• Firing two entire departments (500 people)
  during times of trouble
• Failure to change with the financial trends

11
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