Warren Buffett’s Investment in Salomon Brothers: A Lesson in Crisis Management

• Key Facts

  • Initial Investment: 1987

  • Investment Amount: $700 million in convertible preferred stock

  • Dividend Yield: 9% annually

  • Conversion Feature: Convertible into common stock at $38 per share

  • Major Crisis: 1991 Treasury Bond Scandal

  • Buffett’s Role: Became interim chairman in 1991 to restore confidence

  • Final Outcome: Salomon was sold to Travelers Group in 1997 for $9 billion

  • Profitability: Buffett earned dividend income + capital gains but endured years of turbulence​.

Why Buffett Invested in Salomon Brothers (1987)

By 1987, Salomon Brothers was one of the most powerful investment banks on Wall Street, known for its dominance in bond trading, securities underwriting, and proprietary trading. However, it was also an extremely volatile business—heavily dependent on trading profits and market conditions.

Buffett saw two key advantages in investing in Salomon:

1) A Safe, High-Yield Investment with Upside Potential

Buffett structured the deal as convertible preferred stock, meaning he would:

• Receive a fixed 9% dividend yield ($63 million annually).

• Have downside protection in case the stock performed poorly.

• Have the option to convert shares at $38 each, allowing him to benefit from potential stock price appreciation.

This was a low-risk, high-reward structure, designed to protect Buffett’s investment while still giving him exposure to the upside.

2) A Favorable Valuation for a Well-Positioned Investment Bank

At the time of Buffett’s investment, Salomon was trading at 11.4x earnings and 1.7x book value, which was reasonable for a leading Wall Street firm.

Salomon had a strong business model, with its securities trading division generating nearly 80% of its revenue, alongside its commercial finance and energy trading operations.

Buffett was not necessarily excited about the volatile nature of investment banking, but he believed the price was fair and the structure protected him from downside risk​.

The 1991 Treasury Bond Scandal: Buffett Steps In

Just four years after Buffett’s investment, Salomon Brothers became embroiled in one of the biggest scandals in Wall Street history—a massive scheme to manipulate U.S. Treasury bond auctions.

What Happened?

• Paul Mozer, a Salomon bond trader, submitted illegal bids at U.S. Treasury auctions, trying to corner the market.

• When regulators found out, Salomon initially failed to report the misconduct—turning a bad situation into a full-blown crisis.

• The U.S. Treasury nearly banned Salomon from participating in bond auctions, which would have crippled its business.

Buffett Takes Control

As Salomon teetered on the edge of collapse, Buffett—one of the largest shareholders—was asked to step in as interim chairman in August 1991.

Buffett later described this as one of the most stressful periods of his career, stating:

His first priority was restoring credibility. In a dramatic Senate hearing, Buffett declared:

Buffett’s reputation for integrity helped rebuild trust with regulators, the Federal Reserve, and Treasury officials, preventing Salomon from being shut down​.

Buffett’s Turnaround Strategy for Salomon

1) Immediate Crisis Management

• Fired top executives, including CEO John Gutfreund, who had failed to act when alerted to the wrongdoing.

• Implemented strict compliance measures to prevent future scandals.

• Cooperated fully with regulators, avoiding criminal charges for the firm.

2) Restoring Salomon’s Reputation

• Buffett personally met with major clients and government officials, assuring them that Salomon would operate with integrity.

• His public statements and testimony reassured the financial markets, stabilizing the firm.

3) Long-Term Stability and Sale to Travelers Group (1997)

• Once the crisis was under control, Buffett stepped down in 1992, handing control to new leadership.

• In 1997, Salomon was acquired by Travelers Group for $9 billion, effectively ending Buffett’s involvement​.

Did Buffett’s Investment in Salomon Pay Off?

1) Financial Return

Despite the crisis and regulatory fallout, Buffett still made a profit:

• 9% annual dividend on his $700 million investment provided steady returns.

• The final sale to Travelers in 1997 allowed Buffett to exit with a gain.

While not his best investment, he managed to avoid losses—a testament to the protective structure of the deal.

2) Lessons in Corporate Governance and Risk Management

Buffett has often cited Salomon as a lesson in corporate culture and ethics. He later said:

He became even more selective about investing in financial institutions, ensuring strict risk management and ethical leadership​.

Lessons from Buffett’s Salomon Brothers Investment

1) Structure Your Investments to Limit Risk

Buffett used preferred stock with a fixed dividend and a conversion option, giving him:

• Downside protection (guaranteed 9% yield).

• Upside potential (convertible into common stock).

This strategy ensured that even if things went wrong, he wouldn’t lose everything.

2) Integrity is More Important Than Profits

The Salomon scandal taught Buffett that no matter how profitable a company is, a lack of ethics can destroy it overnight.

This experience reinforced his focus on investing in businesses with strong leadership and integrity.

3) Be Ready to Step In When Necessary

When the crisis hit, Buffett didn’t sit on the sidelines—he took control, restored confidence, and navigated the company through turmoil.

This hands-on approach helped prevent an even bigger collapse.

4) Even the Best Investors Make Tough Investments

Buffett never invested in another Wall Street firm after Salomon.

His preference shifted toward well-managed commercial banks (like Wells Fargo and Bank of America), which had:

• Stronger risk management.

• More predictable earnings.

• Fewer conflicts of interest than investment banks.

Conclusion: A Tough Investment That Paid Off in Lessons

Buffett’s investment in Salomon Brothers was not one of his biggest winners, but it was one of his most important experiences.

Despite a near-collapse, a massive scandal, and regulatory battles, Buffett:

• Protected his investment through smart deal structuring.

• Helped save the company through leadership and integrity.

• Walked away with a profit, despite the turmoil.

Key Takeaway: The Salomon Brothers experience shaped Buffett’s future investing principles—reinforcing his commitment to integrity, risk management, and structuring deals to minimize downside risk.

The information is provided for educational purposes only and does not constitute financial advice or recommendation and should not be considered as such. Do your own research.