The Success of Salomon

Despite the recent upturn in the stock market, Wall Street these days is hardly the avenue of joy. Most firms are still reducing payrolls, closing branches and trying to sublet excess space. One notable exception is Salomon Bros., the nation's biggest bond-trading house and fourth largest underwriter of securities. Salomon Bros.' broad-ranging business has been better than ever, and the firm has outgrown its quarters. Last week it moved into new, highly computerized walnut-and-glass offices that are more than double the size of those it occupied for almost half a century.

The new office is a marvel of electronic gadgetry. On its two-story-high, 100-ft.-long trading floor, 186 men specialize in just about everything that moves in large dollar amounts--corporate stocks and bonds, Government securities, tax-exempts, commercial paper, bankers' acceptances. The illuminated, electronic quote board, largest in the world (90 ft. by 6 1/2 ft.), shows the prices of 195 key issues. William R. (Billy) Salomon, 56, a founder's son who is now the managing partner, sits behind a desk at one end of the noisy trading floor. The buttons on his phone light up and he answers himself--often to call a quick meeting with partners on the floor to decide whether the firm will commit millions on a deal. Says one partner: "Billy never second-guesses any of us."

Delicate Positions. Salomon Bros, began as a bond trading house in 1910 and later diversified into other activities. Last year it traded some $135 billion worth of bonds--an average of $530 million every working day. The bear market caused many pension funds and trust departments to dump bonds, but Salomon was able to find enough mutual funds, other banks and individuals to buy them up.

Salomon Bros.' most spectacular specialty is "positioning," the delicate art of arranging the sale and purchase of exceptionally large blocks of stock. In such a transaction, Salomon usually buys a block of stock from one or more institutions--mutual funds, pension funds, banks or insurance companies--and sells it to another institution or group of them. With $65 million in capital and great borrowing power, Salomon can buy almost any block of stock offered.

The Biggest Block. One morning last week Goodyear Tire & Rubber reported a marked decline in earnings. About noon, Salomon Bros, handled the sale and purchase of 1,184,300 shares of Goodyear--the largest block ever traded on the Big Board. Jay H. Perry, 35, the partner in charge of block trading' first got a call from a big Goodyear holder, who wanted to sell. The seller was eager to get out quickly as usual, but refused to accept less than the going market price. Perry made a deal to pick up the stock, and further decided to buy all the other shares of Goodyear that he could find on the market. Reason: he wanted to be sure that the price would not be knocked down by some other big seller.

Then Perry started phoning around to find buyers, but got commitments for only 20% of the stock. As a result, Salomon Bros, itself briefly had to hold onto 80% of the shares, tying up $23.5 million of its own capital. If the Goodyear shares tumbled just one point, Salomon Bros, stood to lose about $1,000,000. But with all the available shares off the market, the price steadied and, within an hour, the Salomon traders were able to sell the entire position at a profit. In addition, the firm collected brokerage fees from buyers and sellers alike. The fee: $300,000.

Salomon Bros.' individual traders, like Perry, have been known to commit as much as $150 million on a single Government bond deal, and it takes a certain kind of stomach and nervous system to withstand the pressure. According to Billy Salomon, the best traders are intuitive oddsmakers and could be just as proficient at gambling if that were their calling. Many of them, including Salomon and twelve other general partners, never went to college.

The rewards for risk-taking can be great. Last year Salomon Bros, partners got about a 30% return on their invested capital and had six-figure incomes. And in May, at the bottom of the bear market, all 900 employees collected a 60th-anniversary bonus of two weeks' salary.

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