Salomon Brothers 1991 Treasury Auction Scandal: Paul Mozer & Buffett’s Rescue

At 10:05 a.m. on Sunday, August 18, 1991, the United States Department of the Treasury announced that it was barring Salomon Brothers Inc.—Wall Street’s most powerful government bond house—from bidding in all future U.S. Treasury debt auctions. For a leveraged investment bank rolling over more than $100 billion in overnight repurchase agreements, exclusion from the primary Treasury market was a corporate death sentence that threatened to trigger an immediate liquidity run when Tokyo markets opened that evening. ^[1]

Only a frantic personal appeal to Treasury Secretary Nicholas Brady by Warren Buffett—who had just stepped in as Salomon’s emergency interim chairman after the resignations of CEO John Gutfreund and President Thomas Strauss—persuaded the government to modify the ban four hours later, allowing Salomon to continue bidding for its own account while restructuring governance and ushering in the era of automated electronic Treasury auctions.

1. The 35 Percent Rule and Paul Mozer’s Unauthorized Customer Bids#

Under rules established by the U.S. Treasury and the Federal Reserve Bank of New York, no single primary dealer was permitted to bid for more than 35 percent of the securities offered in any single Treasury auction. Resentful of that limit, Paul Mozer, the head of Salomon’s Government Bond Trading Desk, began submitting secret additional bids disguised as customer orders in the names of institutional clients—including Mercury Asset Management, Quantum Fund, and pension funds—without their knowledge or authorization, and then transferring the awarded bonds quietly into Salomon’s own proprietary trading account. ^[2]

2. The May 1991 Two-Year Note Squeeze and the Four-Month Cover-Up#

The scheme culminated in the May 22, 1991 auction of $12.26 billion in two-year U.S. Treasury notes. Through Salomon’s own 35 percent bid plus unauthorized customer bids and pre-auction financing arrangements with Tiger Management and Quantum Fund, Mozer ended up controlling 94 percent of the entire two-year benchmark issue—forcing rival Wall Street dealers who had sold the note short in the “when-issued” market to pay punitive repo rates to borrow the security. ^[3]

Even more damaging to Salomon than Mozer’s trades was the failure of senior management to report the violation promptly: although Mozer confessed a February 1991 fake bid to CEO John Gutfreund, President Thomas Strauss, Vice Chairman John Meriwether, and General Counsel Donald Feuerstein in late April 1991, the executives waited until August 9, 1991 to inform the New York Fed. ^[4]

3. Buffett’s Congressional Testimony, the $290 Million Settlement, and Automated Auctions#

Appearing before Congress on September 4, 1991, Warren Buffett delivered his famous admonition to Salomon employees: “Lose money for the firm, and I will be understanding; lose a shred of reputation for the firm, and I will be ruthless.” In May 1992, Salomon Brothers paid $290 million in SEC fines, Justice Department forfeitures, and restitution claims, while the Treasury and Federal Reserve overhauled the primary dealer system, replaced manual paper tenders with the automated TAAPS electronic bidding system, and adopted single-price (Dutch) auctions for all U.S. Treasury securities. ^[5]

Archival Balance-Sheet Metrics & Salomon Brothers 1991 Findings#

To evaluate the full scale of Salomon Brothers 1991, historians and financial regulators cross-reference four primary institutional findings verified in post-crisis liquidation audits: ^[6]

• To enforce competitive distribution of sovereign debt, the U.S. Treasury prohibited any single primary dealer from bidding for more than 35% of a Treasury auction.
• Between December 1990 and May 1991, Salomon Brothers managing director Paul Mozer submitted $11.2 billion in unauthorized bids using the names of clients including Warburg Asset Management.
• In the May 22, 1991 two-year Treasury note auction, Mozer captured 94% of the $12.26 billion issue, squeezing short-sellers across Wall Street.
• On August 18, 1991, the U.S. Treasury suspended Salomon from bidding at auctions until interim chairman Warren Buffett secured a partial reversal and negotiated a $290 million settlement.

Systemic Contagion & Long-Term Regulatory Legacy of Salomon Brothers 1991#

Beyond the immediate balance-sheet losses recorded during Salomon Brothers 1991, the episode permanently reshaped statutory accounting standards, lender-of-last-resort intervention doctrines, and counterparty disclosure rules across United States and international capital markets. When credit markets froze during Salomon Brothers 1991, clearinghouses and monetary authorities discovered that opaque off-balance-sheet commitments and concentrated collateral pledges amplified contagion far faster than statutory reserve ratios anticipated.

Subsequent legislative reforms directly addressed the structural vulnerabilities exposed by Salomon Brothers 1991, mandating independent external audits, stricter capital adequacy buffers, and transparent reporting of insider or concentrated credit exposures. For comparative historical dossiers across this era, explore our Corporate Scandals & Frauds Archive and the complete Forgotten Fortunes Historical Archive.

Theoretical & Balance-Sheet Transmission Mechanism#

In the Kindleberger–Minsky taxonomy of financial instability (Kindleberger, 1978; Minsky, 1986) and Irving Fisher’s (1933) debt-deflation framework, speculative asset booms become systemic crises when credit expansion shifts balance sheets from hedge finance (cash flows covering principal and interest) to speculative and Ponzi finance (relying on rising asset prices and short-term margin roll-overs).

Once monetary tightening or an exogenous shock halts price appreciation, forced margin liquidations trigger Fisherian debt-deflation: fire-sale asset discounts erode bank collateral values, contracting credit supply across the real economy.

Sources and Further Reading

1. U.S. Department of the Treasury, SEC & Federal Reserve — Joint Report on the Government Securities Market (January 1992) Central Bank / Monetary Authority
2. Federal Reserve Bank of New York — Garbade & Ingber, “The Treasury Auction Process: Objectives, Structure, and the 1991 Salomon Squeeze” Central Bank / Monetary Authority
3. U.S. Securities and Exchange Commission (SEC) — SEC v. Salomon Inc. and Salomon Brothers Inc., Administrative Proceeding & $290M Settlement (May 1992) Official / State Archive
4. U.S. Government Accountability Office (GAO) — U.S. Government Securities: More Transaction Information and Investor Protection Measures Are Needed (1992) Official / State Archive
5. Irving Fisher — "The Debt-Deflation Theory of Great Depressions," Econometrica 1, no. 4 (FRASER Federal Reserve Archive, 1933): 337–357 Central Bank / Monetary Authority
6. Charles P. Kindleberger & Robert Z. Aliber — Manias, Panics, and Crashes: A History of Financial Crises (Palgrave Macmillan) Peer-Reviewed / Academic Research

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