Buffett's ten months at Salomon turned a Treasury scandal into record 1992 profits

In August 1991 Salomon Brothers admitted its traders had been submitting false bids at US Treasury auctions to evade the 35 percent limit on single-buyer purchases. Probes by the SEC, the New York Fed, the US Treasury, a federal prosecutor and the Justice Department followed. Within a week the stock had lost $1.3 billion of market value, investors were boycotting Salomon's commercial paper, and customers such as the World Bank and CalPERS had suspended business. Chairman John Gutfreund and president Thomas Strauss resigned August 17.

The next day Berkshire Hathaway — holder of $700m of Salomon convertible preferred since 1987 — put Warren Buffett in the chairman's seat as interim chief. His first move paired an outsider with an insider: in ten-minute interviews, ten of twelve senior executives named Deryck Maughan to run the firm. Maughan built new systems of control and regulatory compliance, stabilized customers, and prepared a contingency plan to liquidate assets while Salomon's IOUs were shunned. Buffett took the regulators and shareholders, and mapped a downsizing of the buccaneer culture Washington blamed.

The numbers turned within a year. Buffett stepped down in June 1992 after ten months, and Salomon Brothers reported record pre-tax earnings for 1992, 34 percent above its previous high. In Fortune's annual reputation survey that September, Salomon ranked second among 311 companies in how much it had improved its standing. Buffett later wrote that without Maughan, Bob Denham, Don Howard and John Macfarlane, the firm very probably would not have survived.

The rescue bought Salomon a second act rather than independence: in 1997 it was sold to Travelers, and Buffett credited Maughan and Denham with first saving the firm from extinction and then restoring its vitality to a level that made it an attractive acquisition.

Salomon Brothers' 1992 pre-tax earnings ran 34% above its previous high; the firm survived five regulatory probes and was bought by Travelers in 1997.

The scandal froze funding and customers simultaneously, so survival depended on visible leadership changes made within a day of the admissions.

Pairing Buffett's credibility with regulators and Maughan's operational control separated external repair from internal running, and let each happen fast.

Controls and compliance were rebuilt before any growth plan, because the five government probes could have revoked the licenses the franchise ran on.

A liquidation contingency prepared against a funding boycott stopped the panic from becoming self-fulfilling while confidence was repaired.

In a trust collapse, a credible outside name plus a quick inside operator beats either alone: one faces the regulators, the other runs the desk, and controls get rebuilt before strategy.

Maughan ran Salomon through the rest of the decade as chairman and chief executive, and the firm Buffett steered out of extinction became attractive enough that Travelers acquired it in 1997, with Maughan moving up into the combined group. Berkshire's final results from the Salomon investment, Buffett wrote in his 1997 letter, would be far better than he had anticipated two years earlier — a rescue that ended as one of his most instructive experiences rather than his worst mistake.