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Citigroup: The last days of Salomon Brothers

As the markets began to crumble around Wall Street executives in late August, former Salomon Brothers chairman and chief executive officer Deryck Maughan was in a good mood. "He seemed tickled pink that he had sold the firm a year earlier," says David Berry, an analyst at Keefe Bruyette & Woods, recalling a conversation with Maughan.

Former Salomon bankers say they know why Maughan was so happy. Given Salomon's historical dependence on proprietary trading and the type of bond arbitrage that almost destroyed the firm run by ex-Salomon traders - Long-Term Capital Management - "Salomon would probably have been bankrupt by then," says one who left almost as soon as the 1997 merger with Travelers Group (which owned retail brokerage Smith Barney) was announced.

By the end of October, however, Maughan wasn't sitting so pretty. Travelers' next merger - with Citicorp - came on the heels of disastrous third-quarter earnings at its Salomon Smith Barney investment banking unit. It made a net loss of $325 million, compared with a pro-forma profit of $508 million in the third quarter of 1997. The poor figures were largely the result of $700 million-worth of trading losses, mostly from proprietary bond trading.

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