Salomon jettisoned its chairman and four other top executives Sunday because of a scandal involving the firm's attempts to corner the market in Treasury bonds at several recent auctions.
Mr. Buffett is taking over from John Gutfreund, whose trading skills animated the Salomon during the 1980s.
Berkshire Hathaway Inc., a holding company of which Mr. Buffett also is chairman, owns a 14 percent stake in Salomon. Moving to protect that investment, Mr. Buffett said he would serve as interim chairman while Salomon tried to regain its reputation.
To help him "clean up the sins of the past and capitalize on the assets of the firm," Mr. Buffett said, he appointed Deryck Maughan as Salomon's president and chief operating officer. Mr. Maughan, 43, was head of Salomon's Asian operations for five years and was appointed co-chairman of the firm's investment-banking department in New York.
The straight-laced and poker-faced former British Treasury official was chosen over about a dozen other Salomon senior insiders to enact controls on Salomon's free-wheeling traders. The controls had been voted by the board and discussed with Treasury Secretary Nicholas F. Brady in several phone calls from Mr. Buffett on Sunday.
The Treasury suspended the firm from its auctions Sunday morning because f attempts by Salomon to corner government securities markets, but it partly rescinded the decision following the announcement that Mr. Gutfreund and the four other executives would leave the firm.
Mr. Brady relented to the degree of allowing the firm to join in the auctions, but only to buy bonds for its own inventory and not on behalf of clients. The essence of Salomon's auction rule violations was that ittried to corner the market during three Treasury auctions by submitting the names of customers who had not put in orders.
The firm remains under investigation by the Treasury, the Federal Reserve Board and the Securities and Exchange Commission.
The aim of the Treasury ruling was to restrict Salomon's government bondbusiness to maintain confidence in the honesty of the market that depends heavily on the trust of the public as well as among the dealers themselves.
Along with Mr. Gutfreund's resignation came those of Thomas W. Strauss, the firm's former president, and John Meriwether, who was named head of the government bond department earlier this month as the scandal unfolded.
Salomon alsodismissed two other executives who were directly involved with the market-cornering activity, in which the firm bid for more than the 35 percent maximum amount at three auctions. The two, who previously had been suspended, were Thomas Murphy, head of the government securities trading desk, and Paul Mozer, who had responsibility for foreign exchange trading. Mr. Murphy is chairman of the committee on government trading practices of the Public Securities Association, the dealers trade group.
Recounting what he had been told since taking over at Salomon, Mr. Buffett said at a news conference Sunday that Mr. Meriwether was approached by Mr. Mozer and shown a letter from the Treasury to a Salomon client with a copy to Mr. Mozer. Mr. Mozer knew the letter "would lead to trouble relating to the April bond auction," Mr. Buffett said.
Mr. Gutfreund learned about it within a day, Mr. Buffett said, "but it is inexplicable to me that this did not get reported."
He continued: "Mr. Meriwether said it was not his job to report this. I've seen similar dumb things happen in companies I've been involved in, and I cannot explain the subsequent failure to report."
Salomon began an investigation on July 6 by bringing in Wachtel Lipton Rosen &Katz, a New York law firm.
Mr. Buffett, 60, is one of the wealthiest people in the world, with a net worth of $4.4 billion. He operates his company on the long-term principles of value. He invests from his home in Omaha, Nebraska, and he is the antithesis of the swaggering Salomon trader. He protected Salomon from the corporate raider Ronald O. Perlman and saved Mr. Gutfreund's job in 1987 by investing $700 million in Salomon preferred stock.
Mr. Buffett made it clear that the most difficult thing about his task would be to change Salomon's wheeling and dealing corporate culture,which also has been the source of its big profits. The trading culture was satirized in a best-seller entitled "Liar's Poker," written by a former junior Salomon bond salesman.
The new chairman warned that traders who did not abide by the new controls would be let go.
The controls include the restriction of advance trading in Treasury securities before auctions to the government securities desk, as well as more stringent record keeping and daily reports than in the past, and confirmation in writing of all customer orders.
Mr. Buffett said the firm had to "earn back its integrity, 98 percent by behavior and only 2 percent by words." One way of doing so was clearing to bring in Mr. Maughan as president from the investment-banking side of the firm.
Mr. Maughan told reporters, "I am not an American, not a trader, and I am as astonished as you."
Mr. Buffett's task was made a little easier by the Treasury's change of heart on the suspension of Salomon from the regular auctions of bills, notes and bonds. These sales are not only are essential for financing the U.S. government's annual deficit, now running at almost $300 billion, but also for the the smooth operation of the nation's money markets.
Salomon can also continue to trade in the huge private, or secondary, market for the resale of Treasury securities. These account for less than 10 percent of Salomon's gross revenue but represent the firm's flagship business.
More crucial to the firm's future are the millions of dollars at stake in civil suits filed by competitors who claimed they lost money in Salomon's squeeze on the market. Any civil or criminal indictments that could further damage the firm's reputation and credibility.
The threat of such events sent the firm's stock down by $7 last week, to $27.875 a share. On Friday, the fears also knocked $110 off the value of a share of Berkshire Hathaway, which closed at $8,825.