Salomon warns of dollars 200m losses in second quarter: Tumbling bond markets likely to hit Wall Street investment banks

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SALOMON, the US investment banking and securities house, warned yesterday that it expects to report an after-tax loss of about dollars 200m for the second quarter.

The announcement was viewed by analysts as an early indication of severe losses among a number of Wall Street investment banks as a result of the crash on the bond markets.

Salomon said its losses were attributable primarily to its client- driven businesses, which were 'adversely affected by inventory- related losses, particularly in fixed-income markets, and declines in underwriting activity and customer trading volume'.

Losses were also recorded in Salomon's proprietary trading businesses, though these are understood to be heavily outweighed by client business losses. The profits warning comes a fortnight ahead of the release of detailed quarterly figures due on 21 July.

Analysts said that Salomon Brothers, the securities and investment banking arm, was one of the world's biggest fixed-income market-makers, trading in stocks ranging from treasury bonds to mortgage-backed securities and corporate bonds.

Market-makers often reap large profits from their inventory in a rising market, but can be hit hard in a downward plunge.

'You cannot pull out just because markets are falling - if you want to keep your franchise you keep posting bid and offer prices,' a rival trader said. 'That means assuming risk in your client-driven operations.'

In addition to marking down bond inventory values, commission income generated by the bid- offer spread also fell off sharply during the second quarter as worried investors retreated to the sidelines. The bond underwriting business also shrank after a boom year in 1993 when corporate borrowers rushed to issue fixed-rate bonds and take advantage of very low interest rates.

A particularly severe example of the drop in underwriting business is apparent in issues for Latin-American borrowers, where Salomon has been a market leader.

During the second quarter there were only 11 Latin-American offerings, raising a total of dollars 1.3bn, compared with 49 offerings raising dollars 5.7bn in the first quarter.

Losses at Salomon Brothers will be partly offset by good results at the Phibro division, the company's commodity trading business. Phibro is active in oil trading.

Salomon is headed by Deryck Maughan, a Welsh expatriate who replaced John Gutfreund when he resigned as a result of the 1991 treasury bond market scandal.

At closing Salomon shares were trading at dollars 45.50 down dollars 1.50 from their previous close, in heavy volume. They had been as low as dollars 44.75 earlier in the day.