The author draws two main lessons from the Treasury bond bidding scandal at Salomon Brothers that took place in the early 1990s, which led to a sharp curtailment of both the firm’s franchise value and its future as an independent company:
(1) private market forces provide strong deterrents to unethical conduct, thereby reinforcing ethical standards and in some cases limiting the need for regulation; and
(2) badly designed laws and regulations—those that effectively provide people with incentives to cheat customers and otherwise game the system—are almost certain to produce the bad corporate culture and ethical lapses that many observers are all too ready to attribute to capitalism and the pursuit of profit.
The second of these two lessons appears to have gotten through to the U.S. Treasury, which in 1998 replaced the multiple-bid procedure that many identified as inviting manipulation with a single-bid auction that Milton Friedman, among others, recommended as early as the 1970s. And the Treasury auction process has since proved scandal-free.