Bill Ackman once sought insights from Berkshire Hathaway's chairman Warren Buffett about the investment appeal of the Salomon Brothers.

What Happened: At the 1994 Berkshire Hathaway annual meeting, Ackman, then a young hedge fund manager, raised a critical question about Salomon Brothers.

He directed his question to Buffett, asking, "What is the appeal of the business to you, given its leverage of 30-to-1 and relatively modest returns on equity?"

Buffett responded thoughtfully, acknowledging the high leverage involved but underscoring the importance of leadership in managing such risks.

The Oracle of Omaha praised the efforts of Salomon's leaders, including Deryck Maughan, Bob Denham, and John McFarlane, who navigated the company through challenging times without prior discussions on compensation or guarantees.

"The test will be whether they control the business in a way that leverage doesn't prove dangerous," Buffett stated, noting that businesses using significant leverage should expect higher returns on equity, given the inherent risk, but that successful management of that risk was paramount.

Why It Matters: Salomon Brothers, founded in 1910, was a major player on Wall Street, renowned for its fixed-income trading.

In 1987, the bond trading firm revealed a $70 million loss from debt related to its junk bond trading activities. This set off a chain of events that contributed to the 1987 market crash, although other factors also played a role in the market's downturn.

Salomon traders were caught submitting fraudulent bids for Treasury bonds in violation of trading regulations.

Just before the scandal, Buffett had invested $700 million in Salomon Brothers. The controversy resulted in a loss of one-third of his investment.

To restore order during the turmoil, Buffett took control of the company for nine months, methodically removing those involved in the scandal.

By the time the firm was stabilized, it had been sold to Travelers Companies Inc. Buffett had walked away with a substantial profit, as his investment had more than doubled.

Travelers Group merged Salomon Brothers with Smith Barney, creating Salomon Smith Barney, which later became part of Citigroup following the 1998 merger between Travelers and Citicorp.

Over time, Citigroup integrated and eventually dismantled the Salomon Smith Barney brand. By the mid-2000s, Salomon Brothers ceased to exist as a standalone entity.

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