IN "The Bonfire of the Vanities," Tom Wolfe's hilarious but disquieting sendup of Wall Street in the '80s, the hero is a no-holds-barred bond trader in an investment firm modeled, it's said, after Salomon Brothers, New York's preeminent and most aggressive bond-trading company. Sherman McCoy - a self-proclaimed "Master of the Universe ultimately is brought low by arrogance and misjudgments. Now, as life imitates art, Salomon Brothers itself and the men most responsible for its corporate culture have beenhumbled by scandal in the firm's government-securities trading operations. Salomon traders in Treasury bills, notes, and bonds - the short- and long-term IOUs through which the United States government pays its bills and funds the deficit - are accused of secretly bidding for a larger portion of several Treasury auctions than permitted under federal rules. The object, apparently, was to corner the market for the respective securities and drive up the price to competitors. More damaging to Salomon's reputation and prospects, however, was the inexplicable failure of top management to report the misdeeds to the government for some four months after they learned of the unlawful bids. For sitting on the information until government investigators were closing in, the firm's chairman, John Gutfreund, and three other top executives were pressured to resign late last month. In building Salomon into a powerhouse, Mr. Gutfreund and others fostered a culture supportive of hard-driving, almost blindly ambitious business practices, where success was rewarded with dazzling salaries and bonuses (one of the under-40 traders implicated in the scheme earned $10 million last year). Warren Buffett, the new temporary chairman, refreshingly has warned that he will be ruthless in punishing lapses in integrity. Beyond the need to chasten Salomon (and, by example, perhaps others on Wall Street) is the issue of whether tighter oversight of the largely unregulated market in government securities is required. Certainly it is imperative that investors have trust in the fairness of the $2.3 trillion market, as investor wariness will raise the cost to the Treasury - and the taxpayers - of borrowing money to operate the federal government. Yet regulation itself also imposes borrowing costs. Despite the Salomon scandal, the government-securities market appears to police itself pretty effectively. The 40 "primary" dealers authorized to bid in government auctions are all major investment firms not easily hornswoggled. Indeed, it was the suspicions of some Salomon competitors that put government investigators onto the scent. In the absence of further evidence of widespread manipulation of the market, especially through collusion by major dealers, it would be premature to slap more regulations on government auctions. But the players had better recognize that they are being watched more closely than they were a month ago.