John Gutfreund: 1980s Bankster Dies (Once Thrown Under the Bus By Warren Buffett)

Michael Siconolfi writes:

John Gutfreund died Wednesday at age 86, marking the formal end of an era on Wall Street when swashbuckling bond traders made huge bets using house money.

A cigar-chomping former bond trader, Mr. Gutfreund spent 38 years at Salomon Brothers, once a feared powerhouse on Wall Street that he boasted was “the greatest trading organization the world has ever known.”

Mr. Gutfreund transformed Salomon into the dominant force in the Treasury securities market, overseeing a trading floor the size of a football field. Under his helm, Salomon made big wagers using the firm’s cash and sold the first mortgage-backed bonds. He turned Salomon from a private partnership to a publicly traded firm. Business Week dubbed him the “King of Wall Street.”

But Mr. Gutfreund’s career at Salomon came to a sudden halt in 1991 amid a Treasury-note auction scandal, one of the largest ever on Wall Street.

In one instance, Salomon controlled an astonishing 94% of the two-year Treasury notes sold to competitive bidders at an auction, enabling Salomon to corner a good portion of the market, violating Treasury rules.

He became personally embroiled in the scandal when Salomon revealed that he had been told the firm had made an illegal bid in a Treasury-note auction, but didn’t report the wrongdoing to the government for months.

Nestled in his elegant 43rd-floor office in 7 World Trade Center overlooking the Hudson River, Mr. Gutfreund initially sought to tough it out. Dressed in his trademark dark suit and white shirt, he told top executives at a closed-door meeting shortly after the disclosures: "I’m not apologizing for anything to anybody. Apologies don’t mean s—. What happened, happened.”

He soon was pressured to resign, following two calls from the furious head of the Federal Reserve Bank of New York who had demanded action.

It was one of the swiftest falls for a leading Wall Street chief executive: Just weeks earlier, Salomon had reveled in record earnings, driven largely by bond-trading profits.

Warren Buffett, the billionaire investor who had held a large Salomon stake, stepped in and helped lead the firm out of the scandal. The reality of the firm’s business strategy later was crystallized in a homespun way at a Salomon board meeting.

Charles Munger, Mr. Buffett’s close associate and then a Salomon director, likened Salomon’s trading arms to a “gambling casino with a restaurant out front.”

What happened under Gutfreund's watch really wasn't much different than what was going on at other bankster firms at the time and nothing close to what would go on decades later with the bankster antics surrounding the super-expanded mortgage backed securities business.

Still, Buffett and Munger were ruthless in their treatment of Gutfreund, a completely different manner from the way they currently treat super-bankster Lloyd Blankfein.

B&M first made an investment in Salomon as a white knight when the firm was facing a hostile takeover. B&M  really put the screws to Gutfreund at that time. Alice Schroeder wrote in The Snowball: Warren Buffett and the Business of Life:

Buffett's nostrils had caught the rich warm scent of money, for Gutfreund had the air of desperation. So he said Berkshire would buy $700 million of Salomom preferred stock, as long as it made 15 percent. Gutefreund ordered his horrified employees to design a security that would deliver to Buffett the kind of returns normally earmed only on a junk bond....Over a handshake, [Buffett] agreed to buy a preferred stock with a nine percent coupon and that would convert to common stock at the price of $38....the upside was unlimited. But if the stock went down, he had the right to "put" the security back to Solomom and get his money back. The deal worked out to an expected fifteen percent profit, on an investmnet that carried very little risk...Inside Salomon, people were outrage.

Still when the Treasury bond accumulation reporting scandal occurred, they threw Gutfreund under the bus and then turned the wheels to make sure it got him direct on. Forced to resign, with a hard nudge from B&M. he asked to be paid his severance package of $35 million. Buffett was concerned about the headline such a severance package would cause and believed Gutfreund should be paid much less, though he didn't tell Gutfreund and his lawyer that at the time.

In one of their last negotiations over the severance, Gutfreund went out for a steak at Chis Chella in New York with B&M and even offered to stay on as a consultant at Salomon (where he could have explained some of the complexities of the firm) for free as long as he got his duly owed severance. Eventually at the meal, although they told Gutfreund he would be treated "fairly" he said."You guys are smarter than I am. You guys are going to fuck me."

Which they proceeded to do. They raked him over the coals during arbitration, painting him as perhaps the worst man on earth and he ended up getting nothing.

Gutfreund was right, they were smarter than him and probably a lot meaner.

 -RW