If John Gutfreund hadn’t existed, you’d probably have needed to have invented him. The former CEO of Salomon Brothers, who passed away on March 9 aged 86, ran the storied firm from 1978 until a Treasury bond scandal forced him out in 1991. For good or for bad, the King of Wall Street became and remained a market legend.
In so many ways, Gutfreund created the Wall Street archetype: the brash, flash, aggressive cigar-chomping well-heeled trader; an image that has become so beloved of writers, Hollywood film directors and an image that was still firmly etched in the minds of the populace-at-large when the global financial crisis broke in 2008.
Even though Gutfreund was forced out of the industry as part of the price Salomon paid for attempting to corner the US Treasury market, he never really faded from the market’s collective memory. Salomon Brothers, of course, was subsumed into what is now Citigroup in 1998 as Sandy Weill acquired the firm and bolted it onto the global banking behemoth he was creating out of the merger of Citicorp and Travelers. Its name lived on in Salomon Smith Barney until 2003 when Citigroup finally rebranded and the name was lost.
Former Salomon alumni still in the market – and there are many – have fond memories of Gutfreund and reject the notion that he was a one-dimensional character obsessed by bonds, and prop trading in particular, as popular narrative would have it. One former Salomon banker recalls taking Gutfreund on a client trip in Europe and remembers the man’s brilliance and captivating presence and says he was very focused and interested in clients.
Salomon Brothers under Gutfreund wasn’t a one-trick pony, driven by bond trading and arbitrage, though the fact that the likes of Lou Ranieri (who joined Salomon in 1968 and in essence invented MBS and mortgage trading as we know them), John Meriwether, Larry Hilibrand and Victor Haghani (of LTCM infamy) and many other trading gunslingers hailed from the firm does tend to give that element of its business a lot more prominence.
Encouraged by Gutfreund, Salomon certainly lived an ‘eat what you kill’ existence in capital markets underwriting as in trading, and it had an aggressive edge. In that it was hardly unique but one thing is for sure: that throughout many periods of its existence it did what it did as well as, if not better than, most.
Gutfreund was most certainly an operator. He masterminded the sale of Salomon Bros to energy trader Phibro in 1981 for US$550m and then got board support to become chief of the combined firm, which ultimately adopted the Salomon Inc. name. He fought off corporate raider Ronald Perelman by enlisting the backing (albeit for a hefty price) of Warren Buffett. Turmoil, it seemed, was never far from the surface during the Gutfreund years. Whether that was a sign of the rapidly changing times in the broker-dealer/investment banking world or a function of Gutfreund’s idiosyncratic management style we’ll never know.
In the end, though, his career was curtailed by a single and fatalistic error of judgment. When it became apparent internally that Paul Mozer, the firm’s chief government bond trader, had rigged a US Treasury auction in order to garner more paper for the firm’s trading desk, Gutfreund didn’t fire him. Needless to say, it happened again, but this time it came to attention of US Treasury officials. In the ensuing investigation, Salomon asked for a string of similar offences to be taken into account. The firm was fined, Gutfreund was barred from the industry, there was an exodus of talent to the competition and Salomon at one point faced oblivion.
It just so happened that at that very time, Salomon had been appointed by the UK government as one of two joint bookrunners on the second tranche of the British Telecom privatisation. Because of the scandal, Salomon was kicked off the mandate and Goldman Sachs was brought in, one former alum recalled. “How different each firm’s market position might have been if that hadn’t been the case,” he mused. Indeed.