At Salomon, The King Is Dead But Few Are Crying

If pressure from Federal Reserve Bank officials hadn't persuaded John H. Gutfreund to submit his resignation as chief executive officer of Salomon Brothers Inc., it's likely that Gutfreund would have been deposed from within. No one was angrier at Gutfreund's belated disclosure of serious improprieties in Salomon's government-bond-trading operation than were the firm's other senior executives, almost all of whom apparently were kept in the dark. Says one Salomon manager: "The reaction here was, `You bastard. Why should we walk the plank for you?' "

The full extent of the wrongdoing by Salomon and Gutfreund's personal culpability in the affair won't be established until various investigations now under way are completed. It's clear already, though, that Gutfreund not only failed to inform federal authorities of the violations but deceived his colleagues in an apparent attempt to save his own neck.

LAME EXPLANATION. In first disclosing bond-bidding irregularities on Aug. 9, Salomon issued a statement that omitted any mention of Gutfreund. Internally, Gutfreund assured colleagues that he had just learned of the problem and that he was as shocked as they were. On Aug. 14, though, Salomon issued a second statement disclosing that Gutfreund and two other top officers first learned in April of at least one unauthorized bid. Gutfreund resigned but offered neither explanation nor apology. "Apologies are bull . . . ," he declared at his final meeting of the executive committee, adding: "This is just a lifestyle change."

And so Gutfreund's 38-year career came to an ignominious and puzzling end. The ungraciousness of his exit came as no surprise. After all, this is a man who 10 years ago fired his childhood friend, Robert A. Bernhard, with a curt: "We're going to have to let some people go, and you're one." But even Bernhard is mystified by Gutfreund's failure to alert the authorities when he first was informed of the violations, if only to protect himself--as, indeed, he later attempted to do by stonewalling, however briefly. "Among his former friends and colleagues, the one thing no one understands is: Why didn't he pick up the phone in April and talk to the Treasury Dept.?" Bernhard says.

Did Gutfreund know about the rule-breaking all along? No, says Salomon. In its Aug. 14 statement, Salomon denied that either Gutfreund or President Thomas W. Strauss, who also resigned, had any prior knowledge of unauthorized trades. The statement attributes Gutfreund's and Strauss's failure to blow the whistle to "insufficient attention to the matter"--a lame explanation at best. Gutfreund could not be reached for comment.

Assuming that Salomon survives the scandal, as seems likely, Gutfreund's place in history will be primarily defined by his accomplishments, which place him among the half-dozen most important Wall Street figures of recent decades. Gutfreund oversaw the reinvention of the New York bond house as a globe-girdling giant whose prowess in high-tech securities trading set the standard for other investment banks.

ERRATIC EARNINGS. But Gutfreund failed to bring to Salomon the balance and cohesion of such rivals as Morgan Stanley & Co. or Goldman, Sachs & Co., which have remained highly profitable through the market gyrations of recent years. By contrast, the hallmarks of Gutfreund's recent leadership have been erratic earnings, sudden reversals in strategic direction, mounting internal strife, periodic purges, and now, full-fledged notoriety.

To his credit, Gutfreund never sugar-coated trouble. He was always a trenchant critic of the securities industry, his firm, and even himself, often all at once. "Our problem is symptomatic of Wall Street's problem," he declared with characteristic bluntness in early 1987. "The business has grown faster than our ability to manage it."

Although Gutfreund long has styled himself as a hard-nosed, ultrarational human trading machine, in truth he was one of the most mercurial of Wall Street chieftains. Over the course of his 13-year reign, Gutfreund was transformed from a rather sober-sided man of refined, abstemious habits to one of Manhattan's most prominent and biggest-spending socialites. Gutfreund and his second wife (they were married in 1981) were never among the very wealthiest of Manhattan's inhabitants--they just lived that way.

Although he has toned it down a bit in the 1990s, Gutfreund hasn't been able to shake the suspicion among his colleagues that his huge domestic cash-flow requirements caused him to increasingly put his own interests ahead of those of the firm at which he spent his entire career. Certainly, he leaves behind more enemies than friends. Says one ex-colleague: "The striking thing is the gloating going on now that John has finally got his."

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