John Gutfreund's Gut Feeling

As BusinessWeek went to press on Aug. 26, the Dow had been gaining for six consecutive sessions, President Obama had nominated Ben Bernanke to a second term as Federal Reserve chairman, and there were modest signs of life in housing. But not everyone is sanguine about the road ahead. To get some perspective, I talked with one of Wall Street's elder statesmen, John Gutfreund, onetime CEO of Salomon Brothers and current president of the financial consultancy Gutfreund & Co.

MARIA BARTIROMONew York University economist Nouriel Roubini wrote an op-ed on Aug. 23 saying he's worried about a double-dip recession. Are you?

JOHN H. GUTFREUNDRoubini is being intelligent and cautious. I think the market is unduly exuberant, and there are a number of problems that will begin to loom heavier.

Like what?

Like unemployment heading for 10%. The U.S. has had some successes, but fundamentally it's been successful in bailing out the big banks. It hasn't been lending to the public. The biggest loan to the public is the car deal, which is ending.

Wasn't that a small program in the big scheme of things?

Psychologically, it was important.

Is the financial crisis over?

[Sighs] I'm sighing because that's a very tough question. I think that the extreme part of the crisis—the panic part—is past. The question now is, [what happens if] we don't recover as rapidly as some of the stock bulls would like?

How would you rate the Obama Administration's handling of the financial and economic crisis?

He's got a very smart team. I think they're doing the best they can in a situation that is unprecedented in terms of the lifetime experience of these people. I just think the variety and the number of the problems are more than any one Administration can handle in five or six months.

And this is petty and almost venal, but the idea that one Wall Street firm [Goldman Sachs (GS)] is the key to our stability and success is annoying to me. Goldman has emerged as very important. They've got some talented people. Historically, they were very smart, relatively faceless. They weren't like a Merrill Lynch (BAC) or a Morgan Stanley (MS) in terms of their presence. They played it very cool, and they've insinuated themselves in all parts of the government. But are they perfect? Hell, no.

Should investment banks and commercial banks be separate?

I thought that ending Glass-Steagall was a mistake. Commercial banks are very good for certain businesses, like loans and guarding other people's money. They're not great investors or entrepreneurs. Investment banks were a totally different bunch of animals.

But you can't re-enforce Glass-Steagall. That's ridiculous. There's going to have to be some new system. And where the hell has the Securities & Exchange Commission been?

Well, it missed Madoff. Should the SEC be merged with another agency? The Commodity Futures Trading Commission, maybe?

I think they will merge over time. The SEC under Mr. [Christopher] Cox was a nightmare. Total passivity.

Will it change and get more aggressive under Mary Schapiro?

I think Mary Schapiro will be more aggressive. She's a more assertive regulator. The question is, will she get support? I don't see a lot of people standing up to say: "We're for Mary."

Should Congress be reining in pay on the Street or anywhere in business?

I was going to use a crude expression about Congress not knowing their something from their elbow, but I'm not going to. They're politicians. They are not very strong, practical people. I don't think they should be determining compensation. I was the highest-paid guy at a public company on Wall Street in 1982, and I earned a million dollars—nothing like the sums you hear about today.

How did compensation get so out of whack?

Because the ownership of the companies has no vote in what people get paid. The public shareholders have nothing to say about nothing. If they don't like it, they sell their stock.

Should some of these people who oversaw institutions that failed or were brought to their knees be asked to give back some of their compensation?

Don't hold your breath.

BusinessWeek proclaimed you the King of Wall Street 25 years ago. Is there a king these days?

I wouldn't know him. I guess the king is Goldman Sachs.

Which Wall Street firms are best positioning themselves for the future? And what will the future look like in financial services?

That's a nice little question. I think the firms that'll do best are the ones that have some commitment to serve shareholders as well as employees. You don't see that today. The average firm doesn't represent the public or the shareholders. The banks are putting in some Fancy Dans as directors, but they have no big equity interest. You have to find a way to balance the ownership and the producers.

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