Tribute to John Gutfreund

John Gutfreund, fondly dubbed the “King of Wall Street” by Business Week, passed away on Wednesday due to pneumonia. He had the typical image of a Wall Street trader’s swagger, notorious for smoking cigars while trading securities. He scored huge profits in making huge bets in the bond market, spending 38 years trading at Salomon Brothers, one of the powerhouse firms in the US financial markets at that time.

John was born in Scarsdale, New York, and attended Oberlin College, where he received a degree in English. He even served in the US Army in Korea before joining Salomon Brothers as a trainee in the statistical department. At that time, Salomon had only 200 employees and its reputation rested on the institutional bond business.

John started working as a clerk in the firm’s municipal bond floor then climbing up the ranks to become a trader and manager. He discovered that he was good with numbers and had a pretty good memory, eventually becoming the head of the syndicate department then earning a spot as the top underwriter of debt in America. In 1978, Billy Salomon named him to succeed him as the head of the firm, becoming the highest paid Wall Street executive then.

In his stint at Salomon, John placed big wagers using the firm’s money and oversaw a trading floor the size of an entire football field. This group was known for selling the world’s first mortgage-backed bonds and transforming the firm from a small private partnership to a publicly traded company.

John was also known for overseeing the rise of oil trading on Wall Street. In 1981, he engineered a deal to sell the firm to commodity broker Phibro for $550 million, with $40 million going to his pocket. Phibro was a publicly traded company that benefitted from rising oil prices when inflation spiked in the 70s. And when the Federal Reserve lowered rates then, oil prices dropped while bond prices rose to the advantage of Salomon.

From there, John was quick to take advantage of the reversal of fortunes, ousting David Tendler, the head of Phibro and the co-chief executive officer of the merged firm in 1984. Gutfreund renamed the company Salomon Inc. and shrank Phibro’s share, broadening their client services and global presence by constructing a mortgage securities unit, exploring mergers and acquisitions, and building its foreign currency exchange operations. For some, this allowed Salomon to become one of the greatest investment banks in the world, but it also soured his partnership with former senior partner Billy Salomon.

Still, John spent most of his time keeping the firm in shape and making sure that trading was profitable. By 1990, the firm had amassed $109 billion in assets and was one of the top firms in the US. John had been making a salary of $2.26 million then.

However, his career encountered a road bump in a Treasury note auction scandal in 1991, as he was controlling more than 90% of the two-year Treasury notes sold to bidders at that time. This allowed him to corner a huge share of the market, which was against Treasury rules. John was dragged in the scandal when he failed to disclose that Salomon had made an illegal bid in the Treasury market then.

Although he initially tried to fight it and refused to apologize, he was forced to resign after the head of the Federal Reserve of New York demanded action. Prior to this, Salomon had been able to report record earnings driven mostly by bond trades.

Fortunately, Warren Buffett stepped to John’s and Salomon’s aid, helping the firm out of the scandal and engineer a $290 million accord with the Securities and Exchange Commission the following year to settle allegations. However, Salomon has been unable to make it back to its glory days, later on being absorbed by Citigroup.

As for John, he took a lower profile and worked as a Senior Managing Director and Executive Committee Member of investment bank C.E. Unterberg, Towbin. He also formed a financial consulting company called Gutfreund & Company, which specialized in advising corporations and financial institutions in the US, Europe, and Asia.

John Gutfreund was featured in Michael Lewis’ book Liar’s Poker in 1989. John wasn’t very pleased with this portrayal, claiming that it destroyed his career and made a laughingstock of Salomon Brothers. In fact, he says that the book also caused tension with the firm’s clients even though it “bore no relation to reality.”

Lewis, a former Salomon trader, wrote that John “seemed to smell money being lost” and had a sixth sense that seemed to guide him to profit from a crisis that was just unfolding. “Often as not, our chairman just hovered quietly for a bit, then left. You might never have seen him,” Lewis wrote. “The only trace I found of him on two of these occasions was a turdlike ash on the floor by my chair, left, I suppose as a calling card. Gutfreund’s cigar droppings were longer and better formed than those of the average Salomon boss.”

“My reputation was damaged,” Gutfreund said in an interview with Bloomberg in 2010. “As a result of that, they didn’t want me on the board of JPMorgan. Years ago, they might have been glad to have me. But the world changes, and I accept that and I’ve moved on.” After his resignation from Salomon, John devoted his time to charity work and was honored for his contributions by the UJA Federation of New York.

He married Joyce Low, a daughter of a partner at Bear Stearns, in 1958 and they had three sons: Nick, Josh, and Owen. In 1981, he married Pan-Am flight attendant Susan Penn, the daughter of a Hungarian-American US Air Force pilot, and had one child: Peter. Following this second marriage, he became known for holding lavish parties in his apartments on the East River and Fifth Avenue, as well as weekend trips to their home in Paris.

Outside of work, he was fond of painting and music, particularly that of Tony Bennett who on at least one occasion sang on a visit to John Gutfreund’s New York apartment.

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