The chairman of Salomon Brothers was also familiar to readers of the social columns of newspapers and magazines. By 1991 Salomon was said to be the world’s most profitable corporation per employee. But after a treasury bond rigging scandal Gutfreund resigned in 1991. He felt like a fall guy. His parting words as he left the final meeting were: “Apologies don’t mean shit.” Eight years on Gutfreund, who turns 70 this year, runs a corporate advisory firm with two assistants. He speaks to Philip Eade from the office above New York’s Central Park about his early days on Wall Street, leaving Salomon Brothers and the truth about that hand of liar’s poker.
In the 1980s, you were called a “world-class financial celebrity”. How did you see yourself?
As a very lucky fellow. I was part of a very good organization and by virtue of that job I got to meet some of the more successful people in financial services and industry in general in different parts of the world and that’s a treat. By virtue of my position, a lot of doors were opened to me. That’s a nice thing.
Looking back, how do you feel about leaving Salomon Brothers?
I had 38 great years. The last seven or eight haven’t been as good.
When I left Salomon in 1991, it was under a cloud. There had been a scandal which I was not the perpetrator of, but as the CEO I felt accountable. This was turned by the media into the perception that there may have been some guilt there. So although this was not the case, I was left tarnished.
I choose not to look back because if I dwell on inequity or my mistakes or my non-forthcomings, whatever it was, that would not be a useful exercise. I had the rest of my life to live, and the rest of my life was going to be different. I was cut off, totally, for a variety of reasons, some of which were my own doing. I felt that it was in Salomon’s interest to be totally remote from me, and it was.
I’d asked Warren Buffett to come in as a temporary CEO and that worked. But because for some people I was a useful means of expressing their displeasure in the short run, I became demonized. I had never been particularly interested in the media. Nor had I been particularly interested in pushing my own reputation forward.
Did you deliberately sever your ties with the people at Salomon?
I did. There was no contact. It was my choice and theirs.
And that included with Buffett?
I talked to Warren a few times but we had a fundamental disagreement about what I thought I was owed having worked there 38 years – not very large [amounts of] money by today’s standards. They cancelled all my options which I had never cashed in and some stock awards. So I lost a huge amount of money for me, and then I fought when they didn’t want to settle on the terms that I thought were appropriate and I lost that. But that was the environment of the time.
So when you talk about looking back, why should I dwell on something so painful, so unfair in my view? I had to re-establish a life for myself. Obviously, you look forward but you’re not stupid enough to forget the past. You don’t make the same mistakes repeatedly. But again, what useful purpose does it serve to rehash something like that or to rehash [the story of] Paul Mozer who was the fellow who caused this debacle at Salomon, or the attitude of Warren subsequently, playing God on High.
Gerry Corrigan at the Fed said publicly through spokesmen that they never asked for my resignation. That was my choice. Warren spun the story, but Warren is a master at handling the media and I’ve never spent the time to cultivate the media. I felt if I did a good job that would suffice. I was wrong.
What do you think the episode said about Salomon?
It said that the controls were not as good as they should have been. The Federal Reserve did not discover this: we discovered it. The problem was that it was felt that I had not reported quickly enough. It was reported three months later, and it should have been reported immediately. Not as a legal matter, but as a business matter.
If the episode had not happened where would Salomon be today?
I have no idea, but I do believe that it would probably be independent, with a much larger asset-management business.
And I feel that Citigroup, Travellers, Smith Barney, Salomon is too big to manage. I don’t see the synergies. I don’t see the cross-selling, it’s just too big. I don’t think it suits the employees particularly because they lose their identity. I don’t think it suits the shareholders necessarily, and I certainly don’t think it suits the customers. It may suit the management. It’s like dealing with the telephone company here: if your telephone’s botched up, it’s a hell of a job getting it fixed.
And where would you be?
I’d certainly be out of there. I would have expected to have left when I was 65, and had some nice cushy office where I could do whatever I could do to help the company. But I would certainly not have anything to do with the management, and if they’d wanted me 100% out that would have been fine with me.
And you’d be richer
I’d be rich – $50 million or $100 million at least, as opposed to a next-to modest amount. But does it make a hell of a lot of difference to me? No. I’m not going to worry about it.
Tell us something about your childhood and how you chose a career in banking
I grew up in the suburbs of New York City. My father was in the meat business and then the trucking business. At school I was weak in the sciences and strong in English and history, poetry and drama. When I went to college at Oberlon, Ohio that trend accelerated. I ran a drama club which had some success in the summer theatre.
When I graduated from college in 1951, I was immediately drafted into the army. I volunteered to go to Korea as a private. I did not think I had the qualifications to be an officer. I spent well over a year in Korea and sailed home the day the conflict ended.
After I got out of the army in August 1953, I was thinking about perhaps going to teach, but there was no money in teaching and I didn’t have a lot of money. My parents were nice middle-class people, not poor but not rich.
Is it true that you wanted to be on Broadway?
I knew I would never be a good enough actor or writer. I’d done some acting and some editorial work on literary magazines at high school and college, but I knew I was not great. And I think in the arts unless you’re truly dedicated or know that you’re wonderfully accomplished or can be, mediocrity would be a painful life.
Instead I got a job in Salomon Brothers & Hutzler. My father was friendly with two of the Salomons, Percy and Bill. Percy was one of the founding brothers. Bill was the eldest son, and chairman before me. They asked me if I wanted to train. I just drifted into it.
What are your memories of Wall Street and Salomon then?
Wall Street in those days was not exactly the golden harvest that it has become. Keep in mind that Wall Street through the 1930s was for the lesser sons of families, a Protestant-dominated industry. The trading of securities on the exchanges was dominated by the newer class, the immigrants, the Irish Catholics, the Italians, the Jews.
All this began to restructure after World War II with the GI Bill and the general opening up of society. When I took this job as a trainee at Salomon, it probably had about 250 people, and only two college graduates as I recall. Its reputation was totally in the institutional bond business. It was not known as a stock house.
It turned out that I was reasonably good with simple numbers and had a good memory and was quite diligent. It was something to sink my teeth into. I’d get in by 8.15 in the morning and leave by 5.30. That was a long hard day in those days, even by Wall Street reckoning.
In the 1980s, Salomon became known for its star traders. Were you the equivalent of that in the 1950s and 1960s?
No. In 1962 when I left the municipal department where I’d been a trader, I became the head of the syndicate department and the sales manager. So you can see how small a firm it was. There we built a reputation and formed a group of underwriters who led the field in competitive bidding for utility bonds for the next 25 years.
We were the number-one underwriter in debt for many of those years. We formed a partnership called the “fearsome foursome” with Lehman Brothers, Blyth [later Blyth Eastman Dillon, now Paine Webber], and Merrill Lynch. We were brought in because we were perceived to be the most knowledgeable in bonds and a pretty good risk taker. Merrill Lynch came on board because they had a distribution network and ambition. Lehman Brothers came in because they wanted to add to their investment banking expertise, and Blyth was a very important large firm of what was then called Club 17 – the establishment of the securities business of the United States. Salomon was not a member of Club 17.
What happened was the firms of the 1930s, 1940s and 1950s began to disappear and consolidate in the 1960s. And institutions in the 1950s and 1960s began to invest for the first time in common stocks. They’d previously been restricted by statute and by custom, and were bond buyers. And in the 1950s and 1960s came the growth of mutual funds, the public and private pensions with new attitudes toward investing. Whereas originally they were limited to maybe 5% or 10% in common stock, today it has reached 50%, 60% or 70%.
We rode the curve. We became the most powerful underwriting group for bonds. In the 1960s and 1970s we spread our wings and began to underwrite common stocks, basically utilities because they were more like bonds. The conclusion to this story is that the world became institutionalized: the place of traders and entrepreneurs changed in relation to their domination.
How did you become chairman of Salomon in 1978?
Consistency. I grew along with the market and I was fortunate. We had a very good institutional sales force and their information, combined with my and my partners’ abilities to make some bets. was the reason that we rose.
You were known for being always formally dressed. Was it your upbringing that made you conservative?
No, I think I just hid behind grey striped suits. You can’t give everything away. You’d see how flabby I was if I walked about in a T-shirt.
How did you get mixed up in the razzmatazz of high society?
I really don’t want to talk about my social life. My social life is run by my wife. New York is a money town. That’s what gives you social panache. If you happen to be attractive or unusual, that helps too, like Donald Trump.
I didn’t have that. I have an attractive wife. When you’re on top everyone kisses your ring and blesses you. And when you’re not on top, you’re not as prominent. I spend a lot of my time now on charitable work. I gave away real money when I was at Salomon because I had it then. Now they get it in labour instead of money. Whether it’s a Montefiore Hospital, which is the largest employer in the Bronx, or the New York Public Library, or this photographic foundation Aperture.
What gave you most satisfaction at Salomon?
Probably the most impressive accomplishment was the talent of the team. And it was a team. When you thought about Salomon in the 1960s, 1970s, 1980s I would hope that you wouldn’t identify me particularly, but that you’d identify a number of other people.
Sidney Homer was very important. Henry Kaufman was his heir, in terms of analyzing the history of bonds and what they mean. Then came Marty Leibowitz, a very bright, modest person, and in my view much more interesting than Kaufman. Henry was an economist out of the Fed, and he got a big reputation. But we built his reputation on purpose. We also built the reputation of Lewie Ranieri who founded the mortgage market.
Then there was Jon Meriwether and his people who were the most important architects of derivative trading and principal trading as it eventually superseded trading for customers. But what happened was as we attracted these very bright people, they began to look inside the market and see better avenues for profitability. However, in doing so it was necessary not only to have the mathematical skills and the knowledge of the markets, but also to have the information that goes along with making markets and having customers. That information base is very important.
The other important element is the liquidity that the market provides for. Most of the great trades and traders have operated on the edge of the market. You know that the market is enormous, but it moves not because great volumes are traded but because at the margin it moves. The failure of Meriwether and those people in the middle 1990s came about because they became too big for the market – too many people were doing the same thing – and also hubris. They began to trade things in which they did not have the advantage, the edge, the knowledge.
Did you invest in Long-Term Capital Management?
No. I didn’t have the money. And they were always smarter than I in their minds and in my mind.
You once said that to be at the leading edge, your people needed to be idiosyncratic. Did you consciously set out to hire misfits?
I tried to hire the best people. The best people don’t fit in boxes. If you look at the arts, over history, are the best people the imitators? Not normally. They’re the innovators, the people who have ideas.
Why did you put so much trust in Lewie Ranieri despite the friction between his mortgage department and the government bond department?
Well I stood up for him until I fired him. I stood up for him because I knew he was a bright, dedicated person and he was creating a new business for us in which we were very good. Until Lewie got beyond his ken, as everybody does, Lewie hired some good people. All these fellows are mavericks in their way. Certainly Meriwether and his team were mavericks. It was also more interesting, more fun to have people who are diverse.
So why did you fire Ranieri?
Because he was causing too big a schism in the firm. He wanted his own separate firm for mortgages and all the derivative products that related to mortgages. And I had corporate, investment banking and research people. He was just divisive.
Did you have a policy of encouraging employees to become well-known figures?
We built stars because we thought it was in our interest. People like Kaufman, Ranieri, Meriwether, [James] Wolfensohn [now World Bank president]. They will all maybe tell you that they were stars and we simply helped them become recognized. Somehow people want to do business with stars. It’s like movie stars or baseball stars. If Lewie Ranieri worked in your shop. he would attract a lot of interest. Or Jim Wolfensohn or Michael Bloomberg [founder of Bloomberg LP] or Jon Meriwether. I did not publicize myself. I drifted into that, unfortunately. Today sound organizations do not run on the star principle. The venture capitalists run on that.
Why did you let Michael Bloomberg go after the sale to Phibro in 1981?
Michael had done a fabulous job expanding our technological expertise and inputting into the “Quotron” machine – which is now Bloomberg – the programs that our traders, research people and clients could use to analyze and assess bond values. I think Michael would have rather been a trader, but he wasn’t going to run the equity trading, and it was time for him to move on. There were better opportunities for him. He’s turned out to have a very successful business of his own.
Had he grown too big for his boots?
No, Michael’s fine. That was not a problem.
Jimmy Wolfensohn’s another of our alumni who’s done very well for himself. He ran investment banking for us for a couple of years in late 1970s, then left us in 1981. Great salesman, very talented, very sophisticated – a true charmer.
But were there others who’d outgrown their boots?
There are always people who think they’re better than the organization, and if they’re better then they move. Ira Harris was a great salesman. Lovely man and moved because I don’t think he liked the risk profile. He’d gotten his capital out when it went public. He went to Lazard Frères, took his capital and did very well.
One of the things I found when we sold the business in 1981 was that most people were really glad to get their capital away from the risk and operate as a public company, using other people’s capital. Some of them saw it as a chance to play a much bigger game because it was now other people’s money and some saw it as just a chance to get their capital out do what they wanted to do.
For example, Tully Friedman has been extremely successful out in California in the LBO business, raising billions. A number of people wanted a world where their personal impact was greater.
If you had your time at Salomon again, are there things you would have done differently?
If I were smarter, I would have probably done things differently, but I don’t really waste a lot of time thinking about what I would have done differently. I told you, it’s over.
Was the global expansion too quick?
No. The problem there was that a number of my partners didn’t believe in it as I did. And they didn’t give me their best talent to send over to London. We did not have a first-rate London office for many years because the heads of various departments in New York didn’t want to send their best and brightest. Tokyo worked out differently because we had to start de novo there. But global expansion was the right thing to do.
You came from a trading background. Did that give you a bias in favour of traders?
Yes, in fairness. There’s a lot of charm and glamour in investment banking. Doing the deals for General Motors and IBM was kind of fun. But intellectually, most of the time, the traders were much more fun, much more interesting. The investment bankers were always a self-important, superior-in-their-own-minds group of folks. Traders tend to be more short-term oriented, more result oriented. They’re easier to deal with. When they fail they know it. A banker can always say: “Pay me this year because I’m going to do the deal next year.” Next year: “Pay me more, because I did the deal this year and I may do more next year.” Traders are more matter of fact.
Why were equities so unpopular at Salomon?
Because of the history, and because of jealousy. All these firms operate within themselves as fiefdoms. And the investment banking versus the trading element is the most difficult to harmonize. Over the years it’s changed. Investment banking now is dominated by quantitative researchers who become investment bankers, plus investment bankers who are salesmen. The traders have become proprietary and the order function is secondary.
But in your time at Salomon, wasn’t trading the most profitable business?
Yes, but in the 1980s it began to swing. All this rewritten history talks about proprietary trading being the whole business which is untrue. Proprietary trading cannot exist without an ear to the market and liquidity in the market. An ear to the market means knowing what the customers are doing, and the market means being able to buy and sell. Can you buy and sell in great volume? That was the end of Long-Term Capital. That’s the ultimate example. You may have a brilliant idea for $1 billion, but if you try to do it for $50 billion or $100 billion the market won’t tolerate it, and in equities it’s smaller.
Were you ever tempted to go out and trade yourself when you were chairman? Did you miss that buzz?
I probably would have liked to because it would have been more fun. It’s easier, mistakes can be corrected quickly. When you’re running a place and setting the policy, the mistakes tend to be longer term and you live with them.
As a bond trader by background, was it difficult to run the whole operation?
My qualifications were being able to use common sense, simple mathematics knowledge and good memory in dealing in relative values. It’s very straightforward even though there are interesting dynamics and subtleties – and of course one of the ways people make a lot of money today is looking at those differences and arbitraging between the markets. You can also do that now with certain kinds of stocks in industrial sectors. In service industries its more difficult to measure variables. My competence would end at the point where it’s all perception.
What goes through your mind when newspapers and magazines recycle old stories about you?
Michael Lewis wrote a novel called …. what was the name of the novel?
Liar’s Poker.
That’s it. Anyway, I don’t know if I met him, but he worked for Salomon, mainly in London as I recall. The first chapter or two was rather amusing, then you got into a tedious thing with mortgages and Lewie Ranieri. In London we saw the galleys and I met with counsel to decide whether to sue for libel since there were some gross inaccuracies in the story.
It was determined that if we did sue for libel we would probably cause publicity for this novel and that would give it broader circulation. So wise counsel said you’re better off ignoring it. But he was wrong. It was the right time, and the book was the first unattractive scar on me and on Salomon. It made us look as if we acted against our clients and anything which does that is detrimental to your business, in the short and the long run.
It must be galling that you are probably best known among the general public for an anecdote which you say isn’t true.
I think Lewis would probably admit that the story [of the $1 million hand of liar’s poker] wasn’t true, but it doesn’t make any difference. It’s a preposterous kind of idea. But is it galling? If I thought about it and dwelt on it, of course it would be, but why would I do that? Why would I cause myself an ulcer for something I can’t do anything about?
But was there part of you that missed the risk-taking side of being a trader?
Would I gamble with Meriwether? Well sure. Would I lose quite often? Sure I would. But we’re talking about $500. A million dollars is ridiculous.
Did you pay sufficient attention to developing the investment-banking side of Salomon Brothers?
I’ve been criticized for anything and everything, I’m not really very sensitive about it. I did the best I could. We didn’t have the best management, we didn’t have the best talent. The reason we didn’t was probably ultimately my fault. It’s a dumb thing to say, but I did the best I could. We did well in investment banking for a while but we did not do well in principal investment banking. Drexel [Burnham Lambert] was way out in front and everybody copied Drexel but us. And when we tried to, we were inept. Keep in mind that Morgan Stanley and Goldman Sachs are big proprietary traders and big proprietary bankers now. That comes out of Milken. Milken was the genius there.
You admired Milken?
Admired would be the wrong word. I respected his ability. I thought he broke the law. They bought and sold securities for themselves and for their friends ahead of the public. That’s illegal. Regardless of my respect, if you do something illegal you pay the price, and he did, and then he got on with his life.
But Milken was probably the most extraordinary event of the 1970s and 1980s. Innovative, bold, bright, trapped eventually because of lack of management at a senior level at Drexel Burnham. Milken was totally talented but went beyond the rules.
Did you have the same respect for Henry Kravis?
Henry is very smart and saw an opportunity and has done a wonderful job. He made an effort to be not in the forefront of public interest but because he’s made so much money they pay some attention to him. He’s a friend of mine, not an intimate friend of mine, but I see him from time to time.
With the RJR Nabisco deal, what happened was that Milken had done a lot of successful deals with KKR and we were brought along as an afterthought by Shearson to be their partner because it got too big. At the end, whereas we might have been willing to pay more, Henry Kravis wanted Drexel to run the show because they had a lot of experience and he’d done very well with them. We didn’t wish that. We thought that we should run the show. So we lost. It turned out to be a good loss.
What about other big personalities over the years, such as George Soros, Charlie Sanford? What were your opinions of them?
Charlie Sanford’s very ambitious and able. Bankers Trust, not at the top of the pack in the commercial-banking world, had to make an identity for themselves. They did it through being an innovative, creative, bright team of people. Charlie had a couple of ventures that turned out to be sour, and operating as a public commercial bank it’s difficult. They’re held to a slightly different standard than an investment bank. Charlie’s very personable, very bright, had some good people. I like Charlie.
George Soros is not a close friend of mine but I know him. Soros has been very opportunistic. He is more interesting to me than anyone because he’s ambivalent. Whereas he’s been very bright and opportunistic, he looks at it and wonders what this does for the world. Now maybe that’s just because he’s made so much money. His Hamlet-like posture-after-the-fact is very interesting.
Do the people on Wall Street today seem more grey to you?
The characters and the idiosyncratic personalities that once were part of the game of Wall Street have been superseded by what we would call organization men and women. In the old days when you talked about Goldman Sachs, you’d talk about Gus Levy who was a great stock trader and very important, or at Bear Stearns Si Lewis, another great trader, or Lazard Frères where André Meyer was the eminence grise.
Today when you look at the better run firms, they try a little bit, but you don’t talk personalities. The personal attributes of the people at Goldman Sachs or Merrill Lynch are generally unknown, which is a good thing. The sting today is how much money does everybody make. Is it $5 million or $10 million or $20 million – some outrageous number.
In the 1970s and 1980s, which firms on Wall Street were you most afraid of?
I never thought about it that way. The standard was to be the best. We were certainly second rate in the venture capital business. We were not the best in equity underwriting, not the best in equity research. But we were the best in bond research.
What were the key events during your career in banking?
I suppose a big event was May Day in 1975, when they deregulated commissions. In the 1980s, there was the public ownership of securities firms and the evolving changes in the rules as to who could be in the business of securities, and who couldn’t. But by far the most important event has been the unquantifiable change in methods of doing business by virtue of technology and telephony. That revolution supersedes all the others infinitely, and that is still in its early stages. So in the 21st century the technology and the universality of its availability will be the thing to look at. That’s one of the reasons you don’t have the great personality traders. You now have a machine-dominated business.
In the 1970s and 1980s did you predict how banking might develop?
I did think about it, but I didn’t make public predictions, and I won’t today. Most of them though have been accurate. I was pretty good on the vision.
But broadly, what were your predictions?
Public ownership, globalism, higher technological component. I never realized, however, the extreme to which compensation would go in the industry, related to the risk of personal capital. That’s gone far beyond what I thought it would. The problem as I see it and saw it, was what is seemly and appropriate. It’s a very difficult question. The business throws off a huge amount of money. Does it belong to the shareholder? Should he put it back into the company, or does it belong to the employees? That’s a problem to me. Since it’s not the employees’ capital at risk, I think they tend to treat themselves too generously.
Are you glad that you had your heyday in banking when you did?
Starting out now, I don’t think I’d be in the business, because I don’t think I’d be good enough. I don’t have the technical expertise and I think it’s a different game.
Would you advise your children to go into the business?
I have four sons. I wouldn’t advise them to do anything they didn’t want to. They live their own lives and that’s great.
One of them is out in California doing venture banking, partner in a smallish firm, one’s a teacher, one’s in the music business and one’s in high school.
