(Bloomberg) -- John Gutfreund, who was proclaimed the "King of Wall Street" in 1985 for harnessing the egos and fiefdoms of Salomon Brothers into one of the most profitable investment-banking firms, only to be deposed after a 1991 trading scandal, has died. He was 86.
He died Wednesday at New York Presbyterian/Weill Cornell Medical Center in New York, his son, John Gutfreund, said in a telephone interview. The cause was pneumonia.
As managing partner and later as chairman, Gutfreund (pronounced GOOD-friend) transformed Salomon from a traditional bond-trading firm into a pioneer in businesses such as mortgage-backed securities, under Lewis Ranieri, and computer-driven trading techniques, under John Meriwether. It also became the largest underwriter of municipal bonds, the department where Gutfreund got his start.
"Gutfreund seemed able to smell money being lost," Michael Lewis wrote in "Liar's Poker," his 1989 account of working at Salomon. "He was the last person a nerve-racked trader wanted to see."
In overseeing New York-based Salomon's transition from private partnership into what Lewis called "Wall Street's first public corporation," Gutfreund was a pioneer in taking the risks once assumed by a small group of senior partners and spreading them among shareholders. His view of business as a daily battle was captured in his exhortation to traders that they come to work "ready to bite the ass off a bear" every day.
Readers of the Lewis book were introduced to Gutfreund and to the particular ways of Wall Street, including the game referenced by the title, which involves wagering on the serial numbers printed on the paper currency in players' hands and nerves-of-steel bluffing. In the opening pages, Gutfreund marches out of his office to challenge Meriwether, his bond trader extraordinaire, to one contest, for $1 million, backing down when Meriwether ups the proposed bet to $10 million.
The book "destroyed my career, and it made yours," Gutfreund told Lewis years after its publication.
The New York-born son of a prosperous trucking-company owner, Gutfreund assumed control of Salomon in 1978. His reputation as a tough corporate infighter was burnished after he agreed to sell Salomon in 1981 for $554 million to Phibro, a publicly owned commodities-trading firm that had benefited from rising oil prices as inflation spiked in the late 1970s. When the Federal Reserve lowered the inflation rate, oil prices dropped while bond prices, Salomon's lifeblood, rose.
Gutfreund seized on the reversal of fortunes to oust David Tendler, the head of Phibro and co-chief executive officer of the combined firm, in 1984. He renamed the company Salomon, shrank what remained of Phibro and allowed his bond traders to use the company's expanded capital base to boost profits.
He broadened Salomon's client services and its global presence by creating a mortgage-securities unit, moving into mergers and acquisitions, building its foreign currency-exchange operation and opening offices in Tokyo, Zurich and Frankfurt.
Salomon's capital grew to $3.4 billion from $209 million when he took over, and BusinessWeek magazine put Gutfreund on its cover in 1985 with the headline: "King of Wall Street."
"He helped build Salomon into a superpower," Robert Rubin, the former U.S. Treasury secretary, said Thursday in an interview. Rubin was a leader of Goldman, Sachs & Co. in the years when Salomon grew into a rival. "We were the major equity-trading house. He really built what became the modern Salomon Brothers, which was a firm that wasn't just a major fixed-income trading house, but became the other major equity-trading house, plus a substantial investment banking firm. They went beyond their base, whereas other firms that didn't expand beyond their base, over time, disappeared."
Gutfreund also became a prominent figure in the New York City social scene.
In 1981, he married Susan Penn, a former beauty queen and Pan Am flight attendant. They were known for parties at their apartments on the East River, and later on Fifth Avenue, and weekend trips to their home in Paris.
Author Tom Wolfe denied speculation that the real-life Gutfreunds had inspired the fictional Bavardages in his 1987 novel "Bonfire of the Vanities," the couple he called "this year's host and hostess of the century, the most busily and noisily arrived of the arrivistes."
Missteps first weakened Gutfreund's grip on the firm, then led to his ouster from Wall Street.
In 1987, when Ronald Perelman, the head of Revlon, tried to buy a 14% stake in Salomon, Gutfreund was forced to sell a 12% share to Warren Buffett's Berkshire Hathaway for $700 million to discourage hostile challenges.
In 1991, Salomon admitted it had violated U.S. Treasury Department auction rules by placing orders for securities in the name of customers who hadn't authorized them. Paul W. Mozer, then the head of government bond trading at Salomon, served four months in federal prison for lying to regulators. Gutfreund, criticized for failing to notify U.S. regulators quickly enough about Salomon's false bids, resigned from the firm, with Buffett taking over as chairman for nine months.
Gutfreund insisted he tried to do the right thing for the company and its shareholders during the scandal. Asked by MIT Sloan Management Review magazine in 1996 how the public viewed him, he replied:
"If they remember me, it will not be because I helped build Salomon as the No. 1 underwriter in the world, the No. 1 market-maker and trader, but as somebody who got involved with a scandal. They have dim memories of it because I was never indicted or charged or anything else. It's one of those vague, 'not-quite-good-taste-in-the-mouth' leftover impressions, which I find very dissatisfying."
He paid a $100,000 civil penalty and was barred from serving as chief executive of a securities firm.
He never again ran a financial-services company. Salomon was acquired by Travelers Group in 1998 and now is part of Citigroup Inc.
"My reputation was damaged," Gutfreund told Bloomberg News 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."
Citigroup CEO Michael Corbat and President James Forese said Thursday in a statement, "John was a brilliant businessman and pioneer who provided us with an incredible foundation upon which we built the Citi we are today."
John Halle Gutfreund was born on Sept. 14, 1929, in New York City and, along with his sister, was raised in Scarsdale. He received a bachelor's degree in English from Oberlin College in Ohio in 1951, and served in the U.S. Army in Korea from 1951 to 1953.
His father, Manuel Gutfreund, owned a fleet of trucks that delivered meat to New York City-area businesses. As a member of the Century Country Club in Purchase, New York -- "a social center for the German Jewish establishment," according to a 1998 profile in New York magazine -- Manuel Gutfreund was a golfing buddy of William "Billy" Salomon, the son of one of the founders of the firm that bore his name.
MOVE TO SALOMON
After his father arranged an interview, Gutfreund dropped thoughts of teaching literature and joined Salomon as a trainee in the statistical department. He moved quickly into trading municipal securities. Twenty-five years later, Billy Salomon named Gutfreund to succeed him as head of the firm.
On Wall Street, Gutfreund was visible and accessible. He kept a desk at the head of Salomon's trading floor, where he often gave interviews to the press and conducted business. He was rarely without a lit cigar, which was common at Salomon until smoking was banned indoors.
He had a small office, which he used for private meetings. It had only a table and little art on the walls, other than a drawing of his second wife and a vintage photo of Abraham Lincoln.
He changed Salomon, a firm founded in 1910, for good with the 1981 Phibro deal, selling the partnership to a publicly held company. Billy Salomon was among those upset by the deal, saying he had left the firm in Gutfreund's hands "in the hope and expectation that we would remain a general partnership for a long time."
THE KING OF WALL STREET
Among the half-dozen general partners let go at the time was Michael Bloomberg, who would go on to found Bloomberg LP, parent company of Bloomberg News, and then to serve three terms as New York City mayor.
In his 1997 memoir, Bloomberg recalled how he was sent packing by Gutfreund in 1981, with $10 million to ease his pain, "after 15 years of 12-hour days and six-day weeks." Gutfreund "had hired me as a fresh MBA when I needed a job -- and he had fired me when my era there had passed," Bloomberg wrote. "In both instances, his timing was impeccable."
Bloomberg, the majority owner of Bloomberg LP, said in a statement after Gutfreund died: "John Gutfreund hired and fired me -- and I'm grateful he did both. Along with Billy Salomon, he was a mentor and friend who taught me about hard work, management, leadership, and philanthropy. He was brilliant, honest, caring, and tough, and his reputation as the 'King of Wall Street' was well-earned. He had a profound impact on my life, and his generosity has had a profound impact on our city."
Under Gutfreund, Salomon rode the bull markets of the 1980s, leading up to the October 1987 plunge in equity markets. After the crash, Gutfreund canceled a planned new corporate headquarters as profits fell and some senior executives quit.
By 1988, Gutfreund was candid in admitting that the firm's management hadn't kept up with its growth.
"The world changed in some fundamental ways, and most of us were not on top of it," he told the New York Times. "We were dragged into the modern world."
LOST ARBITRATION CASE
A year after his unhappy departure from Salomon, Gutfreund rejected the company's offered payout of $8.5 million, representing its estimate of what Gutfreund was owed from vested options and pension benefits. Gutfreund chose to take the case to arbitration, seeking as much as $30 million. The arbitration panel awarded him nothing.
In his later years, Gutfreund ran a New York-based consulting firm, Gutfreund & Co., and stayed busy with his family. He had three sons, Nicholas, Joshua and Owen, from his first marriage, to Joyce Low. His second marriage produced another son, John, known as J.P.
He was chairman emeritus and board member of the Aperture Foundation, a photography-related organization in New York, and a trustee of Montefiore Medical Center in the Bronx and the New York Public Library. Last month, Aperture feted Gutfreund for his 20 years of service. He was also a member of the Washington-based Brookings Institution and served on the New York Public Library's board of trustees.
In the 2010 interview with Bloomberg News, Gutfreund said he didn't have many regrets in life. "If I should have been a saint, I would have been," he said.
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