Nightmare on Wall Street

John Gutfreund, ex-chairman and chief executive officer of Salomon Brothers, is a man one loves to hate. An English major at Oberlin, the multi-millionaire, cigar-chomping Gutfreund boasted of owning fewer than a hundred books. He surrounded himself with subordinates without college degrees. By treating them condescendingly, he pumped up his own ego.

Recently lettered, Gutfreund joined Salomon as a municipal bond trader in 1953, eventually rising to a position second only to that of William R. Salomon, the firm’s managing partner. When Salomon retired in 1978, Gutfreund replaced him. He demeaned those beneath him, annihilating anyone who crossed him, meanwhile going on a corporate spending spree that made the excesses of the most free-spending Roman emperors pale by comparison.

Salomon, nationally the largest dealer in United States government bonds, fell victim to Gutfreund’s arrogance. Those surrounding him could not check (and often imitated) his high-handedness. The May 22, 1991 auction of U.S. treasury bonds brought to a head a situation that had been festering for years.

Federal law prohibits any one buyer from bidding for more than 35 percent of the treasury bonds available at an auction. It permits brokerage houses, however, to bid for their clients who order bonds; these bids do not count against the firm’s 35-percent limit. Salomon, long an outspoken critic of the limitation, regularly entered bids in clients’ names, unbeknown to those clients.

After the May 22 auction, when Salomon walked away with $10.6 billion of the $11.3 billion available in U.S. treasuries, the government launched the investigation that brought the house of Salomon and many of its executives down. Martin Mayer, a consummate storyteller who presents complex economic information with admirable depth, accuracy, and clarity, here unfolds an intriguing tale with far-reaching implications.