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John Gutfreund died Wednesday at age 86, marking the formal end of an era on Wall Street when swashbuckling bond traders made huge bets using house money.

A cigar-chomping former bond trader, Mr. Gutfreund spent 38 years at Salomon Brothers, once a feared powerhouse on Wall Street that he boasted was "the greatest trading organization the world has ever known."

Mr. Gutfreund transformed Salomon into the dominant force in the Treasury securities market, overseeing a trading floor the size of a football field. Under his helm, Salomon made big wagers using the firm's cash and sold the first mortgage-backed bonds. He turned Salomon from a private partnership to a publicly traded firm. Business Week dubbed him the "King of Wall Street."

But Mr. Gutfreund's career at Salomon came to a sudden halt in 1991 amid a Treasury-note auction scandal, one of the largest ever on Wall Street.

In one instance, Salomon controlled an astonishing 94% of the two-year Treasury notes sold to competitive bidders at an auction, enabling Salomon to corner a good portion of the market, violating Treasury rules.

He became personally embroiled in the scandal when Salomon revealed that he had been told the firm had made an illegal bid in a Treasury-note auction, but didn't report the wrongdoing to the government for months.

Nestled in his elegant 43rd-floor office in 7 World Trade Center overlooking the Hudson River, Mr. Gutfreund initially sought to tough it out. Dressed in his trademark dark suit and white shirt, he told top executives at a closed-door meeting shortly after the disclosures: "I'm not apologizing for anything to anybody. Apologies don't mean s—. What happened, happened."

He soon was pressured to resign, following two calls from the furious head of the Federal Reserve Bank of New York who had demanded action.

It was one of the swiftest falls for a leading Wall Street chief executive: Just weeks earlier, Salomon had reveled in record earnings, driven largely by bond-trading profits.

Warren Buffett, the billionaire investor who had held a large Salomon stake, stepped in and helped lead the firm out of the scandal. The reality of the firm's business strategy later was crystallized in a homespun way at a Salomon board meeting.

Charles Munger, Mr. Buffett's close associate and then a Salomon director, likened Salomon's trading arms to a "gambling casino with a restaurant out front."

The casino—the group doing proprietary trading for the house—"is the thing we really want because it makes a lot of money," he told directors. "And we're happy to have the restaurant"—customer businesses such as stock and bond trading and investment banking—"as long as it doesn't cost too much."

Salomon in 1992 struck a $290 million accord with the Securities and Exchange Commission and other government agencies to settle allegations relating to the bidding scandal.

Salomon never was the same, and later was absorbed into what became Citigroup Inc. In his later years, Mr. Gutfreund cut a far lower profile, working for a time as a senior adviser at C.E. Unterberg, Towbin, a boutique firm.

Born in Scarsdale, N.Y., Mr. Gutfreund attended Oberlin College, received a degree in English and served in the U.S. Army in Korea. He joined Salomon in 1953 after his Army service as a trainee in the statistical department, clerked in the firm's municipal-bond department and later became a trader. Even after he rose into management, he would spend hours smoking cigars and trading securities.

Under Mr. Gutfreund's helm, Salomon traders could make huge amounts of money—often far exceeding what he earned.

Mr. Gutfreund also helped oversee the rise of oil trading on Wall Street.

Through it all, Mr. Gutfreund presided over bawdy antics of some of Salomon's traders. Some of these were depicted in the best-selling book "Liar's Poker," which irked him. In the book, former Salomon bond salesman Michael Lewis painted an unflattering picture of Salomon sticking certain clients with bad bonds on occasion, among other things.

At Salomon's 1990 annual meeting, Mr. Gutfreund admitted that the book had made the firm "a laughingstock" and caused tension with clients.

At the meeting, Mr. Gutfreund said he never met Mr. Lewis, and said the book bore "no relation to reality." The book "systematically attempted to say we ravaged our customers. It didn't make much sense," he said. "We may have been stupid, but we have been honorable in dealing with our customers."

In an unusual diversion from the meeting's Wall Street solemnity, Mr. Gutfreund also critiqued other financial books. He called "Barbarians at the Gate"—the account of the mammoth RJR Nabisco Inc. takeover—a "pretty good book."

One passage in "Barbarians" describes Salomon pulling out of the deal because its name wouldn't be on the preferred side of a planned advertisement.

That passage was "a gross oversimplification," Mr. Gutfreund said. "We had major reservations about other aspects of the deal."

Outside of work, Mr. Gutfreund was very fond of Tony Bennett and his music and his painting. Mr. Bennett used to visit Mr. Gutfreund's apartment in New York to sing.

(END) Dow Jones Newswires

March 09, 2016 17:05 ET (22:05 GMT)

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