The Snowball_ Warren Buffett and the Business of Life - Alice Schroeder [322]
Billy Salomon had installed Gutfreund as a trading assistant. Joining a roomful of men who spent their days buying and selling bonds for clients on the phone, Gutfreund, like the rest, carved off a little slice of everything for Salomon in return for his labors. He proved a deft trader and made partner in 1963 at the age of thirty-four. Partners at Salomon were bound by the edict of Billy Salomon, all of their interests welded together by the capital he forced them to leave at risk in the firm—instead of taking it out year by year as bonuses and profits.
In 1978 Billy Salomon promoted Gutfreund to head of the firm, then retired. Three years later, Gutfreund showed up on his friend and mentor’s beachfront porch in East Hampton to say that he was selling Salomon to Phibro, a giant commodities dealer, to create Phibro-Salomon Inc. Gutfreund and his partners walked away with an average of nearly $8 million apiece in profit from the sale, while those who had built the firm and were now retired—like Billy Salomon—got zero, zilch.62 One former partner thought it a Greek tragedy: the story of Oedipus, who had killed his own father.
Gutfreund became co-CEO with Phibro’s David Tendler. Running a firm with a co-CEO is like trying to balance two ends of a seesaw in the air. When Phibro’s business slumped after the sale just as Salomon’s was soaring, Gutfreund wasted no time. He slammed his end of the seesaw to the ground and sent Tendler flying.
After Gutfreund took control, he added a foreign-currency business, broadened into equity trading and underwriting, and expanded the bond business into Japan, Switzerland, and Germany. For the next few years, the witch doctors from academia with their computers and formulas filtered onto Wall Street, and Phibro-Salomon’s floor became populated with PhDs who unlocked the mathematical secrets of stripping, slicing, packaging, and trading mortgages and other bonds. By inventing a whole new segment of the bond market, Salomon (for the Phibro-Salomon name never quite replaced “Solly” in people’s minds and was dumped in 1986) grew in a few short years from a second-tier firm to the top of the Street, with a swagger to match, as its traders stayed many steps ahead of other banks.
They ruled from “The Room,” Solly’s trading floor, a smoky palace about a third the size of an airplane hangar, filled with long double rows of desks where the traders, salespeople, and assistants crouched in front of banks of screens with a slice of pizza in one hand and a telephone receiver in the other. The daily battle took place as a symphony of groans and curses and farts and screams punctuating the background babble, yelps, and mutterings of trader talk. Eccentrics were welcome, as long as they produced. Gutfreund shot down the aisles every morning from his desk on the floor as if fired from a cannon. He glared through horn-rimmed spectacles, chomping his stogie, and shredded screwups into piles of mulch on the trading floor.
The characters on the trading floor bartered with a camaraderie born of competition and a united obsession with killing the other team. They so dominated the bond-underwriting market that BusinessWeek crowned Salomon “The King of Wall Street.”63 The story also said it was the kind of place where the “long knives” could come out if things went south—in other words, that Gutfreund would purge anyone suspected of dissent in order to still a revolt.64
Salomon’s profits peaked in 1985, when the firm made $557 million after tax. But the new businesses—principally equities—didn’t earn their keep; thus, internal competition started to get out of hand. The traders who had built Salomon’s unique and profitable business started to leave, enticed by million-dollar