One Bluff Too Many

In the mid-1980s on Wall Street, nobody symbolized the era's unruly passions better than Salomon Brothers chairman John Gutfreund. With his social-climbing wife, Susan, he helped define the decade's passion for conspicuous consumption: the couple spent some $20 million to refurbish a six-bedroom Fifth Avenue apartment, threw lavish, caviar-and-champagne-filled fetes for Manhattan high society and feuded bitterly and publicly with neighbors over their attempt to hoist a 22-foot Christmas tree by crane into their East River duplex. A gruff, cigar-chomping bulldog of a man, Gutfreund transformed the once staid brokerage house into a machismo-fueled money bazaar-and the most profitable firm on the Street. His defining moment was captured in Michael Lewis's best-selling "Liar's Poker," in a scene in which he challenged Salomon vice chairman John Meriwether to a betting match tied to the serial numbers of dollar bills. "One hand. One million dollars. No tears," Gutfreund dared. Meriwether called his bluff--one of the few who dared take him on.

Now another nail has been driven into the coffin of the 1980s. On Sunday, Gutfreund-along with Salomon president Thomas Strauss-was expected to resign as the latest Wall Street scandal engulfed the firm. The prestigious brokerage house is under federal investigation for allegedly manipulating the most critical of all financial markets: the buying and selling of United States Treasury bonds. The firm now admits that Gutfreund and two other senior managers knew of at least one of Salomon's improper actions and failed to report the information to federal regulators for three months, The news sent Salomon's stock plunging 27 percent last week. Salomon faces criminal and civil probes that could result in fines, suspension or even disbarment as a primary dealer of Treasury bills. That wouldn't trouble some on Wall Street, who see the scandal as a deserved comeuppance for a firm second only to Drexel Burnham Lambert in the fear and loathing it aroused. Says one trader: "I don't think anyone will shed any tears for Salomon."

Salomon moved quickly to halt the company's free fall. At an emergency meeting set for Sunday, the board was expected to name Warren Buffett as chairman and chief executive officer until a permanent replacement could be found. A board member since 1987 when he invested an estimated $700 million into Salomon, Buffett enjoys wide respect on Wall Street.

The Salomon board was clearly sending a message to Wall Street that the John Gutfreund era was over. Buffett, 60, couldn't be more different from his flamboyant predecessor: he wears off-the-rack suits and scuffed shoes, works out of a no-frills office in Omaha, Neb., and prefers Cherry Cokes and McDonald's to champagne and caviar. Yet his shrewd, conservative investments have made him the second wealthiest man in America-and raised the stock price in his Berkshire Hathaway Corp. from $12 in 1965 to a staggering $8,825 a share. A frequent critic of Wall Street excess, Buffett recently called the Street "the only place where people ride to in a Rolls-Royce to get advice from those who take the subway."

Buffett's investment strategies stand in sharp contrast to much of Wall Street's. While Salomon's traders might consider 30 minutes a long-term investment, Buffett believes in investing in companies for years, even decades, and working with management behind the scenes. He typically buys "cheap" stocks of companies with sound businesses and figures he can wait until the rest of the market catches on. Buffett owns sizable stakes in The Washington Post Company (which owns NEWSWEEK; he sat on the Post's board from 1974 to 1986) and Capital Cities/ABC and Coca-Cola. In recent years he's had a history of bolstering companies under attack by corporate raiders. At the invitation of management, he provides "takeover protection" by buying a chunk of the company's stock-sometimes at prices more favorable than to the public. His Salomon investment came about that way in 1987, when the firm was threatened by Revlon Inc's Ronald Perelman. More recently Buffett bought a 2.5 percent stake in American Express for $300 million.

Buffett will take command of a company whose aggressive, high-risk reputation is a mirror of Gutfreund, 61. The son of a truck-fleet owner, Gutfreund rose from trainee at the bond house Salomon Brothers & Hutzler in 1953 to chairman in 1978, succeeding the founder's son, Billy Salomon. Four years later Gutfreund sold the partnership to Phibro, a giant commodities trader. He ousted Phibro's management and built the firm into a major force in bonds and securities. Salomon's traders became notorious for their arrogant style-yet their deals were hugely profitable. Business Week called Gutfreund "The King of Wall Street" in 1986.

In the current scandal, Salomon's take-no-prisoners style seemed to go one step too far. In a series of disclosures, the firm said that four brokers violated federal law by buying more than the legal limit of bonds at three Treasury auctions starting in December. Under federal rules, no firm may purchase more than 35 percent of a bond offering at a single auction, but Salomon's traders gobbled up 57 percent at a February sale and 44 percent in May. The May auction tipped off Salomon's rivals that something was amiss. Dealers who had gambled that the bonds would drop in price lost millions of dollars when the prices soared unexpectedly. Many on Wall Street suspected that Salomon was deliberately trying to "squeeze" prices by cornering the market. While Salomon admits to the overbuys, it denies perpetrating a deliberate squeeze. The company asserts that the four traders, who've since quit, connived without the firm's knowledge.

Other damning revelations brought Salomon's, and Gutfreund's, competence into question. At one winter auction, a Salomon managing director and a customer duped a bond salesman with a practical joke: they rigged a phony "buy" order which the salesman failed to recognize as bogus. The salesman wound up buying an extra $1 billion worth of Treasury bills. Salomon admitted that the hands-on Gutfreund, as well as Strauss and Meriwether, learned of the February auction overbid in April but failed to fire the trader or notify the government until August. According to Salomon's version of events, executives blamed the lapse on "a lack of sufficient attention to the matter."

As Salomon struggles to clean up its reputation, the question remains whether the scandal could undermine confidence in the $2.2 trillion market in government bonds. Treasury notes are of critical importance in regulating the U.S. money supply and covering the federal budget deficit. Virtually all other financial markets worldwide peg their values to T-bill prices. In response to the scandal, Congress will consider new regulations this fall to tighten oversight of the T-bill market.

Can Salomon bounce back? Initial responses were mixed: Wisconsin's pension fund said it was suspending business with Salomon for the time being. But Salomon's stock bounced back a bit on Buffett's appointment, and many on Wall street are predicting that he can help the firm re-establish credibility. Buffett's predecessor may not be so lucky. Although Gutfreund's fall from grace will be cushioned by his financial holdings-he owns about $27 million worth of Salomon stock and notes-his high-flying days on Wall Street are almost certainly over. The onetime master of liar's poker has learned the hard way that he can no longer play by his own rules.

Bringing Back Those 1980s John and Susan Gutfreund were the likely inspiration for a nouveau-riche couple in the 1980s-excess novel "The Bonfire of the Vanities." Here's why:

The couple reportedly spent $1 million for a rug and turned half a floor into a bathroom/dressing area.

Their Paris triplex apartment boasted a garage so luxurious it was once described as looking like a ballroom.

Susan put a fridge in her bathroom for chilled perfumes, apres bathing.

Lavish parties included such delicacies as a dessert of green spun-sugar apples that resembled Venetian glass.

A Christmas tree was so big they hoisted it from outside-later prompting a lawsuit from an angry neighbor.

Susan spoke often of her "subway bracelet"; sliding panels hid diamonds.