Monday, February 25, 2013

The Criminal 80's & the Creation of Mortgage-Backed Securities

An Eighties Anecdote:
Not long before the stock market crashed on "Black Monday," October 19, 1987, having feigned off a corporate raider in the person of mascare guru Ronald Perelman, while getting little Warren Buffett to agree to pay $700,000,000 for 18 percent of Salomon, but still needing to make a few costs cuts at the directive of a new conservative sugar daddy, it's John Gutfreund who has made the hard decision and "suddenly dropped out of the municipal business" entirely. The commercial paper division, which dealt in short-term corporate securities, would shut down as well, with phasing out municipal bonds done before the cold of winter set in. Shuttering these divisions of Salomon, "the nation's largest underwriter of municipal securities," was a move which "astonished the entire industry," but please, no politician, or ex-officio would dare to say a thing about a matter of such little importance. Yes, you'll show them all! As well as gain the prepper's advantage over the birther, by moving up the announcement by two weeks, because word was already starting to "leak out."

OK, so maybe some post-80's stuff got mixed in there too. But below is the good word brought out bright and early Monday morning in the Times, six days before other people's fiscal thinking would be...umm...somehow changing. One quick question though: How many corporate raiders announce their intentions to a pretty target instead of quietly going about behind the scenes assembling a position? Does he ask her if she wants to touch his putative? That's like telling your beloved that you're thinking about buying her a ring instead of actually proposing. If it doesn't fit, or she says no, you take it back, but here the bride is making a wedding announcement to the press, when she wasn't asked, would have said no, is letting herself get undesirably fat, and has already ran off with an old guy to begin with. The writer for the New York Times, Robert J. Cole, is gifted enough to get the whole panoply of twisted tenses just right, as well as, for the most part, the forward logic of the anonymous hypothetical "speculation." As far as something like Black Monday occurring in between a planned announcement and the actual time it had quickly been moved up to, I can only quote Dear Abby and say: The baby was on time; it was the wedding that was late.
So look, ladies and gentlemen, our symbol is now gliding into view! I see no furious paddling from beneath the calm surface of the still waters; nothing is out of order.

October 13, 1987, New York Times, Salomon to Dismiss 12% of Staff And End Its Municipal Bond Role, by Robert J. Cole,

In a retrenchment expected to be followed by other leading Wall Street firms, Salomon Inc. said yesterday that it would dismiss 12 percent of its work force, close its municipal bond department and re-examine its space needs in New York City and around the world.

Only marginally profitable of late, Salomon, the nation's biggest investment house, has been hard hit by volatile trading markets and thin profit margins caused in part by increased competition from commercial banks in the United States and Europe. Facing similar pressures, several other Wall Street firms have disclosed that they, too, are taking hard looks at where to cut costs and what businesses they want to pursue. [ Page D8. ]

Mostly Better-Paid 

Salomon said that from now on it would concentrate on businesses with high profit margins, such as investment banking, where it already deals in mergers and acquisitions.

The firm's cutbacks will affect mostly higher-paid personnel, many of whom have seen their salaries skyrocket in the bullish environment for stocks, bonds and investment banking deals in the 1980's. The average compensation of those affected is $125,000 a year, including salary and bonus, suggesting that many people who will lose their jobs may have earned considerably more money.

The long-expected cutbacks at Salomon are designed to produce savings of $150 million a year. Those cutbacks--coupled with the firm's statement that it would reassess ''all of our space requirements'' - raised the question of whether the big investment firm would ever move to a new multi-million-dollar skyscraper it hoped to occupy in Manhattan's Columbus Circle in the next few years.

Asked if Salomon would go ahead with the mid-Manhattan project, across the street from Central Park, John H. Gutfreund, chairman and chief executive, replied, ''I have nothing to say on that today.''

News of the staff cuts, amounting to about 800 of Salomon's current payroll of more than 6,500 people, was officially relayed to employees yesterday, two weeks ahead of the planned announcement, after details became widely known last Friday. Two years ago, the firm had only 4,000 employees.

About 100 alone are being dismissed at Salomon's huge new offices near Buckingham Palace in London, where competition from international banks and investment firms in the Eurobond market has become increasingly sharp in the last year. Where Cuts Will Come

The municipal bond department's closing will affect an additional 200 additional employees, while yet another 200 jobs will end with the closing of several other weak departments, including those dealing in certificates of deposit, bankers' acceptances and commercial paper. The remaining cuts will be spread throughout the organization, affecting secretaries, securities traders and salespeople.


It said in its announcement that it would also ''phase out'' such operations as municipal bonds, commercial paper and short-term bank liabilities by the end of the year. The firm said it and expected to write off $60 million to $70 million in the fourth-quarter to cover costs related to the program.

The firm Salomon said it would also consider selling some of its other operations, including part of its commodities business, and use the money to buy back an undetermined amount of stock.

Salomon's action also raised the possibility that other leading Wall Street investment houses, each of which raises billions of dollars for American cities, would not find it profitable to continue operating their own municipal bond departments, which help American cities raise billions of dollars for uses ranging from building sewers to expanding highways.

Banks, which are allowed by law to participate in the municipal underwriting business, are believed to have stepped up the competition in the business by offering to raise money at less cost to borrowers. One reason banks can do so is that their salary schedules are considerably lower than those of Wall Street firms.

No Broad Retail Network

Insiders at Salomon maintained that Salomon might also be leaving the business because, unlike other Wall Street firms with thousands of offices around the country, it lacks a broad retail distribution set-up and is therefore at a major disadvantage in selling municipal bonds to investors.

Salomon's decision to pull out of the municipal bond business was greeted with a mixture of surprise and delight by its competitors. Executives at other firms said they were confident that the business would return to profitability soon, and that Salomon's action was shortsighted.

"In a very competitive business, it is never bad when a strong player gets sidelined," said the head of a municipal bond department at a major New York investment bank. "But this is a very unwise business decision. They decided to give up an entire franchise instead of hunkering down a little bit and being a lot more careful. Sure, the business is hurting right now, but there is no question that there will be a need for future capital financing by states and localities."

The executive pointed out that, by closing down its municipal bond operations, Salomon was also cutting itself off from an entree to officials who might purchase other financial assets - from government bonds to mortgage-backed securities - for the portfolios of their state or local pension funds.

Earlier, when asked why Salomon withdrew, Robert S. Salomon Jr., a managing director, said, ''We couldn't be all things to all people.''

Effect on Stock Cited

Salomon's reorganization comes less than two weeks after it arranged to place a 12 percent stake in the firm with the investor Warren E. Buffett, chairman of Berkshire Hathaway.

Some Wall Street analysts contended that one big reason for Salomon's move was to bolster its stock price as a result of the cost savings and thus discourage Ronald O. Perelman, the multimillionaire Manhattan investor and chairman of Revlon Inc., from making good on his threat to buy as much as 25 percent of the company.

Analysts contended, however, that Mr. Perelman might not buy any Salomon stock unless market conditions were "right," that is, unless the stock price were weak. In the wake of yesterday's announcement, Salomon stock rose only 37.5 cents, to slightly less than $35, probably not low enough to interest the Revlon chief.

In one of the few pleasant aspects of what Salomon is calling a "strategic reappraisal," one company insider remarked, "No one famous has been mentioned."

Rumors on Kaufman

This referred to rumors that the casualties might include Henry Kaufman, Salomon's chief economist, best known for his interest-rate forecasts and their effect on the stock market, and Gedale B. Horowitz, a millionaire Salomon executive and a key figure in saving New York from bankruptcy a few years ago. Although Salomon vehemently denied any such suggestion, insiders maintained that at least Mr. Horowitz's future role seemed doubtful, with the elimination of the municipal department he headed for many years.

Salomon said yesterday that it would place more emphasis on merchant banking, putting up its own money to help clients; on corporate restructuring, where it helps companies revamp their operations much as it did for itself, and on other, high-margin advisory work.

It said it would emphasize foreign stock deals and continue to concentrate on foreign bonds, such as Eurobonds, yen bonds and others denominated in such currencies as sterling, marks and Australian dollars.

As part of what it called a streamlining of operations, it created a new expense-control office under Bruce C. Carp, a director of Salomon Brothers, a unit of Salomon Inc. His main duties may be to keep employment within bounds and fight off requests for new equipment.

In an interview, Mr. Gutfreund noted that Salomon's growth in the last three years failed to have "strong enough constraints on the way we handled our expenses," particularly jobs. He noted, however, that Salomon would still have "selective hiring" and continue its program for young trainees.

Salomon leases four buildings in Manhattan, its headquarters at 1221 Avenue of the Americas, and three others downtown, at One and Two New York Plaza and at 55 Water Street, with some of the leases expiring in three years. It has other offices in London, Tokyo, Frankfurt and Zurich. Salomon said it had no plans to cut office space in London and no plans to cut either jobs or office space in Tokyo because it saw opportunities for "profitable growth" in Asia.

Although some analysts argued that Salomon's difficulties were special, Mr. Gutfreund remarked, "I think everybody in the industry is facing some of the problems we have; I can't imagine that ours are unique."


But this is what what John Gutfreund had said eight months prior. According to his thinking then, he still would have had 16 more months to make sense of his vast expenditures on infrastructure. But something had changed his mind...

February 11, 1987, New York Times, Salomon's Net Falls 38.6% in Quarter,

Salomon Inc., one of the nation's leading investment banking houses, reported yesterday that its fourth-quarter earnings fell 38.6 percent.


John H. Gutfreund, Salomon's chairman and chief executive, said yesterday that ''revenue gains failed to keep pace with cost increases attributable to staff and office expansion at Salomon Brothers' London, Tokyo and New York locations.'' He said that personnel at Salomon Brothers increased by 40 percent, to 6,000 people, during the year.

Benefits of Expansion Seen

Mr. Gutfreund added that the expansion should provide benefits for the firm, although it would take 18 months to two years for the new employees to begin earning their way.

Black Monday, 1987

In financial markets, Black Monday is the name given to Monday, October 19, 1987, when stock markets around the world crashed, shedding a huge value in a very short period. The crash began in Hong Kong, spread west through international time zones to Europe, hitting the United States after other markets had already declined by a significant margin. The Dow Jones Industrial Average (DJIA) dropped by 508 points to 1739 (22.6%).[1] By the end of October, stock markets in Hong Kong had fallen 45.8%, Australia 41.8%, Spain 31%, the United Kingdom 26.4%, the United States 22.68%, and Canada 22.5%. New Zealand's market was hit especially hard, falling about 60% from its 1987 peak, and taking several years to recover.[2] (The terms Black Monday and Black Tuesday are also applied to October 28 and 29, 1929, which occurred after Black Thursday on October 24, which started the Stock Market Crash of 1929. In Australia and New Zealand the 1987 crash is also referred to as Black Tuesday because of the timezone difference.)

The Black Monday decline was the largest one-day percentage decline in stock market history. Other large declines have occurred after periods of market closure, such as Saturday, December 12, 1914, when the DJIA fell 24.39%, ending the four month closure due to the outbreak of the First World War,[3] and Monday, September 17, 2001, the first day that the market was open following the September 11, 2001 attacks.

Interestingly, the DJIA was positive for the 1987 calendar year. It opened on January 2,1987, at 1,897 points and would close on December 31st, 1987, at 1,939 points. The DJIA would not regain its August 25, 1987 closing high of 2,722 points until almost two years later.

A degree of mystery is associated with the 1987 crash, and it has been labeled as a black swan event.[4] Important assumptions concerning human rationality, the efficient market hypothesis, and economic equilibrium were brought into question by the event. Debate as to the cause of the crash still continues many years after the event, with no firm conclusions reached.

In the wake of the crash, markets around the world were put on restricted trading primarily because sorting out the orders that had come in was beyond the computer technology of the time. This also gave the Federal Reserve and other central banks time to pump liquidity into the system to prevent a further downdraft. While pessimism reigned, the market bottomed on October 20.

The black swan theory or theory of black swan events is a metaphor that describes an event that is a surprise (to the observer), has a major effect, and after the fact is often inappropriately rationalized with the benefit of hindsight.

The theory was developed by Nassim Nicholas Taleb to explain:
The disproportionate role of high-profile, hard-to-predict, and rare events that are beyond the realm of normal expectations in history, science, finance, and technology
The non-computability of the probability of the consequential rare events using scientific methods (owing to the very nature of small probabilities)
The psychological biases that make people individually and collectively blind to uncertainty and unaware of the massive role of the rare event in historical affairs
Unlike the earlier philosophical "black swan problem," the "black swan theory" refers only to unexpected events of large magnitude and consequence and their dominant role in history. Such events, considered extreme outliers, collectively play vastly larger roles than regular occurrences.[1]
  1. April 9, 2007, Statistical Modeling, Causal Inference, and Social Science Blog, Nassim Taleb's The Black Swan, by Andrew Gelman,
  2. April 22, 2007, New York Times, The Black Swan: The Impact of the Highly Improbable,
  3. April 2007, Penguin Ltd. London. 1st ed., The Black Swan: The Impact of the Highly Improbable, by Nassim Nicholas Taleb,
  4. April 16, 2008, New York: Financial Times, Market Risk: Mispriced risk tests market faith in a prized formula, by Anuj Gangahar,
  5. December 2008, McKinsey Quarterly, Taking improbable events seriously: An interview with the author of The Black Swan, by Alan Webb,

Black Swan carriers [cite me] are accustomed to an experience of a reverse engineered order to life, where they assume they are bearers of any mastery and control. They call this order BackHistory, and celebrate this reality each year during BackHistory Month. They are by necessity good liars, and
accomplished actors, but not so good they don't leave tell-tale markers around. They feel superior to anyone who lacks this prescient experience of knowledge, and even more superior to anyone who is unaware of what they don't know.

Conversely, they are terrorfied they will be found out some day and killed by exposure. Whole armies of these people live in colonies called The Otherside, but they mingle easily and function well in the outside world too. They have secret code words, symbols and hand signals to get a witting point across, but also just to tease those they see as oblivious, as sincerity bores them. They're used to taking strict orders, never balk, and are always accountable, but on average are quite stupid, since they never get a chance to be properly tested. One theory goes that they are soulless organic portals serving up as grist for human millstones. Treated with the usual respect and some humor, the status quo is the best that can hoped for, since they can't know us, and we can't know them.

Black swans shouldn't be confused with indigo children, by the way, who are a class of gifted children and young adults who've come down to the earth to fulfill a special mission, usually a chance to sing on the X-Factor and make it into the finals; then, either a record contract, or a YouTube career, either would be alright.

McKinsey & Company's wikipedia has 127 footnotes, and I think this is the same McKinsey who has placed five cookies on my computer

Why am I the one to whom institutional memory has devolved?

May 26, 1989, The Washington Post, Salomon Brothers Agrees to SEC Censure; No Fines Levied in Case Involving Short-Selling During Crash,

Salomon Brothers Inc. has settled Securities and Exchange Commission allegations that the brokerage violated laws governing short-selling during the 1987 market crash and failed to promptly provide its books for inspection, the SEC said today.

Without admitting or denying guilt, Salomon agreed to be censured and to establish procedures to prevent short-selling violations in the future. It will not pay a fine.

Salomon is one of the biggest investment firms and the first to be implicated for short-sale abuses that many on Wall Street have privately said aggravated the spectacular drop in stock prices on Oct. 19, 1987, when the Dow Jones industrial average tumbled 508 points.

Short-selling is the sale of borrowed stock, used as a strategy by investors who believe the price of a stock will decline. Under rules governing short sales, the strategy cannot be used when a stock price already is falling.

"I view this as a signal to the securities industry that they had better start to improve their compliance ... to our examinations," said Lawrence Iason, the SEC's New York regional administrator. "If they don't, penalties in the future will be more severe."

Robert Salomon, spokesman for the company, was unavailable for comment.

While the short-selling allegations are serious, it is particularly unusual for the SEC to admonish a securities firm for failing to respond quickly to its investigation, experts say.

According to the SEC, Salomon made 70 short sales for its own account throughout the Black Monday crash. The sales involved 300,000 shares of stock in 19 New York Stock Exchange companies and carried a market value of $12.5 million.

"Those sales were executed in a declining market at a price below the last different reported price for that security on the NYSE," the SEC said.

Iason did not indicate how much profit Salomon had made from the sales. The 19 companies weren't identified.

Short selling was widely abused after the crash of 1929 by speculators who would relentlessly gang up on a target company, spreading lies about it to drive down the stock price.

Such abuses led the NYSE to implement the short-sale rule, also known as the uptick rule, which theoretically prevents short sellers from mercilessly depressing a stock price.

Under the rule, a short sale may be executed only in instances when the previous sale raised the stock's price or left it unchanged.

Shortly after the Oct. 19, 1987 stock market crash, the SEC and the NYSE began probing allegations that improper short selling may have contributed to the crash, though ultimately they reached no determination. It was not clear whether the Salomon allegations resulted from that investigation, but the SEC's examination of the brokerage began shortly after the crash.

Iason could not comment on whether other firms are being investigated for similar violations. @Slug: D10SA

And how did Salomon do in the October, 1987 crash? In a scene he left out of his best-seller, Michael Lewis, author of "Liar's Poker," put it this way

Excerpt from:

January 24, 1999, New York Times, How the Eggheads Cracked, by Michael Lewis,

Riding the Crash of '87 With Meriwether and His Young Professors

"The first time I saw a market panic up close was also the last time I had seen John Meriwether -- the stock-market crash of Oct. 19, 1987. I was working at Salomon Brothers, then the leading trading firm on Wall Street. A few yards to one side of me sat Salomon's C.E.O., John Gutfreund; a few yards to the other side sat Meriwether, the firm's most beguiling character. The stock market plummeted and the bond market soared that day as they had never done in anyone's experience, and the two men did extraordinary things.

I didn't appreciate what they had done until much later. You cannot really see a thing unless you know what you are looking for, and I did not know what I was looking for. I was so slow to grasp the importance of the scene that I failed to make use of it later in "Liar's Poker," the memoir I wrote about my Wall Street experience. But the events of those few hours were in many ways the most important I ever saw on Wall Street.

What happened in the stock-market crash was one of those transfers of authority that seem to occur in the financial marketplace every decade or so. The markets in a panic are like a country during a coup, and seen in retrospect that is how they were that day. One small group of people with its old, established way of looking at the world was hustled from its seat of power. Another small group of people with a new way of looking at the world was rising up to claim the throne. And it was all happening in a few thousand square feet at the top of a tall office building at the bottom of Manhattan.

John Gutfreund moved back and forth between his desk and the long, narrow row of government-bond traders, where he huddled with Craig Coats Jr., Salomon's head of government-bond trading. Together they decided that the world was coming to an end, as it came to an end in the Crash of 1929. The end of the world is good news for the bond market -- which is why it was soaring. Gutfreund and Coats decided to buy $2 billion worth of the newly issued 30-year United States Treasury bond. They were marvelous to watch, a pair of lions in their jungle. They did not stop to ask themselves, Why do we of all people on the planet enjoy the privilege of knowing what will happen next? They believed in their instincts. They had the nerve, the guts or whatever it was that distinguished a winner from a loser on a Wall Street trading floor in 1987.

And in truth they had been the winners of the 80's boom. Business Week had anointed Gutfreund the King of Wall Street. Coats was believed by many to be the model for the main character in a book then just published called "The Bonfire of the Vanities." Coats was tall and handsome and charismatic. He was everything that a bond trader in the 80's was supposed to be.

Except that he was wrong. The world was not coming to an end. Bond prices were not about to keep rising. The world would pretty much ignore the stock-market crash. Soon, Coats would arrive at work and find that his $2 billion of Treasury bonds had acquired a new name: the Whale. Traders near Coats started asking him about the Whale. As in, "How's that Whale today, Craig?" Or, "That Whale still beached?" In the end, the gut decision to buy the Whale cost Salomon Brothers $75 million.

Meanwhile, 20 yards away was Meriwether. When I think of people in American life who might have been like him, I think not of financial types but creative ones -- Harold Ross of the old New Yorker, say, or Quentin Tarantino. Meriwether was like a gifted editor or a brilliant director: he had a nose for unusual people and the ability to persuade them to run with their talents. Right beside him were his first protgs, four young men fresh from graduate schools -- Eric Rosenfeld, Larry Hilibrand, Greg Hawkins and Victor Haghani. Meriwether had taken it upon himself to set up a sort of underground railroad that ran from the finest graduate finance and math programs directly onto the Salomon trading floor. Robert Merton, the economist who himself would later become a consultant to Salomon Brothers and, later still, a partner at Long-Term Capital, complained that Meriwether was stealing an entire generation of academic talent.

No one back then really knew what to make of the "young professors." They were nothing like the others on the trading floor. They were physically unintimidating, their bodies merely life-support systems for their brains, which were in turn extensions of their computers. They were polite and mild-mannered and hesitant. When you asked them a simple question, they thought about it for eight months before they answered, and then their answer was so complicated you wished you had never asked. This was especially true if you asked a simple question about their business. Something as straightforward as "Why is this bond cheaper than that bond?" elicited a dissertation. They didn't think the same way about the markets as Craig Coats did or, for that matter, as anyone else on Wall Street did.

It turned out that there was a reason for this. On the surface, American finance was losing its mystique, what with ordinary people leaping into mutual funds, mortgage products and credit-card debt. But below the surface, a new and wider gap was opening between high finance and low finance. The old high finance was merely a bit mysterious; the new high finance was incomprehensible. The financial markets were spawning vastly complicated new instruments -- options, futures, swaps, mortgage bonds and more. Their complexity baffled laypeople, and still does, but created opportunities for those who could parse it. At the behest of John Meriwether, the young professors were reinventing finance, and redefining what it meant to be a bond trader. Their presence on the trading floor marked the end of anti-intellectualism in American financial life.

But at that moment of panic, the young professors did not fully appreciate their own powers. All their well-thought-out strategies, which had yielded them profits of perhaps $200 million over the first 10 months of 1987, wilted that October day in the heat of other people's madness. They lost at least $120 million, which was sufficient to ruin the quarterly earnings of the entire firm. Two years before, they were being paid $29,000 to teach Finance 101 to undergraduates. Now they had lost $120 million! And not just anybody's $120 million! One hundred twenty million dollars that belonged in part to some very large, very hairy men. They were unnerved, as you can imagine, until Meriwether convinced them that they should not be unnerved but energized. He told them to pick their two or three most promising trades and triple them.

They did it, of course. They paid special attention to one big trade. They sold short the newly issued 30-year U.S. Treasury bond of which Craig Coats had just purchased $2 billion and bought identical amounts of the 30-year bond the Treasury had issued three months before -- that is, a 29-year bond. (To "short" a stock or bond means to bet that its price will fall.) The young professors were not the first to see that the two bonds were nearly identical. But they were the first to have studied so meticulously the relationship between them. Newly issued Treasury bonds change hands more frequently than older ones. They acquire what is called a "liquidity premium," which is to say that professional bond traders pay a bit more for them because they are a bit easier to resell. In the panic, the premium on the 30-year bond became grotesquely large, and the young professors, or at any rate their computers, noticed. They laid a bet that the premium would shrink when the panic subsided.

But there was something else going on that had nothing to do with computers. The young professors weren't happy making money unless they could explain to themselves why they were making money. And if they couldn't find the reason for a market inefficiency they became suspicious and declined to bet on it. But when they stood up on Oct. 19, 1987, and peered out over their computers, they discovered the reason: everyone else was confused. Salomon's own long-bond trader, the very best in the business, was lost. Here was the guy who was meant to be the soul of reason in the government-bond markets, and he looked like a lab rat that had become lost in a maze. This brute with razor instincts, it turned out, relied on a cheat sheet that laid out the prices of old long bonds as the market moved. The move in the bond market during the panic had blown all these bonds right off his sheet. "He's moved beyond his intuition," one of the young professors thought. "He doesn't have the tools to cope. And if he doesn't have the tools, who does?" His confusion was an opportunity for the young professors to exploit.

Years later it would be difficult for them to recapture the thrill of this moment, and dozens of others like it. It was as if they had been granted a more evolved set of senses, and a sixth one to boot. And they had nerve: they were willing to put money where their theory was. Three weeks after the 1987 crash, when the markets calmed down, they cashed out of the Treasury bonds with a profit of $50 million. All in all, the bets they placed in the teeth of one of the greatest panics Wall Street had ever seen eventually made them more money than any bets they had ever made, perhaps $150 million altogether. By comparison, all of Merrill Lynch generated $391 million in profits that year. The lesson in this was not lost on the young professors: panic was good for business. The stupid things people did with money when they were frightened was an opportunity for more reasonable people to exploit. The young professors knew that in theory already; now they knew it in practice. It was a lesson they would regret during the next big panic, far bigger and more mysterious than the Crash of October 1987 -- the panic of August 1998. They would still be working together, but at Long-Term Capital Management.
The following article is from American Banker, and it's about Lewis Ranieri, who was a prominent Salomon Bros. broker in the 1980's. He is considered by a Wikipedian to be the "godfather" of mortgage finance for his role in pioneering securitization and mortgage-backed securities, although from the sound of him, what he really needs is a chat with the fairy godmother of refinance. You know when you hear that threatened tone coming through the message communication that some laws are going to get changed, and quick. Hr got his way but then he got fired and wound up fat in Florida to lick his wounds
I'll try and dig out some old research I once did on "Senator Pot Hole," Alphonse D'Amato, Republican of New York in the "80's and "90's. He was the lawmaker who threatened the banking industry with a law that would limit interest on credit card debt to 14 percent. Prior to this, bankers weren't much involved in politics, and not big donors to campaigns, but that changed radically. I'm not sure if D'Amato's effort represented a carrot or a stick, because the changes he spearheaded to the middle-class bankruptcy codes were a precursor to the FEMA internment camps ("What! Are there no work houses?" that you ask, yes, actually, there are.)
The executive who was also in league with the initiative was named Charles Cawley, I believe, who headed the MBNA Bank, and he claimed for himself the role of originator of those boutique, or prestige branded credit cards that gave a small percentage to one's chosen alma mater or favorite charity---so deadbeats weren't really his issue. But I think it was the family who sold him the bank, an old-money, Jewish family named Fisher (Is Fisher Island ringing a bell?) who majorly funded military hospitals for wounded war personnel; and they had some sort of weird, tragic young death pattern within the family a well. Oh well, maybe sacrificial victim is just me.
D'Amato had many interesting connections too. The woman he married, Katuria Smith, played a role as a special broker for tenants interested in leases in the World Trade Center towers. Just getting a lunch with her was a big deal. The widely believed hype by outsiders was that you had to have "connections" in order to get in there. In fact, her gatekeeper role was part of the systematic depopulating of the tenancy over an extended time, without the appearance of such---kind of like being kept waiting in a big crowd held back behind the velvet rope at Studio54, only to be let inside to find yourself in a place that's almost totally empty.

May 20, 1986, American Banker, Ranieri warns of a mortgage securities "fiasco," by David Zigas,
Lewis Ranieri, managing director of Salomon Brothers Inc., said Monday that past pricing experience in the mortgage-backed securities market "has gone out the window' with the unprecedented surge in home refinancings in recent months.

Noting that spreads of mortgage securities have gone from a range of 90 to 100 points over the Treasury curve to 200 points over the last four or five months, Mr. Ranieri characterized the situation as a "fiasco' resulting from "an absolute lack of performance.' The market, he added, appears to be acting on the "enormous assumption' that the current situation will prevail for a long period.

"The market was never designed to handle the refinancing of 50% to 60% of every [mortgage] that's ever been issued,' he said. "It was basically designed for new construction and people buying new homes. Everyone underestimated the cost of the lack of call protection' inherent in mortgage securities, "and over the [recent] period mortgage securities have performed very poorly.'

The pricing of current coupon mortgage securities may now be suffering because of recent experience "as the pendulum swings the other way,' said Mr. Ranieri. While high-coupon securities such as the Government National Mortgage Association 13s "unquestionably' did not carry a sufficient penalty in their prices to account for prepayment risk, he said too much of a discount may be built into the Ginnie Mae 9s.

"The market is going merrilly along recasting prices for a protracted period of time, but we don't know what the final outcome will be,' he cautioned. "The market has gone from making presumptions of prepayment rates of 6% or 7% to rates of 30% and is using the past two months' numbers and projecting them on a straight line into the future.'

Mr. Ranieri said the market appears to be assuming that rates will remain the same for a couple of years and that everybody who can refinance will do so. "If rates go back up next year,' he added, current mortgage securities pricing "would be totally wrong.'

As a result, he said, he and others in the housing financing industry are pressing for mortgages that would impose a penalty on homeowners who refinance their homes. The penalty would not apply in cases in which the mortgages were prepaid because the homeowner sold the house.

Individual lenders are free to originate such mortgages, Mr. Ranieri noted, but they cannot be sold into the secondary mortgage markets because federal agencies such as Ginnie Mae will not accept them.

"You don't want to inhibit normal housing activity, because that's built into the average 12-year life' of mortgage-backed securities, he said. "The only thing there should be a penalty for is when you want to prepay your house just to save the debt service. Because a certain percentage are refinancing, now everybody is being charged 100 basis points more. Everybody is being charged for what a handful of people want to do.'

Wall Street could offer "a much better investment product,' said Mr. Ranieri, if two kinds of mortgages were available: current loans with no penalty for refinancings, and lower-interest loans that would impose a premium for refinancings.

"I'm all for helping the homeowner, but how is the homeowner benefited if the system is bankrupted?' Mr. Ranieri asked.

January 27, 2002, New York Times, Update / Lewis Ranieri; A Mortgage Man Charts New Seas, by Riva D. Atlas,

THESE days, everyone in finance and many people on Main Street know what a mortgage-backed security is. It was Lewis Ranieri, as a trader at Salomon Brothers in the 1980's, who famously worked to develop the American market for these mortgage packages, which are resold as securities by Fannie Mae and many banks and make mortgages cheaper for homeowners.

But the financier, now 55, left that arena long ago. He is out on his own, an investor in the health care, technology, boating and financial services industries.

Mr. Ranieri, who grew up in Bayside, Queens, started in 1968 working the night shift in the mailroom at Salomon Brothers, then rose to become the head of its mortgage bond group. In 1987, he was abruptly fired by Salomon's chairman, John H. Gutfreund, but quickly built a second successful career, starting his own investment firm, Hyperion Partners, in Uniondale, N.Y. Two years ago, he and his partners made a fortune when they sold Bank United, a Texas savings institution he had acquired in the savings-and-loan crisis of the late 1980's, to Washington Mutual for $1.5 billion.

Since then, Mr. Ranieri has largely dropped out of the public eye, but he said the other day that he had been quite busy. "Only some of the stuff we own happens to be public," he said. He acquired American Marine Holdings, which builds high-performance boats and fishing boats, in the late 1980's, and he is increasingly fascinated by health care, particularly companies that use technology to shift medical treatments like dialysis to the home from the hospital. He is an investor in a large home health care company in Britain, which he declined to name, and has been making smaller investments in this area in the United States.

Mr. Ranieri said he hoped to pick up some bargains among companies hurt by the economic downturn. While he would not name names, he said he was looking at credit card and mortgage companies, as well as "some areas of the technology and telecommunications world that you wouldn't normally associate with me."

He raised millions for Rick Lazio's unsuccessful campaign for United States Senator from New York in 2000, in part because he wanted to support a candidate from Long Island, where he lives and works. He joined the board of Computer Associates, also based on Long Island, for much the same reason and, he said, because he was genuinely interested in technology. "People associate me with mortgages," he said, ''but I've been a techie all my life."

I like the following story so much because of the part where the LA Times says this securities' fraudster who operated for years out of an upmarket stockbrokerage was "exposed, almost by chance during an unrelated FBI investigation of organized crime," which I can't help but read as saying "he was exposed, almost by chance during an unrelated FBI Ponzi scheme undertaken with organized crime figures." I mean, come on---it was Boca! Was there a Wendy's next door? Generosa Pope lived in South Florida!
Then there's the part about a troop of Boy Scouts---who must have been purchasing financial instruments to win their merit badges---taken in by something being "pitched as a sophisticated options-trading system. Investors were advised that it was best they keep their participation secret even from their lawyers and accountants, lest word spread and rival traders enter the market to throw off the program's painstaking calculations." Is there a badge for best response to an email from a Nigerian Christian tribal princess who just wants you to hold a large sum of money for a short while?
Made for TV infancy narratives like this make me wonder if even Madoff wasn't made up, or given an assist, for a share of the plunder.

March 17, 1987, Los Angeles Times, Insider Trading : Wall Street Discipline Under Fire, by Michael A, Hiltzik,

NEW YORK — Even today, after six years of court proceedings, people wonder how Dennis E. Greenman managed to pull off one of the largest investment frauds in history under the noses of his superiors at three major Wall Street firms.

At each one--Merrill Lynch, Paine Webber and A. G. Becker--Greenman rose rapidly to become a star stockbroker. What his superiors at the firms did not know, but government regulators say they should have been able to detect routinely, was that Greenman was operating a massive con game based on trading in stock options.

By the time he was exposed, almost by chance during an unrelated FBI investigation of organized crime in 1981, Greenman had taken about 400 investors in South Florida--including a branch of the Boy Scouts of America, several churches and many prominent individuals--for nearly $100 million.

Paine Webber's View

Genius, master forger, supreme con artist: That is the picture of Dennis Greenman that emerged from his employers' defenses against the scores of lawsuits that were filed against them. Paine Webber, the firm where Greenman's scheme matured, maintains that he was so devious that he could outsmart even the most sophisticated internal controls.

The Securities and Exchange Commission disagrees. In proceedings that led to severe disciplinary actions against two of his supervisors, the agency said that Greenman left a trail that his supervisors simply ignored. It pointed to many customer accounts with identical addresses, some of them at post-office boxes, to a series of customer complaints and to reports that his sales presentations claimed preposterously high returns on investments.

Implicit in the SEC's charges, as well as in the score of customer lawsuits over the affair, is an important question: If the Wall Street firms could not catch Dennis Greenman, whom can they catch?

Under Greater Scrutiny

The securities industry's system of in-house surveillance and discipline, known generally as compliance, has never been under as much scrutiny as it is today.

Under the securities regulations established by Congress in the mid-1930s, the SEC and the stock exchange require investment firms to supervise their employees closely and to respond decisively to customer complaints and other signs of wrongdoing, but the system is pockmarked with countless conflicts of interest and other shortcomings.

Those shortcomings have perhaps never been as obvious as they are now. The parade of top Wall Street executives being marched through federal courtrooms on insider-trading charges has raised serious questions about the securities firms' ability and willingness to monitor their own employees' activities adequately .

Regulators, private attorneys, and investment executives (many of whom agreed to be interviewed on condition of anonymity) say that although the technology for in-house compliance investigations--including computers that can sound the alert on suspicious trading activity--has improved rapidly, the temptations that employees face have multiplied faster.

Not only does the superheated mergers-and-acquisitions market offer the chance to make millions of dollars in profits from a single illicit transaction, the unprecedented complexity of the markets gives unscrupulous brokers, traders and investment bankers the opportunity to commit crimes in nearly undetectable ways.

"As the industry's expanded, with more customers, more products, more strategies," said one prominent regulator, "that's placed a greater burden on compliance departments, and in some ways, an excessive burden."

Once used chiefly to monitor contacts between retail brokers and their individual clients, compliance systems at large, multiple-services firms now cover a variety of businesses that tax the comprehension even of some participants, let alone enforcement personnel.

"All the systems fall short of perfection," said O. Ray Vass, compliance director at Merrill Lynch & Co., which last week fired its London chief of mergers and acquisitions for alleged insider trading for two years. The nominal secrecy of merger negotiations, for example, works against compliance officers. "You don't always know what the investment banking department knows, so you may not even be able to recognize (suspicious trading activity)."

Foreign Markets Used

Lawbreakers can now use the international trading markets to disguise their transactions and, in effect, hide them from surveillance.

Without subpoena power or the ability to monitor employee trading that takes place off their premises, securities firms say, their ability to unearth illicit trading is limited.

Few regulators, for example, fault any of the three Wall Street firms that employed Dennis B. Levine for failing to notice for five years that he was building a $12-million nest egg by taking advantage of inside information: Levine did all of his illegal trading through offshore bank accounts opened under pseudonyms, and often used pay telephones for delicate conversations.

"If people are running around the world with suitcases full of cash, it's hard to see how an in-house surveillance program will pick that up," said former SEC Commissioner Roberta Karmel, now a private attorney and a member of a New York Stock Exchange panel that is reviewing regulatory issues.

Said the general counsel to one major firm that prides itself on strict compliance procedures but has faced SEC charges over at least one embarrassing breach of its own rules: "I'd never bet my life that I've insured the firm against all violations."

Yet regulators and lawmakers alike have faulted the firms for not exercising all the powers they do have, a failure they say has allowed a freewheeling atmosphere to thrive on Wall Street.

Warning on Discipline

In a speech March 3, Rep. John D. Dingell (D.-Mich.), one of the industry's congressional overseers, upbraided a group of securities executives for lax supervision. "If you don't immediately set to putting your houses in order, it will be done for and to you," he said.

The New York Stock Exchange, to which the federal rules assign extensive supervisory responsibilities, also reacted like a stern mother lecturing wayward children to the insider-trading arrests last month of three top securities traders from the firms of Kidder, Peabody & Co. and Goldman, Sachs & Co.

In a special bulletin, the Big Board ordered its member firms to improve their compliance procedures. The firms were told they must certify quarterly that all their employees' trading has been scrutinized for wrongdoing, must report all customer complaint letters and report to the exchange annually all compliance problems and their resolutions. The exchange is also developing a qualifying examination for compliance directors, and has said it will fine any firm that does not respond promptly to its requests for information in disciplinary cases.

Still, it is a rare Wall Street firm where a compliance official's word is law, particularly when the subject of an investigation is in a high position or a "top producer," a broker earning exceptionally high commissions.

"Big producers do get more chances," said the compliance director at one leading firm. "I used to think they didn't, but that was before I'd been beaten up as many times as I have been over the issue."

Some Alarms Ignored

Others say that the informal information network among compliance officials often identifies troublesome individuals who are moving from firm to firm, but such intelligence is often disregarded by brokerage executives thirsting after a top producer.

"I've heard the most cockamamie excuses for hiring some people," said one official. "The production executives will say someone just had a 'personality problem' with his former boss, for example. Often a sales manager thinks he can better supervise someone who's had a problem at another firm."

In fact, some of the most conspicuous compliance breakdowns have involved so-called big producers. In one case, a fine detective job by a firm's compliance staff apparently was undermined by superiors' kid-gloves treatment of Peter Brant, a Kidder, Peabody & Co. broker who in 1983 entered into an illicit information-sharing arrangement with R. Foster Winans, columnist for the Wall Street Journal.

Brant later pleaded guilty to fraud charges. Winans was tried and found guilty; his conviction of securities fraud has been appealed to the U.S. Supreme Court.

Brant was Kidder, Peabody's top broker in 1983, when he racked up $1.8 million in commissions. Toward the end of that year, the firm's compliance department noticed that Brant's--and Kidder's--biggest retail brokerage customer had been profiting consistently from trading in stocks one day before they were mentioned in the newspaper's daily "Heard on the Street" column of market gossip and analysis. In fact, Winans was sharing the column's contents with Brant, who was tipping his client.

Client Switched Brokers

Kidder's general counsel, Robert A. Krantz Jr., later testified that he visited the client, an attorney named David W. C. Clark, to ask him the source of his trading information. Somewhat to Krantz's consternation, Clark told him he would simply take his business--worth $100,000 a month to Brant--elsewhere.

That day, Krantz went to visit Brant, but did not ask him whether he knew the source of Clark's information or if he had participated in the trading himself. Instead, he explained his visit as "a little bit of handholding," to commiserate with Brant for having provoked his best customer to leave the firm.

At one point, Brant asked whether Krantz saw any reason to report the suspicious trading to the SEC.

"I said no, I did not, on the basis of what we saw," Krantz testified. "I didn't see any basis for reporting anything to the SEC at that point."

Krantz had already received a memo from Kidder's outside law firm, Sullivan & Cromwell, saying that any trading linked to the Wall Street Journal column was probably illegal, but he testified that he did not tell Brant of the memo's conclusion.

Dennis Greenman's victims contended in court that Greenman's status as a top salesman at the firms of Merrill Lynch, Paine Webber and A. G. Becker contributed to their failure to cut short his fraudulent activities. Evidence in the case suggests that Greenman developed his scheme while at Merrill Lynch, but undertook most of the illegal activities while at Paine Webber and an independent investment firm associated with Becker that has since been dissolved.
Settlement Is Challenged

Greenman, now reportedly selling computer software in South Florida, could not be reached for comment. Ultimately, Merrill Lynch, Paine Webber, and Becker participated in a $23-million, class-action settlement with his victims. Some investors are challenging that settlement in federal appeals court in Atlanta.

Greenman's scheme involved what was pitched as a sophisticated options-trading system. Investors were advised that it was best they keep their participation secret even from their lawyers and accountants, lest word spread and rival traders enter the market to throw off the program's painstaking calculations.

"He's a very bright fellow," said Hugo Black Jr., a Miami attorney who supervised numerous consolidated lawsuits against Greenman. "He looks like a nerd, comes across as very credible. He went to jail and was a model prisoner, first chance of parole he got out . . . He's still wandering around South Florida while most of his customers are waiting to get their money back."

Investigators found that Greenman's system was a type of Ponzi scheme, in which early investors are paid out of the contributions of later investors.

Greenman was investing some of the money in options, but he was taking tremendous losses. Toward the end of the scheme, when Greenman was trading through Becker, his options volume was so large that traders on the Chicago Board Options Exchange openly called his floor broker "Jaws."

Unanswered Question

Whether that should have alerted Becker executives to something gone awry in Greenman's program is one question that may never be answered, since the tentative settlement has put an end to court-supervised fact-finding.

Lawyers for the plaintiffs say that they were prepared to show that Paine Webber had grown so suspicious of Greenman that it was about to fire him when he quit in 1980 to form a private firm and do business through Becker.

"We alleged that he flew the coop just before Paine Webber was going to chop his head off," said Black, receiver for the investment firm through which Greenman was associated with Becker. "Circumstantial evidence pointed to the fact that Paine Webber had knowledge."

Paine Webber denies that. It says that Greenman was negotiating to leave the firm for almost a year before his departure in May, 1980. Paine Webber insists, instead, that Greenman's smoke screen was so sophisticated that no one got suspicious.

"Greenman was a genius," said one Paine Webber attorney. "Put a piece of paper in front of him and he'd forge a signature on it. What he did was extraordinarily difficult to pick up." The firm contended that on one or two occasions when superiors did question the trading in one of his accounts, Greenman glibly diverted their suspicions.

'Well Nigh Perfect'

"Usually, when you're dealing with a bad (salesman), he'll screw up some trading," said the firm's lawyer, "but Greenman did all that well nigh perfectly."

The SEC, in administrative proceedings against Philip Huber, Greenman's immediate supervisor at Paine Webber, and Robert D. Punch, his regional manager, charged that the supervisors ignored opportunities to follow up on several customer complaints about losses. Other informants had told the firm that Greenman was making preposterous claims for his program.

In the end, the SEC permanently barred Huber from holding any supervisory job in the securities industry, and suspended Punch from supervisory jobs for six months. Administrative proceedings against a third Paine Webber supervisor are still in progress, the SEC says.

The commission's dual role, as both top cop and overseer of Wall Street compliance departments, creates some conflicts in supervision, officials say. In fact, the relationships among the SEC, the stock exchanges and the brokerage firms create a mix of incentives and disincentives for thorough internal probing.

Perhaps the chief incentive is that a vigorous compliance effort will help dissuade the SEC from bringing civil charges against a firm when one or more of its employees are violating the rules. In such cases, the SEC can take one of three steps: It can absolve the firm of responsibility and charge only the employees; it can charge the firm with "failure to supervise" its workers, a relatively mild sanction carrying a modest fine; or it can charge the firm with substantive violations of the law. The third action can expose a firm to costly litigation and high damage claims.

Fewer Firms Prosecuted

In recent years, however, the SEC has been less willing to bring substantive charges against firms for the misconduct of employees. One reason is a recognition that companies with perhaps tens of thousands of employees cannot be expected to catch everything. Another is the difficulty of making such charges stick.

Just last month, a federal court jury in Philadelphia acquitted Shearson Lehman Bros., a unit of American Express Co., of complicity in a money-laundering scheme operated by workers in its branch in that city. The other defendants, including two Shearson employees, were convicted.

On the other hand, thorough internal investigations have a way of producing documentary evidence that regulators or plaintiffs could use in civil suits against a firm, and that possibility serves as a disincentive for firms to investigate misconduct in any formal way.

"Firms have become very defensive with the regulators," said one regulatory official, "because lurking in the background is all this litigation. They've devoted more of their energy to anticipating lawsuits than to ongoing programs to anticipate problems."

The securities industry and the SEC, in fact, have engaged in a long tug-of-war over how much internal documentation can be withheld from authorities.

Dispute Over Evidence

"There have in the past been questions about internal reports," said Dennis Shea, the SEC's assistant director of market regulation. "We've consistently believed that we ought to have access to them, and generally, we get it."

"That's a Catch-22," said Theodore A. Levine, a former associate SEC enforcement director who now represents many brokerages as a private attorney. "There ought to be a qualified privilege for self-evaluation material" to allow some of it to be withheld, he says.

Otherwise, he said, firms may operate their compliance departments so as to protect themselves from litigation, and the result could be much less disciplined supervision of workers. Some firms might deal with employees orally rather than in writing, for instance, and this would undermine any attempt to foster an unambiguous atmosphere of supervision.

Regulators and securities executives believe that this year's rash of insider-trading cases will lead to major changes in the compliance responsibilities of the firms, the exchanges and the SEC, perhaps with more pressure to monitor the industry imposed on the SEC and exchanges. Even now, the New York Stock Exchange and other markets, equipped with sophisticated programs to identify unusual trading practices, provide the SEC with the initial evidence on many major insider cases.

The stock exchanges are concerned, however, that these supervisory responsibilities may be incompatible with a world in which they compete with each other for the business of the very firms they may be penalizing.

So far, the exchanges say, they are still tightening up on supervision of securities firms. The New York Stock Exchange, for example, recently fined Kidder, Peabody $300,000, one of its largest fines in history, for years of lax customer-account supervision. Among other things, the firm was charged with using customer securities as collateral for its own borrowings.

In that case, the Big Board took the unusual step of charging two top executives with contributing to the violations. They were John T. Roche, chief operating officer of the 120-year-old firm, and Gerard A. Miller, a former director of operations. Both men were fined $25,000; Roche was censured and Miller was barred for six months from holding a supervisory position at any NYSE member firm.

January 10, 1988, New York Times, Too Far, Too Fast; Salomon Brothers' John Gutfreund, by James Sterngold,

LAST MONTH, JOHN H. GUTFREUND, the chairman and chief executive of Salomon Brothers, Wall Street's largest investment banking house, completed the grueling task of fixing the annual bonuses for his senior managers. There was a lot of bad news to be passed around, including that of his own compensation. He told his executives he would take a $2 million pay cut.

Last year, the most tumultuous of Salomon's 78 years in business, the concern became a glaring corporate victim of Wall Street's extended mad rush to expand. In 1985, its peak year, the company brought in $760 million in pretax profits, more than the entire securities industry earned in 1978. Riding the crest, John Gutfreund planned to take Salomon out of its longtime offices at One New York Plaza, in lower Manhattan, and erect what was to have been the city's most glittery new office tower as its headquarters, uptown, on Columbus Circle. The project was abandoned last month.

The excesses of the last five years caught up with all of the investment world last fall, of course. Once-proud E.F. Hutton was put up for auction and sold to Shearson Lehman Brothers; some 6,000 of its employees are expected to be dismissed. Several others have initiated major cutbacks. But no firm's problems are more emblematic of the era drawing to a close than those of the giant Salomon, whose decline was evident even before the stock market crashed.

"The world changed in some fundamental ways, and most of us were not on top of it," Gutfreund admits. "We were dragged into the modern world."

In September, [1987] after months of dwindling profits, Salomon was forced to fend off a potential takeover bid from a cosmetics company. And though it was not disclosed at the time, John Gutfreund was so affronted by the prospect of working for what he considered a hostile interloper - Revlon Inc. - that he informed Salomon's board of directors he was prepared to resign and expected most of Salomon's senior management to depart with him.

Just two weeks later, seeking urgently to cut expenses and recoup needed capital, Salomon, the nation's largest underwriter of municipal securities, suddenly dropped out of the municipal business. At the same time, its commercial paper division, which dealt in short-term corporate securities, was shut down as well, leaving major customers, such as the International Business Machines Corporation and Mobil Oil, to find another broker to raise their short-term capital.

Then Black Monday arrived. When the stock market plunged 508 points on Oct. 19, Salomon lost $75 million in after-tax earnings for the month.

Gutfreund had no choice; bonuses of top executives were slashed. At his own suggestion, the 58-year-old chairman, who earned $3.2 million in 1986, took no bonus at all. He received his $300,000 annual salary, plus $800,000 of cash deferred from 1984. But in lieu of a bonus, he received 300,000 options for Salomon stock, exercisable at $18.125, the closing price on the day they were awarded. The options represented optimism; they are worthless unless Gutfreund can boost the company's earnings and its share price.

The confidence is characteristic of a man whose tactics in taking advantage of the bull markets of the 1980's brought him the title ''The King of Wall Street,'' when he was featured on the cover of Business Week magazine. Beginning in 1978, when he assumed control of Salomon Brothers as managing partner, Gutfreund pursued a strategy of aggressive expansion, both in the services Salomon provided for its customers, and in the role of the firm in the global marketplace. Ten years ago, Salomon was a privately held house with $208.7 million in capital, specializing in bond trading. Under Gutfreund's stewardship, the firm became publicly owned, created a mortgage securities division, expanded into mergers and acquisitions, built its foreign currency exchange operation and opened offices in Tokyo, Zurich and Frankfurt. By 1987, its capital - the actual store of funds with which the company operates - reached $3.4 billion, and it had become investment banker to America's largest corporations. During the same period, many houses on Wall Street grew rapidly and suffered for it; Salomon's dominance, however, made its fall most dramatic.

Gutfreund takes responsibility for many of Salomon's woes. But in the wake of the recent calamities, his is a businessman's repentance, tempered by renewed determination. "I don't have many regrets," he says. "I regret mistakes, particularly those that damage other people, and we've all made some of those. But I'm not sad about change. It's part of my job."

EVEN IN THE HARD-EDGED environment of Wall Street, silver-haired, portly John Gutfreund (pronounced GOOD-friend) stands out as an imposing figure. Supremely self-confident, intellectual, ferociously competitive, he is a throwback to the days on Wall Street when partnerships reigned and the personality of one man could dominate a firm. "There are a lot of people here, I mean senior people, who measure their day by whether John smiles at them," says one senior executive.

Salomon is, above all, a trading house. Its primary business has always been in buying and selling a range of stocks and bonds, hoping for a profit on each transaction. Originally, this was about all the firm did, before it gained entree to the more lucrative world of securities underwriting - the business of issuing and selling new securities for companies wishing to raise capital. (Salomon's clients are institutions and corporations; it does not have a retail-branch system that deals with individuals.) For decades, there had been a two-tier order on the Street. On top were an elite group of firms - Morgan Stanley and First Boston, for instance - who had longstanding connections with America's largest industrial companies and arranged most of their financing. Beneath them were a range of securities houses, Salomon Brothers among them, catering to the needs of smaller companies and trading the securities underwritten by the more prestigious firms.

By the 1960's, however, major corporations realized they could save money by encouraging competition for their business. And firms that had been relegated to securities trading found that their practiced skills at pricing stocks and bonds enabled them to woo corporate clients effectively. Gambling with greater confidence on thinner profit margins, they undercut their more prestigious rivals. This allowed Salomon Brothers to vault into the first ranks of Wall Street underwriters. It made Salomon's syndicate department, which organizes underwritings, into a powerful entity within the firm. The head of that department was John Gutfreund.

Gutfreund talks easily about politics and global economics, sometimes in an affected British accent. About business, he will field even the most critical question sharply, but he bristles with his trademark impatience when he's confronted. Surprisingly, he shies away from talking about himself, though when he finally does, it is in a direct and plain-spoken fashion.

He grew up in the suburbs of New York City, a young man with an interest in drama and a leaning toward liberal politics. His father, the owner of a prosperous trucking company, was a golfing buddy of William (Billy) Salomon, the son of one of the founders of the firm that bore his name. Gutfreund graduated from Oberlin College, in Ohio, in 1951, with a degree in English, and considered teaching literature. But after two years in the Army, he joined Salomon Brothers, at Billy Salomon's invitation, 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.

Today, Gutfreund and his second wife, Susan, a former flight attendant, live in palatial quarters on Fifth Avenue, with their 2-year-old son John Peter. In fact, Gutfreund has undergone a transformation since he was married in February 1981. He and his wife have become prominent figures in New York society, something the old John Gutfreund shunned.

''When I made John heir apparent, he was the most conservative person in the partnership, no question,'' says Billy Salomon. ''Frugal is an understatement. If you turned in an expense account and you had taken a client to Caravelle for dinner or something, John would ask you if it was really necessary. I thought that was a good example for the boys.''

Though Gutfreund's appearance is polished, he is most at ease on the trading floor, peeling off crude expletives with the traders who work for him. His office - a tiny one, by Wall Street standards - functions principally as a retreat for private chats or interviews and a place to store his cigars, kept in an antique chest. There is no desk, just a polished-wood table with some photos of his family and a romantic drawing of his wife, her face surrounded by a cloud of wavy hair. Above it on the wall is a small photo of Abraham Lincoln.

He spends most of his time at a large desk, overseeing one end of Salomon's gymnasium-sized bond trading room, probably the most accessible chairman of any concern on Wall Street. The nitty-gritty of dealmaking, waging war with the weapons of quarters and eighths of a point, remains John Gutfreund's delight.

In October, for instance, co-underwriting a huge offering of shares in British Petroleum, Salomon took a $70 million shellacking when the deal was torpedoed by the stock market crash. Along with its co-underwriters, Salomon had guaranteed the offering would be completed at the equivalent of 330 pence per share. After Black Monday, the share price fell by 20 percent, leaving the underwriters to make up the difference. But even that painful episode had a bright side for Gutfreund. With a deft bit of financial footwork, selling chunks of shares at times when the market seemed receptive, Salomon managed to diminish its potential loss and free the capital for other endeavors.

"I got great pleasure from being involved in that," he says. "Salomon is a trading house and I was a trader. It was fascinating to talk to Vic Cohn [ the head of Salomon's syndicate department ] about his strategy on what looked like it could have been an $80 million loss. To hold the shares? Sell them back to the market? How did we diminish our liability? It was just fascinating."

BEGUN TWO DECADES AGO, THE shift from what is known as "relationship banking," in which a corporation gives most of its business to an investment banker it has known for years, to ''transactional banking,'' in which investment houses compete for clients on a deal-by-deal basis, accelerated in the deregulated markets of the 1970's and 80's. In the race to win deals, profit margins were continually driven lower, and the only way for investment banks to make up for the decline was to increase their volume and to find new businesses, at home and abroad, where profit margins were higher.

Early in his tenure, Gutfreund recognized that the trend toward transactional banking, coupled with the explosive growth in the financial markets, would require investment houses to build greater stores of capital; more and more, the ability to compete was being defined by financial heft. In 1981, seeking a larger and more permanent source of capital, Gutfreund agreed to sell Salomon for $554 million to Philipp Brothers, then one of the world's largest commodities traders. Gutfreund became chairman of the Salomon Brothers subsidiary and co-chief executive (along with the Philipp Brothers chairman, David Tendler) of the newly formed holding company, Phibro-Salomon Inc.

The deal was worked out in total secrecy over a matter of weeks, then was revealed as a virtual fait accompli to Salomon's stunned partners. It was a pivotal and still-controversial move, particularly shocking because Gutfreund had previously declared his opposition to abandoning the partnership structure and assuming a corporate one. And though all the partners became rich in the bargain, for one, at least, the experience was embittering. Billy Salomon, not having been informed of the deal until after it was finished, was furious. And he had reason to be. He received less than a $10 million share in the transaction, compared with more than $30 million for Gutfreund.

It quickly became clear that the sale had its pluses and minuses. First, Gutfreund had sold cheap. Salomon received a price equal to slightly less than twice the firm's book value - the capital its partners had invested in it. The same year, by comparison, Prudential Insurance paid more than twice book for Bache, and Shearson Loeb Rhodes received 3.4 times book from American Express. Still, the access to Phibro's huge capital resources enabled Salomon to deal in larger volume, take larger risks and operate on lower profit margins.

Meanwhile, the commodities markets went through a convulsion. With the success of the Federal Reserve's battle against inflation in the early 1980's, the price of everything from gold to crude oil tumbled, and Phibro's profits followed. In 1983, Phibro's traders earned $307 million before taxes; Salomon's earned $463 million, and they began clamoring for control over the combined company, to which they felt their financial muscle entitled them.

The stage was set for the coup. Gutfreund, who by then had mastered the art of corporate warfare, waited for his rival to make a mistake.

In mid-1984, sensing that the arrangement between the concerns was unraveling, David Tendler attempted to buy back the commodities business from the combined company. He could not find financing, however, and the proposal died.

The mopping-up operation went swiftly. Gutfreund, arguing that his Salomon Brothers unit was producing most of the company's profits, lobbied the board of the holding company to be named sole chief executive officer. When he succeeded, Tendler resigned. Within a year, the Philipp Brothers trading unit was slashed to a third of its size. The name of the holding company was changed from Phibro-Salomon to Salomon Inc.

"I was never out to consciously usurp Tendler's power or run a commodities company," Gutfreund says. "Unfortunately, it became my job to do that. Tendler played a weak hand. When you do that and you lose, you're out."

WHAT FOLLOWED WERE GUTFREUND'S best years. Salomon became the undisputed leader in a number of low margin-high volume businesses, such as the underwriting of corporate bonds and trading in government securities and large blocks of stock. At a time when all of the major Wall Street firms, as well as the major American commercial banks, were moving aggressively abroad, Salomon, too, added staff in Europe and Asia and committed capital to businesses overseas. It was an era of seemingly uninhibited growth, fueled by bull runs in the stock and bond markets.

In 1986, however, Salomon's expenses shot up an astounding 40 percent, and it was clear that not only had the company grown too big, too fast, but it had grown chaotically. Until earlier this year, for example, Salomon did not even have a chief financial officer to monitor its nearly $20 billion in daily transactions. Operations were being duplicated in different parts of the organization.

''Central control was lacking,'' Gutfreund concedes. ''The business has gotten beyond my simple abilities.''

In the fall of 1986, Gutfreund formed an Office of the Chairman; he remained chairman, but promoted a new generation of managers to share with him important responsibilities. His selections made it clear that he had lost confidence in some of his senior managers, and the shifts unsettled Salomon's executive ranks.

The three men Gutfreund named to join him were Thomas W. Strauss, who became president; William J. Voute, who was named vice chairman, and Lewis S. Ranieri, also named a vice chairman, but who himself would be forced out within a year. Left out was, among others, Salomon's highly respected economist and internal conscience, Henry Kaufman, vice chairman of Salomon Inc. Kaufman quit the board of Salomon Inc., though he remained head of its prestigious research department until he resigned from the company last month. [Dec. 1987]

Gutfreund takes the blame for the weak management structure; his greatest failure, he says, was in not being quick enough to move out older managers, a fault many within Salomon Brothers acknowledge. ''I'm too paternalistic,'' he says. ''My problem is that I am too deliberate on people issues.''

The best example of this was the painful restructuring Salomon initiated last year. Backed into a corner by tumbling profits, Gutfreund tried to reduce expenses with judicious cutbacks. But by early October, he realized that fine-tuning would never be enough.

When, as a result, Salomon shut down its municipal securities department, which raised capital for state and city governments, and its commercial paper division, it astonished the entire industry. Salomon Brothers had been the leading concern on Wall Street in municipal finance. It was the business in which Gutfreund himself had gotten his start (and in which his son Owen currently works at Lazard Freres). Recalling his proudest moments at Salomon, Gutfreund lists the company's part in rescuing New York City and the state of Massachusetts from fiscal emergencies.
The cutbacks included 800 layoffs. ''It was emotionally unsettling,'' Gutfreund says. ''But in the short term it was more attractive to gain those cost benefits. In an ideal world, I would have downgraded rather than excised.''

Other firms have made similar moves. Kidder, Peabody, for instance, has all but dismantled its municipal securities department. Paine Webber just about gave away its commercial paper business to Citibank late last year. But in the municipal business, at least, many on Wall Street feel that Salomon was to blame for the industrywide setback.

''Salomon had a conscious policy to drive other people from the business by cutting out the management fees on deals; they drove the margins into the ground so nobody made money,'' says Sherman R. Lewis, a vice chairman of Shearson Lehman Brothers.

''The reality,'' says one senior executive at Salomon Brothers, echoing a widely held view there, ''is that we are paying for problems that we failed to get a handle on earlier. The munis area was very poorly managed. We all knew that. It never made as much money as it should have. It was a people problem. And John can be very slow to make people decisions.''

THE MOST CALAMITOUS series of events in Salomon Brothers' history began on Saturday morning, Sept. 19, when John Gutfreund received a telephone call at his apartment from his friend Martin Lipton, a senior partner at Wachtell, Lipton, Rosen & Katz, the law firm that represents Salomon Brothers. Lipton had jolting news: Felix G. Rohatyn, a partner at Lazard Freres, had called him to say that the Minerals and Resources Company, known as Minorco, had found a buyer for the 14 percent stake it held in Salomon.

Gutfreund had known since April [1987] that Minorco, a Bermuda-based holding company controlled by South Africa's Anglo-American mining empire, wanted out of its position in order to invest the capital in the mining business. Gutfreund, in fact, had initially been receptive to a proposal by Rohatyn that Minorco sell the block to a major Japanese bank or insurance company. But at the last minute Gutfreund turned down the proposal, leaving a perturbed Minorco hanging. It was an error he would regret.

On Wednesday, Sept. 23, Gutfreund went to Lipton's midtown office, where he met with Rohatyn and Henry R. Slack, Minorco's president, and learned the identity of the proposed buyer of the stock. It was Revlon Inc., the cosmetics manufacturer that had been acquired two years earlier, in a bitter takeover battle, by the corporate raider Ronald O. Perelman. Although the investment was described as passive, Perelman wanted not only Minorco's 14 percent block; he said he might seek to raise his stake to as much as 25 percent.

The implication was clear: Salomon, a brawny, fearless competitor in the global financial markets, had become the quarry of a corporate raider. Minorco's was the largest stake in Salomon, a fulcrum that could be used to tilt its strategy and key decisions.

"I was embarrassed for John," says Lipton. "John sees Salomon as occupying a very special place in the financial system, and that could have been wrecked. From that moment on, it was crystal clear to John that the continuation of the firm was in jeopardy."

That Salomon had been targeted at all was painful to Gutfreund. The company had become vulnerable because of weaknesses that its rapid expansion and a cooling in the markets had exposed.

Its stock price, like those of most other brokerage companies, had been depressed for nearly a year. Expenses had continued to outpace revenue growth, with the staff having swelled to a peak of 6,800, from 2,300 in 1981. The firm is expected to report post-tax earnings of about $100 million for 1987, a remarkably steep drop from $332 million the previous year, and the peak of $557 million in 1985.

But there was an unmistakable irony to the Perelman bid as well. Salomon had been late in entering the lucrative field of financing takeovers with the sale of low quality, high yielding ''junk'' bonds. That is just the kind of hostile bid for which Perelman is known.

A year earlier, after a divisive internal quarrel, Gutfreund had finally given Salomon's investment bankers the go-ahead to pursue the takeover business, even though he remained ambivalent. Now the concern found itself on the receiving end of a bid, part of whose logic, Perelman had explained, was that his skills in this area could be tapped to boost Salomon's business.

''I was shocked,'' Gutfreund says. ''Perelman was just a name to me, but I felt that the structure of Salomon Brothers, in terms of our relationships with clients, their trust and confidence, would not do well with our having a bond with someone deemed to be a corporate raider.''

Forced into action, Gutfreund needed to find a friendly buyer, a white knight, and he decided to call on his old friend Warren E. Buffett, the chairman of Berkshire Hathaway Inc. Buffett is an investor with a reputation for shrewdly picking off stocks cheaply. In fact, noting the depressed level of Salomon's stock over the summer, he had already proposed to Gutfreund that he'd be interested in buying a piece of the company if its stock price sank low enough.
Gutfreund immediately entered into negotiations. Over the next week, he worked out a deal in which Salomon would buy the Minorco block for $809 million; Salomon would then sell a 12 percent stake for $700 million to Berkshire Hathaway, in the form of a new issue of preferred stock. Remarkably sweet terms for Buffett: Salomon would be left with a $109 million dent in its capital and an annual bill of $63 million for the dividends on Buffett's stock.

On Saturday night, Sept. 26, [1987] Gutfreund met with Perelman at the swank Hotel Plaza Athenee, on Manhattan's Upper East Side.

He had walked to the Plaza Athenee accompanied by Lipton, who did not stay for the talk. Gutfreund, though cordial, repeated what he had told Perelman once already: that an investment by Revlon in Salomon would not be appropriate or welcomed. Perelman reminded him that he could be very stubborn. A threat was in the air.

Gutfreund returned to Lipton's apartment angry; two diet sodas, he complained to Lipton, had cost nearly $10. A few minutes later he concluded the deal with Minorco. On Sunday morning, he and Buffett finalized their agreement, which left one last hurdle. The board of the holding company, Salomon Inc., had to approve the transaction.

Just after 5 P.M. on Monday, Sept. 28, Gutfreund stepped into the Salomon board room. In his calm, breathy baritone, he said he would resign as chairman and chief executive if the deal he had arranged was rejected in favor of Revlon's competing bid.

He was seconded by the firm's other top executives, including Tommy Strauss, who added that many others would follow suit. It had gotten that bad; the firm was teetering.

''I never stated it as a threat,'' Gutfreund says. ''I was stating a fact.''

After two hours of deliberations, the Salomon Inc. board decided to accept the deal with Buffett.

But there was little time for Gutfreund to savor the triumph. The second week in October, Salomon announced its restructuring and the layoffs.


A week later, the stock market plunged, and Salomon was hit, like most of its competitors, with staggering losses. In addition to the $70 million British Petroleum fiasco, the crash also undermined a $1.5 billion junk bond offering that Salomon was planning to co-underwrite to finance a buyout of the Southland Corporation, the owner of the 7-Eleven convenience store chain. The deal had been intended to show that Salomon was now a force in junk bonds.

Finally, in December, Gutfreund announced that Salomon was abandoning the construction of its controversial new headquarters. The withdrawal would force a $51 million after-tax write-off. ''We pulled back on a move that was no longer appropriate,'' Gutfreund says, typically resolute. ''It's like a piece of bad inventory. You get out of it, you get on with it.'' But there was equivalent damage in symbolic terms. The tower was to have represented the company's eminence; Salomon's withdrawal was widely viewed as an embarrassment.

''We had an incredible run,'' said Tommy Strauss, Salomon's president, shortly after the plan was shelved. ''Those were just great years we had. Then this.''

AT THE END OF 1986, the numbers of people we had doing things did not make sense,'' John Gutfreund says. ''Only when I really examined these things did I realize how off track we were. I came to my senses cumulatively.''

For Gutfreund, the experience of the last year has obviously been chastening. A man who once spoke ambitiously about Salomon's global expansion, now speaks of a world of limits. But the man who had been the architect of the ideal money machine for the first half of the 1980's is ready now, he says, to get on with the task of reinventing America's largest investment banking house.

Salomon has already begun to retrench internationally, and in the future, Gutfreund says, the company will stop trying to become a major factor in a number of foreign stock markets. He names Italy, Sweden and Australia: ''We won't be so arrogant as to think we can become a factor in their indigenous markets. We had been seduced into thinking we could do that.''

Domestically, Gutfreund says, Salomon will turn away from its previous aim of being all things to its institutional customers. One reason for this is that investment banks are facing increased competition from commercial banks, which have been edging inexorably into the securities field. In the coming year, he will seriously consider selling businesses not directly related to its core operations of underwriting and trading securities. This would include the Philipp Brothers and Phibro Energy commodity trading subsidiaries, Salomon's former owners.

''One of the things we're going to look at very hard is to reaffirm relationship banking,'' he says, a startling reversal of philosophy. Rankings, which meant everything to the big-league sluggers of the first half of this decade, he goes on, will mean little.

''We'll operate in businesses that are cost effective. Is being No. 1 in all of the markets something we can or want to do now? We will always want to be, but we have to consider what would be more profitable. I can see us coming back to the top in profits, but we won't be No. 1 in all of the markets.''

Profits, stock price. Gutfreund now knows he is vulnerable. But, as his willingness to forgo his guaranteed bonus indicates, he is also betting on the future:

''I can say we're better than half way to where we want to be. Maybe 75 percent. It doesn't look right yet because we just came through a real shock, the shock of 1987. But we're doing the important things.''

There are those who are unconvinced. Henry Kaufman feels that Salomon has shifted permanently from its central mission of helping provide capital for America's largest corporations, a course, he says, that will keep the company from rebounding. Kaufman particularly resented Salomon's push into merchant banking, the business of arranging and financing corporate takeovers, and having resigned last month to start his own investment consulting firm, he rails against what he perceived to be the deaf ear turned to his cautionary exhortations.

''It is always oh so pleasant to expand,'' Kaufman says. ''It expresses virility, drive, the profit motive. But it is so difficult to consolidate, to reassess where you want to be. True, you do have to take advantage of some of the fluff that comes along, the new businesses where there are substantial profits. But you cannot veer from your main course.''

Within the company, however, support for Gutfreund remains. For the last six years, ever since the merger with Phibro, Salomon's executives have been net sellers of stock in their own company. But on Oct. 19, as the stock market spun out of control, Gutfreund bought 100,000 shares of Salomon stock. Since then, another 180 Salomon employees have bought 1.2 million of the company's shares. In a world in which money talks, the message is clear.

''That's the best vote you can get, I think,'' Gutfreund says.

INVITATIONS TO THE GUTFREUNDS ARE DELIVERED by hand, and arrive pinned with a yellow rose. Presents come by the same route, usually in monogrammed shopping bags topped with monogrammed black and white ribbons.

Such personal touches are the invention of Susan Gutfreund, the 40-year-old hostess whose rapid rise has been the talk of New York society. Often clad in clothes by Givenchy, she is pretty and blond and exudes a warm, personable manner. Yet her lavish apartments and extravagant parties delight some of her guests and repel others. "Susan's wanted to make the big time and she's done it better than anyone I know," says the fashion publicist Eleanor Lambert. "Susan's bright and she's developed a personal style for herself,'' declares the designer Bill Blass. Her look is thoroughly American.''

American perhaps, but with a European touch. She loves cold houses, she says, because she was born in a 15th-century thatch-roofed house in England. (Her father, Louis J. Kaposta, a retired Air Force pilot, says she was born in Chicago, and grew up ''all over the place.") She's a frequent visitor to Paris - so frequent that the Gutfreunds recently bought a portion of an old mansion on the Left Bank in Paris.

Those who have seen the Paris flat say it is in superb taste. But the Gutfreunds astonished the French by putting in an immense eat-in kitchen. They reportedly shocked neighbors even more when they teamed up with the couturier Givenchy and the industrialist Jacques Bemberg, who also live in the house, to put in a $1 million underground parking garage so their cars wouldn't have to be left in the courtyard overnight.

Mrs. Gutfreund is fastidious about all areas of her life. She went to great pains to have a small refrigerator installed in the bathroom of her former apartment in the River House, in New York, because after bathing she likes her perfume to be chilled. But that was a minor detail compared to the extensive renovation elsewhere in the apartment. The modern architects Richard S. Weinstein and Wayne Berg created a contemporary setting featuring a dramatic swirling staircase. Mrs. Gutfreund also hired MAC II, the well-known New York interior-design firm, who filled the grand living room with a Robert Adam carpet and French furniture. The convergence of stark modernism and the 18th century appalled the architects, but it was striking nonetheless.

Decorating is Mrs. Gutfreund's passion. So is shopping for antiques. Three years ago, when the Gutfreunds moved from the River House to a large Fifth Avenue apartment, they hired the French decorator Henri Samuel. Everyone who has seen the new place extols the decorator's work, especially the recently formed collection of antiques. Whenever you admire anything, Mrs. Gutfreund replies: "Thank you. I've had it for ages."

Tales of her parties abound. In the early days of her marriage to John Gutfreund (her first husband was a wealthy Texan who met her on a flight when she was an airline stewardess), she gave a lot of theme parties. One she remembers well was "a Proustian evening." Elaborate gilt candelabra adorned each table, and bouquets of herbs were tied to the back of each chair. In recent years, however, Mrs. Gutfreund has taken to entertaining less because she believes times have changed. "Smaller tables are much more fun," she says. "I also find that people like honest home-style cooking." Her style now is to hold Sunday night suppers offering a Texan menu of fried chicken and monkey bread that she says she cooks herself.

Still, those evenings of fantasy she held in years past are remembered among the purveyors of New York's social history. In fact, many insist Tom Wolfe was thinking of the Gutfreunds when he created the Bavardages, the nouveau-riche couple whose party is so vividly depicted in "The Bonfire of the Vanities." Wolfe denies the comparison, but he's not the only novelist whose name comes up when Mrs. Gutfreund is the topic. "She's right from Trollope or Wharton," says Eleanore Lambert. "It's such an interesting phenomenon. Every 30 years, one hears of people like her. She's her own invention."

Whether fact or fiction, there is a mythic quality about Mrs. Gutfreund's life.

To her, it still seems like make-believe. When she's asked about the last eight years, since she moved to New York and met her husband at a small dinner party, her eyes grow wide. "New York is wonderful," she says.

"It's like living in a fairy tale." - CAROL VOGEL

October 11, 1987, New York Times, Life After Salomon Brothers, by William Glaberson,

ONE day this summer, Lewis S. Ranieri had one of the best jobs on Wall Street. The next, at the instigation of Salomon Brothers' chairman John H. Gutfreund, Mr. Ranieri was out; out as vice-chairman of the powerful company and out of Salomon Brothers altogether. The 40-year-old Mr. Ranieri went home with millions of dollars and a reputation as a brilliant competitor that he earned in 21 years as Salomon's rising star. He was suddenly, as one of his old colleagues at Salomon put it, "outside the sandbox" in which he had spent his entire professional life.

Some on Wall Street said the Ranieri episode was a classic power struggle. Others saw it as a sign that the changing financial business no longer had room for restless innovators. But whatever it meant to others, to Lew Ranieri it meant he had to figure out what to do with the rest of his life.

Mr. Ranieri's wealth assures that he will never have to confront the fears that preoccupy most people who lose their jobs. But, as he and a fast-growing group of other former Salomon stars have discovered, life after Salomon - or after being key members of any powerful and prestigious institution - can present its own challenges.

Many of the Salomon alumni seem driven to discover how much of their success was theirs alone - and how much had come because of the extraordinary organization where they made their names. And they are not likely to be the last to face that issue: Last week, Salomon was awash in rumors that new high-level dismissals were in the offing, part of a broad reorganization that is already underway.

While Mr. Ranieri was planning his future over the last several weeks, many of his old partners talked about their experiences - sometimes-painful, sometimes rewarding - of trying to find new places for themselves in a world where being an ex-anything does not mean much. Now, they are all outside the same sandbox. But until Salomon Brothers merged with the publicly owned Phibro Corporation in 1981, they were Mr. Ranieri's partners, part of a privileged collection of 62 men who had worked their way to the summit of the country's largest privately owned investment bank. The Phibro deal made the already-rich men even richer: Every member of Salomon Brothers "Class of '81" received an average of $7.8 million for his partnership shares.

But in the six years since the merger, almost half of the 62 have found their way - or have been pushed - out the door of the firm they propelled into Wall Street's top tier. A few retired with their millions. But most are working hard, proving what most people believe, but few have the luxury of testing: People work to give their lives meaning, not only to feed their families.

Salomon was, in the years when the members of the Class of '81 were climbing its ladder, a tough place to work. But people believed it was going somewhere. With a lean, aggressive style, it transformed itself in a matter of years from a modest bond house with limited corporate ties into a Wall Street powerhouse.

SALOMON'S big stakes, its Spartan style, the sharp elbows one fended off inside the firm, and the heady victories against its adversaries may have intensified the pressures on those who later tried to make it on the outside. They had seen themselves not just as part of an institution but as part of the best house on the Street.

"Salomon was home," said Robert F. Dall, a member of the Class of '81. "When I saw that name 'Salomon' in a tombstone ad in the newspaper, that was my name," said Michael R. Bloomberg, another member.

Mr. Bloomberg, 45, drives himself harder these days, if possible, than he did in his intense years at the firm. The name on the door now really is his: Bloomberg Inc. When he was winning in Salomon's bruising internal wars in the mid-70's, he occupied one of its prestigious seats: chief of the equity trading desk. He also designed a sophisticated computerized trading system that many Salomon traders believed gave them an edge.

By the time of the Phibro deal, he acknowledges, he was no longer winning. Except for Mr. Gutfreund, he says, he was not getting along with most other Salomon top managers. He had lost a power struggle and his coveted post in the trading room. In 1981, he left, and the day after he cleaned out his desk, he started putting together a new business. It has become hugely successful.

"There are cycles," he said. "Are you a winner or a loser? It depends on what part of the cycle it is." Clearly he likes this part of the cycle better.

Mr. Bloomberg saw a need among institutional investors that he thought he could fill: He supplies detailed information on securities trading through his own analytical computer network. He has applied himself to the task with the fierceness that made him a Wall Street headliner.

The relentlessly energetic businessman, who is just beginning to look a bit older than the bright-eyed Harvard Business School graduate he was when he started at Salomon, is up every morning at 5. He is in his New York office from 7 A.M. to 7 P.M. and his last call before he turns in each night is to his computer room. The company has 2,500 computer terminals on traders' desks all over the world. Mr. Bloomberg says he has access to all the capital he needs. And he may need plenty. ''Do I want to put a terminal on everybody's desk?'' he asked. ''Sure.''

To get to where he is now, Mr. Bloomberg had to deal with the details - big and small - that are usually handled by someone else in a big company. He needed an office and chose a space on Park Avenue, then had it designed with side-by-side desks to look like the Salomon trading room. He needed a major Wall Street firm as a partner to get access to its information base. He found Merrill Lynch and gave it a 30 percent stake.

The unfamiliar minutia of commerce were accompanied by flashes of uncertainty. ''Anybody who is successful has a little bit of an inferiority complex, or power mania or something,'' he said. ''You are always worrying. That's the thing that keeps you going.'' The other day his cheerful tone broke when he spoke about a friend whose business had failed. If things hadn't worked out, he said, that could have been me.

At first, some ex-partners said, it was liberating being free of all the pressure. ''Remember that television program 'The Millionaire,' when someone rings your bell and gives you a million dollars and you can do whatever you want with it?'' asked Kenneth Lipper, one of the select 62 who has since left the firm. ''Figuratively, that's what happened here. Everyone is blessed with the opportunity of free will here. The question is: What do you do with your free will?''

MANY traveled and increased the time they spent on favored charities. Some served on the boards of schools they had attended, or wished they had. Mr. Lipper worked two years as Mayor Koch's Deputy Mayor and then ran unsuccessfully for City Council president. After the defeat, he went on a three-month archeological dig in Israel. Robert P. Quinn, another Salomon alumnus, enrolled in wine-making, music and French classes before he realized they could not hold his interest. Next, he spent $500,000 running for - and losing, but not by much - a Congressional seat.

At first, the freedom was intoxicating, said Jon W. Rotenstreich, who decided to leave in 1983. But rapidly, he said, the fun turned to panic. ''After two months out, you are at a dinner party and people ask 'What do you do?' and you are tempted to say 'I was a very important partner at Salomon Brothers.' ''

Mr. Rotenstreich, now 44, was another of the ambitious young men who helped make Salomon. The son of a furniture merchant in Birmingham, Ala., he was, like many of his peers, very young, just 29 years old, when he made it into the partnership. And, like many of the others of his generation at Salomon, he had a sharp, wandering mind and a strong personality that sometimes met head on with other strong personalities.

Salomon was, in the early 70's, a place where comers like Mr. Rotenstreich thrived on the intense intramural competition somehow managed by the firm's top partner, William R. Salomon. Under ''Billy's'' leadership, Mr. Rotenstreich developed the concepts for several new securities and helped engineer one of Salomon's major breakthroughs into the ranks once limited to a handful of old-line firms, the underwriting of a debt offering for International Business Machines in 1979.

The problem with some of Salomon's impatient geniuses, though, was that they had a tendency to get impatient. Mr. Rotenstreich started to feel itchy in 1983. ''I looked forward and I said, 'What's going to happen in the next 10 years? Am I just going to do a thousand and one transactions?' Once you've done a transaction, once you've done a corporate financing, it's only repetition.''

Mr. Rotenstreich, like many of his old partners, learned quickly that his ''free will'' had been shaped uncannily by life at Salomon. Regardless of whatever else was important to each, a Salomon partner's life was business - 24 hours a day, seven days a week.

He had intended to enjoy his freedom for six months, Mr. Rotenstreich said, but after five months, he accepted an offer to become corporate treasurer of I.B.M. He found out during the time he was between jobs, he said, that he was still the same man who had moved so fast through the ranks at the hottest firm on the Street. Being rich and free had only increased his ambition.

''You don't play this game for other people,'' he said. ''You play this game for yourself. The fact that you have been given more resources is every reason to go on and do more. It doesn't end.'' After nearly three years at I.B.M., he left to become president of the Torchmark Corporation, an insurance and financial services company with $4 billion in assets. Over the years, even before the merger, many of the Salomon names Wall Street knew best disappeared. William E. Simon left in 1972 to become Deputy Secretary and then Secretary of the Treasury, and later built a huge financial empire. James D. Wolfensohn, who put Salomon in the spotlight as Chrysler's adviser, left after the buyout and now runs his own successful financial consulting firm.

Jay H. Perry and Richard G. Rosenthal, feuding geniuses who did as much as anyone to build the firm, also left. Mr. Perry, who put Salomon on the map as a trader of huge blocks of stock for institutional investors, never made it into the Class of '81. He lost his struggle with Mr. Rosenthal, was banished to the Dallas office and resigned in 1978. After stays at two other securities houses, he died of leukemia in 1985.

Mr. Rosenthal, a high school dropout with a genius for making money in arbitrage, was one of the firm's leaders at the time of the buyout.

But the next year, he left. He dabbled in business and had health problems. He died on a drizzly, foggy day last April, when the twin-engine plane he was piloting slammed into a house in Pleasantville, N.Y. He was 45.

The experts say successful executives often have trouble adjusting when they find themselves out of a job, even when they quit. James A. Wilson, a business professor at the University of Pittsburgh and a psychologist, says he has seen many people who have fulfilled the American dream. Many, he said, slip into depression when forced to build a new career. Years of intensity, single-minded commitment to clear goals, and reinforcement from others who share the same passions often leave people unprepared for anything other than the types of jobs that gave them success, Mr. Wilson said.

In the highly specialized, clubby world of Wall Street, the anguish of withdrawal can be especially intense. "If you've got a great athlete who gets hurt and can't play, it's misery," said Stephen A. Schwarzman, a former Lehman Brothers partner who is friendly with many of his old Salomon competitors. "And it's not the money: He wants to play ball." Mr. Schwarzman had his own experience with dislocation when he left Lehman after it was sold to Shearson/American Express in 1984.

Jay L. Lassner, 52, who ran Salomon's money-market desk, said he realized quickly that he needed something meaningful to fill his days after he left the firm. The enjoyable part of being able to do anything he wanted, he found, was not taking advantage of it - just knowing he could if he wanted. After 31 years at Salomon, he is in his third year of law school at Hofstra University and plans to practice securities law.

EVEN many ex-partners who no longer have ties to any institution remain bound tightly to their pasts. Stanley Arkin, 52, a securities trader who was given early retirement at the time of the merger, said he felt that the wealth he accumulated made it impossible for him to work energetically anywhere else. "There would never be another Salomon Brothers for me on Wall Street," he said. "It was a divorce for me: You're away from your family, you lose your children."

Still, he goes almost everyday to a small Manhattan office and trades for his own account. One recent day the market dived and he took a bath, he said. Leaning across the desk, he pushed a button on the Quotron machine. "I'm still a trader at heart," he said, with some loneliness in his voice.

Robert Dall sits in a small glass-walled office at Drexel Burnham Lambert, where he is a senior vice president in the mortgage department. Mr. Dall, 53, knew both happiness and despair at Salomon. In 1977, he initiated what would become a $550 billion new market for Wall Street. His innovation would become at once his greatest accomplishment - and his undoing.

Mr. Dall had the idea of marketing a new security backed by residential mortgages. It was a classic financial invention that caught on almost immediately. Soon, he was heading Salomon's new mortgage-backed securities department. He selected as his deputy Lewis Ranieri, then 30 years old and recognized as a Salomon man of extraordinary shrewdness.

Mr. Dall is not bitter about what happened next. But he says it began a very difficult period in his life. Slowly, he noticed that key clients and Salomon partners were conferring with Mr. Ranieri, not with him. From his office he could see all the activity while he slipped out of the information loop. Mr. Dall was, as Mr. Ranieri and others would be in time, forced out of a key post he cared very much about.

But Mr. Dall's fall was not formalized for many months. He would have liked a graceful way out, he said, but did not quarrel with the decision to have Mr. Ranieri bypass him. Mr. Dall was in poor health. Mr. Ranieri, he knew, had unique skills that could take the department further than he could. He felt the rise of his friend and deputy - and his own defeat - were inevitable results of the market that Salomon so worshipped making known its will. "If I didn't believe in the capitalist system, I could never accept what happened," Mr. Dall said. "But I do believe in it: The fittest moved ahead." Exactly three years after the Phibro merger, as soon as the terms of the deal allowed him to go to work for another major firm, Mr. Dall left Salomon. "I won financially," he said, "and I think I lost as far as the point in the ladder I got to."

He went to Morgan Stanley for a time, then tried retirement for nine months. Then, at 52, he returned to the work he enjoyed. At Drexel, he says, he is happy advising on mortgage deals and making sales calls to many of the people he has called on throughout his career. He is still competitive, but he is realistic: ''I don't have any delusions, I'm not going to be president of Drexel."

Those who were asked to leave had other complicated feelings to deal with. "It was quite emotional," said Robert A. Bernhard, a corporate-finance partner who was informed he would not be "coming along" after the Phibro merger. For him, Salomon had meant a new kind of freedom.

He is the great-grandson of Meyer Lehman, one of the founding Lehman Brothers, where Mr. Bernhard had worked as a young man. The Salomon meritocracy, Mr. Bernhard said, "was really the first experience I had had without being saddled with being a Lehman. When I was at Lehman Brothers, it was always, 'Well, what do you expect, he's a Lehman,' when I did well or badly." It was especially defeating to be dismissed after shaking off that heritige, he said. The disappointment was not eased by the fact that the decision was made by Mr. Gutfreund, once a close friend who had been married to a cousin of Mr. Bernhard's wife.

With his "Our Crowd" roots and family fortune, Mr. Bernhard had never needed to work for a living. But whatever it was that had kept him going all those years moved him again, at the age of 53. Immediately after he left Salomon in 1981, he opened his own firm in New York, Bernhard & Associates, and went looking for investment-banking deals.

For the first few years, he said, one prospect after another fell through. "But somehow or other, I had to prove to myself that I could go on in business," he said. At the beginning, he was focused on proving to "them" that they had made the wrong decision, he remembered. As a result, he said, he sometimes pursued overly ambitious plans. Then, when he began to look forward, instead of back, he said, and to scale back his ambitions, things began to fall into place.

Today Bernhard & Associates has four partners, manages more than $100 million and makes periodic investments in mature companies that are in special situations. It is now breaking even and the profits on some of its investments have been substantial. But, he said, he wouldn't object if a big investment-banking client walked in the door of his office tomorrow morning. "We are still," he said, "waiting for deals."

Each ex-partner found his own answers to the questions all faced after they left Salomon. But most are, in one way or another, still looking for that next big deal. They are looking because, in their Salomon years, the deals helped them know who they were and where they belonged. It is what they know how to do.

Some will rediscover the thrill they knew as part of the group that built Solly. Some will never get there again. They don't know that yet or, perhaps, don't want to. "Most people," said Mr. Dall, "are not willing to accept that they're not going to win." With that, the inventor of the mortgage-backed security, a Salomon man, shook hands and went back to work at someone else's firm, in someone else's mortgage department.

November 28, 2004, BusinessWeek, Lewis S. Ranieri: Your Mortgage Was His Bond, by Mike McNamee,

As part of its anniversary celebration, BusinessWeek is presenting a series of weekly profiles of the greatest innovators of the past 75 years. Some made their mark in science or technology; others in management, finance, marketing, or government. For profiles of all the innovators we've published so far, and more, go to

The past quarter-century has seen a revolution in finance. It's felt every time a homeowner refinances a mortgage or signs up for a credit card. No one person can claim to have lit the fuse for this revolution -- but Lewis S. Ranieri was holding the match. Joining Salomon Brothers' new mortgage-trading desk in the late 1970s, the college dropout became the father of "securitization," a word he coined for converting home loans into bonds that could be sold anywhere in the world. What Ranieri calls "the alchemy" lifted financial constraints on the American dream, created a template for cutting costs on everything from credit cards to Third World debt -- and launched a multibillion-dollar industry.

Salomon and Bank of America Corp. (BAC) developed the first private mortgage-backed securities (MBS) -- bonds that pooled thousands of mortgages and passed homeowners' payments through to investors -- in 1977. Not a moment too soon: Skyrocketing interest rates were turning the business of savings and loans -- funding long-term mortgages with short-term deposits -- making it a financial death trap for banks just as the housing demands of maturing baby boomers began to surge.

Ranieri's job was to sell those bonds -- at a time when only 15 states recognized MBS as legal investments. With a trader's nerve and a salesman's persuasiveness, he did much more, creating the market to trade MBS and winning Washington lobbying battles to remove legal and tax barriers.

A less likely financial engineer would be hard to imagine. Ranieri, a Brooklyn native, set out to be an Italian chef until asthma ruled out work in smoky kitchens. A part-time job in Salomon's mail room set him on the path to trading. A large, volatile man, Ranieri built the firm's mortgage desk in his own image: "fat guys," as author Michael Lewis described them in Liar's Poker, promoted from the back office, who indulged in feeding frenzies and practical jokes while selling strange new bonds to doubtful investors.

But Ranieri also recognized that "mortgages are math." He hired PhDs who developed the "collateralized mortgage obligation," which turns pools of 30-year mortgages into collections of 2-, 5-, and 10-year bonds that could appeal to a wide range of investors. The homeowner in Albuquerque could now tap funds from New York, Chicago, or Tokyo, a change that Ranieri figures cuts mortgage rates by two percentage points. Soon everything from credit-card balances to auto loans was being repackaged.

As MBS trading exploded in the '80s, Salomon dominated the market. After becoming vice-chairman, Ranieri was seen as "too big" in the trade by his bosses and was forced out in 1987. Now he is non-executive chairman of Computer Associates International Inc. (CA) and runs his own investment firm. And the market he created has funneled trillions into the American dream of homeownership.


What follows is bit off-topic, but not really. I've enjoyed spending time seeing how history in the Philippines manifests itself, since the country seems a perfect expression of an American shadow---or at least the dark sides of Capitalism and Catholicism as I've known it.
On the bright side, no one does a political demonstration better than the Filipinos. They can mobilize via their cell phones in an instant, whipping together a crowd straight out of ACT-UP, with accouterments--signs, banners, war paint, men on stilts---worthy of a Christo, all the while they're expressing the people's power and having their messages heard, they wear the most outrageous grins and have greatest fun. I like a people who are at their best when they are having a cathartic demonstration.
On the other hand, they seem to have taken the worst embodiment's of American faith, culture and process, and combined them all together with indigenous roots and the strong flavor of Spanish colonial overlordship, and joined it all together into some sort of test, not a game.
For instance, no example of political murder could be more savage or the evidence in photographs more gruesome to behold then the political attack which took place on the morning of November 23, 2009, when a convoy of relatives and supporters of Esmael Mangudadatu, who seeking the mayoralty of Datu Unsay, was traveling to file his certificate of candidacy papers at the town hall.
Since violence was anticipated, most in the group were female, it being wrongly assumed that they would stay safe should any possible encounter break out. Adding an extra layer of assurance it was thought, was the large cadre of journalists who were accompanying the mission. They would serve as witnesses and recorders of the trip should anything go awry.
Something did go terribly wrong that day, when the traveler's jeepneys and bus were stopped on a deserted stretch of country road by relatives and supporters of an opposing candidate for mayor, Andal Ampatuan, Jr., the son of the incumbent governor of Maguindanao, Andal Ampatuan, Sr., The attack, called the Ampatuan, or Maguindanao massacre, killed 58 people, included Mangudadatu's wife, his two sisters, journalists, lawyers, aides, and motorists who were witnesses or were mistakenly identified as part of the convoy. Mercifully, most were shot, not an undue consideration where people can be hacked to death with bolo knives and then parts eaten for superstitious, or derogatory reasons
The Committee to Protect Journalists (CPJ) has called the Maguindanao massacre the single deadliest event for journalists in history [4] with at least 34 journalists---print and radio being known to have died in the massacre.
The island of Mindanao is a land of war lords and private armies, so I don't imagine it took a great deal of organization, although a backhoe was made available, and an attempt was made to bury all the evidence--the bodies, even the was bus broken up into several pieces and buried.
The Ampatuans were a Muslim clan high up in the political chain, who were in league with the ruling Christian majority in the capital. I don't know why I'm going on about this. What I intended to talk about was my notion that the cry of "rosebud" that goes up in the movie Citizen Kane, was really a reference to Hearst's lover, Marion Davies' clitoris. In any event, the following piece of commentary from a Philippine newspaper mentions the movie and that is the only point I wanted make as a segue into it.

August 31, 2001, BusinessWorld, Philippines, Vector.

Rosebud, the monicker given to Ms. Mary Rose Ong, one of the witnesses presented by Col. Victor Corpus to buttress his claim on the dangers posed by narco-politics, was also the last word uttered by a dying man in a classic film. The man was Charles Foster Kane and the movie was "Citizen Kane."

Orson Welles' "Citizen Kane" was said to be a fictional portrayal of the life and times of publishing tycoon William Randolph Hearst.

Rosebud was not Mr. Kane's paramour. It was a metaphor for his lost childhood. He was plucked out of his home in rural Colorado at the age of nine, put in a boarding school, then inherited a vast business empire at the age of 25.

He built a huge business empire bannered by his flagship broadsheet, the Inquirer, which changed the paradigm of print journalism by boldly taking the cudgels for the weak and the oppressed.

He was also a political maverick. He railed against corruption in public office and nearly won the race for state governor.

Citizen Kane died a broken man: rich and powerful but desolate and without a true friend.

Rosebud was the name inscribed on his snow sled. He became ruthless because he was rootless. He was unable to secure his moral moorings because he was abruptly uprooted from home and hearth at a tender age.

"Citizen Kane," the movie, offers many timely lessons. It shows clearly what happens to a man (or a society) whose life is not firmly rooted in moral values.

Driven by blind ambition, his abrasive style resulted in disaffection among his closest associates. He was never able to establish a family of his own despite two marriages. He appeared to reap success after success, steadily and surely enlarging his wealth and power, only to realize in the end that his earthly pursuits had been in vain.

How many Citizen Kanes are there among the high and mighty in our land?

Citizen Kane is the epitome of failed leadership. Rosebud was the last word he uttered because till the end, he yearned to regain not just his lost childhood but his personal integrity.

Will the testimony of Rosebud result in the unmasking of putative Citizen Kanes in our midst?

Columnist Teodoro Benigno recalls that another woman, Jessica Alfaro, proved to be the key witness in finally bringing to justice the perpetrators of the heinous Vizconde massacre, more than eight years after the crime was committed.

She was a much-maligned witness, alternately characterized as a drug addict and an inveterate liar. But in the end her direct testimony held its ground.

A good number of senators were apparently impressed by Ms. Ong's testimony. She spoke calmly but her revelations were of earthquake proportions.

She asserted that Camp Crame, the general headquarters of the Philippine National Police, is being used as a virtual center of drug trafficking. And the Philippines serves as transshipment point for the distribution of illegal drugs from the Hong Kong-based Triad to drug syndicates in neighboring countries.

"Is there a paper trail that could back up your allegations about the involvement of high-ranking PNP generals, including now Sen. Panfilo Lacson?" asked one of the senators. Ms. Ong showed a plastic bag full of documents but we have yet to see whether she has the "goods" that can satisfy our honorable senators of the realm.

Meanwhile, the text brigade is urging all victims of the drug trade to produce receipts and send these to the incredulous senators.

Should the Senate hearings go on or should these be terminated so that the legislature can go on with "more urgent" business?

Those who pose this question are foisting a false dichotomy.

There is no essential conflict between unmasking the truth behind the illegal drug trade and other high crimes being attributed to police generals and the process of moving on as a nation.

Unless we discover the truth and ferret out the criminals, the social evils which their misdeeds have spawned will continue to attack the moral fiber of our country like hyperactive malignant cancer cells. This social cancer cannot be licked if the guilty remain untouchable.

Col. Victor Corpus pointed out that he chose the Senate as the appropriate forum for exposing the extreme dangers posed by narco-politics because he was aware of the institutional weaknesses in our criminal justice system.

Even former President Estrada railed against "hoodlums in robes," who would issue temporary restraining orders (TROs) against accused drug lords.

ABS-CBN should consider pulling the plug on its current TV advertorial that tends to depict the current situation as mere political wrangling. Does it have anything to do with creating jobs and creating a better future for today's youth?, the ad inquires in behalf of a child whose face is juxtaposed upon images of the Senate hearings.

Of course it does.

As shown in the impeachment trial, wanton corruption and utter lack of moral values at the highest councils of government are like millstones weighing the whole country down and submerging our body politic in the morass of economic destitution.

"Gather ye rosebuds while ye may" was Walt Whitman's wise counsel. Let's seize the day, seize the opportunity to ferret out the truth, and the truth will set us free.

Oh I get it! Massacre, mascare.

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