Hot Features
Premium
Register for Free to get streaming real-time quotes, interactive charts, live options flow, and more.
The arrogance and sense of entitlement of Wall Street players is so great that they are a breed apart – and not in a good way. There is a culture which often encourages bad behaviour and greed. What I’m writing about today happened in the 1980s, but be warned, the culture has been perpetuated because senior people tend to hire the like-minded and inculcate the same values. If you back these types of people with your money today you are accepting the consequences of their interests frequently not being aligned with the interests of shareholders.
Bonuses must be paid!!
While the Wall Street shenanigans of 1987 made little impact on the real economy, they did create winners and losers on Wall Street; and Salomon, being an aggressive player in many risky areas, was affected more than most. It managed to lose $75m after-tax in the month of October. For the year profits were down around four-fifths on their peak level of $557m recorded in 1985. In January 1988 Gutfreund announced he was to take no bonus for 1987. However, he didn’t want to be completely empty-handed: he would instead receive 300,000 options for Salomon’s stock excisable at $18.125, the then market price – quite a fall from over $30 only weeks before. If the share rose to $38.125 those options would have intrinsic value of $6m.
Despite the serious errors under his leadership he remained at the helm in 1988, “John Gutfreund 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.” (James Sterngold (1988) TOO FAR, TOO FAST; Salomon Brothers’ John Gutfreund, The New York Times, January 10 1988)
In his determination to restore profits Gutfreund elected to sack 800 people (out of 6,800), in the process closing-down those divisions helping state/city authorities sell bonds and the division which arranged commercial paper sales for corporations (borrowing of a few days or a few weeks).
How can this be going on?
The newly-installed board directors, Buffett and Munger, were astonished that following a year when profits plunge along with the share price, the response of the senior management team was to drop the price hurdle set for staff stock options to become valuable, making it easier for them to earn fat bonuses at a time when shareholders had suffered a great deal. Naturally, Buffett and Munger argued against the practice – it was morally wrong. But the Wall Street culture led to a shrug of the shoulders in response to their remonstrations, and the two out-of-towners were ignored.
Without being specific, Buffett says that there were many other things about Salomon that troubled hi
………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
