John Gutfreund Loses Salmon Inc

John Gutfreund Loses Salmon Inc

AJ Woodward

5/3/2013

Case Introduction and Background

A. Case Introduction and Background

In 1991 John Gutfreund was the chairman and chief executive officer of Salmon one of Wall Street's richest companies. Salmon specialized in bond trading of securities for the United States government. Jon Meriwether, one of the nine vice chairmen, was heading the government bond training and had been responsible for millions in company earnings. Under Meriwether's direction, Salmon had an aggressive style for bidding on the government bonds for auction. United States securities are virtually risk free and are considered the gold standard of investing. The government has granted 39 companies as primary dealers and they are the only ones eligible to submit bids for themselves and others. These companies must bid at all auctions and then resell the bonds to others. Each company, however, is only allowed to bid for and buy 35 percent of the bonds at the auction to guarantee that no dealer could corner the market. The dealers want the highest interest rate and Salmon traders would overbid sharply at the stop out rate to get the highest possible yield and 35 percent of the bonds.

Paul Mozer, one of the traders for Salmon, was bidding for Salmon and using customer names without their knowledge to submit more bids for Salmon. The first time these illegal bids were placed the Deputy Assistant Treasury Secretary for domestic finance, Michael Basham, called Mozer and instructed him to stop. This did not deter Mozer has he continued to enter illegal bids in the next two bond auctions, believing his illegal bids would go undetected. The illegal bids were noticed by the federal regulators. Mozer was one of 158 managing directors at Salmon so he could only be suspended by Salmon CEO John Gutfreund. Gutfruend did not notify federal regulators about the illegal bids causing the federal regulators to believe he was in charge of the cover up. Gutfruend finally admitted to the existence of the illegal bids to the federal regulators 3 months after they occurred. Salmon then faced the wrath of the federal regulators for their illegal activity. The last official act of Gutfruend was to appoint his good friend, Warren Buffett, as the new CEO of Salmon.

B. Specific Case Questions

There are two different leadership styles exhibited within the case as the CEO for Salmon, Gutfreund and Buffett. These different leadership styles led to drastically different outcomes for Salmon Inc. Gutfreund knew of the illegal bids placed by Mozer and decided not to take action but instead he hoped the actions would be ignored and go unpunished. Gutfreund did not realize that his indecision would have drastic consequences and threaten the survival of Salmon Inc. Gutfreund often made his decisions in private only afterward informed board members. He often let members of his inner circle do as the pleased he believing they had earned the right to do so. Gutfreund had knowledge of the first illegal bids but assumed others would warn Mozer of his unacceptable actions as his actions were focused elsewhere. He did not understand that the perquisites of high office do not lesson the need for specific and consistent exercise of authority to