John Gutfreund Loses Salmon IncEssay Preview: John Gutfreund Loses Salmon IncReport this essayJohn Gutfreund Loses Salmon IncAJ Woodward5/3/2013Case Introduction and BackgroundA. Case Introduction and BackgroundIn 1991 John Gutfreund was the chairman and chief executive officer of Salmon one of Wall Streets 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 Meriwethers 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 QuestionsThere 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
B. SpecificCase QuestionsPredicting the actions of the other shareholders of Monet would require the involvement of investors in other positions. It would be very difficult for Salomon to predict their future actions by identifying the “sweet spot between one of the highest ranked companies in the world” where Salomon was located. Although this is not true, it is important to take into consideration that each of the stocks represented by Salomon are of high value and are expected to improve. Salomon often is perceived as the highest performing company in the world which is important because any changes could be detrimental to its bottom line. In the case of Salomon they will not only continue to operate but also be very attractive at the highest level because they could be a lot different. Salomon will also experience a significant increase in the value of shares to ensure they are worth the risk, even if they lose their business. ———-
A,B,C,D A unique and valuable market position is a company whose operating, management, and profit margins are highly valued. This position has also been described as being able to meet its objectives and to compete successfully and successfully. Although there is no clear “price” for having such a position, it is possible such position could be valued at any price. As a company which is valued at $5 to $10 billion many in-house executives will be very interested in this position. It is possible that certain shareholders who are involved personally or indirectly in the making and selling of the company should receive more consideration for the position. The company in question is the Salomon Board of Directors, the company’s stockholders. —————————-
G. The company has had success in building relationships with well-known investors. During the past seven years the company has developed a series of relationships with investors who have invested many dollars in the company for years. Although these relationships are not in accordance with the company’s mission, however, they certainly have had a positive effect on shareholders. Many are looking forward to the investment of capital which will encourage those engaged with the company through the investment of these highly valued investors. One particular investor, the former Chairman of the United Kingdom’s EBRT Commodity Investment Trust, was a successful investor as well. This investor is now valued at over $200 million and he is considering holding the position. While these investments are an important one for shareholders, in general this position does not include a capital allocation from which the investor will be limited. He is looking forward to the possibility of investing in investments that are highly regarded by Salomon or which will give dividends to shareholders. —————————-
G. Salomon’s overall outlook is very similar to that of the Berkshire Hathaway Corp and Fidelity Investments. The outlook for the company is low due to the uncertainty and uncertainty surrounding the outcome of its financial results and the management’s focus on its growth. However, despite having significant negative trends being reported in the financial results which will impact future earnings, the company does plan very well in meeting profitability expectations. While it is possible that the company will be well-positioned if the company performs well in future periods, the company may need to increase its expenditures in order to be positioned for future growth opportunities. —————————-