Rebirth in Japan: The Heiress Who Conquered the World

Late September.

New York, Salomon Brothers Headquarters, 47th floor.

John Gutfreund’s desk was piled three layers high with materials.

At the very bottom pressed down was a photocopy of last week’s letter from the Treasury Department, the stack in the middle was the latest memo submitted by the legal team last night, and spread out on top was the customer account change summary just brought over from the risk control department this morning.

A cup of coffee sat in front of him, long since cold, but he hadn’t touched it all morning.

Days of irregular rest made his stomach burn fiercely; if he chugged another cup, he probably wouldn’t be fit to see anyone in the afternoon.

At that moment, the door was knocked twice, and Williams pushed it open and walked in.

”Sit.”

Gutfreund didn’t even raise his head.

Williams was already used to this state. He walked straight over and sat down in the chair directly opposite the desk, laying a brown folder flat between the two of them.

”Good news or bad news first?”

”Heh.”

Gutfreund raised his eyes and squeezed out a laugh.

”Are there still any good news at a time like this?”

”To be precise, there is a piece of news that hasn’t gotten worse.”

”Then talk about that one first.”

”Morgan’s credit line was reassessed yesterday and wasn’t shrunk further.”

Williams opened the folder.

”Consistent with the terms we discussed last week, the short-term repo limit is maintained at 1.2 billion.”

Gutfreund tapped his fingers lightly on the desktop.

1.2 billion... Three months ago, this number was fucking 2.4 billion!

Losing half and still calling it not getting worse, if this is considered good news...

”Bad news.”

Williams’s expression didn’t change much, only lowering his voice by half a tone.

”The California Public Employees’ Retirement System notified us this morning that they have suspended new mandates for Salomon on its fixed-income trading authorization list.”

Gutfreund’s hand stopped.

”Suspended?”

”Yes, suspended. Not revoked yet for the time being.”

Williams quickly added, ”Their phrasing is ’to resume after internal compliance review is completed.’”

”Wait until when?”

”They didn’t give a time.”

Gutfreund leaned back against the back of his chair, took off his glasses and placed them on the desk.

Without his glasses, his face suddenly looked several years older. His eye sockets were much deeper than last month, and his jawline had become more prominent due to losing weight recently.

The California Public Employees’ Retirement System managed close to 70 billion US dollars.

Its own entrusted amount wasn’t a matter of life and death for Salomon, but it was one of the largest public pension funds in the United States.

Once it publicly suspended authorization, all the medium-sized pensions, insurance companies, and endowment funds lined up behind it would all have a reason to do the same.

”The list,” Gutfreund said.

Williams had already turned to the next page.

”Over the past two weeks, institutional clients that have suspended or shrunk trading authorizations with Salomon total fourteen.”

He didn’t read the names one by one, only pushing the document over.

Gutfreund took it, put his glasses back on, and read through it from beginning to end.

Pension funds three, insurance companies two, a state government investment office, university endowment funds four, and several medium-sized asset management companies.

If it were just losing any single one of them, it wouldn’t hurt Salomon’s vital bones and muscles.

But if fourteen clients terminated their contracts simultaneously, for Salomon Brothers it was like pulling out fourteen bricks all at once, making the already unstable wall even more precarious.

”Who else is watching and waiting?”

”There is no explicit notification yet, but those internally reassessing counterparty risk that we know of total about twenty-something.”

Williams said, pausing for a moment.

”TIAA-CREF asked about our latest capital adequacy ratio data once last week.”

Hearing this name, the corners of Gutfreund’s mouth twitched.

TIAA-CREF was the largest teachers’ retirement fund in the entire United States.

If even it left, then it wouldn’t just be a matter of bricks.

The office quieted down.

Manhattan outside the window was still no different from usual.

The traffic around the World Trade Center moved slowly along the streets, and boats on the Hudson River could still be seen in the distance.

The trading floor downstairs was also operating as usual, and telephone rings and quotation sounds hadn’t truly stopped since the market opened.

If you only looked down from here, it was hard to believe this company was experiencing the most dangerous period since its founding.

Salomon still had money.

More money than those outside calculating how much longer it could hold on imagined.

Especially the profits from the past two years.

Just from Saionji’s first-stage Nikkei bearish trade alone, Salomon took away 7 billion US dollars.

Subsequent rounds of position closing and liquidation had also been largely undertaken by them; although commissions had dropped correspondingly, accumulated together it was still an extremely impressive income.

This storm, later called the ”Salomon Brothers Treasury Bond Bidding Scandal,” initially only occurred in the government bond trading department.

In order to break through the maximum holding ratio for a single bidder stipulated by the Treasury Department, the trading team led by Paul Moser had used client names under false pretenses, and even submitted Treasury bond bids without complete authorization, allowing Salomon’s actually controlled share of new bonds to exceed the stipulated limit.

If things had just stopped here, it might have been handled as a few traders violating regulations.

What truly made the problem spin out of control was that the company’s management had already known about a portion of the situation months ago, yet failed to report it to the Treasury Department and the Federal Reserve in a timely manner.

Now regulatory authorities were beginning to investigate upwards along this line, and the problem that originally belonged to the trading desk became a problem for all of Salomon.

But they still had money.

After the scandal began to expand, the finance department quickly increased cash reserves and suppressed some proprietary positions.

Even if commercial paper maturing near-term couldn’t be normally rolled over, the company temporarily had the ability to repay it itself.

”How is commercial paper today?”

Gutfreund asked again.

Williams pulled a sheet out of the folder and glanced at the numbers on it.

”The rollover ratio tallied this morning is less than thirty percent; last week it was still forty percent. The finance department has prepared: if it remains at this level, we will continue to use existing liquid assets to repay the maturing portions.”

Gutfreund frowned.

”With current cash reserves, can we hold on?”

”No problem in the short term.”

Williams pushed that sheet in front of him.

”But if it keeps going like this, the situation will be different. For every commercial paper rollover we lack, we have to use our own money to make up for it.”

”At the same time, counterparties are raising margins, banks are reassessing credit limits, and clients are reducing business.”

Saying this, he glanced at that client list from earlier.

”Today we can of course still pay back money, and probably next month too. But if the market continues to think Salomon is contracting, the conditions given to us in the next round will only be worse.”

Gutfreund didn’t speak.

Williams paused before continuing:

”So the real problem now is no longer whether we have money or not.”

This sentence made Gutfreund’s expression sink.

Salomon hadn’t been choked to death by cash yet, but it was losing little by little the reasons why others were willing to continue doing business with it.

And they had already tried quite a few methods.

The legal team had basically stayed in the building all the time, reviewing the past few years’ bidding records, client authorizations, and internal reports all over again.

They didn’t know how many trips they had made to the Treasury Department, the Securities and Exchange Commission, and the Federal Reserve.

At the very beginning, the company even tried to limit things inside the government bond trading desk.

To bypass the Treasury Department’s bidding limit, several traders used client names to expand declarations.

If things had just stopped there, disposing of the relevant personnel and paying a sufficiently large fine, Salomon would still have had a chance to seal the problem.

But the regulatory authorities had already started chasing another matter.

Who knew first.

When did they know.

After knowing, why wasn’t it reported in a timely manner.

The Treasury Department had raised inquiries about some abnormal bids months ago, and it wasn’t recently that the inside of the company discovered a problem on the trading desk.

As long as this line continued to be pursued upwards, sooner or later it would no longer be limited to the trading hall.

And finally implicate their management.

Gutfreund picked up that cup of long-since-cold coffee, took a sip, and quickly put it back down with a frown.

”What do the lawyers say?”

”The same old way. Actively cooperate, striving to control punishments within fines, personnel disciplinary actions, and partial business restrictions.”

”Then do they have a way to make the Treasury Department forget that we knew about this matter long ago?”

Williams paused.

”No.”

”Then that’s not solving the problem.”

Gutfreund leaned back against his chair.

Those Washington connections from the past were much the same.

Phone calls could still get through.

People who used to be willing to eat together would occasionally have their secretaries reply.

But the investigation had already reached right under Congress’s nose, and no one was willing at a time like this to be written by the media as lobbying regulatory authorities on behalf of Salomon.

The New York Fed’s attitude was also very clear.

They didn’t want Salomon to collapse suddenly, to avoid market chaos resulting from it.

But the trouble Salomon brought upon itself had to be resolved by satisfying the Treasury Department.

And now everyone knew what ”satisfied” meant.

After Williams finished speaking, he turned another page of the document in his hand.

”There is one more thing.”

Gutfreund raised his eyes to look at him.

”Several peers have already started contacting our people.”

This sentence made Gutfreund’s expression turn much uglier all at once.

”Which ones?”

”Goldman Sachs, Morgan Stanley, and Merrill Lynch all do.”

Williams pushed the document forward a bit.

”The government bond trading desk is the most obvious, and some people in fixed income and institutional sales have also received invitations. There is no large-scale departure yet, but if this drags on...”

Heh, this bunch of damned vampires, Salomon hasn’t even fallen yet and they’re already coming to snatch people...

Gutfreund took a deep breath and lay back down in his chair.

Wall Street was not as gentle as vultures; they wouldn’t wait until a company truly breathed its last before dividing things up.

Even while you were still breathing, they could forcefully tear your flesh off.

By the time Salomon was truly done for, the people who should leave would have mostly left.

Clients too.

Even if the Treasury Department didn’t strip away Salomon’s primary dealer qualification in the end, since the largest pension funds, insurance companies, and funds had already moved their business elsewhere, keeping that qualification certificate wouldn’t save anything.

The office was quiet for a dozen seconds.

Manhattan’s afternoon skylight outside the window had turned into that grayish color. Clouds that drifted over from goodness knows where covered the entire sky, and the streets downstairs were a bit darker than usual.

Gutfreund stood up from his chair and walked to the window.

Standing with his back to Williams for a moment.

”So when you came today, what did you want to tell me?”

Williams’s voice came from behind.

”John.”

”Hmm.”

”I think it’s time to have a serious talk with Warren.”

Gutfreund didn’t turn around.

But his shoulders stiffened very noticeably.

”Buffett?”

”Berkshire is the company’s most important shareholder, and his influence on the board of directors is clearer to you than to me.”

Williams looked at Gutfreund’s back.

”If there is still one person in the United States right now who possesses sufficient personal credit, sufficient capital, and sufficient political recognition to help Salomon rebuild trust in front of regulatory agencies—”

”You don’t need to read his resume to me.”

Gutfreund interrupted him.

The voice was much harsher than just now.

He turned around.

”I know what Warren can do.”

Williams looked at him and didn’t speak.

”The problem is not whether he can save Salomon.”

Gutfreund walked back to the desk, one hand propped on the desktop, his tone becoming increasingly hurried.

”The problem is whether that Salomon he is willing to save is still this Salomon right now.”

Williams still didn’t open his mouth.

”You think I haven’t thought about this matter?”

Gutfreund’s tone suppressed a barely controlled irritation.

”If Warren Buffett stands up to endorse Salomon, how will the market react? How will regulatory authorities view it?”

”The effect is of course good, of course it works. A single word from him in Washington is more useful than me sending twenty lobbyists in.”

He paused.

”But Warren never does unprofitable business.”

Gutfreund sat down again.

”What is the premise for him being willing to come out and save Salomon? First, complete transparency. All internal investigation materials, timelines, and reporting records must be laid out entirely and handed over to regulatory authorities. Without any reservations.”

Williams nodded very slightly.

”Second, management must take responsibility. Not the kind of responsibility where dealing with a few traders is enough, but letting regulatory authorities and the public see that ’the person who made the decision to delay reporting’ has been cleaned out.”

Gutfreund’s voice became somewhat calmer here instead.

”Warren will demand that the board of directors reorganize the senior management team, and he will push for a comprehensive settlement with the Treasury Department. He might even personally take over daily operations for a period of time, at least ensuring that Corrigan and the Treasury Department believe Salomon won’t have the same problem happen again in the future.”

He raised his head to look at Williams.

”Among these conditions, which one do you think allows John Gutfreund to continue sitting in this chair?”

Williams was silent for several seconds.

”John—”

”If the final result is handing the entire company over to Warren Buffett to handle,” Gutfreund’s voice dropped. ”Letting him decide who stays and who goes, how to talk to the government, how to rearrange management... That is no different from me announcing my resignation myself.”

He picked up the glasses on the desk and put them down again.

”Salomon might still live.”

”But that is no longer my Salomon.”

After this sentence fell, there was no sound in the office for a long time.

Williams looked at him and let out a long sigh.

”John, this is already the most hopeful choice, we sooner or later have to—”

”Then wait until that time.”

Gutfreund interrupted him, reaching out to forcefully push away the few materials in front of him.

”At least for now... I haven’t lost yet.”