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Collection: Charlie Munger - #86 'John Gutfreund, Salomon Brothers Inc.'


Video Link: https://youtu.be/F7zdh-4SDNs


In this episode, Charlie Munger talks about John Gutfreund (CEO of Salomon Brothers Inc.) and one of the reasons that leads to the fall of Salomon Brothers Inc.


In this episode, you’ll learn:

  • Fall of Salomon Brothers Inc.

  • What should you do when you face embezzlements in your business?

To check out all Collection: Charlie Munger <click here>

[Transcript]

CHARLIE MUNGER 00:08

Here, I think we should discuss John Gutfreund. This is a very interesting human example, which will be taught in every decent professional school for at least a full generation. Gutfreund has a trusted employee, and it comes to light not through confession but by accident that the trusted employee has lied like hell to the government and manipulated the accounting system and was really the equivalent to forgery. The man immediately says, “I’ve never done it before. I’ll never do it again. It was an isolated example.” Of course, it was obvious that he was trying to help the government as well as himself ’cause he thought the government had been dumb enough to pass a rule that he’d spoken against. And after all, if a government’s not gonna pay attention to a bond trader at Salomon, what kind of a government can it be?


At any rate, and this guy has been part of a little clique that has made way over a billion dollars for Salomon in the very recent past, and it’s a little handful of people. So there are a lot of psychological forces at work. You know the guy’s wife, he’s right in front of you, and there’s human sympathy, and he’s sort of asking for your help, which is the form which encourages reciprocation, and there are all these psychological tendencies are working. Plus the fact he’s part of a group that has made a lot of money for you.


At any rate, Gutfreund does not cashier the man, and of course, he had done it before, and he did do it again. Well now you look as though you almost wanted him to do it again or God knows what you look like, but it isn’t good. And that simple decision destroyed John Gutfreund.


It’s so easy to do. Now let’s think it through like the Bridge player, like Zeckhauser. You find an isolated example of a little old lady in the See’s candy company, one of our subsidiaries, getting into the till, and what does she say? “I never did it before. I’ll never do it again. This is gonna ruin my life. Please help me.” And you know her children and her friends, and she’s been around 30 years and standing behind the candy counter with swollen ankles. In your old age, isn’t that glorious a life? And you’re rich and powerful and there she is. “I never did it before, and I will never do it again.”


Well, how likely is it that she never did it before? If you’re gonna catch ten embezzlements a year, what are the chances that any one of them, applying what Tversky and Kahneman called baseline information, will be somebody who only did it this once? And the people who have done it before and are gonna do it again, what are they all gonna say?


Well in the history of the See’s candy company, they always say, “I never did it before, and I’m never gonna do it again.” And we cashier them. It would be evil not to because terribly behavior spreads. [Inaudible] You let that stuff… you’ve got social proof, you’ve got incentive caused bias, you got a whole lotta psychological factors that will cause the evil behavior to spread, and pretty soon the whole damn … your place is rotten, the civilization is rotten. It’s not the right way to behave, and…


I will admit that I have … when I knew the wife and children, I have paid severance pay when I fire somebody for taking a mistress on a extended foreign trip. It’s not the adultery I mind. It’s embezzlement. But there, I wouldn’t do it where Gutfreund did it, where they’d been cheating somebody else on my behalf. There I think you have to cashier, but if they’re just stealing from you and you get rid of them, I don’t think you need the last ounce of vengeance. In fact, I don’t think you need any vengeance. I don’t think vengeance is much good.

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