Salomon Brothers chairman John Gutfreund. (AP)

John Gutfreund, who was proclaimed the “King of Wall Street” in 1985 for harnessing the egos and fiefdoms of Salomon Brothers into one of the most profitable investment-banking firms, only to be deposed after a 1991 trading scandal, died March 9 in New York. He was 86.

The cause was pneumonia, said a son, John Gutfreund.

As managing partner and later as chairman, Mr. Gutfreund (pronounced GOOD-friend) helped transform Salomon from a traditional bond-trading firm into a leader in businesses such as mortgage-backed securitiesand computer-driven trading techniques. It also became the largest underwriter of municipal bonds, the department where Mr. Gutfreund got his start.

In overseeing New York-based Salomon’s transition from private partnership into Wall Street’s first public corporation, he was a pioneer in taking the risks once assumed by a small group of senior partners and spreading them among shareholders. His view of business as a daily battle was captured in his exhortation to traders that they come to work “ready to bite the ass off a bear” every day.

“Gutfreund seemed able to smell money being lost,” Michael Lewis wrote in “Liar’s Poker,” his 1989 account of working at Salomon. “He was the last person a nerve-racked trader wanted to see.”

Readers of the book were introduced to Mr. Gutfreund and to the particular ways of Wall Street, including the game referenced by the title, which involves wagering on the serial numbers printed on the paper currency in players’ hands and nerves-of-steel bluffing.

In the opening pages, Mr. Gutfreund marches out of his office to challenge John Meriwether, his bond trader extraordinaire, to one contest, for $1 million, backing down when Meriwether ups the proposed bet to $10 million.

The book “destroyed my career, and it made yours,” Mr. Gutfreund told Lewis years after its publication.

John Halle Gutfreund was born in New York City on Sept. 14, 1929. He was raised in Scarsdale, N.Y. He graduated in 1951 from Oberlin College in Ohio and then served in the Army in Korea.

His father, Manuel, owned a fleet of trucks that delivered meat to New York City-area businesses. As a member of the Century Country Club in Purchase, N.Y. -- “a social center for the German Jewish establishment,” according to a 1998 profile in New York magazine -- Manuel Gutfreund was a golfing buddy of William “Billy” Salomon, the son of one of the founders of the firm that bore his name.

After his father arranged an interview, John Gutfreund joined Salomon as a trainee in the statistical department. He moved quickly into trading municipal securities. Twenty-five years later, Billy Salomon named Mr. Gutfreund to succeed him as head of the firm.

His reputation as a tough corporate infighter was burnished after he agreed to sell Salomon in 1981 for $554 million to Phibro Corp., a publicly owned commodities-trading firm that had benefited from rising oil prices as inflation spiked in the late 1970s.

When the Federal Reserve lowered the inflation rate, oil prices dropped while bond prices, Salomon’s lifeblood, rose.

Mr. Gutfreund seized on the reversal of fortunes to oust David Tendler, the head of Phibro and co-chief executive of the combined firm, in 1984. He renamed the company Salomon Inc., shrank what remained of Phibro and allowed his bond traders to use the company’s expanded capital base to boost profits.

He broadened Salomon’s client services and its global presence by creating a mortgage-securities unit, moving into mergers and acquisitions, building its foreign currency-exchange operation and opening offices in Tokyo, Zurich and Frankfurt.

Salomon’s capital grew to $3.4 billion from $209 million when he took over, and BusinessWeek magazine put Mr. Gutfreund on its cover in 1985 with the headline: “King of Wall Street.”

Missteps first weakened Mr. Gutfreund’s grip on the firm, then led to his ouster from Wall Street.

In 1987, when Ronald Perelman, the head of Revlon Inc., tried to buy a 14 percent stake in Salomon, Mr. Gutfreund was forced to sell a 12 percent share to Warren Buffett’s Berkshire Hathaway Inc. for $700 million to discourage hostile challenges.

In 1991, Salomon admitted it had violated Treasury Department auction rules by placing orders for securities in the name of customers who hadn’t authorized them. Paul W. Mozer, then the head of government bond trading at Salomon, served four months in federal prison for lying to regulators.

Mr. Gutfreund, criticized for failing to notify U.S. regulators quickly enough about Salomon’s false bids, resigned from the firm, with Buffett taking over as chairman for nine months.

He paid a $100,000 civil penalty and was barred from serving as chief executive of a securities firm. He never again ran a financial-services company. Salomon was acquired by Travelers Group Inc. in 1998 and now is part of Citigroup Inc.

A year after his unhappy departure from Salomon, Mr. Gutfreund rejected the company’s offered payout of $8.5 million, representing its estimate of what Gutfreund was owed from vested options and pension benefits. Gutfreund chose to take the case to arbitration, seeking as much as $30 million. The arbitration panel awarded him nothing.

In his later years, Mr. Gutfreund ran a New York-based consulting firm, Gutfreund & Co., and stayed busy with his family. His first marriage, to Joyce Low ended in divorce. In 1981, he married Susan Penn, a former beauty queen and Pan Am flight attendant.

Besides his wife, survivors include three sons from his first marriage; and a son from his second marriage.

In the 2010 interview with Bloomberg News, Mr. Gutfreund said he didn’t have many regrets in life. “If I should have been a saint, I would have been,” he said.

— Bloomberg News