<PAGE>
 
                                                                    EXHIBIT 10.4


                AMENDED AND RESTATED SECOND EMPLOYMENT AGREEMENT
                ------------------------------------------------
                                        


    AGREEMENT by and between GLENDALE FEDERAL BANK, FEDERAL SAVINGS BANK (the
"Company"), and STEPHEN J. TRAFTON (the "Executive"), dated as of the    16th
                                                                      ----------
day of  December  1997.
       -----------     

    The Board of Directors of the Company (the "Board"), has determined that it
is in the best interests of the Company and its shareholders to assure that the
Company will have the continued dedication of the Executive, notwithstanding the
possibility, threat or occurrence of a Change of Control (as defined below).
The Board believes it is imperative to diminish the inevitable distraction of
the Executive by virtue of the personal uncertainties and risks created by a
pending or threatened Change of Control and to encourage the Executive's full
attention and dedication to the Company currently and in the event of any
threatened or pending Change of Control, and to provide the Executive with
compensation and benefits arrangements upon a Change of Control which ensure
that the compensation and benefits expectations of the Executive will be
satisfied and which are competitive with those of other corporations. Therefore,
in order to accomplish these objectives, the Board has caused the Company to
enter into this Agreement.

    NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:

    1.  Certain Definitions.   (a)  The "Effective Date" shall mean the first
        -------------------                                                  
date during the Change of Control Period (as defined in Section l(b)) on which a
Change of Control (as defined in Section 2) occurs.  Anything in this Agreement
to the contrary notwithstanding, if a Change of Control occurs and if the
Executive's employment with the Company is terminated prior to the date on which
the Change of Control occurs, and if it is reasonably demonstrated by the
Executive that such termination of employment (i) was at the request of a third
party who has taken steps reasonably calculated to effect a Change of Control or
(ii) otherwise arose in connection with or anticipation of a Change of Control,
then for all purposes of this Agreement the "Effective Date" shall mean the date
immediately prior to the date of such termination of employment.

    (b)  The "Change of Control Period" shall mean the period commencing on the
date hereof and ending on the third anniversary of the date hereof; provided,
however, that commencing on the date one year after the date hereof, and on each
annual anniversary of such date (such date and each annual anniversary thereof
shall be hereinafter referred to as the "Renewal Date"), unless previously
terminated, the Change of Control Period shall be automatically extended so as
to terminate three years from such Renewal Date, unless at least 60 days prior
to the Renewal Date the Company shall give notice to the Executive that the
Change of Control Period shall not be so extended.

    2.  Change of Control.   For purposes of this Section 2, "Company" shall
        -----------------                                                   
include within its definition Glendale Federal Bank, Federal Savings Bank, and
its holding company, Golden State Bancorp Inc. (the "Holding Company").  For the
purpose of this Agreement, a "Change of Control" shall mean:

                                       1
<PAGE>
 
   (a) The acquisition by any individual, entity or group (within the meaning of
Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning
of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i)
the then outstanding shares of common stock of the Company (the "Outstanding
Company Common Stock") or (ii) the combined voting power of the then outstanding
voting securities of the Company entitled to vote generally in the election of
directors (the "Outstanding Company Voting Securities"); provided, however, that
for purposes of this subsection (a), the following acquisitions shall not
constitute a Change of Control: (i) any acquisition of its shares directly from
the Company, (ii) any acquisition by the Company, (iii) any acquisition by any
employee benefit plan (or related trust) sponsored or maintained by the Company
or any corporation controlled by the Company or (iv) any acquisition by any
corporation pursuant to a transaction which complies with clauses (i), (ii) and
(iii) of subsection (c) of this Section 2; or

    (b)  Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board; provided, however, that any individual becoming a director subsequent to
the date hereof whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least a majority of the directors
then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of an actual or threatened election contest with respect to the election
or removal of directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board; or

    (c)  Consummation of a reorganization, merger or consolidation or sale or
other disposition of all or substantially all of the assets of the Company (a
"Business Combination"), in each case, unless, following such Business
Combination,  (i) all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Outstanding Company Common
Stock and Outstanding Company Voting Securities immediately prior to such
Business Combination beneficially own, directly or indirectly, more than 60% of,
respectively, the then outstanding shares of common stock and the combined
voting power of the then outstanding voting securities entitled to vote
generally in the election of directors, as the case may be, of the corporation
resulting from such Business Combination (including, without limitation, a
corporation which as a result of such transaction owns the Company or all or
substantially all of the Company's assets either directly or through one or more
subsidiaries) in substantially the same proportions as their ownership,
immediately prior to such Business Combination of the Outstanding Company Common
Stock and Outstanding Company Voting Securities, as the case may be,  (ii) no
Person (excluding any corporation resulting from such Business Combination or
any employee benefit plan (or related trust) of the Company or such corporation
resulting from such Business Combination) beneficially owns, directly or
indirectly, 20% or more of, respectively, the then outstanding shares of common
stock of the corporation resulting from such Business Combination or the
combined voting power of the then outstanding voting securities of such
corporation except to the extent that such ownership existed prior to the
Business Combination and (iii) at least a majority of the members of the board
of directors of the corporation resulting from such Business Combination were
members of the Incumbent Board at the time of the execution of the initial
agreement, or of the action of the Board, providing for such Business
Combination; or

                                       2
<PAGE>
 
    (d)  Approval by the shareholders of the Company of a complete liquidation
or dissolution of the Company.

    3. Employment Period.  The Company hereby agrees to continue the Executive
       -----------------                                                      
in its employ, and the Executive hereby agrees to remain in the employ of the
Company subject to the terms and conditions of this Agreement, for the period
commencing on the Effective Date and ending on the third anniversary of such
date  (the "Employment Period").

    4. Terms of Employment.
       ------------------- 

   (a)  Position and Duties.
        ------------ ------ 

        (i)   During the Employment Period,  (A) the Executive's position
(including status, offices, titles and reporting requirements), authority,
duties and responsibilities with the Company and the Holding Company shall be at
least commensurate in all material respects with the most significant of those
held, exercised and assigned at any time during the 120-day period immediately
preceding the Effective Date and (B) the Executive's services shall be performed
at the location where the Executive was employed immediately preceding the
Effective Date or any office or location less than 35 miles from such location.

        (ii)  During the Employment Period, and excluding any periods of
vacation and sick leave to which the Executive is entitled, the Executive agrees
to devote reasonable attention and time during normal business hours to the
business and affairs of the Company and, to the extent necessary to discharge
the responsibilities assigned to the Executive hereunder, to use the Executive's
reasonable best efforts to perform faithfully and efficiently such
responsibilities. During the Employment Period it shall not be a violation of
this Agreement for the Executive to (A) serve on corporate, civic or charitable
boards or committees, (B) deliver lectures, fulfill speaking engagements or
teach at educational institutions and (C) manage personal investments, so long
as such activities do not significantly interfere with the performance of the
Executive's responsibilities as an employee of the Company in accordance with
this Agreement. It is expressly understood and agreed that to the extent that
any such activities have been conducted by the Executive prior to the Effective
Date, the continued conduct of such activities (or the conduct of activities
similar in nature and scope thereto) subsequent to the Effective Date shall not
thereafter be deemed to interfere with the performance of the Executive's
responsibilities to the Company.

   (b)  Compensation.
        ------------ 

        (i)  Base Salary.  During the Employment Period, the Executive shall
             -----------                                                    
receive an annual base salary ("Annual Base Salary"), which shall be paid at a
monthly rate, at least equal to twelve times the highest monthly base salary
paid or payable, including any base salary which has been earned but deferred,
to the Executive by the Company and its affiliated companies in respect of the
twelve-month period immediately preceding the month in which the Effective Date
occurs.  During the Employment Period, the Annual Base Salary shall be reviewed
no more than 12 months after the last salary increase awarded to the Executive
prior to the Effective Date and thereafter at least annually.  Any increase in
Annual Base Salary shall not serve to limit or reduce any other obligation to
the Executive under this Agreement.  Annual Base Salary shall not be reduced
after any such increase and the term Annual Base Salary as utilized in this
Agreement shall refer to Annual Base Salary as so increased.  As used in this

                                       3
<PAGE>
 
Agreement, the term "affiliated companies" shall include any company controlled
by, controlling or under common control with the Company.

        (ii)  Annual Target Bonus.  In addition to Annual Base Salary, the
              -------------------                                         
Executive shall be awarded, for each fiscal year ending during the Employment
Period, an annual bonus (the "Annual Target Bonus") in cash at least equal to
the Executive's highest target bonus under the Company's Executive Incentive
Plans, or any comparable bonus under any predecessor or successor plan, for the
last three full fiscal years prior to the Effective Date (annualized in the
event that the Executive was not employed by the Company for the whole of such
fiscal year)  (the "Recent Annual Target Bonus").  Each such Annual Target Bonus
shall be paid no later than the end of the third month of the fiscal year next
following the fiscal year for which the Annual Target Bonus is awarded, unless
the Executive shall elect to defer the receipt of such Annual Target Bonus.

       (iii)  Incentive, Savings and Retirement Plans. During the Employment
              ---------------------------------------                       
Period, the Executive shall be entitled to participate in all incentive, savings
and retirement plans, practices, policies and programs applicable generally to
other peer executives of the Company and its affiliated companies, but in no
event shall such plans, practices, policies and programs provide the Executive
with incentive opportunities (measured with respect to both regular and special
incentive opportunities, to the extent, if any, that such distinction is
applicable), savings opportunities and retirement benefit opportunities, in each
case, less favorable, in the aggregate, than the most favorable of those
provided by the Company and its affiliated companies for the Executive under
such plans, practices, policies and programs as in effect at any time during the
120-day period immediately preceding the Effective Date or if more favorable to
the Executive, those provided generally at any time after the Effective Date to
other peer executives of the Company and its affiliated companies.

       (iv)  Welfare Benefit Plans.  During the Employment Period, the Executive
             ---------------------                                              
and/or the Executive's family, as the case may be, shall be eligible for
participation in and shall receive all benefits under welfare benefit plans,
practices, policies and programs provided by the Company and its affiliated
companies (including, without limitation, medical, prescription, dental,
disability, employee life, group life, accidental death and travel accident
insurance plans and programs) to the extent applicable generally to other peer
executives of the Company and its affiliated companies, but in no event shall
such plans, practices, policies and programs provide the Executive with benefits
which are less favorable, in the aggregate, than the most favorable of such
plans, practices, policies and programs in effect for the Executive at any time
during the 120-day period immediately preceding the Effective Date or, if more
favorable to the Executive, those provided generally at any time after the
Effective Date to other peer executives of the Company and its affiliated
companies.

       (v)  Expenses.  During the Employment Period, the Executive shall be
            --------                                                       
entitled to receive prompt reimbursement for all reasonable expenses incurred by
the Executive in accordance with the most favorable policies, practices and
procedures of the Company and its affiliated companies in effect for the
Executive at any time during the 120-day period immediately preceding the
Effective Date or, if more favorable to the Executive, as in effect generally at
any time thereafter with respect to other peer executives of the Company and its
affiliated companies.

                                       4
<PAGE>
 
       (vi)  Fringe Benefits.  During the Employment Period, the Executive shall
             ---------------                                                    
be entitled to fringe benefits, including, without limitation, tax and financial
planning services, payment of club dues, and, if applicable, use of an
automobile and payment of related expenses, in accordance with the most
favorable plans, practices, programs and policies of the Company and its
affiliated companies in effect for the Executive at any time during the 120-day
period immediately preceding the Effective Date or, if more favorable to the
Executive, as in effect generally at any time thereafter with respect to other
peer executives of the Company and its affiliated companies.

       (vii)  Office and Support Staff.  During the Employment Period, the
              ------------------------                                    
Executive shall be entitled to an office or offices of a size and with
furnishings and other appointments, and to exclusive personal secretarial and
other assistance, at least equal to the most favorable of the foregoing provided
to the Executive by the Company and its affiliated companies at any time during
the 120-day period immediately preceding the Effective Date or, if more
favorable to the Executive, as provided generally at any time thereafter with
respect to other peer executives of the Company and its affiliated companies.

       (viii)  Vacation.  During the Employment Period, the Executive shall be
               --------                                                       
entitled to paid vacation in accordance with the most favorable plans, policies,
programs and practices of the Company and its affiliated companies as in effect
for the Executive at any time during the 120-day period immediately preceding
the Effective Date or, if more favorable to the Executive, as in effect
generally at any time thereafter with respect to other peer executives of the
Company and its affiliated companies.

    5.  Termination of Employment.   (a)  Death or Disability.  The Executive's
        -------------------------         -------------------                  
employment shall terminate automatically upon the Executive's death during the
Employment Period.  If the Company determines in good faith that the Disability
of the Executive has occurred during the Employment Period (pursuant to the
definition of Disability set forth below), it may give to the Executive written
notice in accordance with Section 12(b) of this Agreement of its intention to
terminate the Executive's employment.  In such event, the Executive's employment
with the Company shall terminate effective on the 30th day after receipt of such
notice by the Executive (the "Disability Effective Date"), provided that, within
the 30 days after such receipt, the Executive shall not have returned to full-
time performance of the Executive's duties.  For purposes of this Agreement,
"Disability" shall mean the absence of the Executive from the Executive's duties
with the Company on a full-time basis for 180 continuous days because of injury
or sickness during which Executive cannot perform each of the material duties of
his regular occupation for which the Executive is reasonably fitted by training,
education, or experience, as determined by the Company's provider of the long
term disability insurance plan.

    (b)  Cause.  The Company may terminate the Executive's employment during the
         -----                                                                  
Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean:

    (i)  the willful and continued failure of the Executive to perform
substantially the Executive's duties with the Company or one of its affiliates
(other than any such failure resulting from incapacity due to physical or mental
illness), after a written demand for substantial performance is delivered to the
Executive by the Board or the Chief Executive Officer of the Company which
specifically identifies the 

                                       5
<PAGE>
 
manner in which the Board or Chief Executive Officer believes that the Executive
has not substantially performed the Executive's duties, or

    (ii)  the willful engaging by the Executive in illegal conduct or gross
misconduct which is materially and demonstrably injurious to the Company.

For purposes of this provision, no act or failure to act, on the part of the
Executive, shall be considered "willful" unless it is done, or omitted to be
done, by the Executive in bad faith or without reasonable belief that the
Executive's action or omission was in the best interests of the Company. Any
act, or failure to act, based upon authority given pursuant to a resolution duly
adopted by the Board or upon the instructions of the Chief Executive Officer or
a senior officer of the Company or based upon the advice of counsel for the
Company shall be conclusively presumed to be done, or omitted to be done, by the
Executive in good faith and in the best interests of the Company.  The cessation
of employment of the Executive shall not be deemed to be for Cause unless and
until there shall have been delivered to the Executive a copy of a resolution
duly adopted by the affirmative vote of not less than three-quarters of the
entire membership of the Board at a meeting of the Board called and held for
such purpose (after reasonable notice is provided to the Executive and the
Executive is given an opportunity, together with counsel, to be heard before the
Board), finding that, in the good faith opinion of the Board, the Executive is
guilty of the conduct described in subparagraph (i) or (ii) above, and
specifying the particulars thereof in detail.

    (c)  Good Reason.  The Executive's employment may be terminated by the
         -----------                                                      
Executive for Good Reason.  For purposes of this Agreement, "Good Reason" shall
mean:

    (i)    the assignment to the Executive of any duties inconsistent in any
respect with the Executive's position (including status, offices, titles and
reporting requirements), authority, duties or responsibilities as contemplated
by Section 4(a) of this Agreement, or any other action by the Company or the
Holding Company which results in a diminution in such position, authority,
duties or responsibilities, excluding for this purpose an isolated,
insubstantial and inadvertent action not taken in bad faith and which is
remedied by the Company promptly after receipt of notice thereof given by the
Executive;

    (ii)   any failure by the Company to comply with any of the provisions of
Section 4(b) of this Agreement, other than an isolated, insubstantial and
inadvertent failure not occurring in bad faith and which is remedied by the
Company promptly after receipt of notice thereof given by the Executive;

    (iii)  the Company's requiring the Executive to be based at any office or
location other than as provided in Section 4(a)(i)(B) hereof or the Company's
requiring the Executive to travel on Company business to a substantially greater
extent than required immediately prior to the Effective Date;

    (iv)   any purported termination by the Company of the Executive's
employment otherwise than as expressly permitted by this Agreement; or

    (v)    any failure by the Company to comply with and satisfy Section ll(c)
of this Agreement.

                                       6
<PAGE>
 
For purposes of this Section 5(c), any good faith determination of "Good Reason"
made by the Executive shall be conclusive.  Anything in this Agreement to the
contrary notwithstanding, a termination by the Executive for any reason during
the 30-day period immediately following the first anniversary of the Effective
Date shall be deemed to be a termination for Good Reason for all purposes of
this Agreement.

    (d)  Notice of Termination.  Any termination by the Company for Cause, or by
         ---------------------                                                  
the Executive for Good Reason, shall be communicated by Notice of Termination to
the other party hereto given in accordance with Section 12(b) of this Agreement.
For purposes of this Agreement, a "Notice of Termination" means a written notice
which (i) indicates the specific termination provision in this Agreement relied
upon,  (ii) to the extent applicable, sets forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated and (iii) if the Date of Termination
(as defined below) is other than the date of receipt of such notice, specifies
the termination date (which date shall be not more than thirty days after the
giving of such notice).  The failure by the Executive or the Company to set
forth in the Notice of Termination any fact or circumstance which contributes to
a showing of Good Reason or Cause shall not waive any right of the Executive or
the Company, respectively, hereunder or preclude the Executive or the Company,
respectively, from asserting such fact or circumstance in enforcing the
Executive's or the Company's rights hereunder.

  (e)  Date of Termination.  "Date of Termination" means (i) if the Executive's
       -------------------                                                     
employment is terminated by the Company for Cause, or by the Executive for Good
Reason, the date of receipt of the Notice of Termination or any later date
specified therein, as the case may be,  (ii) if the Executive's employment is
terminated by the Company other than for Cause or Disability, the Date of
Termination shall be the date on which the Company notifies the Executive of
such termination and (iii) if the Executive's employment is terminated by reason
of death or Disability, the Date of Termination shall be the date of death of
the Executive or the Disability Effective Date, as the case may be.

  6.  Obligations of the Company upon Termination. (a)  Good Reason; Other Than
      -------------------------------------------       -----------------------
for Cause, Death or Disability. If, during the Employment Period, the Company
------------------------------                                               
shall terminate the Executive's employment other than for Cause or Disability or
the Executive shall terminate employment for Good Reason:

      (i) the Company shall pay to the Executive in a lump sum in cash within 30
days after the Date of Termination the aggregate of the following amounts:

  A.  the sum of (1) the Executive's Annual Base Salary through the Date of
Termination to the extent not theretofore paid,  (2) the product of (x) the
Recent Annual Target Bonus and (y) a fraction, the numerator of which is the
number of days in the current fiscal year through the Date of Termination, and
the denominator of which is 365 and (3) any compensation previously deferred by
the Executive (together with any accrued interest or earnings thereon) and any
accrued vacation pay, in each case to the extent not theretofore paid (the sum
of the amounts described in clauses (1),  (2), and (3) shall be hereinafter
referred to as the "Accrued Obligations"); and

                                       7
<PAGE>
 
  B.  the amount equal to the product of (1) three and (2) the sum of (x) the
Executive's Annual Base Salary and (y) the Recent Annual Target Bonus; and

  C. an amount equal to the excess of (a) the actuarial equivalent of the
benefit under the Company's qualified defined benefit retirement plan (the
"Retirement Plan")   (utilizing actuarial assumptions no less favorable to the
Executive than those in effect under the Company's Retirement Plan immediately
prior to the Effective Date), and any excess or supplemental retirement plan in
which the Executive participates (together, the "SERP") which the Executive
would receive if the Executive's employment continued for three years after the
Date of Termination assuming for this purpose that all accrued benefits are
fully vested, and, assuming that the Executive's compensation in each of the
three years is that required by Section 4(b)(i) and Section 4(b)(ii), over (b)
the actuarial equivalent of the Executive's actual benefit (paid or payable), if
any, under the Retirement Plan and the SERP as of the Date of Termination;

     (ii)  for three years  after the Executive's Date of Termination, or such
longer period as may be provided by the terms of the appropriate plan, program,
practice or policy, the Company shall continue benefits to the Executive and/or
the Executive's family at least equal to those which would have been provided to
them in accordance with the plans, programs, practices and policies described in
Section 4(b)(iv) of this Agreement if the Executive's employment had not been
terminated or, if more favorable to the Executive, as in effect generally at any
time thereafter with respect to other peer executives of the Company and its
affiliated companies and their families, provided, however, that if the
Executive becomes reemployed with another employer and is eligible to receive
medical or other welfare benefits under another employer provided plan, the
medical and other welfare benefits described herein shall be secondary to those
provided under such other plan during such applicable period of eligibility.
For purposes of determining eligibility (but not the time of commencement of
benefits) of the Executive for retiree benefits pursuant to such plans,
practices, programs and policies, the Executive shall be considered to have
remained employed until three years after the Date of Termination and to have
retired on the last day of such period;

     (iii) the Company shall, at its sole expense as incurred, provide the
Executive with outplacement services the scope and provider of which shall be
selected by the Executive in his sole discretion;

     (iv)  to the extent not theretofore paid or provided, the Company shall
timely pay or provide to the Executive any other amounts or benefits required to
be paid or provided or which the Executive is eligible to receive under any
plan, program, policy or practice or contract or agreement of the Company and
its affiliated companies (such other amounts and benefits shall be hereinafter
referred to as the "Other Benefits"); and

     (v)   all stock awards shall immediately vest.

      (b)  Death.  If the Executive's employment hereunder terminates by reason
           ------                                                              
of his death during the Employment Period, the Executive's surviving spouse
and/or beneficiary or estate (as designated in accordance with any applicable
plan) shall be entitled to receive a payment, as determined below, in a lump sum
in cash, within 30 days of the date of death, and the timely payment or
provision of Other 

                                       8
<PAGE>
 
Benefits. The payment referred to above in this Section 7(b) shall be equal to
the sum of (i) the Executive's Annual Base Salary in effect on the date of death
and the Executive's Recent Annual Target Bonus multiplied by the sum of the
number of whole years remaining on the term of the Agreement and a fraction, the
numerator of which is the number of days remaining from the date of death in the
current year of the Agreement and the denominator of which is 365. With respect
to the provision of Other Benefits, the term Other Benefits as utilized in this
Section 6 (b) shall include, without limitation, and the Executive's estate
and/or beneficiaries shall be entitled to receive, benefits at least equal to
the most favorable benefits provided by the Company and affiliated companies to
the estates and beneficiaries of peer executives of the Company and such
affiliated companies under such plans, programs, practices and policies relating
to death benefits, if any, as in effect with respect to other peer executives
and their beneficiaries at any time during the 120-day period immediately
preceding the Effective Date or, if more favorable to the Executive's estate
and/or the Executive's beneficiaries, as in effect on the date of the
Executive's death with respect to other peer executives of the Company and its
affiliated companies and their beneficiaries. The Company shall have no further
obligation under this Agreement with respect to the Executive.

      (c)  Disability.  With respect to the provision of Other Benefits, the
           -----------                                                      
term Other Benefits as utilized in this Section 6 (c) shall include, and the
Executive shall be entitled after the Disability Effective Date to receive,
disability and other benefits at least equal to the most favorable of those
generally provided by the Company and its affiliated companies to disabled
executives and/or their families in accordance with such plans, programs,
practices and policies relating to disability, if any, as in effect generally
with respect to other peer executives and their families at any time during the
120-day period immediately preceding the Effective Date or, if more favorable to
the Executive and/or the Executive's family, as in effect at any time thereafter
generally with respect to other peer executives of the Company and its
affiliated companies and their families.  The Company shall have no further
obligation under this Agreement with respect to the Executive.

      (d)  Cause; Other than for Good Reason.  If the Executive's employment
           ---------------------------------                                
shall be terminated for Cause during the Employment Period, this Agreement shall
terminate without further obligations to the Executive other than the obligation
to pay to the Executive (x) his Annual Base Salary through the Date of
Termination,  (y) the amount of any compensation previously deferred by the
Executive, and (z) Other Benefits, in each case to the extent theretofore
unpaid.  If the Executive voluntarily terminates employment during the
Employment Period, excluding a termination for Good Reason, this Agreement shall
terminate without further obligations to the Executive, other than for Accrued
Obligations and the timely payment or provision of Other Benefits.  In such
case, all Accrued Obligations shall be paid to the Executive in a lump sum in
cash within 30 days of the Date of Termination.

  7.  Non-exclusivity of Rights.  Nothing in this Agreement shall prevent or
      -------------------------                                             
limit the Executive's continuing or future participation in any plan, program,
policy or practice provided by the Company or any of its affiliated companies
and for which the Executive may qualify, nor, subject to Section 12(f), shall
anything herein limit or otherwise affect such rights as the Executive may have
under any contract or agreement with the Company or any of its affiliated
companies.  Amounts which are vested benefits or which the Executive is
otherwise entitled to receive under any plan, policy, practice or program of or
any contract or agreement with the Company or any of its affiliated 

                                       9
<PAGE>
 
companies at or subsequent to the Date of Termination shall be payable in
accordance with such plan, policy, practice or program or contract or agreement
except as explicitly modified by this Agreement.

  8.  Full Settlement.  The Company's obligation to make the payments provided
      ---------------                                                         
for in this Agreement and otherwise to perform its obligations hereunder shall
not be affected by any set-off, counterclaim, recoupment, defense or other
claim, right or action which the Company may have against the Executive or
others.  In no event shall the Executive be obligated to seek other employment
or take any other action by way of mitigation of the amounts payable to the
Executive under any of the provisions of this Agreement and such amounts shall
not be reduced whether or not the Executive obtains other employment.  The
Company agrees to pay as incurred, to the full extent permitted by law, all
legal fees and expenses which the Executive may reasonably incur as a result of
any contest (regardless of the outcome thereof) by the Company, the Executive or
others of the validity or enforceability of, or liability under, any provision
of this Agreement or any guarantee of performance thereof (including as a result
of any contest by the Executive about the amount of any payment pursuant to this
Agreement), plus in each case interest on any delayed payment at the applicable
Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code
of 1986, as amended (the "Code").

 9.  Certain Additional Payments by the Company.
     ------------------------------------------ 

     (a) Anything in this Agreement to the contrary notwithstanding and except
as set forth below, in the event it shall be determined that any payment or
distribution by the Company or its affiliates to or for the benefit of the
Executive (whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise, but determined without regard to any
additional payments required under this Section 9) (a "Payment") would be
subject to the excise tax imposed by Section 4999 of the Code or any interest or
penalties are incurred by the Executive with respect to such excise tax (such
excise tax, together with any such interest and penalties, are hereinafter
collectively referred to as the "Excise Tax"), then the Executive shall be
entitled to receive an additional payment (a "Gross-Up Payment") in an amount
such that after payment by the Executive of all taxes (including any interest or
penalties imposed with respect to such taxes), including, without limitation,
any income taxes (and any interest and penalties imposed with respect thereto)
and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an
amount of the Gross-Up Payment equal to the Excise Tax imposed upon the
Payments. Notwithstanding the foregoing provisions of this Section 9(a), if it
shall be determined that the Executive is entitled to a Gross-Up Payment, but
that the Payments do not exceed 110% of the greatest amount (the "Reduced
Amount") that could be paid to the Executive such that the receipt of Payments
would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to
the Executive and the Payments, in the aggregate, shall be reduced to the
Reduced Amount.

     (b) Subject to the provisions of Section 9(c), all determinations required
to be made under this Section 9, including whether and when a Gross-Up Payment
is required and the amount of such Gross-Up Payment and the assumptions to be
utilized in arriving at such determination, shall be made by or such other
certified public accounting firm as may be designated by the Executive (the
"Accounting Firm") which shall provide detailed supporting calculations both to
the Company and the Executive within 15 business days of the receipt of notice
from the Executive that there has been a Payment, or such earlier time as is
requested by the Company. In the event that the Accounting Firm is serving as
accountant or auditor for the individual, entity or group effecting the Change
of Control, the

                                       10
<PAGE>
 
Executive shall appoint another nationally recognized accounting firm to make
the determinations required hereunder (which accounting firm shall then be
referred to as the Accounting Firm hereunder). All fees and expenses of the
Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as
determined pursuant to this Section 9, shall be paid by the Company to the
Executive within five days of the receipt of the Accounting Firm's
determination. Any determination by the Accounting Firm shall be binding upon
the Company and the Executive. As a result of the uncertainty in the application
of Section 4999 of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that Gross-Up Payments which will not
have been made by the Company should have been made ("Underpayment"), consistent
with the calculations required to be made hereunder. In the event that the
Company exhausts its remedies pursuant to Section 9(c) and the Executive
thereafter is required to make a payment of any Excise Tax, the Accounting Firm
shall determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the benefit of the
Executive.

  (c)  The Executive shall notify the Company in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment by the
Company of the Gross-Up Payment.  Such notification shall be given as soon as
practicable but no later than ten business days after the Executive is informed
in writing of such claim and shall apprise the Company of the nature of such
claim and the date on which such claim is requested to be paid.  The Executive
shall not pay such claim prior to the expiration of the 30 day period following
the date on which it gives such notice to the Company (or such shorter period
ending on the date that any payment of taxes with respect to such claim is due).
If the Company notifies the Executive in writing prior to the expiration of such
period that it desires to contest such claim, the Executive shall:

  (i)   give the Company any information reasonably requested by the Company
relating to such claim,

  (ii)  take such action in connection with contesting such claim as the Company
shall reasonably request in writing from time to time, including, without
limitation, accepting legal representation with respect to such claim by an
attorney reasonably selected by the Company,

  (iii) cooperate with the Company in good faith in order effectively to contest
such claim, and

  (iv)  permit the Company to participate in any proceedings relating to such
claim;

provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold the Executive harmless, on an
aftertax basis, for any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such representation and
payment of costs and expenses. Without limitation on the foregoing provisions of
this Section 9(c), the Company shall control all proceedings taken in connection
with such contest and, at its sole option, may pursue or forgo any and all
administrative appeals, proceedings, hearings and conferences with the taxing
authority in respect of such claim and may, at its sole option, either direct
the Executive to pay the tax claimed and sue for a refund or contest the claim
in any permissible manner, and the Executive agrees to prosecute such contest to
a determination before any administrative tribunal, in a court of initial

                                       11
<PAGE>
 
jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that if the Company directs the Executive to pay
such claim and sue for a refund, the Company shall advance the amount of such
payment to the Executive, on an interest-free basis and shall indemnify and hold
the Executive harmless, on an after-tax basis, from any Excise Tax or income tax
(including interest or penalties with respect thereto) imposed with respect to
such advance or with respect to any imputed income with respect to such advance;
and further provided that any extension of the statute of limitations relating
to payment of taxes for the taxable year of the Executive with respect to which
such contested amount is claimed to be due is limited solely to such contested
amount.  Furthermore, the Company's control of the contest shall be limited to
issues with respect to which a Gross-Up Payment would be payable hereunder and
the Executive shall be entitled to settle or contest, as the case may be, any
other issue raised by the Internal Revenue Service or any other taxing
authority.

  (d)  If, after the receipt by the Executive of an amount advanced by the
Company pursuant to Section 9(c), the Executive becomes entitled to receive any
refund with respect to such claim, the Executive shall (subject to the Company's
complying with the requirements of Section 9(c)) promptly pay to the Company the
amount of such refund (together with any interest paid or credited thereon after
taxes applicable thereto).  If, after the receipt by the Executive of an amount
advanced by the Company pursuant to Section 9(c), a determination is made that
the Executive shall not be entitled to any refund with respect to such claim and
the Company does not notify the Executive in writing of its intent to contest
such denial of refund prior to the expiration of 30 days after such
determination, then such advance shall be forgiven and shall not be required to
be repaid and the amount of such advance shall offset, to the extent thereof,
the amount of Gross-Up Payment required to be paid.

  10.  Confidential Information.  The Executive shall hold in a fiduciary
       ------------------------                                          
capacity for the benefit of the Company all secret or confidential information,
knowledge or data relating to the Company or any of its affiliated companies,
and their respective businesses, which shall have been obtained by the Executive
during the Executive's employment by the Company or any of its affiliated
companies and which shall not be or become public knowledge (other than by acts
by the Executive or representatives of the Executive in violation of this
Agreement).  After termination of the Executive's employment with the Company,
the Executive shall not, without the prior written consent of the Company or as
may otherwise be required by law or legal process, communicate or divulge any
such information, knowledge or data to anyone other than the Company and those
designated by it.  In no event shall an asserted violation of the provisions of
this Section 10 constitute a basis for deferring or withholding any amounts
otherwise payable to the Executive under this Agreement.

  11.  Successors.   (a)  This Agreement is personal to the Executive and
       ----------                                                        
without the prior written consent of the Company shall not be assignable by the
Executive otherwise than by will or the laws of descent and distribution.  This
Agreement shall inure to the benefit of and be enforceable by the Executive's
legal representatives.

  (b)  This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns.

  (c)  The Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company to 

                                       12
<PAGE>
 
assume expressly and agree to perform this Agreement in the same manner and to
the same extent that the Company would be required to perform it if no such
succession had taken place. As used in this Agreement, "Company" shall mean the
Company as hereinbefore defined and any successor to its business and/or assets
as aforesaid which assumes and agrees to perform this Agreement by operation of
law, or otherwise.

  12.  Miscellaneous.   (a)  This Agreement shall be governed by and construed
       -------------                                                          
in accordance with the laws of the State of California, without reference to
principles of conflict of laws and to the extent not preempted by the laws of
the United States of America.  The captions of this Agreement are not part of
the provisions hereof and shall have no force or effect.

  (b)  All notices and other communications hereunder shall be in writing and
shall be given by hand delivery to the other party or by registered or certified
mail, return receipt requested, postage prepaid, addressed as follows:
 
  If to the Executive:  To his last known address in the Company's records. All
  -------------------                                                          
such notices and communications shall be deemed to have been received on the
earlier of the date of receipt or the third business day after the date of
mailing thereof.

  If to the Company:   To the Bank at:
  -----------------                   
 
                               Glendale Federal Bank,      
                               Federal Savings Bank        
                               401 North Brand Boulevard   
                               Glendale, California 91203  
                                                           
                               Attention:  General Counsel  


or to such other address as either party shall have furnished to the other in
writing in accordance herewith.  Notice and communications shall be effective
when actually received by the addressee.

  (c)  The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement.

  (d)  The Company may withhold from any amounts payable under this Agreement
such Federal, state, local or foreign taxes as shall be required to be withheld
pursuant to any applicable law or regulation.

  (e)  The Executive's or the Company's failure to insist upon strict compliance
with any provision of this Agreement or the failure to assert any right the
Executive or the Company may have hereunder, including, without limitation, the
right of the Executive to terminate employment for Good Reason pursuant to
Section 5(c)(i)-(v) of this Agreement, shall not be deemed to be a waiver of
such provision or right or any other provision or right of this Agreement.

                                       13
<PAGE>
 
  (f)  The Executive and the Company acknowledge that, except as may otherwise
be provided under any other written agreement between the Executive and the
Company, the employment of the Executive by the Company is "at will" and,
subject to Section l(a) hereof, prior to the Effective Date, the Executive's
employment and/or this Agreement may be terminated by either the Executive or
the Company at any time with or without cause prior to the Effective Date, in
which case the Executive shall have no further rights under this Agreement.
From and after the Effective Date this Agreement shall supersede any other
agreement between the parties with respect to the subject matter hereof.

  (g) All prior agreements between the parties relating to this Agreement are
incorporated in this Agreement which constitutes the final expression of intent
of the parties.  The terms of this Agreement may not be contradicted by evidence
of any prior agreement or contemporaneous oral agreement.  No extrinsic evidence
whatsoever may be introduced in any judicial or arbitration proceedings, if any,
involving this Agreement. This Agreement may not be modified except in writing
signed by an authorized officer of Glendale Federal and by the Executive.


  IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and,
pursuant to the authorization from its Board of Directors, the Company has
caused these presents to be executed in its name on its behalf, all as of the
day and year first above written.



ATTEST:                            GLENDALE FEDERAL BANK,
                                   FEDERAL SAVINGS BANK



/s/ James R. Eller, Jr.            By: /s/ Diane C. Creel, Chairperson
--------------------------             -------------------------------
Secretary                              Diane C. Creel, Chairperson
James R. Eller, Jr.                    Officer Compensation and
                                       Personnel Committee






WITNESS:                           EXECUTIVE:


/s/ James R. Eller, Jr.                /s/ Stephen J. Trafton
--------------------------             -------------------------------
James R. Eller, Jr.                    Stephen J. Trafton

                                       14