Drexel Burnham Lambert
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Drexel Burnham Lambert was an American multinational
investment bank Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance, the purpose of investing is ...
that was forced into bankruptcy in 1990 due to its involvement in illegal activities in the
junk bond In finance, a high-yield bond (non-investment-grade bond, speculative-grade bond, or junk bond) is a bond that is rated below investment grade by credit rating agencies. These bonds have a higher risk of default or other adverse credit events, ...
market, driven by senior executive
Michael Milken Michael Robert Milken (born July 4, 1946) is an American financier. He is known for his role in the development of the market for high-yield bonds ("junk bonds"), and his conviction and sentence following a guilty plea on felony charges for vio ...
. At its height, it was a Bulge Bracket bank, as the fifth-largest investment bank in the
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.Your Best Job , MoreBusiness.com
/ref> The firm had its most profitable
fiscal year A fiscal year (or financial year, or sometimes budget year) is used in government accounting, which varies between countries, and for budget purposes. It is also used for financial reporting by businesses and other organizations. Laws in many ...
in 1986, netting $545.5 million—at the time, the most profitable year ever for a
Wall Street Wall Street is an eight-block-long street in the Financial District of Lower Manhattan in New York City. It runs between Broadway in the west to South Street and the East River in the east. The term "Wall Street" has become a metonym for t ...
firm, and equivalent to $ billion in . Milken, who was Drexel's head of high-yield securities, was paid $295 million, the highest salary that an employee in the modern history of the world has ever received. The firm's aggressive culture led many Drexel employees to stray into unethical, and sometimes illegal, conduct. Milken and his colleagues at the high-yield bond department believed the securities laws hindered the free flow of trade. Eventually, Drexel's excessive ambition led it to abuse the junk bond market and become involved in
insider trading Insider trading is the trading of a public company's stock or other securities (such as bonds or stock options) based on material, nonpublic information about the company. In various countries, some kinds of trading based on insider information ...
. In February 1990, Drexel was forced into
Chapter 11 Chapter 11 of the United States Bankruptcy Code (Title 11 of the United States Code) permits reorganization under the bankruptcy laws of the United States. Such reorganization, known as Chapter 11 bankruptcy, is available to every business, wheth ...
bankruptcy by the chairmen of the
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and the
Securities and Exchange Commission The U.S. Securities and Exchange Commission (SEC) is an independent agency of the United States federal government, created in the aftermath of the Wall Street Crash of 1929. The primary purpose of the SEC is to enforce the law against market ...
. It was the first Wall Street firm to be forced into bankruptcy since the
Great Depression The Great Depression (19291939) was an economic shock that impacted most countries across the world. It was a period of economic depression that became evident after a major fall in stock prices in the United States. The economic contagio ...
. After Drexel's collapse, Kurt Eichenwald of ''
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'' noted that the bank "fueled many of the biggest corporate takeovers of the 1980s."


Early history

I.W. "Tubby" Burnham, a 1931 graduate of the
Wharton School The Wharton School of the University of Pennsylvania ( ; also known as Wharton Business School, the Wharton School, Penn Wharton, and Wharton) is the business school of the University of Pennsylvania, a private Ivy League research university in P ...
of the
University of Pennsylvania The University of Pennsylvania (also known as Penn or UPenn) is a private research university in Philadelphia. It is the fourth-oldest institution of higher education in the United States and is ranked among the highest-regarded universitie ...
, founded the firm in 1935 as Burnham and Company, a small
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–based retail
brokerage A broker is a person or firm who arranges transactions between a buyer and a seller for a commission when the deal is executed. A broker who also acts as a seller or as a buyer becomes a principal party to the deal. Neither role should be confu ...
."I.W. Burnham II, a Baron of Wall Street, Is Dead at 93"
''The New York Times'', June 29, 2002.
Burnham started the firm with $100,000 of capital (equivalent to $ million in ), $96,000 of which was borrowed from his grandfather Isaac Wolfe Bernheim, the founder of a
Kentucky Kentucky ( , ), officially the Commonwealth of Kentucky, is a state in the Southeastern region of the United States and one of the states of the Upper South. It borders Illinois, Indiana, and Ohio to the north; West Virginia and Virginia to ...
distillery. It became one of the more successful brokerages in the country, eventually building its capital to $1 billion. While Burnham eventually branched out into investment banking, the company's ability to expand was limited by the structure of the investment banking industry of that time. A strict unwritten set of rules assured the dominance of a few large firms by controlling the order in which their names appeared in advertisements for an
underwriting Underwriting (UW) services are provided by some large financial institutions, such as banks, insurance companies and investment houses, whereby they guarantee payment in case of damage or financial loss and accept the financial risk for liabilit ...
. Burnham, as a "sub-major" firm, needed to connect with a "major" or "special" firm in order to further expand. Burnham found a willing partner in Drexel Firestone, an ailing
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-based firm with a rich history. Drexel Firestone traced its history to 1838, when
Francis Martin Drexel Francis Martin Drexel (April 7, 1792 – June 5, 1863) was a Philadelphia (Pennsylvania, United States) banker and artist. He was the father of Anthony Joseph Drexel, the founder of Drexel University and the grandfather of Saint Katherine Drexe ...
founded Drexel & Company. His son,
Anthony Joseph Drexel Anthony Joseph Drexel Sr. (September 13, 1826 – June 30, 1893) was an American banker who played a major role in the rise of modern global finance after the American Civil War. As the dominant partner of Drexel & Co. of Philadelphia, he founde ...
, became a partner in the firm at age 21, in 1847. The company made money in the opportunities created by mid-century gold finds in
California California is a U.S. state, state in the Western United States, located along the West Coast of the United States, Pacific Coast. With nearly 39.2million residents across a total area of approximately , it is the List of states and territori ...
. The company was also involved in financial deals with the federal government during the
Mexican–American War The Mexican–American War, also known in the United States as the Mexican War and in Mexico as the (''United States intervention in Mexico''), was an armed conflict between the United States and Mexico from 1846 to 1848. It followed the 1 ...
and the
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. A. J. Drexel took over the firm when his father died in 1863. He partnered with
J. P. Morgan John Pierpont Morgan Sr. (April 17, 1837 – March 31, 1913) was an American financier and investment banker who dominated corporate finance on Wall Street throughout the Gilded Age. As the head of the banking firm that ultimately became known ...
and created one of the largest banking companies in the world, Drexel, Morgan & Co.''The Man Who Made Wall Street: Anthony J. Drexel and the Rise of Modern Finance''. In 1940, several former Drexel partners and associates formed an investment bank and assumed the rights to the "Drexel and Company" name. The old Drexel, which chose to concentrate on commercial banking after the Glass–Steagall Act regulated the separation of commercial and investment banking, was completely absorbed into the Morgan empire. The new Drexel grew slowly, coasting on its predecessor's historic ties to the larger securities issuers. By the early 1960s, it found itself short on capital. It merged with
Harriman, Ripley and Company Harriman, Ripley and Company was an investment bank created by the partners of Brown Brothers Harriman after the passage of the Glass Steagall Act mandated firewalls between commercial banks and investment banks. Brown Brothers Harriman positioned ...
in 1965, and renamed itself Drexel Harriman Ripley. In the mid-1970s, it sold a 25 percent stake to
Firestone Tire and Rubber Company Firestone Tire and Rubber Company is a tire company founded by Harvey Firestone (1868–1938) in 1900 initially to supply solid rubber side-wire tires for fire apparatus, and later, pneumatic tires for wagons, buggies, and other forms of wheeled ...
, renaming itself Drexel Firestone. Despite having only two major clients by the dawn of the 1970s, Drexel was still considered a major firm, and thus got a large chunk of the syndicates formed to sell stocks and bonds. It was a shell of its former self, however, as evidenced in 1973, when a severe drop in the stock market sent the firm reeling. Drexel management soon realized that a prominent name was not nearly enough to survive, and was very receptive to a merger offer from Burnham. Even though Burnham was the surviving company, the more powerful investment banks (whose informal blessing the new firm needed to survive on Wall Street) insisted that the Drexel name come first as a condition of joining the "major" bracket. Thus, Drexel Burnham and Company, headquartered in New York, was born in 1973'' Den of Thieves''. Stewart, J. B. New York: Simon & Schuster, 1991. . with $44 million in capital. In 1976, it merged with William D. Witter (also known as Lambert Brussels Witter), a small "research boutique" that was the American arm of
Belgian Belgian may refer to: * Something of, or related to, Belgium * Belgians, people from Belgium or of Belgian descent * Languages of Belgium, languages spoken in Belgium, such as Dutch, French, and German *Ancient Belgian language, an extinct languag ...
-based
Groupe Bruxelles Lambert Groupe Bruxelles Lambert (GBL), is a Belgian holding company invested in various sectors within companies that can be considered marketleaders and in which it can play an active role as a professional shareholder over the long term. In the last ...
. The firm was renamed Drexel Burnham Lambert, and incorporated that year after 41 years as a
limited partnership A limited partnership (LP) is a form of partnership similar to a general partnership except that while a general partnership must have at least two general partners (GPs), a limited partnership must have at least one GP and at least one limited ...
. The enlarged firm was privately held; Lambert held a 26 percent stake and received six seats on the board of directors. Most of the remaining 74 percent was held by employees. Burnham remained the enlarged firm's chairman. He handed the posts of president and CEO to Robert Linton, who had begun at Burnham and Company in 1945 as a stock certificate runner. Burnham handed the chairmanship to Linton as well in 1982.


Business

Drexel's legacy as an advisor to both startup companies and
fallen angels A fallen angel is an angel that has been exiled or banished from Heaven. Fallen Angels may also refer to: Film and television * ''Fallen Angels'' (1948 film), a Greek film by Nikos Tsiforos * Fallen Angels (1985 documentary film) by Gregory Dark * ...
remains an industry model today. While Michael Milken (a holdover from the old Drexel) got most of the credit by almost single-handedly creating a junk bond market, another key architect in this strategy was
Fred Joseph Frederick H. "Fred" Joseph (1937—2009) was the former president and chief executive officer of the investment bank Drexel Burnham Lambert during the 1980s. Biography ''The Wall Street Journal'' noted that he was, "The son of an orthodox Jewish ...
. Shortly after buying the old Drexel, Burnham found out that Joseph, chief operating officer of Shearson Hamill, wanted to get back into the nuts and bolts of investment banking and hired him as co-head of corporate finance. Joseph, the son of a
Boston Boston (), officially the City of Boston, is the state capital and most populous city of the Commonwealth of Massachusetts, as well as the cultural and financial center of the New England region of the United States. It is the 24th- mo ...
taxicab A taxi, also known as a taxicab or simply a cab, is a type of vehicle for hire with a driver, used by a single passenger or small group of passengers, often for a non-shared ride. A taxicab conveys passengers between locations of their choice ...
driver, promised Burnham that in 10 years, he would make Drexel Burnham as powerful as
Goldman Sachs Goldman Sachs () is an American multinational investment bank and financial services company. Founded in 1869, Goldman Sachs is headquartered at 200 West Street in Lower Manhattan, with regional headquarters in London, Warsaw, Bangalore, H ...
. Joseph's prophecy proved accurate. The firm rose from the bottom of the pack to compete with and even top the
Wall Street Wall Street is an eight-block-long street in the Financial District of Lower Manhattan in New York City. It runs between Broadway in the west to South Street and the East River in the east. The term "Wall Street" has become a metonym for t ...
Bulge Bracket firms. While Milken was clearly the most powerful man in the firm (to the point that a business consultant warned Drexel that it was a "one-product company"), it was Joseph who succeeded Linton as president in 1984, adding the post of CEO in 1985. Drexel, however, was more aggressive in its business practices than most. When it entered the
mergers and acquisitions Mergers and acquisitions (M&A) are business transactions in which the ownership of companies, other business organizations, or their operating units are transferred to or consolidated with another company or business organization. As an aspect ...
field in the early 1980s, it did not shy away from backing
hostile takeovers In business, a takeover is the purchase of one company (the ''target'') by another (the ''acquirer'' or ''bidder''). In the UK, the term refers to the acquisition of a public company whose shares are listed on a stock exchange, in contrast to ...
—long a taboo among the established firms. Its specialty was the " highly confident letter", in which it promised it could get the necessary financing for a hostile takeover. Although it had no legal status, Drexel's reputation for making markets for any bonds it underwrote was such that a "highly confident letter" was as good as cash to many of the
corporate raider A corporation is an organization—usually a group of people or a company—authorized by the state to act as a single entity (a legal entity recognized by private and public law "born out of statute"; a legal person in legal context) and r ...
s of the 1980s. Among the deals it financed during this time were
T. Boone Pickens Thomas Boone Pickens Jr. (May 22, 1928 – September 11, 2019) was an American business magnate and financier. Pickens chaired the hedge fund BP Capital Management. He was a well-known takeover operator and corporate raider during the 1980 ...
' failed runs at
Gulf Oil Gulf Oil was a major global oil company in operation from 1901 to 1985. The eighth-largest American manufacturing company in 1941 and the ninth-largest in 1979, Gulf Oil was one of the so-called Seven Sisters oil companies. Prior to its merger ...
and
Unocal Union Oil Company of California, and its holding company Unocal Corporation, together known as Unocal was a major petroleum explorer and marketer in the late 19th century, through the 20th century, and into the early 21st century. It was headqu ...
,
Carl Icahn Carl Celian Icahn (; born February 16, 1936) is an American financier. He is the founder and controlling shareholder of Icahn Enterprises, a public company and diversified conglomerate holding company based in Sunny Isles Beach. Icahn takes l ...
's bid for
Phillips 66 The Phillips 66 Company is an American Multinational corporation, multinational energy company headquartered in Westchase, Houston, Westchase, Houston, Houston, Texas. Its name, dating back to 1927 as a trademark of the Phillips Petroleum Compan ...
,
Ted Turner Robert Edward "Ted" Turner III (born November 19, 1938) is an American entrepreneur, television producer, media proprietor, and philanthropist. He founded the Cable News Network (CNN), the first 24-hour United States cable news, cable news ch ...
's buyout of MGM/UA, and
Kohlberg Kravis Roberts KKR & Co. Inc., also known as Kohlberg Kravis Roberts & Co., is an American global investment company that manages multiple alternative asset classes, including private equity, energy, infrastructure, real estate, credit, and, through its strate ...
successful bid for RJR Nabisco. Organizationally, the firm was considered the definition of a
meritocracy Meritocracy (''merit'', from Latin , and ''-cracy'', from Ancient Greek 'strength, power') is the notion of a political system in which economic goods and/or political power are vested in individual people based on talent, effort, and achiev ...
. Divisions received bonuses based on their individual performance rather than the performance of the firm as a whole. This often led to acrimony between individual departments, who sometimes acted like independent companies rather than small parts of a larger one. Also, several employees formed limited partnerships that allowed them to invest alongside Milken. These partnerships often made more money than the firm itself did on a particular deal. For instance, many of the partnerships ended up with more warrants than the firm itself held in particular deals. The firm had its most profitable
fiscal year A fiscal year (or financial year, or sometimes budget year) is used in government accounting, which varies between countries, and for budget purposes. It is also used for financial reporting by businesses and other organizations. Laws in many ...
in 1986, netting $545.5 million—at the time, the most profitable year ever for a Wall Street firm, and equivalent to $ billion in . In 1987, Milken was paid
executive compensation Executive compensation is composed of both the financial compensation (executive pay) and other non-financial benefits received by an executive from their employing firm in return for their service. It is typically a mixture of fixed salary, varia ...
of $550 million for the year.


Downfall


1986-1989

According to Dan Stone, a former Drexel executive, the firm's aggressive culture led many Drexel employees to stray into unethical, and sometimes illegal, conduct. Milken himself viewed the securities laws, rules and regulations with some degree of contempt, feeling they hindered the free flow of trade. He was under nearly constant scrutiny from the
Securities and Exchange Commission The U.S. Securities and Exchange Commission (SEC) is an independent agency of the United States federal government, created in the aftermath of the Wall Street Crash of 1929. The primary purpose of the SEC is to enforce the law against market ...
from 1979 onward, in part because he often condoned unethical and illegal behavior by his colleagues at Drexel's operation in
Beverly Hills Beverly Hills is a city located in Los Angeles County, California. A notable and historic suburb of Greater Los Angeles, it is in a wealthy area immediately southwest of the Hollywood Hills, approximately northwest of downtown Los Angeles. Bev ...
. He personally called Joseph, however, who believed in following the rules to the letter, on several occasions with ethical questions. The firm was first rocked on May 12, 1986, when Dennis Levine, a managing director in Drexel's M&A department, was charged with
insider trading Insider trading is the trading of a public company's stock or other securities (such as bonds or stock options) based on material, nonpublic information about the company. In various countries, some kinds of trading based on insider information ...
. Levine had joined Drexel only a year earlier. Unknown to Drexel management, he had spent his entire Wall Street career trading on inside information. Levine pleaded guilty to four felonies, and implicated one of his recent partners, super-
arbitrage In economics and finance, arbitrage (, ) is the practice of taking advantage of a difference in prices in two or more markets; striking a combination of matching deals to capitalise on the difference, the profit being the difference between the ...
ur
Ivan Boesky Ivan Frederick Boesky (born March 6, 1937) is a former American stock trader who became infamous for his prominent role in an insider trading scandal that occurred in the United States during the mid-1980s. He was charged and pled guilty to insi ...
. Largely based on information Boesky promised to provide about his dealings with Milken, the SEC initiated an investigation of Drexel on November 17. Two days later,
Rudy Giuliani Rudolph William Louis Giuliani (, ; born May 28, 1944) is an American politician and lawyer who served as the 107th Mayor of New York City from 1994 to 2001. He previously served as the United States Associate Attorney General from 1981 to 198 ...
, then the
United States Attorney for the Southern District of New York The United States Attorney for the Southern District of New York is the chief federal law enforcement officer in eight New York counties: New York (Manhattan), Bronx, Westchester, Putnam, Rockland, Orange, Dutchess and Sullivan. Establishe ...
, launched his own investigation. Ominously, Milken refused to cooperate with Drexel's own internal investigation, only speaking through his attorneys. A year later, Martin Siegel, the co-head of M&A, pleaded guilty to sharing inside information with Boesky during his tenure at Kidder, Peabody. For two years, Drexel steadfastly denied any wrongdoing, claiming that the criminal and SEC investigations into Milken's activities were based almost entirely on the statements of Boesky, an admitted
felon A felony is traditionally considered a crime of high seriousness, whereas a misdemeanor is regarded as less serious. The term "felony" originated from English common law (from the French medieval word "félonie") to describe an offense that resu ...
looking to reduce his sentence. This was not enough to keep the SEC from suing Drexel in September 1988 for insider trading,
stock manipulation In economics and finance, market manipulation is a type of market abuse where there is a deliberate attempt to interfere with the free and fair operation of the market; the most blatant of cases involve creating false or misleading appearances ...
, defrauding its clients and stock parking (buying stocks for the benefit of another). All of the transactions involved Milken and his department. The most intriguing charge was that Boesky paid Drexel $5.3 million in 1986 for Milken's share of profits from illegal trading. Earlier in the year, Boesky characterized the payment as a consulting fee to Drexel. Around the same year, Giuliani began seriously considering indicting Drexel under the powerful
Racketeer Influenced and Corrupt Organizations Act The Racketeer Influenced and Corrupt Organizations (RICO) Act is a United States federal law that provides for extended criminal penalties and a civil cause of action for acts performed as part of an ongoing criminal organization. RICO was en ...
. Drexel was potentially liable under the doctrine of ''
respondeat superior ''Respondeat superior'' (Latin: "let the master answer"; plural: ''respondeant superiores'') is a doctrine that a party is responsible for (has vicarious liability for) acts of their agents.''Criminal Law - Cases and Materials'', 7th ed. 2012, W ...
'', which holds that companies are responsible for an employee's crimes. The threat of a RICO indictment unnerved many at Drexel. A RICO indictment would have required the firm to put up a
performance bond A performance bond, also known as a contract bond, is a surety bond issued by an insurance company or a bank to guarantee satisfactory completion of a project by a contractor. The term is also used to denote a collateral deposit of good faith mon ...
of as much as $1 billion in lieu of having its assets frozen. This provision was put in the law because
organized crime Organized crime (or organised crime) is a category of transnational, national, or local groupings of highly centralized enterprises run by criminals to engage in illegal activity, most commonly for profit. While organized crime is generally th ...
had a habit of absconding with the funds of indicted companies, and the writers of RICO wanted to make sure there was something to seize or forfeit in the event of a guilty verdict. Most Wall Street firms, then as now, relied heavily on loans. However, 96 percent of Drexel's capital was borrowed money, by far the most of any firm. This debt would have to take second place to any performance bond. Additionally, if the bond ever had to be paid, Drexel's stockholders would have been all but wiped out. Due to this, banks will not extend credit to a securities firm under a RICO indictment. By this time, several Drexel executives—including Joseph—concluded that Drexel could not survive a RICO indictment and would have to seek a settlement with Giuliani. Senior Drexel executives became particularly nervous after
Princeton Newport Partners Convertible Hedge Associates (CHA) was an early alternative investment management company founded by Edward O. Thorp and a partner, Jay Regan, in November 1969. Based in Long Beach, California, CHA was said by Thorp to have been the first marke ...
, a small investment partnership, was forced to close its doors in the summer of 1988. Princeton Newport had been indicted under RICO, and the prospect of having to post a huge performance bond forced its shutdown well before the trial. Indeed, the discovery of Milken's role in many of Princeton Newport's illicit doings led Joseph to conclude that Milken had indeed engaged in illegal activity. Joseph said years later that he'd been told that a RICO indictment would destroy Drexel within a month, if not sooner. As it turned out, even though Milken and Drexel signed a co-counsel agreement, Milken's legal team warned him that Drexel would almost certainly be forced to cooperate rather than risk being driven out of business by the pressures of the investigation. Nonetheless, negotiations for a possible plea agreement collapsed on December 19 when Giuliani made several demands that were far too draconian even for those who advocated a settlement. Giuliani demanded that Drexel waive its
attorney–client privilege Attorney–client privilege or lawyer–client privilege is the name given to the common law concept of legal professional privilege in the United States. Attorney–client privilege is " client's right to refuse to disclose and to prevent any ...
, and also wanted the right to arbitrarily decide that the firm had violated the terms of any plea agreement. He also demanded that Milken leave the firm if the government ever indicted him. Drexel's board unanimously rejected the terms. For a time, it looked like Drexel was going to fight. Only two days later, however, Drexel lawyers found out about a limited partnership set up by Milken's department, MacPherson Partners, they previously hadn't known about. This partnership had been involved in the issuing of bonds for
Storer Broadcasting Storer Broadcasting, Inc. was an American company which owned several television and radio stations in the Northeastern United States. It was incorporated in Ohio 1927, and was broken up in 1986. History 1920s–1940s In 1927, George B. Storer ...
. Several equity warrants were sold to one client who sold them back to Milken's department. Milken then sold the warrants to MacPherson Partners. The limited partners included several of Milken's children, and more ominously, managers of
money fund A money market fund (also called a money market mutual fund) is an open-ended mutual fund that invests in short-term debt securities such as US Treasury bills and commercial paper. Money market funds are managed with the goal of maintaining a ...
s. This partnership raised the specter of self-dealing, and at worst, bribes to the money managers. At the very least, this was a serious breach of Drexel's internal regulations. Drexel immediately reported this partnership to Giuliani, and its revelation seriously hurt Milken's credibility with many at Drexel who believed in Milken's innocence—including Joseph and most of the board. With literally minutes to go before being indicted (according to at least one source, the grand jury was actually in the process of voting on the indictment), Drexel reached an agreement with the government in which it entered an
Alford plea In United States law, an Alford plea, also called a Kennedy plea in West Virginia, an Alford guilty plea, and the Alford doctrine, is a guilty plea in criminal court, whereby a defendant in a criminal case does not admit to the criminal act and ...
to six felonies—three counts of stock parking and three counts of stock manipulation. It also agreed to pay a fine of $650 million—at the time, the largest fine ever levied under the
Great Depression The Great Depression (19291939) was an economic shock that impacted most countries across the world. It was a period of economic depression that became evident after a major fall in stock prices in the United States. The economic contagio ...
-era securities laws. The government had dropped several of the demands that had initially angered Drexel, but continued to insist that Milken leave the firm if indicted—which he did shortly after his own indictment in March 1989. Drexel's Alford plea allowed the firm to maintain its innocence while acknowledging that it was "not in a position to dispute the allegations" made by the government. Nonetheless, Drexel was now a convicted felon. In April 1989, Drexel settled with the SEC, agreeing to stricter safeguards on its oversight procedures. Later that month, the firm eliminated 5,000 jobs by shuttering three departments—including the retail brokerage operation. In essence, Drexel was jettisoning the core of the old Burnham & Company. The retail accounts were eventually sold to
Smith Barney Morgan Stanley Wealth Management is an American multinational financial services corporation specializing in retail brokerage. It is the wealth & asset management division of Morgan Stanley. On January 13, 2009, Morgan Stanley and Citigroup anno ...
.


1989-1990

Due to several deals that did not work out, as well as an unexpected crash of the junk bond market, 1989 was a difficult year for Drexel even after it settled the criminal and SEC cases. Reports of an $86 million loss going into the fourth quarter resulted in the firm's
commercial paper Commercial paper, in the global financial market, is an unsecured promissory note with a fixed maturity of rarely more than 270 days. In layperson terms, it is like an " IOU" but can be bought and sold because its buyers and sellers have some ...
rating being cut in late November. This made it nearly impossible for Drexel to reborrow its outstanding commercial paper, and it had to be repaid. Rumors abounded that the banks could yank Drexel's
lines of credit A line of credit is a Credit (finance), credit facility extended by a bank or other financial institution to a government, business or Personal finance, individual customer that enables the customer to draw on the facility when the customer nee ...
at any time. Drexel had no corporate parent that could pump in cash in the event of such a crisis, unlike most American financial institutions. Groupe Bruxelles Lambert refused even to consider making an equity investment until Joseph improved the bottom line. The firm posted a $40 million loss for 1989—the first operating loss in its 54-year history. Drexel managed to survive into 1990 by transferring some of the excess capital from its regulated
broker/dealer In financial services, a broker-dealer is a natural person, company or other organization that engages in the business of trading securities for its own account or on behalf of its customers. Broker-dealers are at the heart of the securities and ...
subsidiary into its holding company, Drexel Burnham Lambert Group—only to be ordered to stop by the SEC on February 9 out of concerns about the broker's solvency. This sent Joseph and other senior executives into a near-panic. After the SEC, the
New York Stock Exchange The New York Stock Exchange (NYSE, nicknamed "The Big Board") is an American stock exchange in the Financial District of Lower Manhattan in New York City. It is by far the world's largest stock exchange by market capitalization of its listed c ...
, and the
Federal Reserve Bank of New York The Federal Reserve Bank of New York is one of the 12 Federal Reserve Banks of the United States. It is responsible for the Second District of the Federal Reserve System, which encompasses the State of New York, the 12 northern counties of New ...
cast doubts about a restructuring plan, Joseph concluded that Drexel could not stay independent. Unfortunately, concerns about possible liability to civil suits scared off an eleventh-hour attempt to find a prospective buyer. By February 12, it was obvious Drexel was headed for collapse. Its commercial paper rating was further reduced that day, and the holding company defaulted on $100 million in loans.
Citibank Citibank, N. A. (N. A. stands for " National Association") is the primary U.S. banking subsidiary of financial services multinational Citigroup. Citibank was founded in 1812 as the City Bank of New York, and later became First National City ...
led a group of banks that tried to put together a loan package for the reeling firm, but this came to nothing. With other firms shutting Drexel out of deals, Joseph's last resort was a bailout by the government. Unfortunately for Drexel, one of Drexel's first hostile deals came back to haunt it at this point. At the time of Pickens' raid on Unocal, the company's investment bank was the establishment firm
Dillon, Read Dillon, Read & Co. was an investment bank based in New York City. In 1991, it was acquired by Barings Bank and, in 1997, it was acquired by Swiss Bank Corporation, which was in turn acquired by UBS in 1998. History Carpenter & Vermilye Dillon Rea ...
. Dillon, Read's former chairman,
Nicholas F. Brady Nicholas Frederick Brady (born April 11, 1930) is an American politician from the state of New Jersey, who was the United States Secretary of the Treasury under Presidents Ronald Reagan and George H. W. Bush, and is also known for articulating ...
, was now
Secretary of the Treasury The United States secretary of the treasury is the head of the United States Department of the Treasury, and is the chief financial officer of the federal government of the United States. The secretary of the treasury serves as the principal a ...
. Brady had never forgiven Drexel for its role in the Unocal deal, and would not even consider signing off on a bailout. Early on the morning of February 13, New York Fed president E. Gerald Corrigan and SEC chairman
Richard Breeden Richard C. Breeden (born December 6, 1949) is a former chairman of the U.S. Securities and Exchange Commission, hedge fund manager, and corporate chairman. Early career Breeden began his career practicing corporate and securities law in New York ...
called Joseph and told him that they, Brady and NYSE chairman
John J. Phelan Jr. John Joseph Phelan Jr. (May 7, 1931 – August 4, 2012) was an American financier who served as president and later chairman and chief executive of the New York Stock Exchange, where he introduced computerized trading technology. Phelan's leaders ...
saw "no light at the end of the tunnel" for Drexel. They gave Joseph an ultimatum–unless Drexel filed for bankruptcy, the SEC would seize Drexel that morning before the markets opened. After Joseph told the board that Drexel had effectively been told to "go out of business", the board voted to file for bankruptcy. That night, Drexel officially filed for
Chapter 11 Chapter 11 of the United States Bankruptcy Code (Title 11 of the United States Code) permits reorganization under the bankruptcy laws of the United States. Such reorganization, known as Chapter 11 bankruptcy, is available to every business, wheth ...
bankruptcy protection. Drexel was the first Wall Street firm since the Depression to be forced into bankruptcy. The filing covered only the parent company, not the broker/dealer; executives and lawyers believed that confidence in Drexel had deteriorated so much that the firm was finished in its then-current form. Even before the firm's bankruptcy, Tubby Burnham spun off the firm's funds management arm as Burnham Financial Group, which currently operates as a diversified investment company. Burnham was reportedly still arranging deals until his death in 2002 at age 93. The rest of Drexel emerged from bankruptcy in 1992 as New Street Capital, a small investment bank with only 20 employees (at its height, Drexel employed over 10,000 people) and strict limits on its activities. In 1994, New Street merged with Green Capital, a
merchant bank A merchant bank is historically a bank dealing in commercial loans and investment. In modern British usage it is the same as an investment bank. Merchant banks were the first modern banks and evolved from medieval merchants who traded in commodi ...
owned by
Atlanta Atlanta ( ) is the capital and most populous city of the U.S. state of Georgia. It is the seat of Fulton County, the most populous county in Georgia, but its territory falls in both Fulton and DeKalb counties. With a population of 498,715 ...
financier Holcombe Green. Richard A. Brenner, the brother of a president with controlling stakes stated in his memoir ''My Life Seen Through Our Eyes'' that other firms at Wall Street did not support Drexel or come to its aid when the company got into trouble because they were "smelling an opportunity to grab this business".


Criticism

By the late 1980s, public confidence in
leveraged buyout A leveraged buyout (LBO) is one company's acquisition of another company using a significant amount of borrowed money (leverage) to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loan ...
s had waned, and criticism of the perceived engine of the takeover movement, the
junk bond In finance, a high-yield bond (non-investment-grade bond, speculative-grade bond, or junk bond) is a bond that is rated below investment grade by credit rating agencies. These bonds have a higher risk of default or other adverse credit events, ...
, had increased. Innovative financial instruments often generate skepticism, and few have generated more controversy than high yield debt. Some argue that the debt instrument itself, sometimes dubbed "turbo debt", was the cornerstone of the 1980s "Decade of Greed". However, junk bonds were actually used in less than 25% of acquisitions, and
hostile takeover In business, a takeover is the purchase of one company (the ''target'') by another (the ''acquirer'' or ''bidder''). In the UK, the term refers to the acquisition of a public company whose shares are listed on a stock exchange, in contrast to ...
s during that period. Nevertheless, by 1990 default rates on high yield debt had increased from 4% to 10%, further eroding confidence in this financial instrument. Without Milken's cheerleading, the liquidity of the junk bond market dried up. Drexel was forced to buy the bonds of insolvent and failing companies, which depleted their capital and would eventually bankrupt the company.


Survivors

A few other firms emerged or became more important from Drexel's collapse, besides Burnham Financial. * There was also the 1838 Group named after the founding date of Drexel established by another group of investment fund managers. The funds suffered from under performance and the group folded. * Drexel Burnham Lambert Real Estate Associates II operates as a real estate management firm. *
Apollo Global Management Apollo Global Management, Inc. is an American global private-equity firm. It provides investment management and invests in credit, private equity, and real assets. As of March 31, 2022, the company had $512 billion of assets under management, ...
, the noted private equity firm, was also founded by Drexel alumni led by
Leon Black Leon David Black (born July 31, 1951) is an American investor and the co-founder and former-CEO of the private equity firm Apollo Global Management. Black also served as the chairman of The Museum of Modern Art (MoMA) in New York City from Ju ...
. *
Richard Handler Richard B. "Rich" Handler (born May 23, 1961) is an American businessman, and chief executive officer (CEO) of Jefferies Group since 2001; one of the longest-serving CEOs on Wall Street. Handler is also the CEO of Jefferies Financial Group, Inc, ...
joined
Jefferies Jefferies is a surname. Notable people with the surname include: * Alan Jefferies (born 1957), Australian writer * Annalee Jefferies (born 1954), American actress * Chris Jefferies (born 1980), American basketball player * Cindy Jefferies, Englis ...
immediately following the Drexel bankruptcy with a number of partners and began building the firm into what today is the largest, independent, full service, global investment bank (non bank-holding company). *
Fred Joseph Frederick H. "Fred" Joseph (1937—2009) was the former president and chief executive officer of the investment bank Drexel Burnham Lambert during the 1980s. Biography ''The Wall Street Journal'' noted that he was, "The son of an orthodox Jewish ...
bought into a firm founded by John Adams Morgan to establish Morgan Joseph, a middle-market investment bank that caters to many of the same kinds of clients as Drexel had. In 2011, the firm merged with Tri-Artisan Partners, a merchant bank, to form Morgan Joseph TriArtisan. Although the firm carried Joseph's name and he was part-owner, he was only co-head of corporate finance until his death in 2009. In 1993, the SEC barred him from serving as president, chairman or CEO of a securities firm for life for failing to properly supervise Milken. Morgan Joseph TriArtisan's chairman and CEO is John Sorte, Joseph's successor as president and CEO of Drexel from 1990 to 1992. In 2011, Portfolio.com and
CNBC CNBC (formerly Consumer News and Business Channel) is an American basic cable business news channel. It provides business news programming on weekdays from 5:00 a.m. to 7:00 p.m., Eastern Time, while broadcasting talk sho ...
named Joseph the seventh-worst CEO in American business history, saying that "his poor management left the company without a crisis plan."


Former employees

*
Tony Ressler Tony may refer to: People and fictional characters * Tony (given name), including a list of people and fictional characters * Gregory Tony (born 1978), American law enforcement officer * Motu Tony (born 1981), New Zealand international rugby leagu ...
, former senior vice president, high yield bond market *
Peter Ackerman Peter Ackerman (November 6, 1946 – April 26, 2022) was an American businessman, the founder and former chairman of Americans Elect, and the founding chair of the International Center on Nonviolent Conflict. Ackerman was the managing director o ...
, former head of Drexel's international capital markets department, also known as a political activist and co-founder of organizations such as the
International Center on Nonviolent Conflict The International Center on Nonviolent Conflict is an independent, nonprofit educational foundation, founded by Jack DuVall and Peter Ackerman in 2002. It promotes the study and utilization of nonmilitary strategies by civilian-based movements to ...
and Americans Elect *
Guy Adami Guy Adami is an American trader, television personality, and professional investor. He is one of the original “Fast Money Five” on CNBC's '' Fast Money''. Biography Early life and education Guy Adami was born in North Tarrytown, New York ...
, panelist on CNBC's '' Fast Money'' *
Leon Black Leon David Black (born July 31, 1951) is an American investor and the co-founder and former-CEO of the private equity firm Apollo Global Management. Black also served as the chairman of The Museum of Modern Art (MoMA) in New York City from Ju ...
, leader of
Apollo Management Apollo Global Management, Inc. is an American global private-equity firm. It provides investment management and invests in credit, private equity, and real assets. As of March 31, 2022, the company had $512 billion of assets under management, ...
*
Joseph Cassano Joseph J. "Joe" Cassano (born 12 March 1955) is an American insurance executive who was an officer at AIG Financial Products from the division's founding in 1987 until his resignation in February 2008.Morgenson, Gretchen (September 27, 2008Behind In ...
, founder of
AIG Financial Products AIG Financial Products Corporation (AIGFP) is a subsidiary of the American International Group, headquartered in New York, New York, with major operations in London. The collapse of AIG Financial Products, headquartered in Wilton, Connecticut, is co ...
*
Abby Joseph Cohen Abby Joseph Cohen (born February 29, 1952) is an American economist and financial analyst on Wall Street. , she continues to serve as an advisory director at Goldman Sachs, after retiring from leadership of its Global Markets Institute. Prior to ...
, partner and chief U.S. investment strategist at Goldman, Sachs & Co *
Jerry Doyle Jerry Doyle (July 16, 1956 – July 27, 2016) was an American talk radio host, right-libertarian political commentator, television actor and founder of the content platform EpicTimes. His nationally syndicated talk show, ''The Jerry Doyle Sho ...
, later actor and talk radio host * Marc Faber, formerly managing director of Drexel's Hong Kong office, famous for the Gloom Boom Doom investment report "Dr Doom" *
Nigel Farage Nigel Paul Farage (; born 3 April 1964) is a British broadcaster and former politician who was List of UK Independence Party leaders, Leader of the UK Independence Party (UKIP) from 2006 to 2009 and 2010 to 2016 and Brexit Party#Leaders, Lea ...
, leader of
UK Independence Party The UK Independence Party (UKIP; ) is a Eurosceptic, right-wing populist political party in the United Kingdom. The party reached its greatest level of success in the mid-2010s, when it gained two members of Parliament and was the largest par ...
* Steve Feinberg,
Cerberus Capital Management Cerberus Capital Management, L.P. is an American private equity firm,Leaders Magazine"Providing Economic Opportunity: An Interview with The Honorable Dan Quayle, Chairman, Cerberus Global Investments, LLC". specializing in distressed investing. ...
* Gerard Finneran, cofounder of
TCW Group TCW Group is an asset management firm based in Los Angeles, California. History Founded by Robert Addison Day in 1971 and headquartered in Los Angeles, TCW manages a broad range of investment products. The TCW Group was originally known as Trus ...
later arrested after 1995 air rage incident * James Stephen Fossett, American aviator, sailor, and adventurer *
Mark Gilbert Mark David Gilbert (born August 22, 1956) is a former outfielder in Major League Baseball who served as the United States Ambassador to New Zealand and Samoa from 2015 to 2017. Gilbert played for the Chicago White Sox in 1985.Joel Greenblatt Joel Greenblatt (born December 13, 1957) is an American academic, hedge fund manager, investor, and writer. He is a value investor, alumnus of the Wharton School of the University of Pennsylvania, and adjunct professor at the Columbia University G ...
, founder of Gotham Capital *
Richard B. Handler Richard B. "Rich" Handler (born May 23, 1961) is an American businessman, and chief executive officer (CEO) of Jefferies Group since 2001; one of the longest-serving CEOs on Wall Street. Handler is also the CEO of Jefferies Financial Group, Inc, ...
, current CEO of
Jefferies & Company Jefferies Group LLC is an American multinational independent investment bank and financial services company that is headquartered in New York City. The firm provides clients with capital markets and financial advisory services, institutional br ...
* Roderick M. Hills, former chairman of
U.S. Securities and Exchange Commission The U.S. Securities and Exchange Commission (SEC) is an independent agency of the United States federal government, created in the aftermath of the Wall Street Crash of 1929. The primary purpose of the SEC is to enforce the law against market ...
(SEC) *
Frederick H. Joseph Frederick H. "Fred" Joseph (1937—2009) was the former president and chief executive officer of the investment bank Drexel Burnham Lambert during the 1980s. Biography ''The Wall Street Journal'' noted that he was, "The son of an orthodox Jewish c ...
, co-founder of Morgan Joseph * Mark N. Kaplan, former CEO of Drexel from 1970 to 1977, CEO of
Engelhard Engelhard Corporation was an American ''Fortune'' 500 company headquartered in Iselin, New Jersey, United States. It is credited with developing the first production catalytic converter. In 2006, the German chemical manufacturer BASF bough ...
, and senior partner at
Skadden Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates is an American multinational law firm headquartered in New York City. Founded in 1948, the firm consistently ranks among the top U.S. law firms by revenue. The company is known for its wor ...
* Dennis Levine, chairman & CEO, Adasar Group, Inc. *
Michael Milken Michael Robert Milken (born July 4, 1946) is an American financier. He is known for his role in the development of the market for high-yield bonds ("junk bonds"), and his conviction and sentence following a guilty plea on felony charges for vio ...
, former head of the non-investment-grade bond department; almost single-handedly created the market for "high-yield bonds" (also known as "
junk bonds In finance, a high-yield bond (non-investment-grade bond, speculative-grade bond, or junk bond) is a bond that is rated below investment grade by credit rating agencies. These bonds have a higher risk of default or other adverse credit events ...
") *
Ken Moelis Kenneth D. Moelis (born 1958) is an American billionaire investment banker, and founder of Moelis & Company, an investment banking firm. Early life and education Moelis was born in 1958, the son of Gaye (née Gross) and Herbert I. Moelis, pre ...
, former president and head of investment banking at
UBS UBS Group AG is a multinational Investment banking, investment bank and financial services company founded and based in Switzerland. Co-headquartered in the cities of Zürich and Basel, it maintains a presence in all major financial centres ...
; founder of
Moelis & Company Moelis & Company is a global investment bank that provides financial advisory services to corporations, governments, and financial sponsors. The firm advises on strategic decisions such as mergers and acquisitions, recapitalizations and restruct ...
*
Terren Peizer Terren Scott Peizer, is an investor and company executive. He is the CEO of Acuitas Group Holdings and Neurmedix. He is also the CEO and chairman of Ontrak. He has held senior executive positions within technology and biotech companies, at Goldma ...
, current CEO of Hythiam Co *
Richard Sandor Richard L. Sandor is an American businessman, economist, and entrepreneur. He is chairman and CEO of the American Financial Exchange (AFX) established in 2015, which is an electronic exchange for direct interbank/financial institution lending and ...
, current chairman of the
Chicago Climate Exchange The Chicago Climate Exchange (CCX) was a voluntary, legally binding greenhouse gas reduction and trading system for emission sources and offset projects in North America and Brazil. CCX employed independent verification, included six greenhous ...
*
Rick Santelli Rick John Santelli (born July 6, 1956) is an editor for the CNBC Business News network. He joined CNBC as an on-air editor on June 14, 1999, reporting primarily from the floor of the Chicago Board of Trade. He was formerly the vice president for ...
, current on-air editor for CNBC's ''
Squawk on the Street ''Squawk on the Street'', which debuted on December 19, 2005, is a business show on CNBC that follows the first 90 minutes of trading on Wall Street in the United States. Originally airing as a one-hour program, the show doubled its airtime t ...
'', known for his remarks on CNBC on February 9, 2009, which were credited with helping to ignite the
Tea Party movement The Tea Party movement was an American fiscally conservative political movement within the Republican Party that began in 2009. Members of the movement called for lower taxes and for a reduction of the national debt and federal budget defic ...
. *
Tom Sosnoff Tom Sosnoff (born March 6, 1957) is an entrepreneur, options trader, co-founder of Thinkorswim and tastytrade, and founder of Dough, Inc. He was senior vice president of trading and strategic initiatives at TD Ameritrade. Sosnoff promotes option ...
, founder of the
thinkorswim Thinkorswim by TD Ameritrade (often stylized and officially branded as thinkorswim, lacking capitalization) is an electronic trading platform by TD Ameritrade used to trade financial assets. It is geared for self-directed stock, options and fut ...
trading platform and current CEO of tastytrade.com *
Gary Winnick Gary Winnick is an American financier best known for founding and being Chairman of Global Crossing between 1997 and 2002, when it declared bankruptcy. As of 2015, he was Chairman and Chief Executive Officer of Winnick & Company, a Los Ang ...
, founder and former chairman of
Global Crossing Global Crossing was a telecommunications company that provided computer networking services and operated a tier 1 carrier. It maintained a large backbone network and offered peering, virtual private networks, leased lines, audio and video con ...


References


"Drexel's Fall: The Final Days"
''
New York New York most commonly refers to: * New York City, the most populous city in the United States, located in the state of New York * New York (state), a state in the northeastern United States New York may also refer to: Film and television * '' ...
'' March 19, 1990. {{Authority control Companies based in Philadelphia Drexel family Defunct financial services companies of the United States Former investment banks of the United States American companies established in 1935 Financial services companies established in 1935 Banks established in 1935 Financial services companies disestablished in 1994 Banks disestablished in 1994 Defunct companies based in Pennsylvania 1935 establishments in New York City 1994 disestablishments in New York (state) Financial services companies based in New York City Defunct companies based in New York City American companies disestablished in 1994 Michael Milken