Howard A. Baker Jr., Drexel in Talks on Chairman’s Post

The embattled Wall Street firm Drexel Burnham Lambert Inc. has been negotiating with former White House chief of staff Howard H. Baker Jr. about becoming its chairman, a move some of the firm’s officials see as a way of avoiding criminal charges, sources said Monday.

Baker and Drexel declined to comment directly on the status of their discussions. Drexel, however, issued a statement acknowledging that it has been working with Baker and his Tennessee law firm “on matters relating to internal corporate governance, and which are unrelated to either the ongoing investigation by the U.S. attorney or any Washington matters.”

The Drexel statement continued: “It would be entirely inappropriate to comment or speculate on any subject which is under review or discussion between Drexel, (Baker) and his law firm.”

Senior Drexel executives recently have discussed the possibility of Baker becoming chairman as part of internal talks about how the firm might avoid criminal securities fraud charges. Some senior Drexel executives hope that arrival of the widely respected Baker would persuade U.S. Atty. Rudolph W. Giuliani not to name the firm in an expected racketeering indictment, sources said.

Talks With Giuliani

Some people familiar with Baker’s negotiations with Drexel downplayed any link between those talks and the possibility of a settlement with federal prosecutors, but others noted that Baker and Giuliani are no strangers. When he was White House chief of staff, Baker summoned Giuliani to Washington in 1987 and offered him the chairmanship of the Securities and Exchange Commission. Giuliani declined the offer, and the job later went to law professor David S. Ruder.

In recent weeks, Drexel’s lawyers have been trying to persuade Justice Department officials in Washington that racketeering charges against the firm would be unjustified. If Drexel fails to head off an indictment in Washington, as expected, the firm would then begin a final round of settlement talks with Giuliani, according to sources familiar with the case. No such talks are under way, the sources said.

If Baker agreed to join Drexel, the firm would be well positioned for those negotiations. In an earlier and similar criminal case involving a major Wall Street firm, Giuliani’s office decided not to file charges against Kidder, Peabody & Co. when the firm voluntarily brought in a new chief executive and allowed other executives to resign. In their internal discussions, some senior Drexel executives have talked about the possibility of a similar settlement.

Any possible deal might also involve the resignation from the firm, at least temporarily, of Michael Milken, Drexel’s controversial “junk bond” chief, who, along with the firm, has been accused by the SEC of insider trading, market manipulation and a host of other securities law violations. Drexel has repeatedly denied any wrongdoing.

As part of a possible settlement, Drexel might agree to pay a huge fine to the SEC--perhaps as much as several hundred million dollars--to be taken from a large reserve the firm has set aside for that purpose.

Parties Far Apart

Sources said Milken is determined to assert his innocence and fight any government charges at a trial. So far, Drexel has stood firmly behind Milken. The prospect of a racketeering indictment, however, which could have unpredictable effects on Drexel’s business, customers and employees, has put considerable pressure on the Drexel executives.

So far, any settlement with Giuliani’s office is only talk, and there are a number of questions about whether one could be achieved. The parties are said to have been far apart in earlier settlement talks.

A former majority leader in the Senate, Baker would bring to Drexel an enhanced reputation as a Republican trouble-shooter. He succeeded Donald T. Regan as President Reagan’s chief of staff amid the Iran-Contra scandal and was credited with restoring stability to White House operations. He resigned last July in what he said was an effort to spend more time in Tennessee with his wife, who is ill.

The chairmanship of Drexel would bring Baker a big boost in income. It isn’t clear whether Baker has discussed specific compensation terms with Drexel, but any package of salary, stock and incentives would almost certainly exceed $1 million annually, and perhaps much more.

In recent years, Drexel has been one of the most profitable investment banks on Wall Street. The firm cleared $522.5 million in 1986--after paying generous salaries, bonuses and other compensation to its executives.