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Fessing Up to Greed

While dramatic, the decision by Drexel Burnham Lambert Inc. to plead guilty to six counts of mail, wire and securities fraud--and to pay financial penalties totaling $650 million--still leaves many issues in that complex and controversial case unresolved.

Still to be detailed, for example, are precisely where the fifth-largest firm on Wall Street and some of its top executives crossed the line from legal to illegal activity in using so-called “junk bonds” to finance business deals. Presumably some of the information will come out in future negotiations between the firm, the Securities and Exchange Commission and the U.S. attorney’s office in New York. Such details are important, for while the Drexel case is not going to stop the recent mania for hostile takeovers in the American business world, it could set the legal parameters within which other financiers conduct future deals. It is still possible that many of the details will come out in open court. That will happen if, as many observers expect, Drexel’s guilty plea lays the groundwork for future indictments against executives in the company’s junk-bond department.

For now, the development should at least silence cynics who insist that hostile takeovers are somehow good for U.S. business--that Wall Street’s wheeling-and-dealing has toughened corporations and made them more competitive. Drexel’s decision, as Times financial columnist James Flanigan points out, shows that part of the driving force behind the takeover mania of the 1980s was not just sharp, aggressive investing, but fraud. At least some takeover artists made profitable deals not because they were smarter than the next guy but because they were dishonest.

That many American companies could be leaner and meaner than they are goes almost without saying. That the threat of hostile takeovers makes them so has yet to be proved. Indeed, it still appears that most hostile takeovers produce nothing more substantial than profits for a relative handful of top executives and investors while leaving many working men and women without jobs, or fearful that their jobs might disappear in some fast corporate shuffle.

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