Symbolic Slap : Can’t Co-Manage Two Bond Issues, N.Y. Tells Drexel

In a mainly symbolic gesture, New York City said it will temporarily ban Drexel Burnham Lambert from co-managing city bond issues because of the investment bank’s recent admission of criminal wrongdoing.

But the ban would apply only to two bond issues, totaling $750 million, after which Drexel will again be free to participate in underwriting New York City’s debt. A city official estimated that the ban would cost Drexel about $400,000 in fees.

In a statement issued jointly by Mayor Edward I. Koch and City Comptroller Harrison J. Goldin, the officials said they were “dismayed” by the disclosure that the firm had agreed to plead guilty to six federal criminal charges. “Whether in the public sector or the private, such misconduct cannot be condoned,” they said.

However, the city--which in the last two years has been rocked by its own share of scandals ranging from corruption by high-ranking city officials to bribe-taking by restaurant inspectors--will, according to the officials, “look forward to again doing business with the firm following these two sales.”

Mark Page, deputy director for finance in the city’s office of management and budget, acknowledged that the move wouldn’t have much financial effect on Drexel. Municipal bond underwriting is believed to provide only a tiny share of the firm’s revenue. But he said that “in terms of symbolic importance, it means something.”

Perrin Long, an analyst at Lipper Analytical Securities, said he didn’t see any signs of other municipalities curtailing business with Drexel, although he said it’s possible that “one or two” may follow suit. He also said he didn’t see signs yet that the firm’s admission of wrongdoing has had any major impact on its business. Drexel announced plans Dec. 21 to plead guilty to six felony charges and pay financial penalties totaling $650 million.

The city had taken similar steps against E. F. Hutton & Co. in 1985 after that investment firm, now part of Shearson Lehman Hutton, pleaded guilty to a massive check-kiting scheme.

Page noted that much of the wrongdoing for which Drexel was under investigation by U.S. Attorney Rudolph Giuliani had to do with the firm’s high-yield “junk bond” business, not municipal bonds. He said Drexel would be welcomed back for future city bond issues because Drexel “has done a good job for us” in past bond issues.

Under the temporary ban, Drexel is barred from co-managing the sale of about $500 million of general obligation bonds for the city, tentatively slated for February, and a sale of some $250 million of New York City Water Authority revenue bonds scheduled for March. Page said he also expects that Drexel will be banned from participating in a bond issue by the city’s semi-independent Metropolitan Transportation Authority.

No Comment

A Drexel spokesman declined to comment on the city’s decision.

The Drexel spokesman said he didn’t expect any negative effect from a ruling by a federal judge in Boston on Thursday that temporarily blocked MAI Basic Four’s $20-a-share hostile tender offer for Prime Computer. Drexel is acting as MAI’s financial adviser for the offer. The judge ruled that more information must be disclosed about Drexel’s settlement with prosecutors, since he said it raised questions about Drexel’s ability to raise financing for the MAI offer.

The Drexel spokesman said he expected there wouldn’t be any difficulty in supplying the additional information.