THE DREXEL SETTLEMENT : Drexel Doesn’t Expect Deal to Hurt Its ‘Junk Bond’ Unit

Drexel Burnham Lambert’s lucrative high-yield “junk bond” department in Beverly Hills must undergo several notable managerial and policy changes--including the firing of junk bond impresario Michael Milken--following the firm’s settlement with the Securities and Exchange Commission.

But the unit that generates as much as half of Drexel’s profit and made the firm a Wall Street giant will be allowed to stay in Beverly Hills. And its basic ability to conduct trading and other activities are not expected to be significantly hindered, company officials and industry observers said Thursday.

“This should have no material effect on their ability to distribute high-yield securities,” said Marshall V. Davidson, a former managing director at Drexel who now holds a similar title at Kidder, Peabody & Co.

“We’ve structured the settlement in such a way to enable us to continue to function efficiently and close to normal, if not better than that,” Drexel spokesman Steven Anreder said.

The key victory for Drexel was winning the SEC’s consent to let the junk bond department stay in Beverly Hills.

While there is no reason the firm couldn’t trade junk bonds out of New York, the firm was concerned that many of its key people in Beverly Hills--with their families and lives settled in Southern California--would not have wanted to move east. Milken moved the department to Southern California in 1977.

Accordingly, Drexel mounted a lobbying effort, including pleas from key California legislators and clients, to persuade the SEC to allow the junk bond unit to stay put.

The Beverly Hills operation must, however, undertake several key measures to tighten oversight and separate certain functions to reduce potential for abuse. Among the changes:

- Drexel can no longer employ or do business with Milken, its longtime junk bond chief, who is singularly responsible for transforming Drexel from a Wall Street doormat in the 1970s to a powerhouse in the 1980s.

Industry opinion is mixed on how well Drexel can retain its market share in junk bonds in the post-Milken era. But without Milken, the firm earlier this year pulled off the major part of the biggest junk bond financing in history for the takeover of RJR Nabisco. And one thing is agreed: The firm is loaded with highly talented traders and investment bankers.

- A new Capital Markets Services Department will be created, separate from the junk bond unit, to minimize potential insider trading, market manipulation or other abuses. That department will be headed by Peter Ackerman, a skilled deal maker and Milken’s former right-hand man.

Ackerman’s department, however, will still work closely with the junk bond unit, designing, pricing and marketing new junk bond issues and developing and maintaining relationships with investment banking clients.

- Drexel will transfer equity and convertible securities trading activities in Beverly Hills to New York. Previously part of the high-yield department, those functions are not seen as critical to junk bond trading. The bulk of Drexel’s equity trading was already based in New York anyway. Only about 20 employees will be affected and many, if not all, may remain in Beverly Hills and join the junk bond department, Drexel spokesman Anreder said.

- An unnamed member of Drexel’s executive committee, acceptable to the SEC, will reside in the Los Angeles area and supervise the Beverly Hills operation--including junk bonds, capital markets services and corporate finance. Previously no individual held that role, although John H. Kissick, acting chief of the junk bond department since March and highest ranking official in Beverly Hills, is a member of Drexel’s board.

Drexel also must take other steps to boost oversight, including the posting of at least three compliance officers in the junk bond unit, reporting to Drexel’s compliance director in New York.

MAIN STORY: Part I, Page 1