THE TROUBLE AT DREXEL BURNHAM LAMBERT : Drexel Seeks Help, but ‘There’s No Line Forming’ : Securities: As the junk bond market worsens, fewer companies want to do business with the struggling investment firm.

It was only a week ago that the battle-scarred investment firm of Drexel Burnham Lambert released its 1989 earnings with a self-congratulatory commentary. The firm’s relatively small $40-million loss was “a tribute to the professionalism of our staff and the loyalty of our clients,” the once mighty firm said in a statement.

Much has changed in a week. As the junk bond market has continued to fall, Drexel has confronted a cash crisis that prompted the firm to announce Monday that it was seeking a merger partner or an investor to shore it up.

Within hours, there were reports that some Wall Street firms were unwilling to trade securities with the firm, for fear that they would not be paid for what Drexel bought.

And while Drexel Chief Executive Frederick H. Joseph and other officials at the firm have insisted that it is still strong, many on Wall Street are predicting that Drexel may find no partners and that one of the investment world’s most dramatic success stories might end. “I would describe them as in extremis, “ said one investment banker.

Drexel officials declined to elaborate on how the crisis had unfolded. But sources said the company had been unable to “roll over” some of the short-term borrowings called commercial paper, as lenders apparently balked at extending new loans. Drexel has about $200 million outstanding in commercial paper, which is typically a source of funds for buying an inventory of securities and keeping them overnight.

Clearly, the major underlying cause of the crisis was the continued fall of the junk bond market. Prices of the average junk bond have fallen about 20% in the past year, and the crisis has recently raised new anxieties about the solvency of life insurance companies and their pension plans as well as savings and loans and other institutions.

As bond prices have fallen, so has the value of a huge inventory of junk that is one of Drexel’s principal assets.

Wall Street officials said the unwillingness of some firms to do business with Drexel was a dire sign. “We don’t know how deep the firm’s problems are, but whatever they are, this will escalate them,” said Michael Lipper, president of Lipper Analytical Services, a research firm.

By early afternoon, there were reports that more than a dozen dealers in mortgage-backed securities had put out the word that they would not trade with the firm through the so-called interdealer brokers. As the afternoon wore on, traders in other types of securities were pulling back from trades with Drexel as well, sources said.

“I’m not going to say we’re pulling back, because nobody wants to be blamed for starting a panic,” said an official of one brokerage firm. “But nobody knows what’s going on with Drexel, and nobody wants to take the risk.”

Drexel still has substantial assets that might attract the eye of some potential buyer. The firm remains the single biggest factor in the junk market, with more than 40% of underwritings in 1989; it is also an important factor in the mortgage-backed securities market.

As the firm noted Monday, it has $800 million in equity capital, down from a peak of $1.4 billion in 1986. And though its work force has declined to less than 5,400 from a peak of 11,000, Drexel still has much of the financial talent that made its reputation during the 1980s.

Some on Wall Street speculated that Monday’s announcement might arouse interest among a foreign buyer--perhaps an investment bank--looking for the important contacts that an acquisition might bring. Some held out hope that Drexel’s lenders would come up with new loans or that some other innovative arrangement would be devised to help the 152-year-old firm survive.

But others were skeptical that the firm would find many bidders among domestic or foreign buyers, in large part because of the potential liabilities that the firm faces from civil suits that may arise from the alleged securities violations of Michael Milken, the firm’s departed junk bond chief, or other employees. Federal prosecutors are expected soon to bring a superseding indictment against Milken, who has denied all wrongdoing.

“Given the potential legal liabilities of Drexel, the fact that its main business is losing money and their stigma . . . I don’t think many people would be interested in buying them,” said Doyle Lyons, analyst with Merrill Lynch in New York.

Another Wall Street executive was more blunt about the level of interest in the company. “There’s no line forming,” he said.

Another drawback for any buyer is that the best employees might soon be hired away by other and stronger firms.

If Drexel filed for bankruptcy court reorganization, among the biggest losers would be Groupe Bruxelles Lambert, the Belgian concern that is Drexel’s largest single shareholder, with a 25% stake. Also hurt would be the senior Drexel employees who hold almost all the rest of the company’s shares.

But while such a step might also further shake the junk bond market, observers say it obviously would not have the widespread effects on the market that it would have had in the mid-1980s, when Drexel was a far more dominant force in underwriting and trading the securities.

The network of junk bond issuers and investors that Milken assembled in the early 1980s has long since adjusted to a world without Milken.

“If growing companies want to issue junk bonds to raise capital, you can bet there will be other firms that will be more than glad to do it for them,” said John C. Coffee, securities law specialist at Columbia University Law School.