Drexel’s Parent Firm Files for Bankruptcy : Finance: Most of the company will cease operations. Its investment bank is not part of the Chapter 11 action.
The once mighty Wall Street investment firm of Drexel Burnham Lambert started going out of business Tuesday and its parent company later filed for bankruptcy court protection.
The company that once was at the center of 1980s merger mania and junk bond finance immediately started selling off its cache of government and mortgage bonds and suspended most trading operations. However, under pressure from regulators, the firm evidently has held off selling any big portion of its massive junk bond holdings.
Drexel said it will eventually cease operations, with some businesses being sold. “The brokerage firm will basically be winding down,” spokesman Steven Anreder said.
The board of Drexel Burnham Lambert Group, the parent of the investment bank Drexel Burnham Lambert Inc., voted Tuesday evening to file for protection from creditors under Chapter 11 of U.S. bankruptcy law. The firm said it was forced to file because it had gone into default on a variety of loans totaling about $100 million.
Drexel said the bankruptcy filing was made late Tuesday at the home of a U.S. Bankruptcy Court clerk outside New York.
The investment bank unit itself, however, is not filing for bankruptcy protection. Regulators said the unit still has enough net capital to remain open, which will allow it to gradually terminate operations. In a statement, Drexel said the parent company has assets of more than $3.6 billion and liabilities of more than $3 billion.
The filing and expected closing of operations mean that many of the firm’s remaining 5,300 employees may soon be out of work, at a time when the securities industry in general is in a decline and most firms are cutting staff. Sources said it was virtually certain that Drexel’s Beverly Hills office, which employs about 400, will be closed.
The Beverly Hills office is the headquarters of Drexel’s junk bond operations, where the firm’s former junk bond chief Michael Milken used to preside over the X-shaped trading desk. Not long ago, limousines used to begin arriving very early in the morning outside the office, dropping off titans of industry and would-be corporate raiders for audiences with Milken.
Joseph Bencivenga, director of Drexel’s high yield research department in Beverly Hills, said the employees “are very much looking for a new home.”
The firm’s condition has been sinking since at least a year ago, when it announced that it would plead guilty to six felony counts and pay $650 million in penalties. The decline of the junk bond market, the core of Drexel’s business, has been under way for months. But many employees had expected the firm to pull through and were stunned by the news.
Total Shock Described
Early in the day, Drexel Chief Executive Fredrick H. Joseph went on the firm’s in-house intercom and told employees of the expected bankruptcy filing. A top mergers and acquisition specialist in the Beverly Hills office said most staffers were “totally in shock.” He said there were no promises of severance pay. “We were told you’ll get Thursday’s paycheck and that’s all,” he said.
Much of Drexel’s stock is owned by its employees and, as the firm’s financial situation deteriorated over the past year, staff members were required to take a considerable part of their compensation in stock. Some employees are said to have a considerable portion of their personal net worth tied up in Drexel’s stock. Whether the stock will have any value after the bankruptcy filing remains to be seen.
Among the firm’s larger unsecured creditors will be Milken, who was forced to leave the firm last year after he was indicted on 98 felony counts. He turned in his stock, as employees are required to do when they leave the company. But Drexel has refused to pay him and has not given him his salary or bonus from 1988. The exact amount Drexel owes Milken could not be learned but it is said to total several hundred million dollars. Milken’s compensation in the 1980s was always staggering. From 1983 through 1987, he received more than $1 billion from Drexel.
Milken has declined to make any public statement on the firm’s demise.
As Drexel prepared its bankruptcy filing, officials of the Federal Reserve, the U.S. Treasury and the Securities and Exchange Commission scurried about in intense behind-the-scenes efforts to prevent Drexel’s misfortune from spilling over to other Wall Street firms. Sources said Federal Reserve Board Chairman Alan Greenspan had been in on-and-off contact with SEC and Treasury officials on Monday to monitor Drexel’s growing crisis. There was particular concern to avoid disrupting the government securities market and to ensure that Drexel’s problems did not trigger a credit crisis at other firms.
Markets React Calmly
The markets reacted with surprising calm. The Dow Jones industrial average ended the day up 4.96 to close at 2,624.10, although on light volume. The junk bond market actually rebounded somewhat among stronger issues such as RJR Nabisco.
The bankruptcy filing comes only a day after Drexel disclosed that it was urgently seeking a major investor or merger partner to bail it out of a liquidity crisis. The cash crunch came from continuing losses in the firm’s junk bond portfolio. The investment bank’s deteriorating financial situation made it impossible for Drexel to continue raising operating money by issuing short-term IOUs known as commercial paper. So it sought an emergency line of credit from commercial banks, reportedly about $300 million, to tide it over until it could find a permanent rescuer. However, Citibank, Drexel’s lead commercial bank, and other banks refused.
“They summarily put us out of business,” one disgruntled Drexel employee said. A Citibank spokeswoman refused to comment.
In a statement, SEC Chairman Richard C. Breeden said his agency and the New York Stock Exchange have stationed “examination teams” at Drexel’s headquarters to make sure the firm’s remaining operations continue smoothly. He said the SEC and the exchange had banned Drexel from transferring any of the brokerage unit’s capital to the parent company.
A number of big Wall Street firms in recent years have run into trouble and were forced to merge with healthy rivals. The most notable recent example was E. F. Hutton & Co., which was forced to merge with Shearson Lehman Bros. in 1987.
But business historian Robert Sobel said the Drexel bankruptcy filing is the first time a major investment bank has been forced into bankruptcy proceedings since the Depression. A much smaller firm, L. F. Rothschild Holdings Inc., filed under Chapter 11 last year.
Drexel will have to begin liquidating its junk bond portfolio. But employees said the firm is under pressure by regulators to do so slowly to avoid inundating the already severely depressed junk market. “I think it’s in everyone’s interest to do it in an orderly fashion so that the disruption of market activity is at a minimum,” said Michael Holland, chief executive of Salomon Bros. Asset Management.
Drexel by no means will be able to find a buyer for all of its junk. Drexel employees estimate that the firm’s junk portfolio has a face value of something more than $1 billion. A senior Drexel official in California said no more than half of the firm’s junk portfolio is considered marketable, because there is virtually no demand for the rest.
Junk Bonds Bought
In a desperate effort to stay afloat and prove that it had not been hurt by its legal problems, the firm in recent months bought large quantities of junk bonds that clients wanted to unload, often as an inducement to get them to buy other bonds.
Long a sleepy, second-tier firm, Drexel rose to prominence in the late 1970s on the strength of the junk bond business pioneered by Milken. By the early 1980s, the firm’s ability to raise huge amounts of money on short notice to finance corporate takeovers or leveraged buyouts made it one of the most powerful investment banks on Wall Street. Milken’s innovative methods and fierce competitiveness created considerable ill will toward Drexel among the more well-heeled, longer-established top firms.
On Tuesday, executives at some rival firms expressed concern about Drexel’s bankruptcy filing and sympathy for its employees. “We think the whole thing is terribly unfortunate,” a spokesman for First Boston Co. said. “The high yield market is a fragile one. The removal of a significant operator in the market is the exact opposite of what we need. We need more players, not fewer.”
However, some clearly viewed Drexel’s downfall as an opportunity. Michael Tennenbaum, vice chairman of investment banking for Bear Stearns & Co., said he plans to seek Drexel’s investment banking clients and is considering hiring some of its top employees. Tennenbaum, who is based in Los Angeles, said he expects other firms to make similar efforts.
NYSE officials said Drexel has a series of “specialist” posts on the floor of the exchange, making markets for the stock of 28 companies listed on the exchange. A NYSE spokeswoman said Drexel was continuing to operate the specialist posts on Tuesday. But a Drexel official said: “We’ll find somebody who wants to take them over.”
Meanwhile, in Beverly Hills, some Drexel employees at least outwardly remained fervently committed to junk bond products. Bencivenga said his staff was looking for new jobs in the field, either separately or as a unit that would remain together and move to another firm. “We’re just trying to get organized to make a run at what we think is going to be one of the great investment vehicles of the 1990s,” he said.
Staff writers Jane Applegate in Los Angeles and Douglas Frantz and Art Pine in Washington contributed to this story.
NO MARKET FOR JUNK--With plenty of sellers but no buyers, the junk bond market virtually ground to a halt. D1
PSYCHOLOGICAL BLOW--Drexel’s collapse is only the latest in a series of traumas suffered by Wall Street. D1
