Drexel’s Bankruptcy
Drexel Burnham Lambert Group filed for Chapter 11 bankruptcy protection last week, only 11 days after the end of my eight years there as co-director of research and then salesman/bond trader. The word reached me while on vacation in Florida. The tranquility of my surroundings felt inappropriate as I listened to my stunned and saddened former colleagues back in Beverly Hills. When I resigned, I knew that the firm was in trouble, but the swiftness of its demise was a shock, to say the least.
On the “MacNeil-Lehrer NewsHour,” A. Gary Shilling, an economist with obviously little knowledge of “junk” bonds, was predicting all sorts of dire consequences from the bankruptcy while James Caywood of Caywood-Christian Capital Management, a high-yield money manager, was trying to bring some reason to the discussion. In recent years, opponents of junk bonds were often given prominent forums to espouse hysterical theories. Shilling was saying that the bankruptcy would cause a severe decline in the stock market (it actually closed up that day), bring many pension funds to their knees (absurd), dramatically increase the cost of the savings and loan bailout (by my calculations it might add 1% at most) and wreak havoc on the junk bond market as Drexel unloaded its unsold inventory.
Much of this ill-conceived “hysteria” was propagated daily in the media, causing the public to flee from high-yield mutual funds, causing regulators to abruptly rewrite the rules for savings and loans and insurance companies and causing elected officials to attack these securities as if they were the equivalent of original sin. It is hard for a market to survive when it is being legislated out of existence.
An equal dose of my chagrin has to be saved for Wall Street’s investment banking community (Drexel included), which took an essentially sound product and promoted it to the point where there was no margin for error in a business where “errors” are fairly common. The fees were too lucrative and most tried to get into the business by “out-Drexeling” Drexel. Furthermore, the demand was there so Wall Street supplied the product to fill it.
Drexel’s demise was especially ironic in that only five months earlier it had pleaded guilty to six felony counts, paid the largest fine in the history of the securities industry and cut loose the man who “made” the firm, Michael R. Milken, all presumably because a majority of the board felt that the impending RICO indictment would have put us out of business, otherwise (of course, nothing has ever been proven in court).
Instead of hunkering down for the tough times ahead, Drexel pretty much sped right over the cliff, blindsided by the lack of management foresight we had always criticized in other firms.
Drexel was a firm that many people loved to hate. I’m sure that its demise has caused more glee than sorrow. True, Drexel was brash and arrogant at times, but having spent over 20 years on Wall Street, I can safely say that at the peak, it was one of the brightest, most innovative, most dynamic group of professionals ever assembled. Milken motivated his people and listened to them. Unlike in much of the business world, this “boss” never let ego or distance stand in the way of good ideas and teamwork. It was truly a great place to work.
LAWRENCE A. POST
Former Senior Vice President
High-Yield Bond Department
Drexel Burnham Lambert
