Decision to ‘Minimize’ Drexel’s Impact Cited

Federal regulators decided to allow an orderly unraveling of Drexel Burnham Lambert Inc. “to minimize the chance of spillovers” from the faltering junk bond giant’s difficulties, Federal Reserve Board Chairman Alan Greenspan told Congress today.

In the government’s first public testimony about Drexel’s stunning slide into bankruptcy, Greenspan said the stock market’s reaction indicates that officials made the right decision.

“The orderly nature of the unwinding process probably has contributed to the relatively calm reaction in financial markets,” Greenspan told a House panel. “In addition, Drexel’s difficulties had been building for some time, and in certain respects were well-known. As a result, the firm’s demise was not entirely a surprise, though the particular timing and speed of the downfall may have been.”

Greenspan, who heads the government’s most important economic policy-making body, testified about Drexel’s bankruptcy before the House Judiciary Committee’s subcommittee on economic and commercial law.

When Drexel first began having trouble obtaining financing to offset short-term debt late last year and early this year, Greenspan said, consultations with Drexel were stepped up by the Federal Reserve Bank in New York, the Fed’s Board of Governors in Washington, the Security and Exchange Commission, the Treasury Department and the New York Stock Exchange.

After Drexel’s attempts to get an infusion of cash failed, Greenspan said, “The government authorities, after careful and frequent consultation, determined that consideration should be given to an orderly shrinkage of the firm to minimize the chance of spillovers from Drexel’s difficulties, helping to maintain the integrity and smooth functioning of our financial system more generally.”

Greenspan added that federal officials determined that the nation’s financial structure “was unlikely to be impaired by the failure of this single firm, provided it was carried out in a generally orderly way.”

Greenspan cautioned that he was speaking for himself and not the entire Fed board. He also said that Congress and regulators should consider several reforms, including monitoring the financial health of securities firms’ holding companies and closer monitoring of financial institutions’ capital resources.