Drexel Burnham Lambert

Drexel Burnham Lambert was an American investment bank whose rise and collapse reshaped Wall Street. It originated in 1935, when I. W. “Tubby” Burnham established Burnham and Company as a small New York brokerage. The firm gradually accumulated capital and expanded into investment banking, but its growth was constrained by the informal hierarchy that governed underwriting syndicates. In 1973, Burnham merged with the distressed Philadelphia firm Drexel Firestone, adopting the Drexel name in order to inherit that firm's position among the established major investment houses. The company later combined with William D. Witter, the American arm of Groupe Bruxelles Lambert, and became Drexel Burnham Lambert in 1976. The firm's defining business was the development and distribution of high-yield corporate debt, commonly called junk bonds. Michael Milken, who led Drexel's high-yield securities operation, helped create a broad market for bonds issued by lower-rated companies, including “fallen angels” and rapidly growing businesses. Drexel connected these securities with institutional investors and used them to finance acquisitions, leveraged buyouts, restructurings and hostile takeovers. Fred Joseph, who became president and later chief executive, supplied senior management and corporate-finance leadership while Milken became the most prominent figure associated with the franchise. During the 1980s, Drexel moved from the lower ranks of Wall Street into the Bulge Bracket. Its reputation for arranging high-yield financing made it a powerful participant in mergers and acquisitions. The firm supported or advised on transactions involving corporate raiders and buyout sponsors, including attempted acquisitions involving Gulf Oil, Unocal and Phillips 66, Ted Turner's MGM/UA transaction, and Kohlberg Kravis Roberts' successful acquisition of RJR Nabisco. Drexel also became known for issuing “highly confident letters,” informal assurances that financing could be arranged for a proposed takeover. Although not equivalent to committed financing, these letters carried unusual weight because investors believed Drexel could create a market for the required bonds. The business generated extraordinary earnings. Drexel reported net income of $545.5 million in fiscal 1986, at the time an unprecedented result for a Wall Street firm. Its compensation culture was highly performance-oriented, and Milken received exceptionally large payments, including reported compensation of $550 million for 1987. The structure also encouraged rivalry among divisions and allowed certain employees to invest alongside Milken-related transactions, creating conflicts that later became central to the firm's regulatory and criminal exposure. Drexel's aggressive culture became increasingly difficult to separate from unlawful conduct. Managing director Dennis Levine was charged with insider trading in 1986 and later implicated other market participants. Martin Siegel, another senior mergers-and-acquisitions executive, subsequently pleaded guilty to sharing confidential information with Ivan Boesky. Regulators and prosecutors then focused on transactions involving Milken's department, including alleged insider trading, market manipulation, client fraud and stock parking. A payment from Boesky connected to Milken's profit participation and the undisclosed MacPherson Partners limited partnership intensified concerns about self-dealing and failures of internal control. The company attempted to negotiate with federal prosecutors while denying broad wrongdoing, but the threat of a Racketeer Influenced and Corrupt Organizations Act indictment posed an existential financing problem. Drexel depended heavily on borrowed capital, and an indictment could have required a very large performance bond while undermining the firm's access to credit. In September 1988, the Securities and Exchange Commission filed a civil action against Drexel. In December, negotiations with United States Attor…

Drexel Burnham Lambert's history combined the growth of a New York brokerage with the decline and absorption of older Philadelphia investment-banking institutions. I. W. “Tubby” Burnham founded Burnham and Company in 1935 with a small amount of capital. The firm built a successful retail-brokerage business and later sought to expand into investment banking. Its progress was limited by Wall Street's informal underwriting hierarchy, which reserved the largest syndicates for established “major” firms. The opportunity to move upward came through Drexel Firestone. The Drexel name traced its lineage to nineteenth-century Philadelphia financier Francis Martin Drexel and his son Anthony J. Drexel, who later partnered with J. P. Morgan. After the separation of commercial and investment banking under the Glass-Steagall framework, the historic Drexel organization became associated with commercial banking, while a newer securities firm adopted the Drexel name. That firm merged with Harriman, Ripley and Company in 1965 and later became Drexel Firestone after Firestone Tire and Rubber Company acquired a minority stake. By the early 1970s, Drexel Firestone had lost much of its strength. The 1973–1974 market crash further weakened the firm, while Burnham needed an established name to gain access to the major underwriting syndicates. Burnham and Drexel merged in 1973. Although Burnham was the stronger operating business, the combined company placed Drexel first in its name because Wall Street institutions required the historic name to retain its status in the major-firm group. The new firm began with approximately $44 million in capital. In 1976, the company merged with William D. Witter, also known as Lambert Brussels Witter, the American securities operation of Belgian-based Groupe Bruxelles Lambert. It was incorporated as Drexel Burnham Lambert after operating for decades as a limited partnership. Lambert received a minority stake and board representation, while most of the equity remained with employees. Burnham continued as chairman, Robert Linton became president and chief executive, and Linton later succeeded Burnham as chairman. The decisive transformation came from corporate finance and high-yield securities. Fred Joseph joined from Shearson Hamill and worked to build a formidable investment-banking platform. Michael Milken, a senior executive retained from the older Drexel organization, developed a large market for high-yield bonds. These instruments allowed companies with weak or recently downgraded credit ratings to raise capital, while giving investors access to higher coupons and greater risk. Drexel became the dominant intermediary in this market and used its distribution capabilities to finance acquisitions, restructurings and leveraged buyouts. During the 1980s, Drexel's high-yield franchise changed its position on Wall Street. It aggressively entered mergers and acquisitions, including hostile transactions that established firms often avoided. The firm's “highly confident letters” gave takeover bidders assurance that financing could be assembled. Drexel's reputation for placing bonds made these assurances influential even though they were not firm funding commitments. The bank was involved in transactions connected with T. Boone Pickens, Carl Icahn, Ted Turner and Kohlberg Kravis Roberts, among others. Its internal culture emphasized individual production and compensation. Divisions were rewarded for their own results, and some employees invested in limited partnerships connected with transactions arranged by Milken's group. This system helped attract talent and generate exceptional profits, but it also weakened firm-wide controls and encouraged conduct that could conflict with the interests of clients, investors and the institution itself. The breakdown began publicly in 1986, when Dennis Levine was charged with insider trading. Levine's cooperation implicated Ivan Boesky and drew regulators toward Drexel. Martin Siegel later pleaded guilty to sharing confidential information with Boesky. The SEC and federal prosecutors investigated Milken's activities, and Drexel was accused of insider trading, stock manipulation, client fraud and stock parking. The MacPherson Partners limited partnership, which involved people connected to Milken and money managers, raised additional concerns about undisclosed interests and self-dealing. Drexel tried to negotiate a resolution while resisting allegations that the firm itself had engaged in systematic misconduct. The possibility of a RICO indictment was particularly dangerous because the company relied heavily on borrowed money and might have been required to post a large performance bond. Creditors could have withdrawn support, effectively forcing a rapid failure. Negotiations with federal prosecutor Rudy Giuliani collapsed in December 1988 after the government demanded extensive concessions. Drexel then reached a settlement, but the agreement could not restore its business model or reputation. Milken left and later pleaded guilty to securities charges. The high-yield market weakened, lenders became less willing to support Drexel, and the firm's legal and financial burdens mounted. In February 1990, Drexel filed for Chapter 11 protection. It was the first Wall Street firm to enter bankruptcy under such circumstances since the Great Depression. The company was dismantled, ending the independent Drexel franchise. Its innovations survived in the modern high-yield and leveraged-finance markets, while its collapse became a lasting example of the risks created by excessive leverage, concentrated executive power, weak internal controls and aggressive financial engineering.

1. 1990Chapter 11 bankruptcy

   Drexel filed for bankruptcy protection and was subsequently dismantled.

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2. 1988SEC sues Drexel

   The regulator brought a civil case alleging insider trading, manipulation, client fraud and stock parking.

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3. 1986Record profit year

   Drexel reported net income of $545.5 million, then described as the largest annual profit achieved by a Wall Street firm.

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4. 1986Insider-trading investigation begins

   The Dennis Levine case led to wider SEC and federal investigations involving Drexel executives and clients.

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5. 1984Fred Joseph becomes president

   Joseph took the presidency and later added the chief executive role, strengthening the firm's corporate-finance leadership.

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6. 1982Robert Linton succeeds Burnham as chairman

   Linton, who had joined Burnham as a young employee, became chairman as the firm's expansion accelerated.

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7. 1976Company becomes Drexel Burnham Lambert

   The firm merged with William D. Witter, the American arm of Groupe Bruxelles Lambert, and adopted its later name.

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8. 1973Burnham merges with Drexel Firestone

   The merger created Drexel Burnham and Company and gave Burnham access to the historic Drexel name and major-firm underwriting status.

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9. 1965Drexel merges with Harriman, Ripley and Company

   The Philadelphia securities firm combined with Harriman, Ripley and Company as its capital position weakened.

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10. 1935Burnham and Company founded

    I. W. “Tubby” Burnham established a New York brokerage that later expanded into investment banking.

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An innovative but highly aggressive investment bank specializing in high-yield finance, takeover funding and transaction-oriented corporate finance.

• High-yield bondsDebt capital markets

  Drexel's signature business was underwriting, distributing and making markets in bonds issued by companies with below-investment-grade credit profiles. The firm helped turn high-yield debt from a specialized instrument into a major source of acquisition, restructuring and corporate-growth finance. Its network connected issuers with institutional investors seeking higher returns in exchange for greater credit risk.

• Mergers and acquisitions advisoryInvestment banking

  Drexel advised takeover bidders, corporate buyers and financial sponsors during the leveraged-acquisition boom of the 1980s. It was willing to support hostile bids that established investment banks often avoided and used its bond-market reputation to help clients assemble acquisition financing. The business included advice, valuation, transaction structuring and debt placement.

• Leveraged buyout financingCorporate finance

  The firm arranged high-yield debt and related securities for leveraged acquisitions and buyouts. Its financing model enabled sponsors and corporate raiders to pursue transactions with substantial borrowed capital, including the financing associated with Kohlberg Kravis Roberts' acquisition of RJR Nabisco.

• Securities underwriting and brokerageCapital markets1935

  Drexel operated as a full-service securities firm, underwriting and distributing debt and equity securities while maintaining brokerage and trading activities. These businesses supplied the distribution infrastructure that allowed its corporate-finance and high-yield operations to scale.

• 1990File for Chapter 11 bankruptcyOther

  Regulatory exposure, legal costs, the departure of Milken, weakened junk-bond markets and dependence on borrowed capital left Drexel unable to maintain creditor confidence.

  What changed. Drexel sought protection under Chapter 11 of the United States Bankruptcy Code.

  Aftermath. The firm was dismantled, ending its independent operations and becoming a prominent case study in the risks of leveraged finance and weak controls.

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• 1988Negotiate a federal settlementStrategy

  The prospect of a RICO indictment threatened to freeze assets, impose a large performance-bond requirement and cut off the firm's access to credit.

  What changed. After initially denying wrongdoing and resisting prosecutors' demands, Drexel pursued a settlement with federal authorities.

  Aftermath. The settlement reduced the immediate indictment risk but did not restore market confidence or preserve the firm's high-yield franchise.

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• 1976Acquire and merge with William D. WitterM&A

  William D. Witter provided research and securities-market capabilities and was associated with Groupe Bruxelles Lambert.

  What changed. The firm merged with William D. Witter and incorporated as Drexel Burnham Lambert.

  Aftermath. The enlarged private partnership had additional capital and international shareholder involvement, although employee ownership remained substantial.

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• 1973Merge with Drexel FirestoneM&A

  Burnham needed an established Wall Street name and access to the major underwriting syndicates, while Drexel Firestone needed capital and a stronger operating platform.

  What changed. Burnham combined with Drexel Firestone and accepted the Drexel name as the first element of the new firm's name.

  Aftermath. The transaction created the platform that later became Drexel Burnham Lambert and enabled Burnham to compete for larger investment-banking mandates.

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• 1989Michael Milken securities caseControversy

  Milken left Drexel after reaching a criminal resolution and pleading guilty to securities-related charges. His departure removed the person most closely associated with the firm's high-yield business.

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• 1988SEC securities-fraud actionControversy

  The SEC accused Drexel of insider trading, stock manipulation, defrauding clients and stock parking in transactions involving Milken's department.

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• 1988MacPherson Partners conflict-of-interest controversyControversy

  A limited partnership connected to Milken's department involved his family members and money-fund managers. Its undisclosed structure raised concerns about self-dealing, improper benefits and violations of Drexel's internal rules.

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• 1987Martin Siegel insider-trading caseControversy

  Martin Siegel, a senior mergers-and-acquisitions executive, pleaded guilty to sharing inside information with Boesky during his earlier tenure at Kidder, Peabody, adding to concerns about the firm's senior deal-making culture.

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• 1986Dennis Levine insider-trading caseControversy

  Drexel managing director Dennis Levine was charged with trading on confidential merger information. His cooperation helped investigators examine relationships among Drexel personnel, Ivan Boesky and other Wall Street participants.

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1. Drexel Burnham Lambert