Financial History Issue 112 (Winter 2015) | Page 10
THE TICKER CONNEC TING TO COLLEC TIONS
The Drexel Burnham Lambert Archives
By Linda Eichler
Drexel Burnham Lambert was a prominent and very successful Wall Street
investment bank which was forced into
bankruptcy in February of 1990. It began
as Burnham and Company, a small New
York City retail brokerage firm founded in
1935 by I. W. Burnham II, a 1931 graduate
of the Wharton School of the University
of Pennsylvania. Burnham began his firm
with $100, 000, of which $96,000 was borrowed from his grandfather, a founder of a
Kentucky distillery.
The firm branched out into investment
banking, and in 1973 it merged with Philadelphia-based Drexel Firestone, an ailing
old line investment bank, which welcomed
the merger with Burnham to form Drexel
Burnham and Company. The name “Drexel
Burnham” rather than “Burnham Drexel”
was chosen because Drexel Firestone was
known as a “major bracket” firm with the
power to underwrite stocks and bonds, while
Burnham and Co. was merely a “sub-major
firm” with no such power. In 1976, Drexel
Burnham merged with William D. Witter,
the American arm of the Belgian company,
Georges Bruxelles Lambert, and then incorporated as Drexel Burnham Lambert (DBL).
Great success followed, largely driven
by DBL’s dominance in the high yield
bond market. Before the late 1970s, blue
chip companies that had fallen on hard
times had to issue high yield bonds (junk
bonds), which often did not fare well in the
future. But Michael R. Milken, a Wharton
MBA who ran the California bond trading
desk of DBL, discovered that new entrepreneurial companies with lower credit
ratings — rated BB or lower — were found
to have only a slightly higher rate of
default than solid blue chip issues, but
interest rates on these new bonds were
MAR 3
1933
higher than those of the blue chips. Therefore, a diversified bond portfolio made up
of these new higher-risk companies would
do well into the future.
In the past these new low-credit companies could only raise money by offering their stock rather than their bonds,
but now DBL created a market for these
first issue high yield bonds. DBL’s share
of this market peaked at 75% in 1983 and
1984. In the mid-1980s, DBL was ranked
among Wall Street’s top investment banks
with employees numbering over 10, 000.
In addition to high yield bonds financing
new companies with low credit ratings,
DBL’s Mergers & Acquisitions Department used the bonds for financing leveraged buyouts and hostile takeovers.
The demise of Drexel Burnham Lambert
began in 1986 with the government investigation of allegations that the firm had
engaged in various illegal activities. DBL
denied it had done anything wrong, but
suits by the US Securities & Exchange Commission (SEC) and the threat of a RICO
indictment by the government took their
toll. Eventually DBL pleaded guilty to six
felony counts and agreed to pay $650 million to settle with the SEC in April of 1989.
Later that month, DBL eliminated 5,000
jobs after closing three departments. The
firm’s securities business collapsed when
the parent, Drexel Burnham Lambert,
defaulted on $100 million in loans, and
Wall Street firms then sharply cut their
business dealings with the firm. DBL filed
for protection from its creditors under
Chapter 11 of the Federal Bankruptcy
Code on February 13, 1990. Thousands
of DBL employees were looking for new
jobs, as Wall Street was stunned by the
rapid decline of the company which had
just recently announced it was seeking a
partner because وH