Drexel Burnham Lambert

I.W. "Tubby" Burnham, a 1931 graduate of the Wharton School of the University of Pennsylvania, founded the firm in 1935 as Burnham and Company, a small New York City–based retail brokerage. Burnham started the firm with $100,000 of capital (equivalent to $ million in ), $96,000 of which was borrowed from his grandfather Isaac Wolfe Bernheim, the founder of a Kentucky distillery. It became one of the more successful brokerages in the country, eventually building its capital to $1 billion. In 1940, several former Drexel partners and associates formed an investment bank and assumed the rights to the "Drexel and Company" name. The old Drexel, which chose to concentrate on commercial banking after the Glass–Steagall Act regulated the separation of commercial and investment banking, was completely absorbed into the Morgan empire. The new Drexel grew slowly, relying on its predecessor's historic ties to the larger securities issuers. By the early 1960s, it found itself short on capital. It merged with Harriman, Ripley and Company in 1965 to form Drexel Harriman Ripley. In the mid-1970s, it sold a 25 percent stake to Firestone Tire and Rubber Company, renaming itself Drexel Firestone. Despite having only two major clients by the 1970s, Drexel was still considered a major firm, and thus got a large chunk of the syndicates formed to sell stocks and bonds. By 1973, however, it was a shell of its former self, and the shock of the 1973-1974 market crash sent the firm reeling. Drexel management soon realized that a prominent name was not nearly enough to survive and was very receptive to a merger offer from Burnham. Even though Burnham was by far the dominant partner and nominal survivor in the merger, the more powerful investment banks insisted that the Drexel name come first as a condition of inheriting the old Drexel's place in the "major" bracket. Burnham had no choice but to agree, since his enlarged firm needed the informal blessing of the more powerful firms to survive on Wall Street. Thus, Drexel Burnham and Company, headquartered in New York, was born in 1973 with $44 million in capital. The merged firm claimed 1935 as its founding date. In 1976, it merged with William D. Witter (also known as Lambert Brussels Witter), a small "research boutique" that was the American arm of Belgian-based Groupe Bruxelles Lambert. The firm was renamed Drexel Burnham Lambert and incorporated that year after 41 years as a limited partnership. The enlarged firm was privately held; Lambert held a 26 percent stake and received six seats on the board of directors. Most of the remaining 74 percent was held by employees. ==Business==

Drexel's legacy as an advisor to both startup companies and fallen angels remains an industry model today. Michael Milken, one of the few senior executives who was a holdover from the old Drexel, got most of the credit by almost single-handedly creating a junk bond market. However, another key architect in this strategy was Fred Joseph. Shortly after buying the old Drexel, Burnham found out that Joseph, chief operating officer of Shearson Hamill, wanted to get back into the nuts and bolts of investment banking and hired him as co-head of corporate finance. Joseph, the son of a Boston taxicab driver, promised Burnham that in 10 years, he would make Drexel Burnham as powerful as Goldman Sachs. it was Joseph who succeeded Linton as president in 1984, adding the post of CEO in 1985. Drexel, however, was more aggressive in its business practices than most. When it entered the mergers and acquisitions field in the early 1980s, it did not shy away from backing hostile takeovers—long a taboo among the established firms. Its specialty was the "highly confident letter", in which it promised it could get the necessary financing for a hostile takeover. Although it had no legal status, by this time Drexel (i.e., Milken) had a reputation for making markets for any bonds it underwrote. This made a Drexel "highly confident letter" as good as cash to many of the corporate raiders of the 1980s. Among the deals it financed during this time were T. Boone Pickens' failed runs at Gulf Oil and Unocal, Carl Icahn's bid for Phillips 66, Ted Turner's buyout of MGM/UA, and Kohlberg Kravis Roberts successful bid for RJR Nabisco. Organizationally, the firm was considered the definition of a meritocracy. Divisions received bonuses based on their individual performance rather than the performance of the firm as a whole. This often led to acrimony between individual departments, who sometimes acted like independent companies rather than small parts of a larger one. Also, several employees formed limited partnerships that allowed them to invest alongside Milken. These partnerships often made more money than the firm itself did on a particular deal. For instance, many of the partnerships ended up with more warrants than the firm itself held in particular deals. The firm had its most profitable fiscal year in 1986, netting $545.5 million—at the time, the most profitable year ever for a Wall Street firm, and equivalent to $ billion in . In 1987, Milken was paid executive compensation of $550 million for the year. ==Downfall==

1986–1989 According to Dan Stone, a former Drexel executive, the firm's aggressive culture led many Drexel employees to stray into unethical, and sometimes illegal, conduct. Milken himself viewed the securities laws, rules and regulations with some degree of contempt, feeling they hindered the free flow of trade. He was under nearly constant scrutiny from the Securities and Exchange Commission from 1979 onward, in part because he often condoned unethical and illegal behavior by his colleagues at Drexel's operation in Beverly Hills. The government had dropped several of the demands that had initially angered Drexel but continued to insist that Milken leave the firm if indicted—which he did shortly after his own indictment in March 1989. 1989–1990 Due to several deals that did not work out, as well as an unexpected crash of the junk bond market, 1989 was a difficult year for Drexel even after it settled the criminal and SEC cases. Reports of an $86 million loss going into the fourth quarter resulted in the firm's commercial paper rating being cut in late November. This made it nearly impossible for Drexel to reborrow its outstanding commercial paper, and it had to be repaid. Rumors abounded that the banks could yank Drexel's lines of credit at any time. Drexel had no corporate parent that could pump in cash in the event of such a crisis, unlike most American financial institutions. Groupe Bruxelles Lambert refused even to consider making an equity investment until Joseph improved the bottom line. The firm posted a $40 million loss for 1989—the first operating loss in its 54-year history. Richard A. Brenner, the brother of a president with controlling stakes stated in his memoir My Life Seen Through Our Eyes that other firms at Wall Street did not support Drexel or come to its aid when the company got into trouble because they were "smelling an opportunity to grab this business". ==Criticism==

By the late 1980s, public confidence in leveraged buyouts had waned, and criticism of the perceived engine of the takeover movement, the junk bond, had increased. Innovative financial instruments often generate skepticism, and few have generated more controversy than high yield debt. Some argue that the debt instrument itself, sometimes dubbed "turbo debt", was the cornerstone of the 1980s "Decade of Greed". However, junk bonds were actually used in less than 25% of acquisitions, and hostile takeovers during that period. Nevertheless, by 1990 default rates on high yield debt had increased from 4% to 10%, further eroding confidence in this financial instrument. Without Milken's cheerleading, the liquidity of the junk bond market dried up. Drexel was forced to buy the bonds of insolvent and failing companies, which depleted their capital and would eventually bankrupt the company. ==Survivors==

A few other firms emerged or became more important from Drexel's collapse, besides Burnham Financial. • There was also the 1838 Group named after the founding date of Drexel established by another group of investment fund managers. The funds suffered from under performance and the group folded. • Drexel Burnham Lambert Real Estate Associates II operates as a real estate management firm. • Apollo Global Management, a private equity firm, was founded by Drexel alumni Leon Black, Josh Harris, and Marc Rowan following the company's bankruptcy. • Richard Handler joined Jefferies Group immediately following the Drexel bankruptcy with a number of partners and began building the firm into what today is the largest, independent, full service, global investment bank (non bank-holding company). • Fred Joseph bought into a firm founded by John Adams Morgan to establish Morgan Joseph, a middle-market investment bank that caters to many of the same kinds of clients as Drexel had. In 2011, the firm merged with Tri-Artisan Partners, a merchant bank, to form Morgan Joseph TriArtisan. Although the firm carried Joseph's name and he was part-owner, he was only co-head of corporate finance until his death in 2009. In 1993, the SEC barred him from serving as president, chairman or CEO of a securities firm for life for failing to properly supervise Milken. Morgan Joseph TriArtisan's chairman and CEO is John Sorte, Joseph's successor as president and CEO of Drexel from 1990 to 1992. In 2011, Portfolio.com and CNBC named Joseph the seventh-worst CEO in American business history, saying that "his poor management left the company without a crisis plan." ==Former employees==

• Peter Ackerman (1946–2022), former head of Drexel's international capital markets department, also political activist and co-founder of the International Center on Nonviolent Conflict and Americans Elect • Guy Adami, panelist on CNBC's Fast Money • Leon Black, co-founder of Apollo Global Management • Joseph Cassano, founder of AIG Financial Products • Abby Joseph Cohen, partner and chief U.S. investment strategist at Goldman, Sachs & Co • Jerry Doyle (1956–2016), actor and talk radio host • Marc Faber, formerly managing director of Drexel's Hong Kong office, famous for the Gloom Boom & Doom Report investment report; "Dr Doom" • Nigel Farage, leader of Reform UK • Steve Feinberg, Cerberus Capital Management • Gerard Finneran, cofounder of TCW Group later arrested after 1995 air rage incident • James Stephen Fossett (1944–2007), aviator, sailor, and adventurer • Mark Gilbert, Major League Baseball player, and US ambassador to New Zealand and Samoa • Joel Greenblatt, founder of Gotham Capital • Richard B. Handler, current CEO of Jefferies & Company • Josh Harris, co-founder of Apollo Global Management • Tony Ressler, former senior vice president, high yield bond market • Marc Rowan, co-founder and CEO of Apollo Global Management • Richard Sandor, chairman of the Chicago Climate Exchange • Rick Santelli, current on-air editor for CNBC's Squawk on the Street, known for remarks on CNBC in 2009 which were credited with helping ignite the Tea Party movement. • Tom Sosnoff, founder of the thinkorswim trading platform and current CEO of tastytrade.com • Gary Winnick, founder and former chairman of Global Crossing == References ==