DREXEL BURNHAM LAMBERT
OUTLINE
O INTRODUCTIONO BACKGROUNDO STRUCTURE OF DBLO CORPORATE COLLAPSEO PROBLEMO REASONSO CONCLUSION
INTRODUCTION
Drexel Burnham Lambert was a major Wall Street
investment banking firm,
Which first rose to prominence
It was forced into bankruptcy in February 1990 by its
involvement in illegal activities in the junk bond market
Driven by Drexel employee Michael Milken.
At its height, it was the fifth-largest investment bank in
the United States.
BACKGROUND
Investment banking firm
I W "Tubby" Burnham Founded in 1935
Its head quarters - New York, United States
$44 million in capital
The enlarged firm was privately held Lambert held 26 percent
stake received six seats on the board of directors.
Most of the remaining 74 percent was held by employees.
THE STRUCTURE OF DBL GROUP
Drexel Burnham Lambert Group, Inc.(DBLG)
Consolidated Assets: $28 billion
Equity: $835,725,000, 12/28/89
Drexel Employees and other private interests
Lambert Brussels Associates, Bermuda
Societe Arabe d’Investment et de Financement,Ltd.
Definancement,Ltd
Group Bruselle Lambert SA
Pargesa Holdings SA
Switzerland
Other unregulated subsidiaries
DBL International
bank N.V.
DBL Trading Corporation
Drexel Burnham Lambert
Inc (DBL)
DBL Govt
securities(GSI)
THE COLLAPSE OF DBL
DBL financial structure became unsustainable
Junk bonds and bridge loans illiquid
Unable to roll over commercial paper
Like commercial bank without a safety net
Prohibited from upstreaming excess capital in
regulated subsidiaries
DBL filed for protection under chapter 11
bankruptcy procedures.
OFFICIALS ROLL OUT THE SAFETY NET
Authorities protected the regulated subsidiaries
Ready to counteract spill over effects
Bank of England and Fed intervened to sustain clearing
and settlement and facilitate unwinding of postions at
DBL trading
A largely successful application of financial regulation
Customers of regulated subs protected
No serious contagion , even though entire group collapsed
PROBLEMS
In September 1988 for insider trading, stock manipulation, defrauding
its clients and stock parking (buying stocks for the benefit of another)
Due to several deals that didn't 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
REASONS
The firm's aggressive culture led into unethical
Milken himself viewed the securities laws, rules and regulations
Unethical behaviour at drexel operation founded by Joseph
Dennis Levine, a Drexel managing director and investment banker, was
charged with insider trading
Milken refused to cooperate with Drexel's own internal investigation,
only speaking through his attorney
Impossible for Drexel to reborrow its outstanding commercial
paper
Its posted a $40 million loss for 1989 - the first operating loss
in its 54-year history
CONCLUSION
Drexel managed to survive into 1990 by transferring some of the
excess capital from its regulated broker/dealer subsidiary into the
Drexel holding company
By February 12, it was obvious Drexel was headed for collapse. Its
commercial paper rating was further reduced that day.
Accordingly, he, the SEC, the NYSE and the Federal Bank strongly
advised Joseph to file for bankruptcy. Later the next day, Drexel
officially filed for Chapter 11 bankruptcy protection