drexel burnham lambert

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