Kidder, Peabody & Co. was an American securities firm, established in Massachusetts in 1865. The company's operations included investment banking, brokerage, and trading.

The firm was sold to General Electric in 1986. Following heavy losses, it was subsequently sold to PaineWebber in 1994. After the acquisition by PaineWebber, the Kidder Peabody name was dropped, ending the firm's 130-year presence on Wall Street.[1] Most of what was once Kidder, Peabody is now part of UBS AG, which acquired PaineWebber in November 2000.[2],_Peabody_%26_Co.

Kidder Faces Life After Siegel
Published: February 22, 1987

IN the days when Martin A. Siegel was riding high as one of the country's top takeover specialists, junior associates at Kidder, Peabody & Company admiringly called him the barracuda. ''He was pretty, he was smooth and he was fast,'' one of them explained.

He was, in short, all the things Kidder, Peabody was not. The 122-year old investment bank was decidedly unflashy. It was plagued with uncertainty about the role it wanted to play on Wall Street. And it moved painfully slowly in a financial world that was racing ever faster.

For many years, the mismatch seemed to work. Mr. Siegel brought Kidder to the forefront of the takeover business by persuading companies that they needed him to defend against unwanted takeover bids. In the process, the young investment banker became a star.

Mr. Siegel was a Kidder Peabody man. He arrived there at the age of 23 and did not leave for 15 years. But he outshone his firm in public, gained extraordinary influence in private and grew impatient with its progress.

Now, because of Mr. Siegel, Kidder has been drawn into the insider-trading scandal. By his own account, he was routinely violating the law, supplying Ivan Boesky, and, the government charges, Kidder's own traders, with confidential information on corporate strategies. Kidder has not been charged with any wrongdoing.

It may be hard to understand why a polished family man who reportedly earned $2.5 million a year would descend into the world of passwords and bagmen (see box). Certainly, plenty of people at other Wall Street firms joined in the insider-trading feast over the years.

But to some extent, the tensions between Kidder and the superstar it fostered may have contributed to pressures that helped lead both astray. As Kidder struggled to define itself, an impatient Mr. Siegel may have come to conclude that he did not have to answer to anyone but himself.

In any event, the scandal may well impede Kidder's hopes of becoming a top-tier investment bank. Last April, Kidder took a major step in that direction. In exchange for access to several hundred million dollars of desperately needed new capital, it sold an 80 percent interest to the General Electric Corporation. But now, Kidder's managers are likely to be preoccupied with the scandal for years, and the effect of the scandal on current and potential customers is not yet known.

There was speculation on Wall Street last week that G.E. might even lean on Kidder's partners to return some of the generous $600 million the company paid for its stake in Kidder, now that legal expenses are likely to begin to mount. G.E. would not comment on the rumors.

Analysts were already wondering whether Kidder, even with G.E.'s backing, could climb up sharply in the major leagues of investment banking, which is largely monopolized by a half-dozen firms.

''Negative publicity - and this certainly is negative - is not going to help us,'' a firm spokesman said. ''But we are going to mount a vigorous defense and we believe that we are going to be exonerated.''

This is not the first time in recent years that the firm has had to cope with bad publicity. In 1984, Peter N. Brant, Kidder's $1 million-a-year stockbroker, embarrassed the firm by testifying that he set up a scheme to trade on tips fed to him by former Wall Street Journal reporter R. Foster Winans. Mr. Brant pleaded guilty to criminal charges.

Despite the current scandal, Kidder says its expansion plans are still on track. G.E. has provided a credit line of $500 million for short-term financing so that Kidder can compete with several other top firms that are moving into merchant banking. In merchant banking, institutions not only advise companies on takeovers and acquisitions but provide financing as well, earning huge fees. In 1985, Kidder says, it placed $500 million of high-yield debt securities. In 1986, that was up to $2.5 billion.

The firm also scoffs at widespread suggestions on Wall Street that Kidder's mergers and acquisitions unit was stalled when Mr. Siegel left a year ago. ''Now,'' says a spokesman, ''you no longer have one superstar, you have a group of people who are working together.'' Internal Kidder reports indicate that the firm's mergers and acquisitions fees continued to increase after Mr. Siegel left the firm.

No Kidder or General Electric executive would be interviewed for attribution for this story. Both companies said it would be inappropriate to talk in the midst of a government investigation. Kidder eventually decided to make a spokesman available for an interview on the condition he not be identified. Current and former employees also asked that they not be identified.

Inside Kidder Peabody last week, there was a lot of damage-assessment going on, as lawyers and executives began to map out their response to Mr. Siegel's charges. Mr. Siegel pleaded guilty on Feb. 13 to misusing inside information. The government also charged that Kidder's arbitragers made millions for the firm's own account by using illegal tips Mr. Siegel fed them. ''There seemed to be a very real expectation that Siegel was about to go down,'' one Kidder insider said, ''but nobody expected that he would try to take Kidder down with him.''
Kidder Faces Life After Siegel

Published: February 22, 1987

(Page 2 of 4)

Indeed, Mr. Siegel's accusations, if true, could jeopardize embroil the firm in countless lawsuits. Two of its arbitragers, Timothy L. Tabor, who left the firm last year, and Richard Wigton, are facing criminal charges. Both men say they plan to fight the charges. Federal prosecutors have subpoened Kidder's trading records.

One key question is likely to be whether Kidder did a proper job of preventing its investment bankers from leaking confidential information to its traders. In the securities business the process is known as maintaining a ''Chinese Wall.''

Government investigators are likely to examine whether Mr. Siegel and other Kidder investment banking executives were too deeply involved in the firm's arbitrage operation, which traded in takeover stocks. Mr. Siegel and another Kidder executive, Max C. Chapman Jr., studied whether to move the firm into arbitrage trading in 1979, a company spokesman said. At that time, Kidder decided not to create a formal arbitrage department, the spokesman said.

Later, according to the government, Mr. Siegel would periodically advise the firm's arbitragers about stock positions based on inside tips he obtained from a source at Goldman, Sachs & Company. Mr. Siegel was held in awe throughout the firm and Kidder sources say that, though he had no formal role in the arbitrage operation, his frequently offered suggestions on takeover stocks were almost always followed. According to sources familiar with the investigation, Mr. Wigton and Mr. Tabor will say they were never told the source of Mr. Siegel's information.

The separation of traders and corporate advisers ''is an extremely fundamental principle,'' said Albert I. Borowitz, a securities specialist at the law firm of Jones Day Reavis & Pogue. ''Any firm that is responsible, that engages in corporate finance and trading, has a Chinese Wall and other procedures to prevent the abuse of confidential information.''

Kidder's spokesman said the firm had a strict policy that prevented investment bankers from talking about their own deals. However, the spokesman said: ''People in the mergers and acquisitions department are going talk to people in the trading department.''

To those who know Kidder best, there was a painful familiarity about the damage the Siegel episode might do to Kidder's hopes. In the long tenure of the firm's all-powerful chairman, Ralph D. DeNunzio, Kidder has not seemed able to sustain momentum in climbing the investment banking ranks, critics say.

Mr. DeNunzio is a big block of a man who easily dominates any room he is in. He can display, people who know him say, the charm of the salesman he was until he began to climb the ranks of the Kidder organization. He moved from sales to head the firm's syndication department. Ultimately, he rose in administration under the firm's aging patriarch, Albert H. Gordon, whom he eventually replaced as chairman. MR. DeNUNZIO may have recognized something of himself in the youthful assurance of Mr. Siegel. Mr. DeNunzio, too, was a star at an early age. In 1971, at the age of 39, he was appointed chairman of the New York Stock Exchange, making him the Big Board's second youngest chairman ever. Many securities professionals credit him with saving them from a slew of back-office and modernization problems that threatened the industry when he took office.

Once in power at Kidder in the late 1970s, however, veterans say Mr. DeNunzio exhibited two key weaknesses that may have kept the firm, from & becoming one of the nation's premier investment banking houses. One concerned strategy. The other concerned the firm's leadership.

Though he is an aggressive manager, Mr. DeNunzio's interests tend to be in the details of running the firm and not in larger policy questions or long-term strategy. For years, for example, he insisted that the regional managers of Kidder's extensive retail brokerage operation report directly to him.

By about 1980, many insiders felt Kidder had to choose between two courses. It could either remain a powerful niche firm or try to move into the top rank, as Drexal Burnham Lambert did in the early 1980s with its strong drive into junk-bond financing.

Kidder was an old-line firm that traced its roots back to genteel Boston investment circles in the 1820s and it lacked the style of some of its bigger competitors. Its lower Manhattan headquarters are furnished with a blandness that for years has been referred to as ''neo-Holiday Inn'' by staffers.

Kidder always had less capital than other investment banks. Between 1979 and 1985, for example, it increased its capital from $92.4 million to $391.9 million. Others in the industry improved their positions too, however. Kidder ranked fifteenth in both years.

It was, however, a prestigious presence in the industry and had some major corporate clients, including Gulf & Western Corporation. And it had solid ties with many small and medium-size companies.

Kidder could have survived in the short term, many insiders believed; it enjoyed a healthy 20 percent return on its equity.But many insiders felt it would not find a place in the future unless it undertook a major expansion. Said one former corporate finance partner: ''The firm was sick, but it didn't have a heart attack, it had a chronic illness.''
Mr. DeNunzio would not make a decision. He was, however, against going public and he rebuffed corporate suitors that expressed interest in acquiring Kidder. The result was confusion. ''We'd have management meetings and it would be like a split personality,'' said one former partner. ''Half the group wanted to be junk-bond kings and the other half wanted to be white-shoe bankers.''

Mr. Siegel and others believed the only choice was to try to push revenues up in order to increase the firm's financial base. Some of the firm's key people thought speculation in takeover stocks would be a good way to increase Kidder's revenues. ''At the highest levels of the firm,'' says one long time Kidder veteran, ''they were quite envious of the money being made in other firms in risk arbitrage. I heard it said by top people that we weren't making money the way some people were.'' In their eagerness for profits, government charges suggest, some of Kidder's executives broke the law.

While the firm was debating its future, Mr. DeNunzio, then in his mid-50s, refused to annoint a successor. Mr. Siegel was especially frustrated by this, people who worked with him said. He was bringing in huge billings and emerging as a major star outside of the firm. But inside, he was not getting the recognition or compensation he felt he was entitled to, according to associates at the time. Eventually, Mr. DeNunzio seemed to settle on three possible new leaders: Mr. Siegel, Mr. Chapman, who had led the firm into highly complex, lucrative trading in financial futures, and Michael Hernandez, who headed the successful municipal finance division. But that recognition for Mr. Siegel was extremely tentative. Mr. DeNunzio had been known to change his mind before.

Some in the office believed he would never allow anyone to move into power as long as he was around. ''As you grew,'' said one man who worked with Mr. DeNunzio, ''he became less comfortable with you.'' Last year, Mr. Siegel left to join Drexel Burnham and Mr. Hernandez went to First Boston. Mr. Chapman, a tough former marine and University of North Carolina football player, was named Kidder's president this fall.

One young investment banker says Mr. DeNunzio would sometimes undermine the firm's rising stars. One afternoon in the summer of 1985, long before Mr. Siegel had been implicated in insider trading, the young investment banker ran into Mr. DeNunzio. The chairman mentioned a story in a trade paper that said Mr. Siegel was losing some of his hold on the rich takeover business.

It was bad news for Kidder, but Mr. DeNunzio, the young banker remembers, appeared oddly satisfied. That, the investment banker said, ''seemed to me to be strange for the head of the firm, since Marty was its star.''

''Marty,'' as everyone in the first-name-basis acquisition game came to call him, had not always been a star. A bright, slightly overweight, kid from a lower- middle class family, he had arrived at Kidder by way of Harvard. He had two sharkskin suits, a friend from those days remembers.

But within a few years, Siegel drastically changed - as though he had decided he needed an image that would carry him beyond the slightly frumpy surroundings of Kidder's 10 Hanover Square offices. ''All of a sudden he really started taking care of himself,'' the friend remembers. He lost about 50 pounds and bought expensive three-piece suits.

About the same time, he started to get more aggressive around the office. Though he never headed the merger department at Kidder, he would sometimes have as many as fifty young corporate finance associates researching companies and analyzing deals for him. He put together what was essentially a sales pitch for boards of directors and he took it on the road. He would speak, sometime for hours, about the risks of hostile tender offers, which were just coming into favor as a tool to take control of public companies.

He had command of the subject and he won the trust of the board members. ''It was a tremendous show,'' said one of the people who worked with him at the time, ''Implicitly, it told the C.E.O.: 'you worked your whole life to get here, don't lose it.' '' In some years, Kidder had 80 or more companies paying in $100,000 annual retainers in the ''tender defense program'' alone.

His entrepreneurial style set him apart at Kidder, where he was, a company spokesman was eager to point out last week, ''always a little bit of a lone wolf.'' He was a star at a house that had few stars and he often told people that he thought he deserved more from Kidder.

THOUGH he would sometimes go off to Mr. DeNunzio's weekend ski house in Vermont and the two were profesionally close, few at Kidder knew how close the relationship was beyond that. Outside the firm, too, Mr. Siegel was a bit apart. Kidder was not known for its aggressiveness, yet Mr. Siegel was in the cutthroat merger world, which allowed little room for gentility.

He socialized little with the takeover chiefs at the other firms - a group that is quite social. Unlike his colleagues, who spent much of their time planning strategy at their home offices in New York, Mr. Siegel was always taking his presentation from board room to board room. One investment banker remembers him as ''the man in the airplane.''
Kidder Faces Life After Siegel

Published: February 22, 1987

Single Page

(Page 4 of 4)

Kidder insiders say they can see how Mr. Siegel's star status and Kidder's informal structure could have created an atmosphere in which the rules were not strictly observed. If the firm had hired a top-notch arbitrger, there might have been less need for communication between the traders and Mr. Siegel. Said one employee, ''it's a firm that's lean and that doesn't like to hire expensive stars from the outside. Marty, because of his mergers and acquisition experience probably knew more about the arbs than anybody.''

In many of the insider trading cases that have come to light this year, managers may be to blame for staying too far out of sight, said William R. Dill, president of Babson College and former dean of the New York University Graduate School of Business. ''I suspect that part of the problem is that some of the sager old hands probably looked at this and said, 'It's going well, why interfere with their entrepreneurial drive? And if I wanted to delve into it, I'm not sure I would be able to understand what they're up to anyway.''

Even extremely rigorous controls probably would not have stopped Mr. Siegel from trafficking illegally in confidential information, and firms very different from Kidder face similar situations. Nonetheless, as it ponders its future, Kidder will undoubtedly be asking itself whether it contributed to its own problems. EXPLAINING THE GREED

The insider trading scandal prompts psychologists to attempt an explanation of the reckless drive for wealth of some on Wall Street.

Why would prominent investment bankers and lawyers risk jail and the destruction of exemplary careers by flouting the rules of the financial game? Is the amassing of ever-greater wealth enough to justify illegally taking advantage of insider information?

While no one can pretend to analyze the deep inner motives of the dozen or so businessmen against whom the S.E.C. has brought charges, psychologists draw on their familiarity with similar clinical cases to offer some insights.

''In people with a maniacal acquisitive drive, the money itself is just a way of keeping score in a psychological game,'' said Steven Berglass, a clinical psychologist at Boston University, who wrote ''The Success Syndrome.'' According to Mr. Berglass and other psychologists, many of those who are driven to success at any cost have had experiences in childhood that led them to a deep fear of failure, a fear that underlies their struggles to succeed. Sometimes a feeling of having been unloved or rejected in childhood leaves an emotional hunger in which money becomes a concrete symbol of personal worth, and the accumulation of vast sums a proof to themselves that they are lovable.

Often it is a failed father, or one who was once successful but then faltered, that causes the anxiety about success. ''The son, as a grown man, harbors a deep fear that he, too, will fail,'' said Dr. Berglass. ''He overcompensates, pinning his emotional well-being and self-esteem on his ability to sustain ever-greater successes.''

But success, by its very nature, makes that an almost impossible goal to sustain, Dr. Berglass points out. ''Each success sets a new, higher mark in an inexorable process that pushes you, finally, to gain the edge that only bending the rules will give you,'' said Dr. Berglass. ''It is not criminal intent so much as the dread of failing.''

Success, too, both requires and breeds a sense of specialness, a feeling of capability greater than most. That, psychologists say, is healthy, even essential, to a point. But the sense of being special can shade over into what psychoanalysts call ''narcissistic entitlement,'' the feeling that one is so special that the rules and laws do not apply to oneself.

Apart from personal motives, being part of a group of people who are all involved in the same endeavors can also make one more likely to take risks. Social psychologists have long known about a phenomenon called the ''risky shift,'' in which people who would normally be conservative in their actions are cajoled into taking risks when they become part of a group. And an atmosphere such as that of Wall Street, where risk is in the air, can make the actions of an investment banker all the bolder. - DANIEL GOLEMAN

Photo of Ralph D. DeNunzio (NYT/Jack Manning); Photo of Martin A. Siegel (Armen Kachaturian); Photos of the founding partners left, Henry P. Kidder, Francis H. Peabody and Oliver W. Peabody, who founded Kidder, Peabody in 1824 (page 29)

Albert Gordon


As of January 1, 1995, Kidder Peabody Group Inc. was acquired by UBS Wealth Management USA. Kidder, Peabody Group provides investment banking and securities services to individuals, corporations, institutions and governments. Kidder Peabody Group Inc. was founded in 1865 and is based in New York, New York.

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.[8] Burnham started the firm with $100,000 of capital (equivalent to $1.5 million in 2019), $96,000 of which was borrowed from his grandfather, the founder of a Kentucky distillery.[6]

It became one of the more successful brokerages in the country, eventually building its capital to $1 billion.[2] While Burnham eventually branched out into investment banking, the company's ability to expand was limited by the structure of the investment banking industry of that time. A strict unwritten set of rules assured the dominance of a few large firms by controlling the order in which their names appeared in advertisements for an underwriting. Burnham, as a "sub-major" firm, needed to connect with a "major" or "special" firm in order to further expand.[6]

Burnham found a willing partner in Drexel Firestone, an ailing Philadelphia-based firm with a rich history. Drexel Firestone traced its history to 1838, when Francis Martin Drexel founded Drexel & Company. His son, Anthony Joseph Drexel, became a partner in the firm at age 21, in 1847. The company made money in the opportunities created by mid-century gold finds in California. The company was also involved in financial deals with the federal government during the Mexican–American War and the U.S. Civil War. A. J. Drexel took over the firm when his father died in 1863. He partnered with J. P. Morgan and created one of the largest banking companies in the world, Drexel, Morgan & Co.[9]

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, coasting 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,[6] and renamed itself 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 dawn of the 1970s, Drexel was still considered a major firm, and thus got a large chunk of the syndicates formed to sell stocks and bonds. It was a shell of its former self, however, as evidenced in 1973, when a severe drop in the stock market 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.[1]

Even though Burnham was the surviving company, the more powerful investment banks (whose informal blessing the new firm needed to survive on Wall Street) insisted that the Drexel name come first as a condition of joining the "major" bracket. Thus, Drexel Burnham and Company, headquartered in New York, was born in 1973[10] with $44 million in capital.[6]

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.[6] 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.[1] Burnham remained the enlarged firm's chairman. He handed the posts of president and CEO to Robert Linton, who had begun at Burnham and Company in 1945 as a stock certificate runner. Burnham handed the chairmanship to Linton as well in 1982.[8][11][6]

Drexel's legacy as an advisor to both startup companies and fallen angels remains an industry model today. While Michael Milken (a holdover from the old Drexel) got most of the credit by almost single-handedly creating a junk bond market, 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.[10]

Michael Milken in 2006. He was Drexel's head of high-yield securities
Joseph's prophecy proved accurate. The firm rose from the bottom of the pack to compete with and even top the Wall Street Bulge Bracket firms. While Milken was clearly the most powerful man in the firm (to the point that a business consultant warned Drexel that it was a "one-product company"),[3] but it was Joseph who succeeded Linton as president in 1984, adding the post of CEO in 1985.[6]

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, Drexel's reputation for making markets for any bonds it underwrote was such that a "highly confident letter" was as good as cash to many of the corporate raiders of the 1980s.[6] 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,[6] and Kohlberg Kravis Roberts successful bid for RJR Nabisco.[12]

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.[1]

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 $1.1 billion in 2019. In 1987, Milken was paid executive compensation of $550 million for the year.[1][3]

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.[1] He personally called Joseph, however, who believed in following the rules to the letter, on several occasions with ethical questions.[3]

The firm was first rocked on May 12, 1986, when Dennis Levine, a managing director in Drexel's M&A department, was charged with insider trading. Levine had joined Drexel only a year earlier. Unknown to Drexel management, he had spent his entire Wall Street career trading on inside information. Levine pleaded guilty to four felonies, and implicated one of his recent partners, super-arbitrageur Ivan Boesky. Largely based on information Boesky promised to provide about his dealings with Milken, the SEC initiated an investigation of Drexel on November 17. Two days later, Rudy Giuliani, then the United States Attorney for the Southern District of New York, launched his own investigation. Ominously, Milken refused to cooperate with Drexel's own internal investigation, only speaking through his attorneys.[1] A year later, Martin Siegel, the co-head of M&A, pleaded guilty to sharing inside information with Boesky during his tenure at Kidder, Peabody.[10]

For two years, Drexel steadfastly denied any wrongdoing, claiming that the criminal and SEC investigations into Milken's activities were based almost entirely on the statements of Boesky, an admitted felon looking to reduce his sentence. This was not enough to keep the SEC from suing Drexel in September 1988 for insider trading, stock manipulation, defrauding its clients and stock parking (buying stocks for the benefit of another). All of the transactions involved Milken and his department. The most intriguing charge was that Boesky paid Drexel $5.3 million in 1986 for Milken's share of profits from illegal trading. Earlier in the year, Boesky characterized the payment as a consulting fee to Drexel. Around the same year, Giuliani began seriously considering indicting Drexel under the powerful Racketeer Influenced and Corrupt Organizations Act. Drexel was potentially liable under the doctrine of respondeat superior, which holds that companies are responsible for an employee's crimes.[1]

The threat of a RICO indictment unnerved many at Drexel. A RICO indictment would have required the firm to put up a performance bond of as much as $1 billion in lieu of having its assets frozen. This provision was put in the law because organized crime had a habit of absconding with the funds of indicted companies, and the writers of RICO wanted to make sure there was something to seize or forfeit in the event of a guilty verdict. Most Wall Street firms, then as now, relied heavily on loans. However, 96 percent of Drexel's capital was borrowed money, by far the most of any firm. This debt would have to take second place to any performance bond. Additionally, if the bond ever had to be paid, Drexel's stockholders would have been all but wiped out. Due to this, banks will not extend credit to a securities firm under a RICO indictment.[1]

By this time, several Drexel executives—including Joseph—concluded that Drexel could not survive a RICO indictment and would have to seek a settlement with Giuliani. Senior Drexel executives became particularly nervous after Princeton Newport Partners, a small investment partnership, was forced to close its doors in the summer of 1988. Princeton Newport had been indicted under RICO, and the prospect of having to post a huge performance bond forced its shutdown well before the trial. Indeed, the discovery of Milken's role in many of Princeton Newport's illicit doings led Joseph to conclude that Milken had indeed engaged in illegal activity. Joseph said years later that he'd been told that a RICO indictment would destroy Drexel within a month, if not sooner. As it turned out, even though Milken and Drexel signed a co-counsel agreement, Milken's legal team warned him that Drexel would almost certainly be forced to cooperate rather than risk being driven out of business by the pressures of the investigation.[1][10]

Nonetheless, negotiations for a possible plea agreement collapsed on December 19 when Giuliani made several demands that were far too draconian even for those who advocated a settlement. Giuliani demanded that Drexel waive its attorney–client privilege, and also wanted the right to arbitrarily decide that the firm had violated the terms of any plea agreement. He also demanded that Milken leave the firm if the government ever indicted him. Drexel's board unanimously rejected the terms. For a time, it looked like Drexel was going to fight.[1][10]

Only two days later, however, Drexel lawyers found out about a limited partnership set up by Milken's department, MacPherson Partners, they previously hadn't known about. This partnership had been involved in the issuing of bonds for Storer Broadcasting. Several equity warrants were sold to one client who sold them back to Milken's department. Milken then sold the warrants to MacPherson Partners. The limited partners included several of Milken's children, and more ominously, managers of money funds. This partnership raised the specter of self-dealing, and at worst, bribes to the money managers. At the very least, this was a serious breach of Drexel's internal regulations. Drexel immediately reported this partnership to Giuliani, and its revelation seriously hurt Milken's credibility with many at Drexel who believed in Milken's innocence—including Joseph and most of the board.[1][10]

With literally minutes to go before being indicted (according to at least one source, the grand jury was actually in the process of voting on the indictment), Drexel reached an agreement with the government in which it entered an Alford plea to six felonies—three counts of stock parking and three counts of stock manipulation.[1] It also agreed to pay a fine of $650 million—at the time, the largest fine ever levied under the Great Depression-era securities laws.

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.[6][10] Drexel's Alford plea allowed the firm to maintain its innocence while acknowledging that it was "not in a position to dispute the allegations" made by the government. Nonetheless, Drexel was now a convicted felon.

In April 1989, Drexel settled with the SEC, agreeing to stricter safeguards on its oversight procedures. Later that month, the firm eliminated 5,000 jobs by shuttering three departments—including the retail brokerage operation. In essence, Drexel was jettisoning the core of the old Burnham & Company.[1] The retail accounts were eventually sold to Smith Barney.[13]

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. 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. Unfortunately, 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 to even 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.[1]

Drexel managed to survive into 1990 by transferring some of the excess capital from its regulated broker/dealer subsidiary into its holding company, Drexel Burnham Lambert Group—only to be ordered to stop by the SEC on February 9 out of concerns about the broker's solvency. This sent Joseph and other senior executives into a near-panic. After the SEC, the New York Stock Exchange, and the Federal Reserve Bank of New York cast doubts about a restructuring plan, Joseph concluded that Drexel could not stay independent. Unfortunately, concerns about possible liability to civil suits scared off an eleventh-hour attempt to find a prospective buyer.[1][10][7]

By February 12, it was obvious Drexel was headed for collapse. Its commercial paper rating was further reduced that day, and the holding company defaulted on $100 million in loans. Citibank led a group of banks that tried to put together a loan package for the reeling firm, but this came to nothing. With other firms shutting Drexel out of deals, Joseph's last resort was a bailout by the government. Unfortunately for Drexel, one of its first hostile deals came back to haunt it at this point. Unocal's investment bank at the time of Pickens' raid on it was the establishment firm of Dillon, Read—and its former chairman, Nicholas F. Brady, was now Secretary of the Treasury. Brady had never forgiven Drexel for its role in the Unocal deal, and would not even consider signing off on a bailout.[7][10]

Early on the morning of February 13, New York Fed president E. Gerald Corrigan and SEC chairman Richard Breeden called Joseph and told him that they, Brady and NYSE chairman John J. Phelan Jr. saw "no light at the end of the tunnel" for Drexel. They gave Joseph an ultimatum–unless Drexel filed for bankruptcy, the SEC would seize Drexel that morning before the markets opened. After Joseph told the board that Drexel had effectively been told to "go out of business," the board voted to file for bankruptcy. That night, Drexel officially filed for Chapter 11 bankruptcy protection.[10] Drexel was the first Wall Street firm since the Depression to be forced into bankruptcy.[6] The filing covered only the parent company, not the broker/dealer; executives and lawyers believed that confidence in Drexel had deteriorated so much that the firm was finished in its then-current form.[7]

Even before the firm's bankruptcy, Tubby Burnham spun off the firm's funds management arm as Burnham Financial Group, which currently operates as a diversified investment company. Burnham was reportedly still arranging deals until his death in 2002 at age 93.[13] The rest of Drexel emerged from bankruptcy in 1992 as New Street Capital, a small investment bank with only 20 employees (at its height, Drexel employed over 10,000 people) and strict limits on its activities.[6] In 1994, New Street merged with Green Capital, a merchant bank owned by Atlanta financier Holcombe Green.[14]

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."[15]

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." Junk bonds were actually used in less than 25% of acquisitions, however, 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.

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, the noted private equity firm, was also founded by Drexel alumni led by Leon Black. Richard Handler joined Jefferies 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.[16][17] In 2011, and CNBC named Joseph the seventh-worst CEO in American business history, saying that "his poor management left the company without a crisis plan."[18]

Former employees
Tony Ressler, former Senior Vice President, High Yield Bond Market
Peter Ackerman, former head of Drexel's international capital markets department, also known as a political activist and co-founder of organizations such as the International Center on Nonviolent Conflict and Americans Elect
Guy Adami, panelist on CNBC's Fast Money
Leon Black, leader of Apollo Management
Joseph Cassano, founder of AIG Financial Products
Abby Joseph Cohen, partner and chief U.S. investment strategist at Goldman, Sachs & Co
Jerry Doyle, later actor and talk radio host
Marc Faber, formerly managing director of Drexel's Hong Kong office, famous for the Gloom Boom Doom investment report "Dr Doom"
Nigel Farage, leader of UK Independence Party
Steve Feinberg, Cerberus Capital Management
Gerard Finneran, cofounder of TCW Group later arrested after 1995 air rage incident.
James Stephen Fossett, American 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
Roderick M. Hills, former chairman of U.S. Securities and Exchange Commission (SEC)
Frederick H. Joseph, co-founder of Morgan Joseph
Mark N. Kaplan, former CEO of Drexel from 1970 to 1977, CEO of Engelhard, and senior partner at Skadden
Dennis Levine, chairman & CEO, Adasar Group, Inc.
Michael Milken, former head of the non-investment-grade bond department; almost single-handedly created the market for "high-yield bonds" (also known as "junk bonds")
Ken Moelis, former president and head of investment banking at UBS; founder of Moelis & Company
Anthony J. Parkinson, co-founder Kronos and current executive vice chairman of Urbix Resources
Terren Peizer, current CEO of Hythiam Co
Richard Sandor, current chairman of the Chicago Climate Exchange
Rick Santelli, current on-air editor for CNBC's Squawk on the Street, known for his remarks on CNBC on February 9, 2009 which were credited with helping to ignite the Tea Party movement.
Tom Sosnoff, founder of the thinkorswim trading platform and current CEO of
Gary Winnick, founder and former chairman of Global Crossing
Stone, Dan G. (1990). April Fools: An Insider's Account of the Rise and Collapse of Drexel Burnham. New York City: Donald I. Fine. ISBN 1-55611-228-9.
Your Best Job |
Kornbluth, Jesse (1992). Highly Confident: The Crime and Punishment of Michael Milken. New York: William Morrow and Company. ISBN 0-688-10937-3.
Business Insider: Michael Milken invented the modern junk bond, went to prison, and then became one of the most respected people on Wall Street - May 2, 2017
Eichenwald, Kurt (April 3, 1989). "Wages Even Wall St. Can't Stomach". The New York Times. Archived from the original on February 4, 2017. Retrieved February 11, 2017. Surely no one in American history has earned anywhere near as much in a year as Mr. Milken.
New Street Capital Inc. - Company Profile, Information, Business Description, History, Background Information on New Street Capital Inc
"The Collapse of Drexel Burnham Lambert". The New York Times. February 14, 1990.
I.W. Burnham II, a Baron of Wall Street, Is Dead at 93. The New York Times, June 29, 2002
The Man Who Made Wall Street: Anthony J. Drexel and the Rise of Modern Finance.
Den of Thieves. Stewart, J. B. New York: Simon & Schuster, 1991. ISBN 0-671-63802-5.
Ben Protess (April 29, 2016). "Robert Linton, Steadfast '80s Wall Street Banker, Dies at 90". The New York Times.
"A Heap of Woe for the Junkman". Time. December 5, 1988. Retrieved May 1, 2010.
A Stomping Ground for Veteran Analysts - January 6, 2006 - The New York Sun
BW Online | March 7, 1994 | DREXEL GIVES UP THE GHOST Archived January 3, 2008, at the Wayback Machine
Brenner, Richard A (2012). My Life Seen Through Our Eyes. Sunstone Press. ISBN 9781611390742.
BW Online | July 14, 2003 | Drexel's Ex-Chief Is Back in Business Archived June 23, 2010, at the Wayback Machine
Morgan Joseph Merges With Tri-Artisan. Institutional Investor, 2011-01-09.
"Fred Joseph". CNBC. 2009-04-30. Retrieved 2011-01-16.
Drexel's Fall: The Final Days. New York magazine Mar 19, 1990
Authority control Edit this at Wikidata
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Categories: Drexel Burnham LambertCompanies based in PhiladelphiaDrexel familyDefunct financial services companies of the United StatesFormer investment banks of the United StatesAmerican companies established in 1935Financial services companies established in 1935Banks established in 1935Financial services companies disestablished in 1994Banks disestablished in 1994Defunct companies based in Pennsylvania1935 establishments in New York (state)1994 disestablishments in New York (state)Financial services companies based in New York CityDefunct companies based in New York CityAmerican companies disestablished in 1994

Personalized Investment Management
The original Drexel Morgan & Co. was founded in the mid-1800s by Anthony J. Drexel with his protégé and partner, J. Pierpont Morgan. After Drexel’s death, the company reorganized in 1895 and became J.P. Morgan & Co., one of the original predecessors of what is today JPMorgan Chase.

In 1979, George W. Connell, who spent more than 25 years with J.P. Morgan & Co. and later as Principal of Drexel & Company, (originally founded by Anthony Drexel’s father) left Drexel to create the firm now known as The Haverford Trust Company.

Mr. Connell later established the Drexel Morgan & Co. name for his bank holding company.

Together with our subsidiaries, The Haverford Trust Company and Drexel Morgan Capital Advisers, we have in excess of $14 billion* in assets under management or consultation.

Drexel Morgan & Co. is a registered investment adviser and bank holding company. We believe above average returns can be achieved by purchasing large capitalization, dividend-paying, primarily A+ rated stocks with excellent balance sheets and consistent growth in earnings.

The Legacy PortfolioTM is our core product representing a considerable percentage of Drexel Morgan & Co.’s assets under management. The investment philosophy behind The Legacy Portfolio has been in existence for over 50 years.

*Estimated as of December 31, 2019