Drexel Burnham Lambert

Drexel Burnham Lambert was one of the largest investment banks on Wall Street. In February 1990, she went bankrupt after irregularities in the junk bond market. At Drexel Burnham Lambert heyday was the fifth largest investment bank in the United States.

Foundation

I.W. " Tubby " Burnham founded the company in 1935 as Burnham & Company, a small New York-based broker. 1967 to 1973 there was a merger with Drexel & Company, which made ​​possible the expansion of the business in the direction of investment banking. Drexel Burnham Company merged again in 1976 with William D. Witter, the U.S. subsidiary of Groupe Bruxelles Lambert. Drexel Burnham Lambert was 26% owned by Lambert, the remaining shares were held mainly by employees.

Business Model

Drexel Burnham Lambert employed both as an advisor to startup companies as well as high-yield bonds ( junk bonds ), which was then mainly of troubled companies ( " fallen angels " ) were issued. Michael Milken is ascribed going to have established the junk bond market. Junk bonds were little known late 70s. Milken was promoting this as an asset class, which were only slightly more risky than bonds issued by blue-chip companies, but then took a 6% higher rate of interest.

The company was doing aggressive business practices than many competitors. In the 80s, Milken and Drexel presented by issuing junk bonds capital available to finance hostile takeovers. Many public companies were then traded at market values ​​that were below the sum of the assets. The purchase of companies, only to break them down into individual parts and resell provided great Profitchanchen. Drexel put 1984 T. Boone Pickens capital to attack on Gulf Oil available, which led to the merger with Chevron. Milken was also behind the takeover bid by Carl Icahn for TWA. Offers for Unocal, Phillips 66, MGM / UA followed. Drexel's bonds were also behind Kohlberg Kravis Roberts & Co. and their offer for RJR Nabisco. Drexel's competitors Goldman Sachs, First Boston, Shearson Lehman Hutton and Merrill Lynch followed in the junk bond market, but Drexel was able to perform in 1985 50% of the revisions.

Downfall

In May 1986, parts of the management of Drexel Burnham Lambert came under indictment in connection with insider trading. Both the Securities and Exchange Commission as well as Rudy Giuliani launched investigations. Drexel Burnham Lambert was threatened with prosecution under the RICO Act; some members of the management saw no opportunity to repel it. Finally, a fine of 650 million U.S. dollars with the SEC was approved, which weakened Drexel. The following collapse of the junk bond market - due to higher default rates, an economic downturn and new legislation, which made it difficult to invest in junk bonds - hit hard Drexel, whose portfolio of more than $ 1 billion in junk bonds rapidly value lost. Drexel's credit rating deteriorated, the bank was, however, dependent on short-term funding. Both this, and attempts to organize a rescue by the SEC or a merger failed. In February 1990, Drexel Burnham Lambert filed for bankruptcy. As a result, 5,000 employees were laid off.

The business magazine Fortune led the collapse of the company primarily on corporate hubris back: "That's why they were the 500 largest companies are threatening to takeover without having to worry about each political retribution. And that's why they could borrow themselves and their customers for unrestrained speculation, without having to prepare for the day, would no longer be on the debt "in". A former senior employee confesses: " Look, we thought we were invulnerable. " "

DBL and the financial crisis from 2007

Drexel Burnham Lambert was from the first institution in 1987 collateralized debt obligations ( CDOs), a special class of asset-backed securities (ABS). CDOs and ABS are viewed as responsible for the financial crisis.

Successor

Apollo Management, a private equity firm, was founded by Drexel's staff, led by Leon Black.

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