Drexel NEW YORK - Drexel Burnham Lambert Inc., the once-powerful Wall Street investment house whose fortunes rose and fell with the high-risk "junk bond" market, announced Monday that its worsening troubles had forced it to seek new funds or a merger partner, touching off concerns about the stability of the financial markets.
The government moved in swiftly to deal with the crisis at Drexel, whose collapse could undermine public confidence in the financial markets.
Senior officials from the Federal Reserve Board and the Securities and Exchange Commission joined representatives from the New York Stock Exchange in hurried talks with Drexel executives to put together a plan to save the firm from collapse, people involved in those talks said.
Drexel's troubles have stirred the concern of so many top government officials and the Wall Street community because of the potential ripple effects on the markets if Drexel collapses.
Drexel has been the dominant player in the $200-billion market for junk bonds, which fueled the corporate takeover boom of the 1980s. If Drexel is forced to sell its huge holdings of junk bonds, that already troubled market would be badly shaken, sending prices sharply lower.
That market was roiled Monday as investors reacted to news of Drexel's financial problems, with prices on junk bonds falling sharply.
"You've got a market that is not functioning," said Barbara L. Kenworthy, a portfolio manager for Dreyfus Corp. Today, the junk bonds issued by major corporations are widely held by pension funds, insurance companies and mutual funds.
In addition, the government is a major owner of junk bonds as a result of the federal bailout of the savings and loan industry, which invested heavily in the high-risk bonds.
Wall Street executives reacted with alarm to word of Drexel's plight.
"Just when you think things can't possibly get worse in this market, they do," said William Reid, a managing director in the high-yield bond department at First Boston.
Drexel had important clients in Florida, including two in the Tampa Bay area. It sold $700-million in junk bonds used to finance the ill-fated $2.4-billion leveraged buyout of Jim Walter Corp. in Tampa in 1987. The transaction, involving Hillsborough Holdings Corp., unwound last fall after the junk bond market deteriorated and Hillsborough sought bankruptcy court protection last December.
For Home Shopping Network Inc., Drexel also sold $100-million on bonds convertible to common stock but the St. Petersburg-based television retailer has sued accusing Drexel of fraud. And in Miami, at failed CenTrust Bank, Drexel sold the thrift most of its junk bond portfolio which reached a peak of $1.3-billion.
Drexel Burnham does not have any retail brokerage operations in Florida. However, in November, it agreed to pay the state of Florida $417,300 in order to retain its securities license in the state. Drexel has been making similar settlements with securities regulators in other states around the country in order to maintain its licenses in spite of its conviction on federal securities charges.
Drexel in many ways symbolized the 1980s on Wall Street. Its hard-driving former deal maker, Michael R. Milken, virtually created the modern junk-bond market, which financed the biggest takeover deals of the last decade.
But a government investigation into insider trading on Wall Street battered both Milken's reputation and Drexel's standing and financial position.
The investigation eventually resulting in Drexel's 1988 agreement to plead guilty to six felony counts and pay $650-million, and to the departure of Milken from Drexel.
Monday's events set off some criticism of the government among junk-bond traders and others as many said they believed the problems in the market would not exist if Milken were still on the job at Drexel.
The causes of the financial crisis at Drexel are complex, but they are rooted in the recent turmoil in the junk-bond market. Junk bonds are those considered to carry more risk and thus pay a higher yield than investment-grade bonds.
The problems at Drexel are primarily focused on the parent of the firm, Drexel Burnham Lambert Group Inc., which owns 100 percent of the firm's stock.
Drexel officials said Monday that the brokerage subsidiary was still solvent and meeting all federal regulatory requirements for capital.
TOP 10 INVESTMENT FIRMS The top investment firms in the country, ranked in terms of capital as of Jan. 1, 1989: Firm Capital Shearson Lehman Hutton Inc. $6,595,208 Salomon Brothers Inc. $3,111,157 Merrill Lynch, Pierce Fenner & Smith Inc. $2,870,933 Goldman, Sachs & Co. $2,771,000 The Drexel Burnham Lambert Group Inc. $1,965,000 The First Boston Corp. $1,647,747 PaineWebber Group Inc. $1,463,928
The Bear Stearns Cos. Inc. $1,418,389 Dean Witter Reynolds Inc. $1,343,180 Morgan Stanley & Co. Inc. $1,327,451 Source: Securities Industry Association