NEW YORK - Drexel Burnham Lambert Inc.'s parent company filed for bankruptcy court protection late Tuesday, signaling the demise of the Wall Street firm that came to symbolize quick riches and scandal in the 1980s. Drexel Burnham Lambert Group Inc.'s board of directors authorized the move to seek protection from creditors under Chapter 11 of the U.S. Bankruptcy Code. The Drexel Burnham Lambert Inc. broker-dealer subsidiary and Drexel Government Securities Inc. were not included in the filing.
Chief executive Frederick Joseph told employees Tuesday morning the parent company and certain subsidiaries would file for Chapter 11, which would protect Drexel from creditors' claims while it attempted to deal with its shattered finances.
The step climaxed one of the most tumultuous periods in Wall Street history for the cocksure investment house, which pioneered the use of risky, high-interest "junk bonds" to finance billions of dollars worth of corporate takeovers under now-indicted executive Michael Milken.
It also could have broad effects far from Wall Street, on companies that have invested in Drexel's junk bonds, pension funds that hold the securities and businesses attempting to pay off junk debt.
Drexel was crippled by the government's insider trading investigation, in which it pleaded guilty to six felonies and paid $650-million to settle fraud charges. Milken's subsequent departure amid criminal allegations against him and the collapse of the junk-bond market which Drexel still dominates contributed to the firm's troubles.
"This means the end of Drexel Burnham as a viable entity," said a former executive at Drexel, which used its junk bond business to catapult from a third-tier brokerage to the nation's fifth-largest in under a decade.
Drexel Burnham Lambert Group Inc. said Tuesday it had defaulted on about $100-million in loans and a lack of cash threatened other defaults. Drexel was turned down for bank financing it sought to avert the filing.
Drexel said in a statement that the petition for reorganization cites liabilities exceeding $3-billion and assets exceeding $3.6-billion. The bankruptcy filing was made late Tuesday at the home of a U.S. Bankruptcy Court clerk outside New York, Drexel said.
The firm began liquidating its positions in billions of dollars worth of government bonds, mortgage-backed securities and other financial instruments; negotiated to transfer customer accounts to Smith Barney, Harris Upham & Co.; withdrew as a market maker in more than 200 over-the-counter stocks; and put entire business units up for sale.
Wall Street professionals said shock waves from Drexel's disclosure were muted because its crippling financial problems had been anticipated, and the decline of its junk bond business known for months.
Wary of the broader impact of Drexel's possible collapse, the Securities and Exchange Commission, Federal Reserve Board and New York Stock Exchange coordinated plans on how to prevent a financial panic over the firm's troubles.