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Savings and loan industry part of complex Drexel web

Government investigators have discovered an elaborate web that connects the bankrupt investment-banking firm of Drexel Burnham Lambert, many of Wall Street's best-known corporate raiders and some of the highest flying savings and loans. Working closely together, those organizations bought each other's bonds, gave each other loans, traded securities back and forth, financed corporate takeovers, participated in real-estate deals together and sometimes allegedly helped each other create phony profits and evade regulatory requirements, investigators said.

The network of companies that used Drexel to finance corporate takeovers is already well known, but the role of savings and loan associations is only now being understood as a result of investigations by the Securities and Exchange Commission (SEC), the Resolution Trust Corp. and the House Banking Committee.

The three federal investigations, the failure of some big thrifts, Drexel's bankruptcy filing last week and other legal proceedings are revealing new connections among the organizations.

"The whole Milken-takeover-junk bond thing was intertwined with the collapse of the thrift industry," said John Stoia, a California attorney representing bondholders who are suing Lincoln Savings and Loan, the thrift that has become a symbol of the S&L debacle.

Lincoln is also a symbol of how the junk-bond and savings and loan crises intertwine.

When Phoenix real-estate developer Charles Keating decided to buy a savings and loan back in 1983, he had no trouble finding the money. Keating went to Drexel's junk-bond chief, Michael Milken, who engineered the sale of junk bonds that financed Keating's $50-million purchase of Lincoln. (The securities are called junk bonds because they carry a relatively high risk of default, as well as a high investment return.)

Soon after buying Lincoln, Keating virtually stopped making loans to families to buy homes and began using depositors' money to buy junk bonds from Drexel. By the time Lincoln went broke six years later, Keating had leveraged the original $50-million from Drexel into $454-million worth of junk bonds _ $374-million of them bought from Drexel and Drexel clients.

Lincoln helped finance such controversial takeovers as Robert Campeau's ill-fated purchase of Allied Stores and Federated Department Stores and the buyout of Eastern Air Lines, all of which are now in bankruptcy court.

Records of Lincoln's holdings obtained by the Washington Post also show that Lincoln bought $50-million worth of bonds from Washington Redskins owner Jack Kent Cooke for a successful cable-television deal.

Drexel secretly acquired 10 percent of Lincoln's parent company, American Continental Corp., without disclosing the investment to the SEC as required by law, according to documents made public when ACC filed for bankruptcy. Nor did Drexel ever obtain permission from federal thrift regulators, who must approve purchases of large stakes in S&L companies.

Asked about the investment, Drexel officials said they could offer no explanation.

Using junk-bond money from Drexel to finance a savings and loan and then using the savings and loan to buy junk bonds from Drexel was a sequence that was repeated two dozen times, records of Drexel's underwriting activities show.

Drexel raised more than $1.2-billion in junk-bond capital for S&L clients and thus was able to create buyers for more than $10-billion worth of bonds issued by other clients.

In at least one case, an S&L financed by Drexel junk bonds bought junk bonds issued by another Drexel S&L client, which in turn used the money to invest in more Drexel junk bonds.

Kenneth Thomas, a Miami banking professor, likened the relationships of the organizations to a bicycle wheel, with Drexel as the hub, the S&Ls financed with junk bonds issued by Drexel as the overlapping spokes, and hundreds of other businesses as the rim.