Good riddance, too bad it took so long for them to go belly up! That's the only way to assess the demise of Drexel Burnham Lambert, the once mighty financial giant that almost convinced the world that if it had not found the Fountain of Youth, it had indeed discovered a Fountain of Money in the junk bond. In an era of greed and glitz, Drexel Burnham Lambert was on top. Now, like other undeserving hustlers, they are out cold _ finished, washed up, destroyed. It remains to be seen how many other high-stakes players, witting and unwitting, will be carried out with them.
At risk today is the entire financial system, including not only the wretched savings-and-loan industry, but commercial banks and overextended corporate borrowers. The excesses of the past 10 or 12 years, fed by a political commitment to financial-market deregulation, are coming home to roost.
The $200-billion junk-bond market that Michael Milken launched in the early 1980s helped finance the wave of corporate takeovers that froze American industry in its tracks, shuffling paper to avoid hostile buyouts, while West Germany and Japan were attending to the mundane business of making quality goods and merchandising them.
Milken, who devised the high-yield, high-risk instrument known as the junk bond for Drexel Burnham Lambert, has been under indictment for fraud since 1988. But by that time, he had drawn $1-billion in salary over four years, including an obscene $500-million in a single year.
Two of America's most solid financial geniuses, Henry Kaufman _ formerly of Salomon Bros., and Felix Rohatyn, senior partner of Lazard Freres _ have been warning for years that all of America's financial institutions were being placed in jeopardy by unregulated greed on Wall Street.
In a speech to the American Society of Newspaper Editors in May, 1984, Rohatyn, who makes his living arranging mergers and acquisitions, said that junk bonds were helping turn "the financial markets into a huge casino." Leveraged buyouts, financed by junk bonds, he said, "bet the company on a combination of continued growth and lower interest rates, with no margin for error."
Kaufman quit Salomon Bros. in 1988 over the extent to which the company should be involved in the junk-bond market. He told me last week that he and others could never get Congress to focus on the threat to financial institutions, including serious conflicts of interest, because no one could promise that danger was right around the corner.
"In Congress, they would ask: "How imminent is this?' And since there was no way you could say it was coming within a month or two or three, but it would cumulate, somewhere down the road, they would relax."
A basic underlying cause for the present mess, Kaufman and Rohatyn believe, was the general pressure during the Reagan years to deregulate and let the markets control their own destiny. Even since 1988, when Drexel pleaded guilty to six criminal charges and paid a $650-million fine, the attitude in Washington and Wall Street has been that the markets would adjust and consolidate. Drexel was merely urged to shrink the size of its business; for example, its retail operations were sold.
But Band-Aids are no substitute for full surveillance and intelligent regulation of financial markets. Kaufman long has insisted that too much is at stake to leave the performance and conduct of financial institutions to the markets alone.
It may be remembered that after the 1987 stock-market crash, the Brady Commission recommended that the Federal Reserve Board be made the ultimate regulator of the securities system. That idea _ and the rest of the Brady Commission report _ was shoved under the rug by Reagan. Now, the Bush administration, which appears to be less ideological on the regulation issue, could do well to reconsider that possibility.
Says Rohatyn: "Maybe all of this sad (Drexel) business will encourage us to be a little more skeptical about the easy assumptions that we live in a new world, where all of the assumptions about the old rules of the game no longer apply. It's easy to say that such things as savings don't matter, or that trade deficits don't matter, or that budget deficits don't matter. But in truth, they do."
Washington Post Writers Group