Drexel Burnham Lambert

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Drexel Burnham Lambert
legal form
founding 1935
resolution 1990
Seat New York City , United States
Branch Banks

Drexel Burnham Lambert was one of Wall Street's largest investment banks . In February 1990, she had to file for bankruptcy following irregularities in the junk bond market . In its prime, Drexel Burnham Lambert was the fifth largest investment bank in the United States .

founding

IW "Tubby" Burnham founded the company in 1935 as Burnham & Company, a small, New York-based broker . From 1967 to 1973 there was a merger with Drexel & Company, which enabled the business to expand in the direction of investment banking. Drexel Burnham Company merged in 1976 with William D. Witter, the US subsidiary of Groupe Bruxelles Lambert. Drexel Burnham Lambert remained 26% owned by Lambert, the remaining shares were mostly held by the employees.

Business model

Drexel Burnham Lambert worked as a consultant to start-ups as well as high -yielding high -yield bonds (also known as junk or junk bonds), which at the time were mainly issued by troubled companies ("fallen angels"). Michael Milken is credited with establishing the market for high-yield bonds ( junk bonds ). Junk bonds were hardly known at the end of the 1970s. Milken advertised these as an asset class that were only slightly riskier than bonds from blue-chip companies, but at the time brought about 6% higher interest.

The company displayed more aggressive business practices than many of its competitors. In the 1980s, Milken and Drexel provided capital by issuing junk bonds to fund hostile takeovers . Numerous stock corporations were then traded at market values ​​that were below the sum of their assets. The acquisition of companies in order to then break them down into individual parts and sell them on offered great profit opportunities. Drexel provided T. Boone Picken's capital for the attack on Gulf Oil in 1984 , which led to the merger with Chevron. Milken also stood behind Carl Icahn's takeover bid 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 , Merrill Lynch and Shearson Lehman Hutton followed in the junk bond market, but Drexel was still able to handle 50% of the new issues in 1985.

Downfall

In May 1986, parts of Drexel Burnham Lambert's management were charged with insider trading. Both the Securities and Exchange Commission and Rudy Giuliani started investigations. Drexel Burnham Lambert faced charges under the RICO Act; some members of the management saw no chance of preventing this. Ultimately, a fine of US $ 650 million was approved with the SEC , which weakened Drexel. The ensuing collapse in the junk bond market - caused by higher default rates, an economic downturn, and new legal regulations that made it difficult to invest in junk bonds - hit Drexel, whose portfolio of over $ 1 billion in junk bonds rapidly depreciated. Drexel's credit rating deteriorated, but the bank was dependent on short-term refinancing. Both this and attempts to organize a rescue by the SEC or a merger failed. In February 1990 Drexel Burnham Lambert had to file for bankruptcy. As a result, 5,000 employees were laid off.

The business magazine Fortune attributed the collapse of the company mainly to corporate hubris : “That is why they were able to threaten the 500 largest companies with takeovers without ever having to fear political retaliation. And that is why they could unrestrainedly borrow themselves and their customers for speculative transactions without arming themselves for the day when debt would no longer be “in”. A former executive confessed: "Look, we thought we were invulnerable." "

DBL and the financial crisis from 2007

Drexel Burnham Lambert was the first institution to issue Collateralized Debt Obligations (CDOs), a special class of Asset Backed Securities (ABS) , as early as 1987 . CDOs and ABS are seen as partly responsible for the financial crisis from 2007 onwards .

successor

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

Individual evidence

  1. Time magazine; Issued February 26, 1990.
  2. cit. n. John Kenneth Galbraith: A Brief History of Speculation . Frankfurt / Main, Eichborn Verlag, 2010 ISBN 978-3-8218-6511-9 , pp. 105f.