Drexel Burnham Lambert 1985

The Drexel Burnham Lambert Group Inc.

Drexel Burnham Lambert’s roots trace back to 1838, when Austrian-born portrait artist Francis Martin Drexel founded Drexel & Co. to finance the infrastructure buildout required by the mid-19th century California Gold Rush. In 1871, Drexel partnered with J.P. Morgan to create the largest and most influential financier in U.S. history, Drexel Morgan & Co., later known as J.P. Morgan & Co. However, after the Glass-Steagall Act of 1933 banned commercial banks from underwriting securities, several former Drexel partners claimed the Drexel name and branched out to pursue investment banking exclusively. During the 1970s, Drexel & Co. solidified its position on Wall Street through a series of mergers, eventually becoming Drexel Burnham Lambert in 1976. The firm became known for its innovative approach to corporate finance, but it was the arrival of Michael Milken in 1973 that would transform its trajectory. Milken, who specialized in high-yield "junk" bonds, saw an opportunity to finance companies that traditional banks had overlooked, setting the stage for the firm’s meteoric rise in the 1980s.

During the 1980s, Drexel Burnham Lambert became synonymous with the leveraged buyout (LBO) boom, with Milken's junk bond financing serving as the engine behind some of the largest corporate takeovers of the era. The firm's ability to provide capital to companies seeking to acquire competitors or take themselves private, despite weak credit ratings, changed the game entirely. Drexel's high-yield bond desk helped finance landmark deals, including KKR’s record-breaking $25 billion buyout of RJR Nabisco in 1989, the largest LBO in history at the time. At its peak, Drexel was the fifth-largest investment bank in the U.S., raking in billions in profits. In 1986, Drexel managed 73 percent of the $14.3 billion worth of junk bonds offered and recorded net profits of $545 million, making it the most profitable firm in Wall Street history. For his contributions, Milken took home over $700 million in total compensation between 1986 and 1987, making him the highest-paid employee in the world at the time. However, the firm's aggressive, high-risk culture led many Drexel employees to stray into unethical conduct, soon attracting the attention of the SEC and the U.S. Justice Department.

The downfall of Drexel Burnham Lambert came swiftly in the late 1980s, amid accusations of insider trading and securities fraud centered around Milken and his high-yield bond operations. In 1986, an insider scandal involving arbitrageur Ivan Boesky, a Drexel client, implicated Milken and triggered a wider investigation by the SEC. In 1988, Drexel plead guilty to six felony counts and received a $650 million fine–the largest in SEC history. A year later, Milken was indicted on racketeering and securities fraud charges, leading to a 1990 plea deal in which he agreed to pay $600 million fine and serve prison time. By 1990, Drexel’s reputation was in ruins. Mounting legal costs coupled with the collapse of the junk bond market, left Drexel unable to meet regulatory capital requirements. To avoid SEC seizure, Drexel filed for bankruptcy in February 1990. The firm's collapse marked the end of an era, epitomizing the dizzying highs and crushing lows of 1980s Wall Street.