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While the huge fine sapped Drexel's strength, the killing stroke was the severe slump in the $200 billion junk-bond market. Several factors -- a rising default rate, a slowing economy and a new federal law requiring S&Ls to dispose of their junk bonds -- conspired to send the prices of such securities plunging to 50% or less of their face value since last fall. Stuck with more than $1 billion in devaluing junk, Drexel's credit rating began sliding, and its banks cut off credit two weeks ago. The parent company, starved for cash, began to siphon money from the investment firm's coffers until Government regulators halted that maneuver. After a frantic search for a bank bailout or a merger partner, directors of Drexel Burnham Lambert Group agreed to put the company into bankruptcy proceedings.
Drexel executives hurriedly moved to sell off the firm's assets, in many cases at fire-sale prices. Drexel attempted to offer whole departments for sale, including Milken's old junk-bond operation in Beverly Hills, but rival firms turned up their noses at anything that might carry legal liabilities or the taint of scandal. The firm's stockholders will get little or nothing, most notably Belgium's Lambert Group, which owned 26% of the firm and may have to take a $92 million write-off. Creditors include Taiyo Mutual Life, a Tokyo firm with a $70 million claim, and Milken himself, who says he is owed more than $200 million in compensation.
In Washington the Government's top economic team stood by with folded arms and watched the company fail. While Federal Reserve Board Chairman Alan Greenspan and Treasury Secretary Nicholas Brady carefully monitored the situation, the team decided that U.S. financial markets could weather the collapse, in part because junk bonds were already trading near all-time lows. Said an embittered Drexel executive: "What we needed was a pittance, and the Government decided just to let the company go. With a little nudge from the Government, the banks would have put a package together."
Drexel's outcast employees have company in their misery. The firm's crack-up comes amid a flurry of reversals for the highflyers who symbolized the boom time. Last month Peter Cohen stepped down as chairman of Shearson Lehman Hutton, the firm he had built into a Wall Street giant that ranked second only to Merrill Lynch. Like so much that flourished during the hothouse decade, Shearson simply grew too fast. Beset by falling revenues, failing deals and internal disputes, Cohen was forced out by James Robinson III, the chairman of American Express, Shearson's parent company.
The pitfalls of overreaching were on full view last month when the U.S. retailing empire that Toronto developer Robert Campeau assembled in the '80s was placed under the protection of federal bankruptcy court. A hard-driving raider, Campeau had used junk bonds to help finance the $10.2 billion he paid for Allied Stores and Federated Department Stores, whose ten chains include Bloomingdale's, Stern's and Jordan Marsh.