Drexel Burnham Lambert

THE JUNK BOND kingdom of financier Michael Milken, of Drexel Burnham Lambert, was raking in[Page 263] enormous profits during the boom of the 1980s. The boom had begun when Drexel offered to buy the telephone company MCI for $1 billion. Within a few years, however, a notorious insider-trading scandal sent Drexel into bankruptcy and Milken to prison. Milken and Drexel had used junk bonds, high-yield bonds issued on high-risk companies, to rescue small companies that were going under because they could not get loans from traditional sources. It was later revealed that Drexel's customers were purchasing both original and secondary securities from one another. Drexel's customers were also being encouraged to buy securities that Drexel felt were crucial to its own success. What appeared to be huge profits for Drexel often came from money being shifted around within the company.

Many of Drexel's clients had gone bankrupt, lacked a credit history, or had insufficient capital. In the past, the only resource for such companies had been to negotiate short-term loans from banks or through private placements with insurance companies that offered highly restrictive stipulations on the loans. Drexel offered to underwrite loans on these high-risk companies with few or no restrictions; and in return, the companies paid high yields to investors and enormous fees to Drexel. Drexel had also discovered that their highest profits came from acquisitions and mergers, particularly from leveraged buyouts in which public companies were taken private. Surprisingly, the junk bond business was relatively free of government regulation, even though the industry handled trillions of dollars.