The fall of two Wall Street securities firms

November 25, 1990|By NEAL LIPSCHUTZ

April Fools: an Insider's Account of the

Rise and Collapse of Drexel Burnham.

Dan G. Stone.

Donald I. Fine.

249 pages. $19.95.

Burning Down the House:

How Greed, Deceit, and Bitter Revenge

Destroyed E. F. Hutton.

James Sterngold.


305 pages. $19.95. It's a bit simplistic to measure things by decades, but such an approach can reveal essential truths. Wall Street's decade was the 1980s.

Securities firms rose to unprecedented strength by the middle of the 1980s, riding bull markets that just wouldn't quit, merging large corporations or breaking them apart, creating a flow of new financial instruments to be sold to pension funds and Mom and Pop. Even the most newly minted MBA, it seemed, would be paid outrageous sums of money simply to join the party.

We now appear to have arrived at the morning after. The business pages reveal a steady drumbeat of Wall Street layoffs and reorganizations. Focus, quite properly, has returned to those who make products from those who make deals. The rise and subsequent stumble of Wall Street's big securities firms are nicely symbolized by the two firms that are the subjects of these books: Drexel Burnham Lambert, king of "junk" bonds, whose holding company filed for Chapter 11 bankruptcy protection; and E. F. Hutton, that venerable firm ("when E. F. Hutton talks, people listen"), which pleaded guilty to a massive check-kiting scheme and was merged out of existence.

Why should we care about these rises and falls? Certainly there is some fascination with big money and big egos. But more important is the role securities firms and markets are supposed to play in the capitalist setup. As former employee Dan Stone puts it in his account of Drexel's fortunes, "The financial markets allow companies to raise money so they can afford to produce what's wanted; at the same time, the markets give those with excess cash the opportunities to invest it."

But what these two and other fin-de-siecle Wall Street books make clear is that investors -- be they insurance companies or individuals -- often got the short end of the stick when they tried to get in on 1980s-style prosperity.

James Sterngold, the New York Times correspondent who has written a detailed and intriguing account of Hutton's downfall, notes the change in customer-firm relations: "At one time a stockbroker was known as a 'customers' ' man.' . . . The customers' man measured himself by his customers' profits. By the 1980s this ideal was a quaint memory. Brokers were measured by production, how much they sold, not by the quality of what they sold or how their customers fared."

A point made in both books is how fragile even a well-known firm can become after suffering major reversals. Mr. Sterngold explains: "Securities firms have relatively little capital compared with the amount of assets they control. They are, in short, highly leveraged. . . . Such is the precariousness of this situation that creditors who are happy one day to loan money to a brokerage house can flee the next if they suspect the capital base has been impaired somehow."

Dan Stone's evenhanded account of the climb and descent of Drexel suffers from the relative freshness of the events he describes and the publicity they have received. Even those with only a casual interest in business and finance probably know the basics of the saga: How Drexel and Michael Milken built a huge market for bonds of companies below investment grade; how those bonds sometimes were used in hostile takeovers; how Drexel and then Milken pleaded guilty to felony charges; how the firm, after lopping off its retail operations, filed under the bankruptcy code.

Mr. Stone was based in New York during eight years with Drexel. He was a vice president for institutional equity sales. Most of the things Drexel was famous for took place in the Beverly Hills offices set up by Milken. So there's much missing in what one might expect in an "insider's account."

Mr. Stone does provide a balanced and thorough portrait of the firm, although he relies too much on anonymous quotes. He nicely summarizes the complex charges made against Milken, notes the huge impact this one man had on a whole sector of the financial markets, and explores the much-debated potential application of the Racketeer Influenced Corrupt Organizations (RICO) law to financial cases.

More of an inside view is provided into E. F. Hutton by an outsider, Mr. Sterngold. Through extensive reporting and his own judgments, he renders a distinct view of a company adrift, lacking in central controls and facing problem after problem.

When former Attorney General Griffin Bell investigated Hutton in the aftermath of the firm's guilty plea on check-kiting, Mr. Sterngold says Mr. Bell described a "medieval structure in which [Hutton chairman Robert] Fomon arranged his barons so that he would maintain control."

Mr. Sterngold provides vivid portraits of Mr. Fomon and Hutton's last president, Robert Rittereiser. The conflict between the two was near the center of Hutton's story. After more than 80 years the firm was swallowed up by American Express' Shearson Lehman. Mr. Sterngold quotes American Express chairman Jim Robinson as saying, "In the hindsight, knowing what we know, we probably wouldn't have done the Hutton deal."

Mr. Lipschutz writes frequently about business. He lived in New York.

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