Progress made in Drexel Burnham bankruptcy plan Company pushed 'junk bonds' was focus of Wall Street scandals

February 19, 1991|By New York Times

NEW YORK -- Drexel Burnham Lambert's bankruptcy case moved a giant step closer to settlement yesterday as the main parties agreed in principle on how to divide up what is left of the firm. And the agreement, if it holds, could even make it possible for Drexel to reorganize and emerge from bankruptcy.

One of the two judges involved, U.S. District Judge Milton Pollack, said last night that the case could be concluded in a couple of months.

The accord was reached after intensive negotiations among Drexel's creditors, including its banks, and the central litigants, including Federal Deposit Insurance Corp. and Resolution Trust Corp. These parties agreed to cut back to around $2 billion their claims against the firm. Pollack estimated that total claims might have amounted to $20 billion. No details of how the $2 billion would be divided were released.

The agreement in principle, which Pollack sent back to the lawyers to work on, does not cover a claim by the Internal Revenue Service filed last week that seeks more than $5 billion. Pollack said the IRS claim was overblown.

Drexel is estimated to have about $2.8 billion in assets but some of that has to be set aside for the continuing operation and expenses of the firm.

Pollack also said some money should be left so the firm has a chance to reorganize and come out of bankruptcy under Chapter 11, which it chose last year to protect itself from its creditors.

Pollack said about $2 billion would remain for creditors and other parties after expenses and reorganization costs are deducted.

Drexel was at the heart of the rise of the "junk bonds" market that fueled the corporate takeovers of the 1980s. But it was also, subsequently, at the center of the scandals that rocked Wall Street at the end of the decade. Before filing for protection from its creditors, Drexel admitted to six felonies and agreed with the Securities and Exchange Commission and the U.S. attorney in Manhattan to pay $650 million in fines and penatlties. Some 13,000 claims have been filed against Drexel, but the total amount has not been officially calculated.

The head of "junk bond" division, Michael R. Milken, has pleaded guilty to six felonies and was sentecned last year to 10 years in prision.

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