February 6, 2005
The Drexel Diaspora
By JENNY ANDERSON
RENT STEVENS did not sleep on that February weekend in 1990. A newly minted Wharton School M.B.A., Mr. Stevens had recently joined Drexel Burnham Lambert, the swashbuckling investment bank that dominated the market for financing risky companies. That Sunday, after working on a deal nonstop for 48 hours, he received an ominous telephone call from a managing director, telling him to go home. He was dumbfounded. Deals were over when they were over, he said, and no one at Drexel slept until they were.
The next morning, Mr. Stevens arrived at 5:30 at Drexel’s office in Beverly Hills to find his boss, Robert Beyer, sitting in his chair. “You’re going to hear some pretty difficult things today,” he recalled Mr. Beyer telling him. “A lot of them will be true. Don’t worry, you’ll be fine.”
Within the hour, Mr. Stevens learned that Drexel, once the most profitable and feared bank on Wall Street, had a liquidity crisis. By evening, the firm would be bankrupt. Later called the “St. Valentine’s Day massacre,” the bankruptcy left more than 5,700 people in Beverly Hills and New York unemployed and potentially tainted by their association with an institution considered by many people at the time to be defiant, greedy and criminal.
That perception, of course, did not come out of thin air. In December 1988, Drexel agreed to plead guilty to six felony counts and to pay a $650 million fine. Three months later, Michael R. Milken, the firm’s legendary junk-bond trader, was indicted on 98 charges, including racketeering. He later pleaded guilty to six felony counts, paid $600 million in fines and restitution and served two years in prison.
But what became of Mr. Stevens and his co-workers? Today, almost exactly 15 years after the firm’s demise, he and many other young employees swept up in the Drexel diaspora have risen to prominent positions on Wall Street. Mr. Stevens is the head of leveraged finance at the Jefferies Group, an investment bank known for lining up complex financing for high-risk companies. Not coincidentally, his boss – Richard B. Handler, the chief executive of Jefferies – was a 28-year-old trader at Drexel when the firm blew up.
Several other former Drexel employees are managing billions for pension funds, endowments, wealthy people and one another – often using junk bonds. Mark L. Attanasio, a senior vice president at Drexel when it collapsed, is a managing partner at Trust Company of the West, a $109.7 billion money management firm. Last month, he bought the Milwaukee Brewers for more than $220 million.
Interviews with more than two dozen former employees showed that, far from being embarrassed by their connection to Drexel, most retain an almost cultlike devotion to the firm and much of what it stood for. Few of them were crucial players in building Drexel’s core franchise, junk bonds. And few of them were especially close to Mr. Milken, who has since survived cancer, established two major foundations devoted to cancer research and become a major investor in an education initiative, Knowledge Universe Inc.
But to a person, they all described their Drexel DNA as a crucial factor in their success today. “It showed you the sky was the limit,” Mr. Handler said. “You realized you could make a difference in finance. The sheer volume of deals, the market share you could have, your ability to add value to clients, how you could drive your competition nuts, also how much wealth creation was possible.”
A HANDFUL of Drexel’s most senior managers also went on to make names for themselves. Perhaps the best known is former Drexel trader Gary Winnick, who founded Global Crossing, the onetime telecom giant that imploded under a mountain of debt in January 2002. Mr. Winnick cashed in more than $700 million in stock before the firm went belly up. Another veteran star is Leon D. Black, founder of Apollo Management, one of the most respected names in the buyout world. He made his fortune buying the bankrupt portfolio of Executive Life, the insurer. Apollo now manages more than $13 billion, registering compound annual returns of more than 40 percent since 1990 on the $12 billion it has invested.
But it is only recently that the younger members of the firm – associates and executive vice presidents, vice presidents and young managing directors – have made their mark. They include Peter J. Nolan, Jonathan D. Sokoloff and John G. Danhakl – all 20-something associates when the firm went bust – who now run Leonard Green & Partners, a private equity shop in Los Angeles that manages $3.7 billion and has posted stellar returns, almost 40 percent a year over the past 16 years. Another is Ken Moelis, who had more seniority at Drexel – though still in his 20’s when the firm collapsed – and now is joint global head of investment banking at UBS. The list goes on.
The money being made in the credit markets by former Drexel employees is vindication to some former managers, who said they felt that the firm was destroyed unnecessarily. “One prosecutor said to me in 1990, ‘With compensation levels like this, this has to be a den of thieves. You couldn’t make this much money,’ ” recalled a former manager who asked not to be identified. “I said, ‘Compensation levels are lower than what they will be doing 10 years from now.’ ”
He was right, of course: he and his fellow alumni are making more money today than they ever dreamed during their Drexel days. Mr. Handler’s stock and options in Jefferies alone are worth almost $200 million, and Jefferies is one of the best-performing financial stocks on the New York Stock Exchange. The Leonard Green group has returned more than $1.4 billion to investors over the past two years, with each of the three managing partners taking home somewhere in the range of $100 million each.
One former government official who was involved in the Drexel case said he was not surprised that many of the alumni had prospered. “The sad thing about Drexel was that a lot of their business was untainted by this, but when it blew up it all blew up,” said Gary Lynch, now the general counsel at Credit Suisse First Boston.
The legacy of Drexel, gray to the outside world, is as white as snow to the group: It was an institution where hard work and good ideas were rewarded, hierarchies were absent, talent abounded and the potential to be very, very, rich was palatable, former employees said. They recall exactly where they were the morning the firm went bankrupt – as well as the details from the steamy party later that week at the Sugar Shack, a Los Angeles bar, now defunct, where mai tais flowed generously and sex was rampant, several employees recalled.
Some still remember their Drexel seniority rank precisely and offer that information voluntarily: 15th to be hired in corporate finance in New York, said one; 10th in trading in Beverly Hills, said another. Almost everyone in the group owns some Drexel memorabilia: a chair, a desk, a computer, all bought or taken during the bankruptcy. And while many were reluctant to be interviewed for this article, once seated, they could not stop talking.
To be sure, nostalgia about Drexel’s rise and fall is not universal, especially among senior managers. One senior trader who worked with Mr. Milken on his famous X-shaped trading desk and asked not to be identified said: “There were those who sat on the X and those who didn’t. There were those who were hired by Mike and those who were not.” As for the fond memories of others, he said: “They did not appear before a grand jury. They did not lose millions in stock.”
No matter what they think of Drexel, however, former employees and other Wall Street watchers seem to agree on this much: there may never be another firm quite like it. “Drexel had a certain chutzpah that hasn’t been seen since,” said Charles R. Geisst, a Wall Street historian at Manhattan College. “People seem to forget it was the only major financial firm to be shut down by regulators. That’s a strong message that chutzpah shouldn’t continue.” And by most accounts, it hasn’t.
By the mid-1980’s, Drexel was the nexus of the nation’s high-yield bond boom and takeover frenzy. Corporate raiders and entrepreneurs like T. Boone Pickens and Ted Turner and Ronald O. Perelman were making plays for companies far bigger than their own. They financed these takeovers with junk bonds, for which Mr. Milken had created a market. The firm – many would say Mr. Milken alone – helped build the cellular, video game and cable industries, including companies like CNN, MCI and McCaw Communications.
In 1980, Drexel underwrote 48 high-yield deals that brought in $1.6 billion. In 1989, the firm did 100 deals worth $23.2 billion. Drexel’s share of the junk bond market was 40 to 60 percent throughout the decade, according to Thomson Financial. It was not until 1987 that a rival, Credit Suisse First Boston, posted a market share in the double digits.
Not surprisingly, Drexel attracted top Ivy League talent. “It was the hot place to go, especially the Beverly Hills office,” said Mark Lanigan, who graduated from Harvard Business School in 1986 and now runs an investment fund seeded by another hedge fund group run by former Drexel employees. “They were shaking up the world. Every other day you opened The Wall Street Journal and Drexel was helping to launch a hostile takeover or helping an established company defend itself.”
Most of the junior bankers chose Drexel over other top-flight banks. They picked it because they thought they could learn more, advance faster, make more money and – corny as it sounds, even on Wall Street – become part of history.
“Drexel was tied to a rocket,” said Leon Wagner, chairman of GoldenTree Asset Management, a $6.5 billion money management firm, who joined Drexel’s high-yield trading desk in 1986 from Lehman Brothers. “Just to be able to sit on the desk and see the calls start at 4:15 in the morning, Boesky and Perelman and Diller and Murdoch,” he said referring to Ivan Boesky, the arbitrageur; Mr. Perelman, of Revlon; Barry Diller, now chairman of IAC/InterActiveCorp, and Rupert Murdoch of the News Corporation.
Because the firm controlled the market, young associates were thrown on big deals and told to execute them. “I learned more in five years than I have in the subsequent 15,” was a typical observation among the former Drexel employees interviewed. Mr. Attanasio, who made his fortune selling his fund, Crescent Capital, to Trust Company of the West, said, “We were the market, so you learned the market.”
Frederick H. Joseph, Drexel’s former chief executive, who is now managing director and co-head of investment banking at Morgan Joseph & Company, the boutique investment bank, likened the experience to being at a top-notch university. “Harvard is as good as it is because of the people there,” he said in an interview. “It’s a favorable vicious cycle.”
There was the money, too – lots of it. The parking lots at the Beverly Hills office were filled with red and yellow Porsches, Ferraris and BMW’s. And Drexel knew how to have a party. At the firm’s famous Predators’ Ball, where it entertained corporate titans, members of the younger generation said they ran around taking notes, gawking at the crowd. Frank Sinatra performed in 1984, Diana Ross in 1985. Star power at credit conferences was rare at the time; the employees thought it was cool.
Despite the controversy engulfing the firm in 1990, few employees saw the end coming. Mr. Moelis was skiing with clients in Colorado. Mr. Wagner found out on the Friday before the implosion from his wife. Mr. Attanasio had been in Germany the previous week doing due diligence on a deal.
It was by no means immediately apparent that Drexel’s young associates and vice presidents were employable. “You had been in Chernobyl,” Mr. Nolan said. Many of them kept working on Drexel business: Chris Kanoff, now head of corporate finance at Jefferies, promised to finish a deal for a client and, using the law offices of Latham & Watkins, finished it in eight weeks.
Others scrambled to find jobs elsewhere after the bankruptcy. One group went to Donaldson, Lufkin & Jenrette. Another went to Jefferies, and a third started Canyon Capital Advisors, now a successful $7 billion hedge fund. Mr. Sokoloff joined Leonard Green, and two others would do so later. Some regrouped back East, including Ted Virtue, now the chief executive of MidOcean Partners, a $3 billion private equity fund, and Mr. Wagner of GoldenTree. Others who worked on the East Coast started over, including Jay R. Bloom, Dean C. Kehler and Andrew R. Heyer, who run the highly successful Trimaran Capital Partners.
FIFTEEN years later, they are bonded by more than history. One just raised $1.5 million for a charity related to a family illness; a substantial amount came from Drexel people. “What do you say to that?” he said, asking not to be identified. Chris Andersen, a senior banker in the New York office when Drexel collapsed, has a Christmas party every year in the Versailles Room at the St. Regis. Of the 250 people who came last year, more than half had been at Drexel. “The culture, at its core, was almost a religious fervor for what we were doing and the power to transform things,” said Mr. Andersen, who founded G. C. Andersen Partners, a merchant banking firm.
And few jumped as the ship was sinking. “It was us against everyone else,” said Mr. Heyer of Trimaran. “You couldn’t have infighting if you were taking on the world.”
Mr. Virtue, who ran the high-yield business, and then banking, at Bankers Trust, now part of Deutsche Bank, before starting MidOcean, said: “There was a sense that we were abandoned orphans. We kept tabs on each other.”
The alumni work together on deals and say that their close ties allow them to execute tough transactions in less time. For example, when Jonathan Coslet, a partner at Texas Pacific Group and a former Drexel financial analyst, bought J. Crew in a highly leveraged deal in 1997, the banker working on the deal was Mr. Lanigan, then at Donaldson, Lufkin & Jenrette. The company received complex financing for the deal from Trust Company of the West, where Mr. Attanasio and two other former Drexel employees – Jean Marc Chapus and Mr. Beyer (Mr. Stevens’s former boss) – were involved. Mr. Chapus is managing partner at TCW, where Mr. Beyer is the president.
When it came time for a second financing, Texas Pacific Group turned to Black Canyon Capital L.L.C., an investment fund run by Mr. Lanigan and backed by the principals at Canyon Capital Advisors. It financed the full $275 million.
Mr. Milken, of course, has also remained in the spotlight. After serving his prison term, he received a diagnosis of prostate cancer. He successfully battled cancer and has been active in the research arena, gracing the cover of Fortune magazine last month alongside Lance Armstrong.
Many former Drexel employees speak glowingly of Mr. Milken. “He’s so brilliant, it’s like getting near the sun,” Mr. Wagner said.
Mr. Virtue added: “He was the best visionary Wall Street every had.”
But in an odd way, some former Drexel young guns are equally grateful that the firm collapsed when it did. “When you were part of the Drexel franchise, you weren’t sure if it was Drexel” or you, Mr. Coslet said. “Now they have made a name for themselves and it’s nice for them to say: ‘It was my innovation and my talent. I did it on my own.’ ”
Of course, they all took from the experience a powerful lesson, one that might have served them as well as any expertise they absorbed during their Drexel days. “There’s a difference between being very competitive and can-do, and winning at all costs,” Mr. Wagner said. “All costs is costly.”