"We Grew Quickly and We Stepped on Toes"

By RICHARD BEHAR Fred Joseph.

Q. Many people feel that Drexel Burnham Lambert epitomized raw greed in the 1980s and that there is poetic justice in its demise.

A. That's primarily the result of how we were depicted in the press, and I think it's outrageous. The press has to capsulize things that people can absorb. The fact is, Drexel became the major source of capital for industrial companies in the country. Even our worst enemies think only a handful of people did anything wrong, so it's unfair to the vast majority of people at Drexel to lump them into a two-word tag line. The damage that's been done is absolutely unjustified. We grew quickly and we stepped on toes. But we did no more than other investment banks did when they hit periods of unusual competitive advantage.

Q. In the end, who killed Drexel? Was it the Government, your colleagues, or even you?

A. The destruction of Drexel at some point became inevitable. I'll accept the responsibility, and if I knew we had done things that were wrong, I would accept blame. What happened was a confluence of events, starting with the federal investigation ((of Drexel's junk-bond department)) and hitting a climax when the firm was forced to plead guilty and pay what we thought were unnecessarily high penalties (($650 million)). Congress then changed the rules by requiring savings and loans to sell their high-yield bonds, and the market for those securities fell. Then Drexel faced yet another rule change, when the regulators suddenly raised our capital requirements. Literally overnight, they said we could no longer touch the $300 million in excess capital in our brokerage subsidiary.

Q. Shouldn't you have known there was impending doom?

A. We had cut costs 50%, and we believed the firm was going to operate profitably in 1990. The problem is that one day you have $300 million and the next day your banker tells you that you can't use it. That's troublesome. Within a day we were totally shut out of the capital markets.

Q. With a little nudging, couldn't the regulators have got the banks to save Drexel?

A. It's a capitalistic system. The banks and regulators are not charged with saving us, and we never asked for direct Government intervention. We did argue aggressively with the regulators, and there were moments when I was angry. I had hoped that the regulators would give some encouragement to the banks, which I don't think happened. I think Drexel's lack of friends -- as perceived by the world -- might have made it easier for a midlevel official in one of those agencies to not help us. In their eyes, we were lacking in political constituencies.

Q. Do you have any final words for Rudolph Giuliani, the former U.S. Attorney who launched the Drexel investigation?

A. The federal racketeering law, as applied to financial institutions, is a devastating nuclear bomb. The penalties we paid ended up doing material long- term damage to the firm, costing 11,000 people their jobs and costing the markets what most people will admit was a creative, innovative force for financing companies. All this because of alleged wrongdoing by a handful of people. It just seems unfair.

Q. Drexel was criticized for doling out more than $200 million in cash bonuses * just weeks before its collapse.

A. A false picture has been painted. There was no expectation of the collapse at the time the bonuses were paid, and the vast majority of them were obligations from the previous year.

Q. One thing you might have done differently was not to take your own $2.5 million bonus in the form of Drexel stock, which is now virtually worthless.

A. My wife would certainly say that. I took the bonus in stock to encourage other employees to do the same. At least nobody could accuse me of having some prophet's ability to predict the coming crisis.

Q. Did you ever fear that junk bonds were a house of cards?

A. I think that's rhetoric from the press and politicians. High-yield bonds are a $300 billion market and there will be cycles, but there's no question of their legitimacy.

Q. But wasn't the market too dependent on one man, former Drexel financier Michael Milken? And did his dismissal from Drexel cause irreparable harm to morale?

A. It's hard to judge midstride, as we are right now, whether the market was too dependent on Milken. It's going to take more time to know. Michael is incredibly knowledgeable, but our high-yield department was a major team effort. We put together the RJR-Nabisco deal after Milken. As for morale, he had some pretty fervent supporters in the company, but I don't think there was any irreparable discontent when he left.

Q. Did Milken really start a so-called whisper campaign against Drexel after he was dismissed?

A. I have no idea. But from the beginning this case has involved what people now call combat public relations by Milken's defenders and enemies at levels that I think are unseemly. And I'm disturbed that while the gods are up there fighting, Drexel has gotten swept into it in ways that are reasonably horrifying.

Q. Your colleagues say you always keep your cool. How do you cope?

A. Getting rattled doesn't help you perform. At this point we've taken Drexel's $25 billion of inventory positions down to around $1 billion, and I'm too busy to try to figure out the long-term psychological impact on me. But it's been very sad to watch the dismantling of what we built. We were trying to create the most effective investment bank in the country, and for a moment in time, we achieved that.