Drexel Burnham Lambert's slow dissolve in the acid bath of liquidation provides more than just a juicy 1980s allegory of greed, hubris and excess. It offers crucial insights into the underlying challenges of managing innovation and how the most successful innovations can lead to the most spectacular disasters.
As sleazy and felonious as many people argue that the investment bank and its junk bond guru, Michael Milken, were, the practical reality was that Drexel, for a time, was Wall Street's most brilliant innovator--as entrepreneurially influential as a Sun Microsystems in computers or a Genentech in biotechnology. As former Undersecretary of the Treasury George Gould puts it: "The rise of Drexel was a reshuffling of the competitive deck in Wall Street and the money-raising function."
Milken and Drexel Chief Executive Frederick H. Joseph took Joseph Schumpeter's definition of innovation quite literally--a form of "creative destruction." With its swaggering arrogance, its "highly confident" funding letters, Milken's X-shaped trading desk and its Byzantine networks of bond buyers and sellers, Drexel's junk bond machine could instantaneously raise billions in capital and shove previously impenetrable Fortune 500 behemoths "in play." The junk bond market--cresting at more than $200 billion--completely reshaped the ecology of finance.
"Junk was the initial spark that lit the fire under Drexel," says Harvard Business School professor Samuel Hayes III. "It was the kernel of value at Drexel. Milken basically ran with that one idea. It's like the Japanese taking the transistor and building a whole slew of electronics products out of it."
Junk--excuse me, "high-yield"--bonds were the silicon chips of finance, and Drexel wanted to be IBM, Apple and Microsoft all rolled into one. For the right fee, Drexel would cheerfully customize securities for its clients much as an Intel or Motorola will help customize computer chips for its valued clients. Drexel was both symbol and substance of a new era of financial innovation--innovations that completely transformed capital markets all over the world.
"There's been a revolution in the technology of finance of which Drexel was only a small part," asserts Joseph Grundfest, a recently retired commissioner at the Securities and Exchange Commission who now teaches at Stanford Law School. Emergent telecommunications networks, powerful computers and new quantitative theories of finance all reshaped the ways capital was created, invested, grown and destroyed.
