Let's Make a Deal

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The hawks on the board held sway over the doves until Giuliani gave an ultimatum. Following the directors' rejection of a settlement on Dec. 19, Giuliani phoned Joseph the next day and promised that unless the board swiftly came to terms, the firm would be indicted at 4 p.m. Wednesday, Dec. 21. That took some of the remaining fight out of Joseph, who had taken to sporting a lapel button emblazoned with the word STRESS. After holding late-night talks between Giuliani and Drexel attorneys in which the proposed criminal penalty was pared from $700 million to $650 million, Joseph called the board back into session at 2:30 p.m. Wednesday. By 4:30 p.m., the board agreed to Giuliani's terms.

The Government consented to limit the plea agreement to less severe and fewer offenses than those detailed in the SEC case against the investment house, which described a pervasive pattern of illicit practices in Drexel's junk-bond department. As in the SEC case, the criminal charges focused on dealings with Boesky from 1984 to 1986. Included in the SEC litany of complaints were insider trading, "parking" stocks to conceal their true ownership, and schemes to gouge Drexel's own customers.

If the criminal agreement had been broader, Drexel might never have agreed to it out of fear that the guilty pleas would have given Drexel's alleged victims a better chance of winning lawsuits against the firm. Even now, the $350 million that the Government plans to set aside to meet damage claims may barely cover the awards that could arise from the 13 class-action suits already lodged against the company.

For Giuliani, the Drexel settlement was the most heralded part of a dramatic three-way sweep. Hours before the deal was announced, a federal grand jury in Manhattan indicted Paul Bilzerian, 38, a raider who won control of the Singer Co. in a $1 billion buyout last February. If convicted of fraud, conspiracy and other charges that arose from earlier takeover tries, Bilzerian would face a maximum of 60 years in prison and at least $3 million in fines. On the same day, testimony began in the Manhattan trial of GAF Corp., a chemical and building-products company, which is charged with inflating the price of Union Carbide stock that it sold after failing to acquire Carbide in 1986.

But the Government's big prize was Drexel, which must now face life as a confessed felon. Said Congressman Edward Markey, a Massachusetts Democrat who heads a House subcommittee that covers finance: "We now know that the single most financially successful Wall Street firm of the 1980s in large measure built its fortune on the foundation of criminality."

Such broadsides will die down, but it may take Drexel a long time to restore its prestige and competitive position. The firm's share of new junk-bond issues has slipped from nearly 80% in the mid-1980s to some 25% today. That puts Drexel barely ahead of Goldman, Sachs and Morgan Stanley, its main rivals. Drexel may suffer a brain drain as well, losing not only Milken but also his loyalists. Moreover, Milken is so much the mastermind that clients may balk at trusting his understudies who remain.