A Short History of Troubled Investment Bank Sales

Drexel Burnham Lambert: Drexel was hit by the unexpected downturn in the junk-bond market in the late 1980s, just as Bear Stearns has been hit by the downturn in the subprime-mortgage markets. Drexel, like Bear, also faced rumors of a liquidity squeeze. In 1989, Drexel’s troubles caused it to post the first operating loss in its 54-year history; in 2007 Bear posted the first loss in its 83-year history.

Then there is the market karma: Drexel racked up many resentful counterparties and such powerful enemies as former Dillon Read banker Nicholas Brady, who later became Treasury Secretary. Similarly, many in the trading community were resentful that Bear didn’t put money into its two collapsed hedge funds last year—and that Bear refused to pitch in on the bailout of Long-Term Capital Management in 1998. Drexel faced a dark future when its civil liabilities and its problems with solvency scared buyers away, and the Fed rejected Drexel’s own restructuring plan for its business. Mr. Brady, who eventually became Treasury Secretary, rejected a government bailout of the firm and advised Drexel to file for bankruptcy protection.

Kidder Peabody: One of the vaunted securities firms of the Northeast, Kidder Peabody was bought by General Electric in 1986. Thereafter, it was plagued by scandals, including insider-trading cases involving Martin Siegel, head of arbitrage Richard Wigton (charges were later dropped), and trader Joseph Jett (who a judge originally found not guilty of securities fraud but, in 2004, the SEC reversed that decision and upheld the charges). Jett wrote a book about his experiences, “Black and White On Wall Street: The Untold Story of the Man Wrongly Accused of Bringing Down Kidder Peabody.” In 1994, General Electric sold Kidder to PaineWebber for $70 million. That was the effective death of the Kidder Peabody legacy; the 129-year-old PaineWebber was sold to UBS.

Salomon Brothers: The firm was forced to pay a huge regulatory fine for allegedly submitting false bids on Treasury bonds. Warren Buffett took over the firm for 10 months and saved Salomon when it was briefly banned from trading Treasurys by intervening with regulators. Mr. Buffett later said he believed Salomon might have gone bankrupt and brought the world’s financial system to a standstill—as many believe might happen were Bear to fall. Buffett sold Salomon to Sanford I. Weill of Travelers Group for $9 billion. Salomon’s name survived for a time as Salomon Smith Barney. Though some veterans still work there, they have been subsumed into Citigroup’s investment bank.