Drexel Burnham Lambert was a major Wall Street investment banking firm, which first rose to prominence and then was forced into bankruptcy in February 1990 by its involvement in illegal activities in the junk bond market, driven by Drexel employee Michael Milken. At its height, it was the fifth-largest investment bank in the United States.
I.W. "Tubby" Burnham, a 1931 graduate of the Wharton School of the University of Pennsylvania, founded the firm in 1935 as Burnham and Company, a small New York City–based retail brokerage. Burnham started the firm with $100,000 of capital, $96,000 of which was borrowed from his grandfather and the founder of a Kentucky distillery.
It became one of the more successful brokerages in the country, eventually building its capital to $1 billion. Burnham eventually branched out into investment banking. However, the company's ability to expand was limited by the structure of the investment banking industry of that time. A strict unwritten set of rules assured the dominance of a few large firms by controlling the order in which their names appeared in advertisements for an underwriting. Burnham, as a "sub-major" firm, needed to connect with a "major" or "special" firm in order to further expand.
Burnham found a willing partner in Drexel Firestone, an ailing Philadelphia-based firm with a rich history. Drexel Firestone traced its history to 1838, when Francis Martin Drexel founded Drexel & Company. His son, Anthony Joseph Drexel, became a partner in the firm at age 21, in 1847. The company made money in the opportunities created by mid-century gold finds in California. The company was also involved in financial deals with the federal government during the Mexican–American War and the U.S. Civil War. A. J. Drexel took over the firm when his father died in 1863. He partnered with J. P. Morgan and created one of the largest banking companies in the world, Drexel, Morgan & Co.
In 1940, several former Drexel partners and associates formed an investment bank and assumed the rights to the "Drexel and Company" name. The old Drexel, which chose to concentrate on commercial banking after the Glass–Steagall Act regulated the separation of commercial and investment banking, was completely absorbed into the Morgan empire. The new Drexel grew slowly, coasting on its predecessor's historic ties to the larger securities issuers. By the early 1960s, it found itself short on capital. It merged with Harriman, Ripley and Company in 1965, and renamed itself Drexel Harriman Ripley. In the mid-1970s, it sold a 25 percent stake to Firestone Tire and Rubber Company, renaming itself Drexel Firestone.
Despite having only two major clients by the dawn of the 1970s it was still considered a major firm, and thus got a large chunk of the syndicates formed to sell stocks and bonds. However, it was a shell of its former self, as evidenced in 1973, when a severe drop in the stock market sent the firm reeling. Drexel management soon realized that a prominent name was not nearly enough to survive, and was very receptive to a merger offer from Burnham.
Even though Burnham was the senior partner in the merger, the more powerful investment banks (whose informal blessing the new firm needed to survive on Wall Street) insisted that the Drexel name come first as a condition of joining the "major" bracket. Thus, Drexel Burnham and Company, headquartered in New York, was born in 1973 with $44 million in capital.
In 1976, it merged with William D. Witter, a small "research boutique" that was the American arm of Belgian-based Groupe Bruxelles Lambert. The firm was renamed Drexel Burnham Lambert, and incorporated that year after 41 years as a limited partnership. The enlarged firm was privately held; Lambert held a 26 percent stake and received six seats on the board of directors. Most of the remaining 74 percent was held by employees.