Michael Milken’s rise ran through Drexel Burnham Lambert, a firm that began in 1935 when I.W. “Tubby” Burnham opened a small New York retail brokerage with $100,000 in capital, $96,000 of it borrowed from his grandfather, a Kentucky distillery founder. Classed as a “sub major” firm and shut out of Wall Street’s elite underwriting syndicates, Burnham bought pedigree in 1973 by merging with Drexel Firestone of Philadelphia, a house dating to 1838, and put the Drexel name first. Fred Joseph, the son of a Boston cab driver, promised to make the firm as powerful as Goldman Sachs, and the engine was Milken in Beverly Hills. He built the high yield, or junk bond, market from scratch, cultivated a loyal network of insurers, savings and loans and mutual funds, and armed raiders such as T. Boone Pickens and Carl Icahn with “highly confident” letters. In 1986 Drexel earned $545.5 million, then the most profitable year in Wall Street history, and in 1987 Milken was paid $550 million.

The fall began when Drexel M&A banker Dennis Levine was caught insider trading and pointed to arbitrageur Ivan Boesky, who pointed to Milken. U.S. Attorney Rudy Giuliani threatened Drexel with a RICO indictment and a $1 billion performance bond at a firm whose capital was 96 percent borrowed. Days before a grand jury vote, Drexel’s lawyers found MacPherson Partners, a secret partnership holding Storer Broadcasting warrants whose partners included Milken’s children and outside mutual fund managers. Drexel took an Alford plea to six felonies, agreed to a $650 million fine and forced Milken out. As the junk market contracted and Drexel posted its first operating loss in 54 years, Treasury Secretary Nicholas Brady refused a bailout, and on February 13, 1990, Drexel filed for Chapter 11, the first Wall Street firm forced into bankruptcy since the Great Depression.

• The government alleged that a $5.3 million payment from Boesky to Drexel, labeled a consulting fee, was Milken’s cut of disguised trading profits.
• Milken refused to cooperate with Drexel’s internal investigators and communicated only through his defense lawyers.
• Drexel had no firmwide bonus pool, so its divisions competed with one another like rival companies.
• Brady had chaired Dillon Read, which advised Unocal when it was attacked by a Drexel-financed raider.
• Milken served nearly two years in federal prison for securities fraud, turned to medical research philanthropy and received a presidential pardon in 2020.