From Big to Small, Drexel’s Creditors Confer on Strategy

NEW YORK —  Judith D. Freedman, 60, a retired Drexel Burnham Lambert stockbroker, was among the throng of creditors, big and small, who showed up Tuesday at the organizational meeting of people who are owed money by the brokerage’s parent, which collapsed into bankruptcy proceedings Feb. 13.

“Zilch” is what she said she expects to get for her stock in Drexel, accumulated over 10 years at the firm. Freedman said the stock made up much of her retirement savings. But she paid her way to New York from her home in Boca Raton, Fla., not only to get information about her chances of recovering money but out of emotional need as well.

“It’s like when you have a family member who dies and then you don’t go to the funeral,” she said. The meeting to her represented a Requiem for the firm. “I can see it and hear it and I can put it to rest.”

Others, however, were there strictly for business. A. Robert Abboud, chairman and chief executive of First City Bancorporation of Texas, which is owed $25 million by Drexel, summed up the reason he and most other creditors were there: “We want our money back.”

More than 300 attended the meeting, held to select a 17-member committee to represent more than 2,000 unsecured Drexel creditors in dealings with the federal bankruptcy court.

The chances of all creditors being paid in full probably won’t be known for months. But Richard Wright, Drexel’s chief financial officer, held out hope. “It is fair to say that there is significant net worth left in the company,” he said.

Wright estimated that the firm currently has a bit less than $700 million in shareholders’ equity, although others said that amount could be eroded by further costs of closing down and by the many lawsuits already pending as a result of Drexel’s admitted illegal activities.

The official business of the meeting paled next to a presentation by Frederick H. Joseph, Drexel’s chairman and chief executive. It was his first public statement since the once mighty junk bond and investment banking firm shocked Wall Street by its sudden collapse two weeks ago.

Joseph said that even though the firm’s financial position had deteriorated rapidly in the year since it agreed to plead guilty to six felony counts, top executives hoped until days before the filing that they could avoid bankruptcy.

Appearing composed, even unfazed, despite the trauma of the preceding days, Joseph said: “As we went through the year, the difficulties piled up on us. We thought we dealt with them aggressively.” But, he said, “It’s clear that the end of the story is that we didn’t make it. We failed.”

Joseph added, “We’re terribly sorry to be in this position.” Although he acknowledged that “we could have done some things differently,” he strongly defended the firm’s decision to plead guilty last year and pay $650 million in penalties rather than face racketeering charges. Joseph’s decision at the time was strongly criticized by many of the firm’s own executives, who wanted the firm to fight. But Joseph asserted Tuesday that a racketeering indictment probably would have put the firm out of business a year earlier.

Drexel’s chief executive didn’t directly address the question that for a lot of creditors seemed paramount: Why Drexel’s management didn’t see disaster looming sooner and take more drastic steps to avoid completely going out of business. But he claimed that officials of the Federal Reserve Board had led him to believe two weeks ago that they were intervening with banks to arrange a $350-million short-term bailout of the firm. In fact, Fed officials didn’t intervene, deciding that there wasn’t any vital economic interest in preventing the firm from going under.

Although the parent firm had more assets than liabilities, it was forced into bankruptcy proceedings by a cash crisis that led it to default on some debt payments.

Many of those present Tuesday were former Drexel employees, who had a large part of their personal net worth tied up in Drexel stock. The stock will be worthless unless Drexel comes up with enough money to pay all of the firm’s other creditors first.

In addition to liquidating securities and winding down business, the main concern of Drexel’s management and bankruptcy lawyers at the moment is to try to persuade creditors not to force the firm’s subsidiaries into bankruptcy. Only the parent holding company, Drexel Burnham Lambert Group, has filed. By remaining out of bankruptcy proceedings, the firm’s brokerage and commodities trading units have been able to liquidate much of Drexel’s massive holdings of securities without the approval of federal regulators or a bankruptcy trustee.

Drexel bankruptcy lawyer Allan Miller said in court Tuesday that if the units are forced into involuntary bankruptcy, the cumbersome process under which a trustee would have to approve each transaction would make efficient liquidation of assets impossible. He said such a move could cost creditors tens of millions of dollars or more.

The dramatic pace at which Drexel traders have been liquidating holdings was made clear by Wright: At the end of December, the brokerage unit and other subsidiaries had $28.6 billion in assets and $27.8 billion in liabilities. As of this week, the firm has $6.9 billion in assets and $6.2 billion in liabilities. Drexel still holds slightly more than $1 billion in junk bonds, many of which may be difficult to sell because of the current depressed state of the junk bonds market.

But creditors seemed profoundly skeptical Tuesday about claims that the subsidiaries should be left in management’s hands. They said one of the first items of business for the new creditors committee would be to decide whether to try to put the subsidiaries into bankruptcy. Stuart Hirshfield, a lawyer representing several large creditors, said one advantage of such a filing is that it would enable the court to reverse transactions made by the units during the past year if they were economically unsound, possibly including the payment of $196 million in cash bonuses to some executives just weeks before the bankruptcy filing.

Steven H. Felderstein, a lawyer representing the California Public Employees’ Retirement System, which is owed $25 million by Drexel, said creditors may not feel comfortable allowing the liquidation of assets to be supervised by the same people who were in charge when Drexel failed. He said he didn’t believe that Joseph had adequately explained “how a company goes from being the mightiest company on the Street to broke in just a few days.”

TURNER SUES DREXEL: Broadcaster Ted Turner has filed a lawsuit alleging that Drexel should have disclosed losses before a $10-million debt purchase deal.