The Predators’ Ball (53 page)

His paramount contribution, however, was in a role that was much like that of a manager of a great Hollywood star. Joseph had managed Milken. “Fred grabbed onto those [Milken's] coattails, directed them some, orchestrated them a lot to the public and to us,” commented one Drexel executive.

Now the firm's shining star had become its greatest liability, and it was not so clear that Joseph's dominant traits were what this crisis required. In a time of terrible uncertainty, when the firm was being publicly tarred with the suggestion that its key employees had committed crimes, its ideal leader would be decisive, strong and principled, the personification of integrity.

There were at least two views of Joseph within the firm. One was that while he came closer to monitoring Milken than anyone else, he still was kept in the dark about some things that transpired on the West Coast. Somewhat short of information, therefore, he was nonetheless seen as an honest, restraining force. Former corporate-finance partner Julian Schroeder claimed, “Mike would do
anything.
I would have felt naked there without Fred.”

Schroeder added that on a visit to Drexel in the spring of '86 he had found Joseph in the midst of one of his many daily phone conversations with Milken, in which Joseph was saying, “Michael, you are the only one who can put yourself in jail—now,
don't do it.”
To Schroeder, this remark indicated that things had not changed since he left the firm in 1984: Joseph was still struggling to control Milken.

Another view, however, was that Joseph and Milken, consumed by a similar, religious fire to win, were more in league than in counterpoint. And that Joseph, therefore, was more pragmatic than principled. As one Drexel employee maintained, “Fred is great in an up-market. In an up-market, the leadership, the salesmanship, the upbeatness are the important things. But all the quick moves that in good times looked like a great salesman, in bad times looked dishonest. And when things are bad, he can't make a decision.”

Joseph, this employee said, “is the consummate rationalizer about why somebody doesn't have to get fired.” There was a case to be made that the firm should have either fired or suspended Martin Siegel in December, after he had been subpoenaed in the grand-jury investigation and it seemed all of Wall Street was convinced that the Boesky-Siegel game was finally exposed. Siegel remained at the firm until his plea was announced in February. (Indeed, even the hiring of Siegel in early '86 arguably attests to Joseph's being long on pragmatism and short on principle, since Siegel was so widely rumored on the Street to be involved in insider trading with Boesky.)

A stronger case could be made for the firing of Jim Dahl, if Joseph believed that Dahl had in fact said what Staley alleged. And this was not the first complaint about Dahl. Beverly Hills Savings and Loan, in its lawsuit against Drexel and Dahl, had accused him of fraudulent misrepresentation. The same employee declared, “Dahl was a loose cannon. He has put securities in people's accounts without calling them. We knew what he was—but Mike
liked him, because he was productive. The Staley threats might not be illegal, but there should be a standard of conduct. But Fred's attitude when it came to firing Siegel or Dahl was, If we get rid of them, they will hurt us.”

Joseph, of course, would not have been the first chief executive to keep employees on so as not to create witnesses friendly to the government, with an investigation in progress; his lawyers might well have advised him not to fire the two. But a less defensible example of Joseph's elevation of pragmatism over principle was his decision, also urged by Milken, to bring Donald Engel back into the firm.

Engel had been a fixture at the firm since the days of Burnham and Company. As Victor Posner became a more important Drexel client in the late seventies and early eighties, Engel had handled his account on the corporate-finance side and become a director on several of the Posner-controlled companies' boards. According to many of his colleagues, Engel knew little about corporate finance, particularly in the sophisticated way that Drexel practiced it by the eighties, but he did have a way with clients. And, since the earliest days of the Predators' Ball, he had been extremely useful to Milken on the social side—a perpetual gladhander, a happy panderer. “Mike always respected Don's usefulness,” declared one former member of the Milken group. “Don could make sure the clients got laid—and Mike didn't have to dirty himself.”

But in 1984 Engel was forced to resign. According to one Drexel executive, Engel had taken money from a Drexel client that should have been paid to the firm. (Engel denies this charge.) Some executives wanted to sever all ties with Engel, but Milken reportedly argued in his behalf, and in the end Engel became a “consultant,” negotiating a lucrative fee arrangement for any business he originated.

Ironically enough, it was as a “consultant” that Engel saw his wealth accumulate. The clients with whom he had relationships—among them Peltz and Perelman—were Drexel kingpins by 1985. One Drexel employee said that Engel's compensation for 1986 (probably including warrants) was about $9 million. And while Engel had had to relinquish his office at Drexel when he was forced to resign (his new business habitat was the third floor of his friend Perelman's town house), he still presented himself as a member of the firm. To reach Engel's office one called the Drexel switchboard.

It was, then, the cushiest of exiles. But in January '87, when Drexel's push for new clients had ground to a halt, and the firm seemed to be in danger of losing much if not all of the territory it had appropriated over the past decade, Engel was deemed too valuable to not be a full-fledged member of the team.

Soliciting new clients was the business of the Investment Banking Group (IBG), formed in early 1986 and headed by corporate-finance partner Chris Andersen. Even before the trauma triggered by Boesky Day, however, the IBG had been a failure (and by late 1987 the group would be disbanded). Andersen, who has a rambling, free-associating habit of mind, was considered by his colleagues to be a creative investment banker but a poor administrator and ill-suited for this management post. Moreover, Andersen's attention to the IBG was sporadic, inasmuch as he and Stephen Weinroth in May of '86 had bought a 13 percent stake in Centronics Data Computer Corporation, a Drexel investment-banking client. Though he and Weinroth had done this with Joseph's permission, their move had caused bad blood among many of their colleagues, particularly when Weinroth, Centronics' new chairman, discussed its becoming a deal-making vehicle whose deals might be in competition with some Drexel clients'.

Some at Drexel maintained that the real problem of the IBG lay in the firm's generally freewheeling, unstructured approach—exemplified in part by the Centronics situation. The Drexel culture encouraged entrepreneurism at every turn. Compliance, capital allocation, exposure and accounting were centralized, but all other decisions were left to the head of each group, so that the firm was run as a loosely connected association of free enterprises.

“Drexel was made up of little fiefdoms, with no rules,” recalled one former IBG member. “Joseph wanted it to be that way. It was supposed to be more entrepreneurial, and I guess it had worked for a while, especially when the place was smaller, but it didn't anymore. You'd [as a member of the IBG] call on a company and find out that, four weeks before, someone from corporate finance had been there; three weeks before, someone from M&A; and two weeks before, one of Mike's guys. No one had any idea what anyone else was doing. It was chaos.”

Now, in January '87, Engel was brought back to the firm to be co-head (with Andersen) of the IBG. Engel invited one of the IBG members, a recent recruit from a premier Wall Street firm, to break
fast. He reportedly told this associate that he, Engel, was his new boss (not Andersen) and that he would be dealing directly with Milken. Symbolic of his stewardship, Engel had rechristened the IBG the “Relationship Group.” He is said to have explained that it was emphasizing relationships that would win the new clients, that that was the style of business at which he excelled and that the way to establish relationships was by “getting in the minds” of prospective clients, and providing them what they wanted.

This associate had heard Engel's analysis before. At the Tokyo bond conference, when he had first met Engel, Engel had allegedly remarked to him, “I understand CEOs, CEOs don't care about money, power or fame. They have all that. What they want is
pussy.
And I'm going to make sure they get it.”

Then, however, Engel had been only a consultant to the firm. Now he was this young investment banker's boss, ready to school the IBG in his kind of business-getting. One Drexel executive recalled, “He [the associate] said, ‘Omigod, everything they told me about Drexel over at . . . , it was all true, the place is a total slime-bucket!' ” He immediately resigned from Drexel and returned to his former firm.

At Drexel, the melodrama continued. Word had circulated about what had precipitated the associate's resignation. Younger employees at the firm did not know why Engel had been forced to resign in 1984; many, knowing Engel as a notorious, compulsive womanizer, believed it had been for the kind of incident that had just occurred. But whatever the reason had been, it was clear to these fresh-faced Harvard M.B.A.'s, who had had their pick of the firms on Wall Street and had chosen Drexel, that Engel (like his longtime client Victor Posner) was an unsavory reminder of the
old
Drexel, which would be better forgotten. If there was ever a time for the firm to cultivate a straight-arrow image, they thought, surely this was it.

Andersen and Weinroth, who both had opposed Engel's reinstatement, now threatened to resign unless he was forced to resign again. And within two weeks, by early February, there was such a popular groundswell against Engel that people were calling it a “revolution.” When Engel tried to enter an IBG meeting on February 6, Andersen ordered him out. Engel left the room and called John Kissick in Beverly Hills, who was participating in the meeting via a hookup. Engel's strongest support had always come from the
Coast. Kissick said he thought it was OK for Engel to attend. As soon as the meeting broke, Andersen walked across the street to Drexel's executive offices to deliver his resignation to Joseph. Weinroth said he would resign, too. Another corporate-finance partner, Alan Brumberger, calling in from out of town, said he would join them.

Joseph—who in earlier, more upbeat times had described himself as the “Dr. Feelgood” of Drexel—reportedly asked for one week to try to resolve the problem in a way that would “make everyone happy.” That, however, was not possible, and Engel was forced to resign. He resumed his “consultant” status.

Engel's reinstatement had lasted less than a month. It is true that in the larger scheme of Drexel's troubles it was only a sideshow. But at a time when Drexel employees were already shell-shocked, depressed, embarrassed, defensive and fearful for their futures, it managed to make morale even worse, holding up a mirror to the firm and reflecting an unsightly image.

That image had nothing to do with what the government was investigating, and yet it had everything to do with it. Engel's procurement of women for clients was not conduct the government would likely seek to prosecute, but its significance lay in the larger truth that it revealed about Drexel. For whether it meant procuring women, or threatening would-be clients, the resounding credo at Drexel was to do whatever it took to win.

Everything bowed before that credo. Morality and legality became mere conventions, accepted modes of conduct for the foot soldiers of the world—the less creative, less aggressive, less visionary. The iconoclastic Milken, in whose image the firm had been formed, had always disdained conventional ways of seeing, conventional ways of doing business. And, thanks to his flouting of convention, Drexel had apotheosized out of nothingness.

It was that credo that had led to Engel's reinstatement. Joseph is said to have personally abhorred Engel. He may have also personally abhorred Engel's function, though he must have known and accepted it for years. He had made a show of enormous though disingenuous indignation to
Institutional Investor
in an interview for its August 1986 Milken profile, when the subject of hookers at the Chasen's dinner and Bungalow 8 was raised. Telling
Institutional Investor
that he “went bananas” when he heard the stories, Joseph added, “I discussed it with Michael and I said, ‘If there ever
is a hooker there, I'll fire everybody in sight, I'll kill everybody . . .” And everyone said, ‘Fred, it's not true, you're overreacting, you're nuts.' I said, ‘All right, but not one woman who would embarrass us if someone knew exactly what she did for a living.' And I think I can guarantee you that there isn't a single woman there who doesn't have a legitimate reason to be there and that none of them are hookers.”

It may well be that had history allowed Joseph to pursue his longtime vision of building an institution comparable to Goldman, Sachs, he ultimately would have done away with Engel and his cast of (in case anyone asked) aspiring actresses and would-be models. But when the firm began to disintegrate around him, Joseph applied Drexel's one abiding test to the question of whether to bring Engel back. “He thought,” said one employee, with a shrug, “that Donnie would be good for business.”

That quintessentially pragmatic credo—whatever it takes to win—may have shaped Drexel's response to the investigation, as well. In the first month or two after Boesky Day, the firm was in turmoil, apparently without a fixed defensive strategy, taking the crisis day by day. There was a considerable amount of anxiety about who might be cooperating with the government. Some days, corporate-finance executives in New York considered casting the West Coast adrift, telling the government that they had known things were not right out there (but never been sure of the specifics, so had not gone to the authorities) and that they wanted now to make their separate peace.