The Last-Minute Money Grab

By Richard Behar/New York

For Wall Street bashers and cynics, the episode seemed a fitting epilogue. Bankrupt Drexel Burnham Lambert acknowledged last week that less than two months before its demise the company began doling out $260 million in 1989 bonuses to employees. The size of the booty was more than twice the amount of debt on which Drexel defaulted before it collapsed on Feb. 13. Even more startling, a few still unnamed Drexel hotshots got bonuses of more than $10 million each in a year when Drexel lost $40 million.

The reaction to the last-minute payouts was swift and brutal, especially among Drexel creditors. One large unsecured creditor, First City Bancorp. of Texas, quickly filed a motion in federal bankruptcy court in New York City asking for an investigation. The New York Times lambasted the bonuses as a case of greed worthy of the Guinness Book of World Records and called on Drexel executives to return the dough. In Washington committees in both the House and the Senate are planning hearings this week that will explore the issue. "It may be that the payments themselves rendered Drexel insolvent," says attorney Stuart Hirshfield, who represents a group of Drexel's creditors. "It just doesn't seem right."

Drexel officials are shocked by the backlash, which a spokesman calls "much ado about nothing." The firm contends that many of the bonuses were promised to executives early in 1989 and that Drexel's best and brightest might have quit en masse if such rewards had not been dangled before them. Nevertheless, Drexel violated one of the cardinal rules of compensation: that bonuses should be linked to corporate performance.

Drexel is trying to reassure creditors that the bonuses were not doled out because of any sense of impending doom. "Believe me, nobody was shoveling money out the door because they felt the roof was caving in," says Drexel director Roderick Hills, a former chairman of the Securities and Exchange Commission. "In fact, many executives expressed their confidence by taking their entire bonus in the form of equity." Among them: chief executive Frederick Joseph, who in December elected to take his $2 million-plus bonus in Drexel stock, which now is virtually worthless.

Even so, some Drexel insiders privately concede that the bonus payouts were excessive. "I certainly wouldn't have paid them," says a current Drexel director. "The bonuses were certainly consistent with the firm's culture and tradition, but if you're asking me an ethical question or a common-sense economic question, the answer is no. But that's the nature of the beast. It's a carry-over of the greed of the 1980s."