The Dow's Big Day and the Death of Drexel


On this day in economic and financial history...

The Dow Jones Industrial Average has enjoyed two major milestones on Feb. 13. The first was one of its largest gains of all time, and the second was its first close above 7,000 points. One was a good omen for the year to come, but the other was merely a speed bump on a rocky road to the bottom of a bear market.

The Dow's false optimism
The Dow's first milestone, a 9.2% one-day gain, occurred on Feb. 13, 1932. Wall Street participants were taken rather by surprise, as this huge rise was only two days removed from a 9.5% gain in the index (both spurred by rumors of looser Federal Reserve policy) in the middle of the worst multiyear bear market in the Dow's history. This rally, despite its smaller percentage gain, was sharper in to a shortened weekend trading schedule that compressed the violent upswing into a two-hour period. An estimated $4 billion was added to the overall market's value -- the most since the previous October -- and the volume of 2.6 million shares was the highest since May of 1930. By comparison, the market had gained roughly $3 billion on similar volume two days earlier over the course of a full trading day.

The New York Times recorded a yearly high for 100 major stocks, which came in addition to strength on the commodity, international, and bond markets. The Glass-Steagall bill was the unfolding saga of the day, but this was not the familiar banking-regulation law that controlled the financial industry for decades after the Great Depression. This Glass-Steagall was its legislative predecessor, which was to pass later in the month and which was the first bill in U.S. history to allocate currency not backed by gold to the Federal Reserve, with the intent of fighting rampant deflation. TheWashington Post gleefully needled market bears over the rise, cheering Glass-Steagall's "powerful antideflation tonic" that "painfully pinched" short-sellers. AT&T "struck terror to the hearts of the bears" by again leading the parade of big-name gainers with an incredible rise of more than 12%. Union Pacific managed to best that with a near-17% gain in just two hours.

Those bears would have the last laugh, however. Even though the Dow had already fallen 77% from its 1929 highs, there would still be another 52% decline in store from Feb. 13's closing price. The Dow would not put that level behind it for good until the summer of 1934, more than a year into President Franklin D. Roosevelt's first term in office.

Up, up, and away for the dot-com-era Dow
Exactly 65 years after its monster dead-cat bounce, on Feb. 13, 1997, the Dow crashed through the 7,000-point barrier for the first time in its history. That day, CNNMoney attempted to put things into perspective by noting that "the Dow [had] knocked off four 1,000-point milestones in just two years, surpassing 6,000 only four months ago and 4,000 two years ago." That day, 590 million shares exchanged hands -- a 22,600% increase in volume (and an 8,100% increase in value) from 1932's big day. Investors in 2013 would feel right at home in 1997's rally, which was fueled in part by a big drop in bond interest rates and further supported by lower-than-expected initial jobless claims.

Five months later, the Dow breached another 1,000-point milestone, and just more than two years later it would reach 11,000 points -- its dot-com-era high. However, it took more than a decade for the Dow to double from 7,000, which finally occurred at the top of the subprime bubble in 2007.

Drexel goes bust
On Feb. 13, 1990, the parent company of Drexel Burnham Lambert filed for bankruptcy. This capped off a two-year battle that pitted the Securities and Exchange Commission against the storied firm, and it was one of the most empathic signals that the wheeling-and-dealing era of Gordon Gekko's Wall Street was finished. The New York Times offered its readers a helpful timeline of Drexel's rise and fall, which is presented here in brief:

  • 1976: The Drexel Burnham Group merges with Lambert Brussels Witter.

  • 1978: Drexel junk bond king Michael Milken moves his operations to Beverly Hills.

  • 1983: Drexel pioneers the use of junk bonds to finance hostile takeovers, which leads to the firm's first billion-dollar revenue year.

  • 1986: Drexel banker Dennis Levine pleads guilty to securities fraud, but Drexel continues to grow and reaches $4 billion in revenue and $545 million in earnings.

  • 1987: Drexel client Ivan Boesky pleads guilty to fraud and agrees to cooperate with the feds, providing the key pieces needed to take down the firm.

  • September 1988: The SEC files a civil complaint against Drexel and Milken.

  • December 1988: Drexel agrees to plead guilty to six counts of criminal fraud and also agrees to remove Milken from his position and pay $650 million in fines.

  • January 1989: The fraud charges are filed.

  • March 1989: A federal grand jury indicts Milken on racketeering charges and seeks $1.8 billion in forfeitures from him and other defendants.

  • April 1989: Drexel and the SEC settle over the original civil charges.

  • May 1989: Drexel and Merrill Lynch complete the $4 billion junk-bond financing of private-equity titan Kohlberg Kravis Roberts' buyout of RJR Nabisco -- the largest such deal in history when adjusted for inflation.

  • June 1989: Milken resigns and announces plans to open his own firm.

  • Feb. 5, 1990: Drexel reports a 1989 annual loss of $40 million on $4.1 billion in revenue.

On Feb. 13, Drexel had no choice but to declare bankruptcy, as it defaulted that day on $100 million in loans after other Wall Street firms, unwilling to assist, made it a pariah. Drexel's 5,000 employees began putting their resumes in order as the firm ceased its trading activities and began to close up shop.

Two months later, Milken pled guilty to six counts of fraud and tax charges. His sentencing resulted in $200 million in fines, $400 million in reimbursements to defrauded investors, a lifetime ban from the securities industry, and a 10-year prison sentence (later reduced to two years). A related civil lawsuit added another $500 million to Milken's losses, bringing his total loss to $1.1 billion.

Since his release, Milken has become a crusader for youth education and health issues. He is the founder of both KinderCare, the largest for-profit child care provider in the United States, and K12 , the largest for-profit primary-age virtual charter school operation in the country. He was also dubbed "The Man Who Changed Medicine" by Fortune magazine in 2004 for his contributions to cancer research and treatment, particularly in the realm of prostate cancer. Despite the massive fines levied against him in 1990, Milken remains quite wealthy. With an estimated net worth of $2.3 billion in 2012, Milken is the 188th-richest man in the United States and the 546th-richest in the world.

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