The nation's biggest junk bond underwriter has had a change of heart about its practice of letting employees buy into its own deals, one week after being accused in Congress of favoring them over its customers. Drexel Burnham Lambert Inc. announced Wednesday that employees and partnerships formed by employees will no longer be permitted to purchase new issues of bonds underwritten by the firm. The investigations subcommittee of the House Energy and Commerce Committee, in hearings last week, released documents showing Drexel employees reaped huge profits by purchasing bonds underwritten by the firm and then quickly reselling them, in one case within 17 days. Employees were permitted to buy bonds during initial offerings of much-sought issues, even when the practice denied bonds to public customers, the documents showed. Drexel was instrumental in developing the market for the high-yield, high-risk junk bonds, which allow companies without a track record of earnings to obtain financing based on whether they have sufficient cash flow to pay off their debts. Junk bonds have been frequently used in corporate raiding. Of the $32 billion in junk bonds issued in 1986, 40 percent were underwritten by Drexel, according to a congressional report. Drexel chief executive Frederick Joseph, in a letter to Rep. John Dingell, D-Mich., chairman of both the committee and subcommittee, stuck by his assertions that the employee purchases were proper, but said the firm was worried about appearances. ``I indicated we supported such purchases; nonetheless public perception is important to financial institutions such as ours and we recognize that even the best of motives can be misunderstood,'' he said. Rep. Ron Wyden, D-Ore., a member of the subcommittee, said Drexel's letter leaves a number of questions unanswered, including whether Drexel will be able to trade for its own accounts and pass profits on to employees in the form of bonuses. He said he would also like to know if employee accounts will be able to trade in the secondary market, which is heavily influenced by the underwriting firm. Steven Anreder, a spokesman for Drexel, said the firm had no comment beyond its brief announcement. Dingell, in a statement released by an aide, called Drexel's decision ``a very good step,'' adding, ``It should lay to rest questions associated with the fairness and legality of that particular practice.'' However, the aide, Dennis Fitzgibbons, said Dingell has made no decision regarding his committee's ongoing investigation of Drexel. Dingell has been criticized by Rep. Thomas Bliley, R-Va., for subpoenaing Michael Milken, chief of Drexel's junk bond unit, to appear before the committee even though Milken had indicated in advance he would refuse to testify based on his constitutional protection from self-incrimination. When he refused to testify, Milken confirmed he is under investigation by a federal grand jury in New York, which is reported to be looking into insider trading allegations. Dingell said the firm's retreat on employee purchases ``indicates that the behavior of the committee was correct and fair in bringing these matters to light.'' Junk bonds pay higher interest rates than those issued by established companies and are considered riskier investments. They have been used by corporate raiders to finance unfriendly takeover attempts.
