VIEWPOINTS : THE MAN BEHIND THE CURTAIN : Humbling Junk-Bond Wizard of Drexel by SEC a Real Public Service

Drexel Burnham Lambert is a bit like the Wizard of Oz. Clients and competitors come before it with a sense of fear and awe. But behind the curtain, pushing the buttons and turning the valves, are mere mortals. And just as Emerald City survived the wizard’s departure, the financial markets will survive the humbling of Drexel.

First, Drexel isn’t going to roll down the shutters--even if it is hit with treble damages under the racketeering law and Michael Milken is exiled from the securities industry. Drexel’s pockets are bursting. And investment banking is built on teamwork. Milken couldn’t have created his junk-bond empire without creating an army of mini-Milkens at Drexel.

They may not have his creative talent, but they can get the job done. Last winter, analysts wrote off First Boston when its two superstars, Bruce Wasserstein and Joe Perella, struck out on their own. But the firm overcame the loss. So will Drexel.

Second, the junk bond market is in no mortal danger. If junk bonds survived an unanticipated 500-point collapse of the Dow Jones industrial avebage last year--a crash that wiped out hundreds of billions in corporate equity overnight--surely they will survive the fully anticipated lawsuit against Drexel. Until big defaults persuade them otherwise, fund managers will continue to find a place for those high yields in their portfolios.

Finally, the SEC’s lawsuit against Drexel won’t make the companies and raiders orchestrating the mergers and takeovers freeze in their tracks. Bad publicity about the deal makers does not change the basic economics. As long as the funds can be got--through Drexel or one of its neighbors--takeovers will be a fact of life. There are still too many entrenched bureaucracies, too many under-performing assets, too many inefficient conglomerates--in short, too many opportunities to make a lot of money--for those activities to abruptly end.

Not that the government’s charges are inconsequential. In the short term, they are likely to shift the balance of power on Wall Street. In the longer term, they may alter the balance of power between Wall Street and Main Street. Most important, they keep the spotlight on the takeover issue and increase the chances that we will make some sense of it.

Fines or not, exile or not, Drexel will lose some business. Drexel’s clients may be sticking close by for now. They’ve got deals to complete. But they’ll think twice the next time around. It’s a matter of confidence. With the fate of a business, its employees and shareholders, not to mention such huge sums of money, at stake, that confidence isn’t taken lightly.

Questions will persist about Drexel’s ability to keep clients’ secrets secret. And would-be clients will want to know that the person they’re relying on to strike the deal won’t be carted off to government housing next week. Public relations can go only so far--not so far as to obscure criminal charges, if it comes to that. The firm of choice will be less automatic.

The options are ever widening. Morgan Stanley, First Boston and a number of their peers have suited up. They’ve even had some playing time. They’ve learned the mechanics and established the ties. Drexel started out owning the high yield market. Already, competitors have nibbled their way into half of it. Now Drexel’s competitors will have the chance to cash in on their less-tarnished reputations.

Investment bankers will lose some political sway; other constituencies will gain some. Leaders of the Fortune 500 resent the fact that junk-bond-financed acquisitions threaten their once untouchable positions atop the economic pyramid. Labor unions resent the wage concessions and plant closings that new owners often demand. Millions of middle-class voters resent the sweeping white-collar layoffs ordered by successful raiders slashing overhead or by companies funneling their resources to fight them off.

So far, those who are against regulation have addressed a purely economic issue. But legislators who defend the invisible hand in the takeover debate will not defend the rather visible hand the federal government claims to have found in the takeover cookie jar.

The latest round of SEC charges--coming so soon after the investigations of Dennis Levine, Ivan Boesky and others--strengthens the association between Wall Street and corruption. Even the strongest opponents of regulation will favor tightening the rules that define acceptable behavior.

The Insider Trading and Securities Fraud Enforcement Act, which the House passed last Wednesday, will gain momentum. Already stiff punishments will get a little stiffer. The SEC and the U.S. attorney will cast longer shadows as they stalk those pocketing the unearned fees.

Still, there’s no victory for the Fortune 500, who have been dodging takeover bullets for several years now. Some lawmakers will try to turn the insider trading bill into anti-takeover law. But Congress isn’t ready to take a stand on whether takeovers do more harm than good. And the capital markets will not go away.

New laws and regulations may help weed out the hustlers who breeze through the capital markets picking pockets as they go. They will not stop the flow of money from those who have it to those who can make more of it by rearranging businesses that under perform.

In the end, then, the SEC is doing a bigger deed than what appears. It has triggered a rebalancing of influence, which in turn creates hope. We may yet find a way to reign in the callous forces that have imposed such painful and penetrating change without resigning ourselves to mediocrity among our business leaders and ourselves.