Kissick Reportedly in Wings in Case Drexel Is Forced to Replace Milken

NEW YORK — If Drexel Burnham Lambert Inc.’s “junk bond” wizard Michael Milken is eventually forced out of the firm by his considerable legal problems, John H. Kissick, the head of Drexel’s West Coast corporate finance department, is likely to be designated head of Drexel’s all-important operations in Beverly Hills, according to knowledgeable sources at the firm.

Senior Drexel executives, in on- and off-the-record interviews, are extremely reluctant to talk about a possible successor to Milken, the firm’s powerhouse for a decade. They say they are optimistic that the firm and Milken will survive the current onslaught of investigations, including a Securities and Exchange Commission insider trading lawsuit. But they say that if massive legal defense efforts fail, and Milken is banned from the industry or jailed, it is likely that Kissick, 46, will be put in charge of Drexel’s West Coast operation.

“If there is a need for a senior person on the coast, it might well be John Kissick,” one knowledgeable official at Drexel said.

The selection of Kissick would be a surprise for some employees of Milken’s junk bond department and some clients, in part because he has a corporate finance background and isn’t a bond trader.

But in recent weeks, concerted efforts have been made to discount widespread speculation that Milken’s successor as the dominant figure in Beverly Hills would be Peter Ackerman, currently regarded as Milken’s right-hand man. However, Ackerman, 42, is in line to run the high-yield bond department within the Beverly Hills operation.

Drexel, Milken personally and three other Drexel employees were named Sept. 7 as defendants in a Securities and Exchange Commission lawsuit accusing them of insider trading, stock market manipulation and defrauding clients. Milken and other employees are expected to be charged soon in a federal criminal indictment in New York.

And the Beverly Hills operation is the subject of an ongoing probe by a congressional committee, headed by Rep. John D. Dingell (D-Mich.), into whether Milken and other employees engaged in improper self-dealing at the expense of Drexel clients through a series of private partnerships.

Transformed Company

In an interview, Frederick H. Joseph, Drexel’s chief executive, said: “A successor is something we don’t like to think about.” But he confirmed that Milken has been forced to spend much of his time away from the X-shaped trading desk at Drexel’s office on Wilshire Boulevard in Beverly Hills.

“Over the past couple of years, Michael has gotten increasingly distracted” because of the investigations, Joseph said. “He’s spending a minority of his time on the desk.”

Drexel officials in New York take pains to emphasize that Milken is still in charge of the high-yield operation. It was mainly Milken’s use of high-risk, high-yield junk bonds that transformed Drexel from a second-string investment banking firm into a Wall Street powerhouse during the past decade.

The word genius is often used about him by others in the industry, and Drexel officials privately acknowledge that the loss of Milken inevitably would hurt the firm.

Joseph, however, said that while “Michael is irreplaceable,” so far “the department is functioning with him being relatively absent.”

He said the high-yield department is staffed with highly qualified professionals, things are running smoothly and the department is still hugely profitable. He said there isn’t a pressing need to designate a second-in-command. Instead, an informal West Coast executive committee or “team” has been established that reports to Milken and Drexel Vice Chairman Edwin Kantor.

Joseph said he favors a team approach. The committee includes Kissick and Ackerman as well as Warren Trepp, the chief bond trader; William Tobey, chief bond salesman, and Lorraine Spurge, the head of syndication, as well as others.

Marshall V. Davidson, a managing director at Kidder, Peabody & Co. who left Drexel in May and knows Milken well, said the high-yield department can run well on its own for some time because Milken “hired people who are individually strong and capable, as opposed to a group of toadies.”

Seek More Control

Kissick is regarded as a protege of Joseph’s. A graduate of Yale University and Stanford Business School, Kissick worked with Joseph at several other Wall Street firms before the two ended up at Drexel.

Joseph hired Kissick away from Blyth Eastman in 1976, and Kissick opened a corporate finance office for Drexel in Los Angeles two years before Milken moved Drexel’s junk bond operation to the West Coast. “He’s a super investment banker,” Joseph said.

As head of corporate finance in Beverly Hills, Kissick runs a department separate from Milken’s high-yield operation, although the two departments work closely together.

The apparent selection of Kissick and not Ackerman is interpreted by some outsiders as an effort by Drexel’s headquarters in New York to exert more control over the sometimes maverick operation run for years by Milken.

Outsiders note that virtually all of the legal problems for which Drexel is being investigated stem from Milken’s Beverly Hills operation.

But another official at Drexel denied that explanation. “Kissick is a superb manager,” the executive said. Milken, for all his renowned creative genius in the area of finance and the huge revenue that he has brought in, has been considered by Drexel officials in New York to be a less-than-stellar office manager. The official said that following the turmoil caused by the investigations, the Beverly Hills office could use someone whose managerial skills were a specialty.

One of Drexel’s bigger customers said that if the firm went through the shock of losing Milken, “the firm would feel a need to pull together” during an ensuing period of adjustment. “I think Kissick would be very good at overseeing that,” the client said.

Joseph declined to be specific on what his contingency plans are if Milken were to leave. Asked if he contemplated any restructuring, he said: “I don’t think so, but we might.” He added: “We don’t fix things when they’re not broken.”

Staff Grew Sharply

Joseph and others denied speculation that Drexel’s junk bonds department might even eventually be moved back to New York.

Milken, a native of San Fernando Valley, decided in 1978 to move the high-yield bond operation to Los Angeles, and by then he was a powerful enough force at Drexel that his decision wasn’t challenged. The department has grown from a staff of only about a dozen people to about 175 professionals today.

Despite several requests beginning last week, a Drexel spokesman said Ackerman and others in the high-yield department wouldn’t be available for interviews. Kissick was said to be out of town Thursday. Milken has refused press interviews for some time.

In part because of the lack of access to the Beverly Hills staff, it’s difficult to assess how much Milken has actually removed himself from day-to-day affairs.

As the investigations have progressed, Milken has had to make frequent trips to New York to meet with his lawyers. He has also been heavily involved in a personal public relations campaign designed to improve his public image. These have included taking groups of handicapped children on the Universal Studios Tour and to a baseball game in New York. He has given speeches on education issues and developing countries’ debt.

Associates of Milken, however, note that he is an extraordinarily driven worker, who was regularly at his desk by 5 a.m. and who routinely coordinated a multitude of deals simultaneously. Even with greatly reduced time on the trading desk, they say Milken is almost certainly still a dominant influence. “Michael in a six-hour day would do better work than the average CEO would do in 12,” Davidson said.

As Milken’s right-hand man, Ackerman plays a key role in structuring deals, acting as a liaison between the corporate finance department and the bond traders. Drexel officials say Ackerman is a crucial figure in putting together transactions, seeing that deals are properly structured to meet what the market is prepared to accept.