Sept. 15 (Bloomberg) -- As Richard Fuld, chairman of Lehman Brothers Holdings Inc., prepared to put the company he has run for 15 years into bankruptcy protection, at least one other Wall Street executive knew what he was going through.

``Running a firm in bankruptcy is a horrendous thing,'' said Fred Joseph, 71, who was in charge of New York-based Drexel Burnham Lambert Inc. in February 1990, when the securities firm collapsed. ``Everyone knows you're a forced seller.''

Eighteen years later, the collapse of Lehman, with $600 billion in assets, will dwarf that of Drexel, whose parent company had $3.5 billion in assets when it filed for bankruptcy, the largest by a financial-services firm at the time.

After Barclays Plc and Bank of America Corp. abandoned talks to buy Lehman yesterday, the New York-based investment bank had little choice but to seek protection from creditors. The firm, founded 158 years ago, filed a Chapter 11 petition with the U.S. Bankruptcy Court in Manhattan today. The company will probably sell off its operating businesses, which weren't part of the filing, eliminating what had been the fourth-largest U.S. securities firm.

Bank of America agreed to buy Merrill Lynch & Co., the No. 3 U.S. securities firm, for $50 billion in stock.

Lehman's undoing was $50 billion in residential and commercial real estate assets whose value was eroded by rising mortgage defaults and the subsequent credit crunch. Drexel's was its holdings of high-yield bonds, also called junk bonds, which were estimated to be about $1.3 billion at the time.

Quick Demise

Drexel rose to prominence in the 1980s on the back of its star banker, Michael Milken, who helped create the junk-bond market that fueled the mega-mergers of that decade. After the market for high-yield bonds tumbled -- and Milken was indicted for securities law violations and Drexel pleaded guilty to six felony counts -- the firm was forced into bankruptcy.

The end was swift for both Fuld and Joseph. As late as Sept. 11, Fuld, 62, was still trying to keep his bank afloat, endeavoring to sell a majority stake in its profitable money- management arm valued at about $5 billion. Barclays and Bank of America each balked at buying Lehman without a guarantee against losses from the U.S. government or other Wall Street firms.

``One parallel between Drexel and Lehman was that the underlying business was a successful business,'' said Joseph, who is now managing director at Morgan Joseph & Co., a New York-based investment bank. ``We were profitable right up until the week we were told to file for bankruptcy.''

Lehman's bankruptcy lawyer, Harvey Miller of Weil, Gotshal & Manges, also handled Drexel's case.

Aftershocks Uncertain

The Drexel filing didn't send global markets into turmoil in 1990. Analysts expect Lehman's collapse will be more problematic.

``Drexel didn't have all the derivatives that Lehman has,'' said Andrew Rahl, co-head of bankruptcy in New York at law firm Reed Smith LLP and a specialist in financial companies.

Analysts estimate that Lehman's positions in credit-default and interest-rate swaps dwarf those of Bear Stearns Cos., which were worth a notional $10 trillion at the time it was bought by JPMorgan Chase & Co. earlier this year.

Lehman bondholders should come out of the process unscathed, Joseph said.

``I'd be surprised if the debt holders aren't, at the end of the day, whole,'' he said. He also said that Lehman equity holders may get something, as did the stockholders of Drexel.

Analysts at CreditSights Inc. said bondholders may get about 60 cents on the dollar. Investors in the company's senior unsecured bonds are likely to get between 60 cents and 80 cents on the dollar after the securities traded as low as 32 cents, analysts led by Baylor Lancaster wrote in a research note yesterday. Holders of debt ranked lower then senior unsecured should expect to get a lot less.

Lehman's 26,000 employees may take comfort in the success of some of the 5,000 Drexel employees who lost their jobs in the wake of the bankruptcy. Members of the ``Drexel Diaspora'' went on to found profitable businesses including private-equity firm Apollo Global Management LLC in New York and hedge-fund manager Canyon Partners LLC in Los Angeles.

To contact the reporters on this story: Katherine Burton in New York at kburton@bloomberg.net; Zachary R. Mider in New York at zmider1@bloomberg.net

Last Updated: September 15, 2008 04:47 EDT