If there's one thing (ING ) to know about Frederick H. Joseph, it's that he is unrepentant. In fact, with his name (in brushed-silver type) on the door of a growing investment bank, he's even emboldened these days.
Joseph presided over the spectacular collapse of Drexel Burnham Lambert, which went from being Wall Street's most successful firm in the mid-1980s to its most infamous. Star trader Michael Milken embroiled Drexel in an insider-trading scandal that landed him in jail. The firm pleaded guilty to six felony charges and paid $650 million in fines in December, 1988. Two years later, it was bankrupt: Thousands of employees were out of work, and investors lost millions.
Unlike many of today's Wall Street chiefs, who have so far evaded punishment for scandals at their firms over analyst conflicts and public-offering payola, Joseph took a hit. He was prohibited by the New York Stock Exchange from taking a supervisory role at any of its companies for three years, banished as a Wall Street CEO for life, and disgraced among colleagues of some three decades.
But Joseph has another take on the scandal. "There were all sorts of things that shouldn't have been done, but after the biggest investigation in history, they [the Securities & Exchange Commission] charged five or six out of 10,978 people, roughly," he says. "There were a few bad apples, and that's really bad. And you end up taking responsibility for that."
Joseph didn't skulk away from Wall Street, though. Actually, he has hardly been out of work a day since Drexel fell apart. During his three-year ban by the NYSE, he was a consultant for Drexel as the firm liquidated its holdings. From January, 1994, until May, 1998, he ran his own investment-banking consulting firm, Clovebrook Capital. From there, he became a senior adviser and managing director at ING Barings LLC, heading their investment-banking unit. When ING put that unit up for sale, Joseph tried to buy it with some other managers and big investors, but lost out to ABN Amro, an international bank based in Holland.
That got Joseph and his backers thinking about starting their own mid-tier investment bank by acquiring one. They did just that, and in the summer of 2001, the firm now called Morgan Joseph & Co. was born. Morgan is John A. Morgan, the great-grandson of John Pierpont Morgan and chairman of the new firm.
Joseph is building his boutique in much the same way he built Drexel: by financing small and midsize companies neglected by larger banking rivals. Deals from $20 million to $100 million have, in fact, been the fastest-growing part of a merger-and-acquisition market that is otherwise in the doldrums, doubling as a percent of total deal volume in two years. In 20 months, Morgan Joseph has inked 40 deals -- restructurings and debt financings -- worth $1 billion in total, and 60 more deals wait in the wings. He has more than doubled the staff, to 109, and plans to grow fivefold in five years. "I'm a deal groupie," he says from his Rockefeller Center office.
At Morgan Joseph, appearances matter. They have to. Since Joseph is prohibited from holding the title of chief executive, there's someone else in that job: John F. Sorte, who replaced Joseph at Drexel in May, 1990, and is one of the firm's main investors. Today, Sorte oversees Morgan Joseph's research-and-equity trading operations as well as its high-yield-bond department, which is growing quickly. The firm's lifeblood are the bankers in New York, and they report to Joseph. Although Joseph is officially managing director and co-head of investment banking, he lists no title on his business card. When asked about Joseph's role at the company, Sorte says: "He's doing exactly what he can do."
Up from what he calls the slums of suburban Boston, Joseph was a tough kid but a good student. He earned a full scholarship ("there was no other way") to Harvard University in the late 1950s and went on to get his MBA there, too. He blossomed into a banker as the industry itself matured: When he was offered a job in the spring of 1963 by E.F. Hutton & Co. chief John Shad, it was only one of a half-dozen investment-banking jobs in existence. Then the father of two, Joseph worked relentlessly, making partner in five years. Eleven years later, he landed at Drexel Burnham Lambert as co-head of corporate finance. He became CEO in May, 1985, when the Dow Jones industrial average was 1,300 -- and Drexel was not yet a household name.
In the public memory, Joseph may still be the boss who missed some of the worst financial skulduggery of the 1980s. He certainly embittered a few Drexel veterans. According to a former senior officer, Joseph has never attended any of the firm's occasional reunions: "No one wanted him there. He was persona non grata for a while, and he is still controversial with Drexel people." A spokesman for Joseph points out that several former Drexel colleagues now work at the firm and that Joseph socializes with others.
On a recent afternoon on Manhattan's Fifth Avenue, Joseph ran into erstwhile archrival John H. Gutfreund, now managing director of C.E. Unterberg, Towbin, a New York investment-banking boutique. As former CEO of Salomon Brothers, Gutfreund was also forced to resign after trading scandals and was banned from leading a securities business. (Gutfreund, Joseph points out, had to pay a fine; he didn't.) They chatted briefly about their new jobs. "The Street allows you to do that. There's no rule that says you have to retire," says Joseph. "Experience is an asset, not a liability." That certainly seems to apply to the House of Morgan Joseph.
By Mara Der Hovanesian in New York