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securities operation had a negative effect on Drexel’s financial
position during 1989. Drexel, however, continued to engage in
business throughout 1989 and into 1990. Drexel responded to the
difficulties facing it by (1) increasing efforts to reduce its
securities positions, especially in high-yield securities and
bridge loans, (2) pursuing alternative sources of financing, and
(3) developing and considering different strategic options for
its lines of business. Drexel developed a 1990 business plan
that projected significant cuts in operating costs, which were in
addition to a large reduction of expenses in 1989 from 1988
levels. Drexel also completed a series of management changes
that were designed to provide new leadership in key business
areas. Despite the adverse developments affecting Drexel, it
projected a profit for 1990.
During January 1990, Drexel’s cash flow from operations was
depressed, and Drexel experienced continuing difficulties in
financing its operations, relying upon the assets of subsidiaries
to fund shortfalls. Drexel also sought new sources of financing
to replace its commercial paper, which was unattractive to buyers
because of a lowered rating. Although Drexel believed that it
could utilize the excess net regulatory capital of its
subsidiaries to finance its operations, it was informed by the
SEC on February 7, 1990, that it could not borrow any of the
subsidiaries' funds without prior SEC approval. Although the SEC
agreed to permit Drexel to borrow funds from a subsidiary to pay
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