(FORTUNE Magazine) – Did you hear that Ivan Boesky will have to pay only $5 million of the $100 million the SEC hit him with for insider trading? How so? Drexel Burnham Lambert told him it is ''highly confident'' it can raise the other $95 million with junk bonds. Within hours of the Securities and Exchange Commission's announced settlement with Boesky on insider trading charges, practically everyone on Wall Street seemed to have heard this joke. The loudest laughs came from investment bankers who have lost business to the fastest-growing and most feared investment bank in the U.S. A street-fighting outsider, Drexel Burnham Lambert has rocketed from near obscurity to revenues of $4 billion a year. Its hurtling pretax profits will hit an estimated $550 million in 1986, putting the firm close to the pinnacle among its peers. Numbers alone do not convey Drexel's power. Letters saying it is ''highly confident'' the firm can arrange financing have given some of America's most formidable raiders the go-ahead, and it has become the most influential company of its size anywhere. Drexel controls about half of the steeply growing, $150-billion market for the high-yield securities known as junk bonds, which account for an estimated 20% of all publicly held corporate debt in the U.S. Morgan Stanley and Merrill Lynch, tied for second place in junks, each underwrite only a fifth of Drexel's volume. Because of its unmatched ability to place these bonds with a network of buyers, the firm can raise billions of dollars in mere days. Drexel pioneered the junk-bond-financed takeover, enabling it to become a catalyst in the dealmaking free-for-all that is reshaping corporations galore. Yet because of unconfirmed rumors and press reports suggesting that the firm has been too closely tied to Boesky, Drexel's carefully nurtured reputation -- upon which its business depends -- suddenly has been called into question. Not only its integrity, but its reputation as the country's reliable source of capital to companies that want it in a hurry. A common belief of clients: ''If Drexel says it can do it, it's done.'' THE SEC, in its far-ranging quest for more evidence of insider trading, has not accused Drexel or any of its current employees of wrongdoing, and perhaps it never will. But the mere suspicion that Drexel might be implicated in the Boesky scandal has already had an effect. According to Brian Wruble of Equitable Life, which holds a $2-billion portfolio of high-yield bonds, the junk bond market experienced ''one of its most severe tests'' just after the Boesky news erupted. Within a few days, many bond prices dropped 4%. Drexel is enmeshed in the SEC's continuing investigations, which could last for months. Dennis Levine, whose illegal trades first put the SEC's bloodhounds on the scent, had been a Drexel managing director for a year before he was caught in May. Drexel had underwritten $660 million of financing for Boesky's arbitrage company, owned about 1% of its equity, and like several important Wall Street firms, maintained professional ties with Boesky himself. Drexel was involved as an investment banker in eight of the ten deals that the SEC reportedly is investigating, and the commission recently subpoenaed Drexel's records. Says Frederick H. Joseph, the Boston cab driver's son who has been Drexel's chief executive since 1985: ''I regret having acted as Ivan Boesky's investment banker. Credibility is critical.'' Joseph says the firm is concerned enough by the SEC's questions to have opened several internal investigations of its own -- a step he notes Drexel did not take after Levine was charged. ''We've got some flags flying on this,'' he concedes. Joseph has calculated that even if 99.99% of his 10,000 employees are perfectly honest, the firm may still have one criminal on its payroll. He declines to assert flatly that any individual Drexel employee is innocent. But he is quick to add: ''I don't know, today, of anything anyone at Drexel did that was wrong.'' The SEC's inquiries will almost certainly lead to more charges. The commission formally accused Boesky only of trading on inside information gleaned from Levine since February 1985, but it is hard to believe that the grizzled Boesky, 49, would have taken up the practice of insider trading for the first time so late in life, or that he would rely on only one source of tips once engaged in it. Boesky's Rolodex was crammed with some of the most important names in U.S. business; he made enormous numbers of phone calls daily, and reportedly the SEC has tapes of his business conversations. Levine apparently set up Boesky. Now that Boesky is singing to the feds, the probability seems high that he will bring down other Wall Streeters. The SEC would surely give them, in their turn, every incentive to rat on their insider trading contacts, and no one knows when the dominoes would stop falling. Should some Drexel executives go down, so in all likelihood would key bankers at other firms with which Drexel competes. Drexel's $1.3 billion in equity capital could be ravaged by penalties if the firm itself were convicted of wrongdoing. Civil law permits treble-damage awards for insider trading. The firm could also be sued by investors and corporations claiming to have lost money as a result of fraudulent trades. A Drexel lawyer, asked about the firm's possible legal exposure, says, ''There are too many variables to make any suppositions.'' As long as the SEC's probe continues, uncertainty will bedevil Drexel. Its dominance of the junk bond market may weaken, and with it the incalculable power of its junk bond boss, Michael Milken, 40, who runs Drexel's secretive trading operation in Beverly Hills and helps orchestrate the takeovers and leveraged buyouts that depend on high-yield financing. This year Drexel will reportedly pay Milken between $25 million and $55 million -- a staggering sum for the services of one man. Though Drexel will not divulge a figure and Milken is not talking to the press at all, it is easy to see why his services are prized. Carefully analyzing a company's creditworthiness, Milken's office issues those letters stating that the firm is ''highly confident'' it can raise the sums a client needs. As far as is known, Drexel has never failed to make good on these commitments, so these opinions have come to be considered as solid as a commercial bank's. But unlike a bank, Drexel needn't risk a dime of its own. By the time a client needs the cash, Milken can quickly market the necessary high-yield securities to a well-developed, exclusive network of clients (see diagram below). What people in the tight-knit community of junk bond aficionados fear most is that Drexel might lose the services of Milken. Opinion is divided about how much his departure would cost the firm. Joseph, visibly pained, refuses to discuss even the hypothesis that the SEC might find Milken guilty of some misdeed. He is more comfortable talking about the possibility of his associate's being run over by a bus. In that event, Joseph guesses, Drexel's revenues might decline by a quarter to a third. ''On revenues of $4 billion,'' he says grimly, ''that's not chopped liver. Michael's tremendously important.'' Because speculation about this and other gloomy scenarios is rampant, some clients that Drexel had been courting are waiting to see which way the wind blows. Other investment banks are trying to scoop them up. Says Leon Black, 35, Drexel's burly co-head of mergers and acquisitions: ''The competition is being opportunistic.'' Thus far there is no evidence that clients who know the firm well have deserted Drexel in its time of travail. But Drexel client Lear Siegler, a Santa Monica aerospace and automotive company, suddenly decided to share its business with rival bank Goldman Sachs. SUDDENLY, TOO, the people Joseph wants to hire are backing off. Drexel long ago became the Street's most aggressive recruiter of young business school graduates as well as experienced bankers from other firms, luring them with annual compensation that can reach millions of dollars a year. Drexel's free- spending recruiting practices helped create the hiring frenzy in investment banking that has given rise to a widely resented new class of Wall Street millionaires. Drexel had hoped to increase its staff by some 20%, or 2,000, over the next year. Joseph has been counting on many of the newcomers to bolster the firm's drive to broaden its line of financial services. Loath to remain overdependent on high-yield bonds, the firm has, for example, seized a top-ranking position in trading mortgage-backed securities, a lucrative business that it entered only three years ago. Drexel says all its departments, which include commodities, government-bond trading, and municipal finance, are moneymakers. The firm has been so successful at branching into other services that Joseph now claims that less than a quarter of Drexel's earnings comes from junk bonds. If the post-Boesky uncertainties drag on, Drexel could face another headache: Some of its most talented employees might grow worried enough to bolt to less- troubled firms. Hardly anyone of importance has left Drexel in years. ''You've got to understand,'' says a man who knows the firm, ''this place is Camelot.'' If key people start scampering now, they could take clients and carefully guarded company secrets with them, leaving weakened departments behind. Virtually all officers own stock in Drexel, a private corporation, which they must sell back to the firm when they quit. An exodus of senior bankers could shrink Drexel's equity, every penny of which represents an advantage in the capital-hungry world of investment banking. DREXEL'S commanding presence in junk bonds seems a bit scary in light of recent events. The mere possibility of new SEC revelations has introduced an unforeseen element of risk. Drexel plays a significant role in underpinning confidence in the junk market. Many investors rely on the firm's esteemed credit analyses of issuing companies, on its commitment to buy bonds when others won't, and on its willingness to help troubled issuers work out their financial difficulties. Drexel collects hefty fees on those workouts. Since 1977 the default rate of Drexel junk issues has averaged 0.6% a year, which compares with 1% for such bonds in general. Most experienced holders of these bonds have been drowning in profits for years as a result of favorable economic conditions and Drexel's promotion of the market. The bulk of the bonds are distributed among institutions that must answer to the public in one way or another. Among prominent holders are insurers (an estimated $10 billion), including Metropolitan Life as well as Equitable; savings and loans ($7 billion), including California's Columbia Savings & Loan; pension funds ($20 billion), such as GM's; and mutual funds ($15 billion). Because the junk market has grown so large, bad news for Drexel could be bad news for the economy. The sudden decline in prices the week after the SEC's announcement on Boesky gives a taste of what could happen. A junk bond trader at another firm reported that for one hectic day, Drexel was making markets in only a fraction of the junk bonds it normally does. A Drexel spokesman responded: ''That's absolutely untrue.'' ''Perceptions are very important in this market,'' says George Collins, chairman of the T. Rowe Price High Yield bond fund, which holds about $800 million of these securities. Might there be a run on junk bonds? ''There has already been a run,'' replies Collins. It appears that junk prices soon recovered some of the lost ground. James Grant, editor of Grant's Interest Rate Observer and no fan of junk bonds, says the market's reaction was milder than back in July when LTV defaulted and prices fell twice as much. Grant feels that the amount of buying that is still going on in the market reflects the ''manic end of a cycle when people have suspended their critical judgments.'' But Edward Altman, a New York University professor of finance and the author of a new book on junk bonds, says, ''I'm still bullish. Recession or major defaults are the only forces that could push the market down strongly.'' If the Boesky affair results in no charges against Drexel or its employees, the firm will still be left with plenty to worry about. The new Congress will make a fresh stab at regulating junk bonds. Last session, through a combination of intense lobbying and fat political contributions, Drexel and other investment banking firms overwhelmed the proponents of legislation that would limit purchases of junk bonds by savings and loan institutions with federally insured deposits. Wall Street won't carry as much weight with the Democrat-controlled 100th Congress. SEC Chairman John Shad opposes any curbs. The better approach is full disclosure in prospectuses, he says, which is already required in public offerings. Says Shad: ''Let the market assess the risk.'' Competitors, meanwhile, are out to grab more of Drexel's market share. Hardly any of the major houses still refrain from issuing junk bonds or from representing companies that launch hostile takeovers. For years bond buyers have been clamoring for more competition to break Drexel's hegemony. Says Alexander C. Schwartz Jr., a managing director at Prudential-Bache Securities: ''Investors would love to see five or six equally strong firms issuing and trading bonds, as in a normal market.'' More bad news would speed that development. Altman thinks the junk bond market could eventually wind up stronger for all that has happened, though some dislocations might occur in the meantime. If Drexel loses its commanding role in the market, competing firms will gain business as they learn the ropes, and new players will move in. That might be good news for future raiders seeking to replenish their war chests. SHORTLY BEFORE the Boesky news broke, First Boston and Merrill Lynch launched the riskiest, yet potentially most effective, attack yet on Drexel's junk bond business. In Campeau Corp.'s $1.8-billion offer for Allied Corp., a New York-based retailer, and Sir James Goldsmith's now-extinct $4.7-billion bid for Goodyear, those firms offered so-called bridge loans to the raiders. This species of loan provides clients with greater security than the ''highly confident'' letter from Drexel it is designed to supplant. The investment houses borrow some or all of the money. But until the firms refinance the bridge loans with junk bonds, or get their money back by selling assets of the acquired company, their credit is on the line. The danger is that the assets might not sell, or that market conditions could deteriorate before the firms get their money back from junks. Joseph, who rarely praises his competitors, acknowledges that bridge loans are a threat. ''It's an effective way of competing with us,'' he says. ''We , may have to do it now to compete with them. It raises our risks without a commensurate increase in our revenues.'' So along with the recent jitters in the junk bond market and all the turmoil turned loose by the Boesky affair, those aggressive folks at Drexel Burnham have another reason for wondering if their firm's days of blistering growth are over.