(FORTUNE Magazine) – The first morning Ken Moelis and his team of investment bankers showed up for work at Donaldson Lufkin & Jenrette's Los Angeles office, they found the doors locked. It was March 1990, and Moelis and his eight-man crew had arrived at 6 A.M.--which was when their day had always begun at their previous place of employment, Drexel Burnham Lambert's infamous Beverly Hills office. But as they quickly discovered, the small DLJ office didn't feel any particular need to open its doors before the markets opened in the East; indeed, the ex-Drexel hands wound up waiting until nearly nine before anyone from DLJ showed up.

Today there's no question about when the DLJ Los Angeles office opens. It opens early. And there's no question about who's the Big Dog in the operation. It's Ken Moelis. In the space of seven years, DLJ's once sleepy West Coast beachhead has become a juggernaut, both within the firm and on Wall Street. It is, in fact, the most powerful U.S. branch office of any Wall Street firm, employing close to 100 bankers and generating hundreds of millions in revenues. What's more, it aggressively pursues its own deals and operates as very nearly an independent fiefdom.

A big, aggressive, independent L.A. office that can do its own deals? Sound familiar? Sure it does: That was one of the characteristics of Drexel back in its 1980s heyday, when Michael Milken ruled the roost. And the similarities don't end there. DLJ is the dominant player in the booming junk bond business that Milken created, underwriting some 20% of new junk bond issues (see chart). It plays in the hostile-takeover arena--Moelis, for instance, is currently advising Hilton Hotels CEO Stephen Bollenbach in his bid to take over ITT. It backs Wall Street renegades--and former Drexel clients--such as Carl Icahn. It does multiple deals with captive clients, just as Drexel used to do. Without question, one can carry this analogy too far--for one thing, nobody has accused DLJ of crossing the line from aggressiveness into illegality. For another, DLJ's Los Angeles office doesn't control its own capital, and has no sales or trading operations, which are usually where Wall Street's most serious abuses occur--including Drexel's. Still, there is no question that DLJ's willingness to hire dozens of former Drexel bankers has been largely responsible for its transformation from a second-tier player into one of the nation's most powerful investment banks, just a step below Goldman Sachs, Morgan Stanley, and Merrill Lynch. "You've got to hand it to DLJ," says Peter Solomon, head of his eponymously named firm. "They really have assumed much of Drexel's business."

DLJ has always been something of a maverick firm. Founded in 1959 as a white-shoe research boutique, it attracted serious press attention in 1970 when it became the first Wall Street firm to go public--in defiance of the New York Stock Exchange. In the 1980s it was an early player in the hostile takeover game, advising T. Boone Pickens in some of his raids. Later it became a niche player in junk bonds and a big player in "merchant banking"--generally defined as raising funds to take stakes in companies a firm is also financing. But even at the height of the 1980s takeover madness, DLJ never got so carried away that it took the kind of excessive risks that marked such firms as First Boston--and, yes, Drexel. As a result, DLJ was in the perfect position to pick up the pieces when Drexel shut its doors in February 1990.

DLJ had two key insights back then. First, the firm realized that junk bonds, then in a severe slump, were not going to wither away just because Drexel was no longer around. And second, it knew that not everybody who had worked at Drexel was a crook. What Drexel alums did share was a tremendous aggressiveness about landing deals; the way DLJ figured it, the firm needed a jolt of that attitude. ("We're deal junkies," concedes Peter Nolan, who came from Drexel with Moelis and now serves as the co-head of the L.A. office.) "There were all these talented guys," says one banker in the know, "but...Goldman and Morgan Stanley wouldn't touch 'em." But DLJ began hiring scads of former Drexel hands.

Moelis was perhaps its biggest catch. Smart but not arrogant, the 38-year-old Moelis grew up in the suburbs of New York City and graduated from Wharton before joining Drexel in 1981. He was soon transferred to the Beverly Hills office. Though never a senior banker at Drexel nor a close confidant of Michael Milken, the deal-hungry Moelis soon got to work for the likes of Steve Wynn, Ted Turner, and Bollenbach. "I first met Steve [Bollenbach] doing a deal for him when he was CFO of Holiday Inns in 1986," says Moelis. "Marty Siegel was the head banker on the deal, and one day he just disappeared and never came back. I ended up filling in." In fact, Siegel left because he was under investigation for insider trading. (He would later plead guilty to violations of securities law.)

Because he was an investment banker--and not a part of Milken's high-yield trading and sales groups--Moelis was never linked to any wrongdoing at Drexel. And though most top-tier firms stayed away from him after Drexel closed, he had feelers from Bear Stearns and First Boston, as well as DLJ. "Ken came to talk to me about where to go," says Stuart Subotnick, the No. 2 at Metromedia, which is controlled by former Drexel client John Kluge. "He wanted to stay in L.A., and I told him, 'DLJ looks right.' They really want to build an office out there." So Moelis and his team, in effect, took over DLJ's L.A. office. They brought with them clients such as Kluge and Icahn. Indeed, since joining DLJ, Moelis has done a number of deals for both men, including a $930 million stock offering for Kluge and a restructuring of TWA for Icahn in 1992. The firm also recently collected a $4 million fee from Icahn for briefly representing him in his aborted run at RJR Nabisco.

In the early 1990s, the main business for the DLJ Los Angeles office was "restructuring"--which at the time was a euphemism for cleaning up the mess the 1980s had created. The irony, of course, is that many of the deals that had to be untangled had been Drexel creations--and now it was the ex-Drexel hands who were charged with fixing them.

Junk bonds were a different story. In the wake of the S&L crisis, the federal government had ordered banks, S&Ls, and insurance companies--the biggest buyers of Drexel-issued junk--to clear their balance sheets of the stuff. Not surprisingly, that caused the junk bond market to tank; new junk bond issues virtually dried up.

Gradually, though, junk came back, just as DLJ has predicted. Except that the demand for high-yield bonds didn't come from S&Ls. It came from an entirely new source: mutual funds. Spurred by a tremendous influx of cash, mutual funds and hedge funds began gobbling up junk in the early 1990s. Today such funds own 55% of all junk bonds, vs. 30% in 1989. And as the junk market came back, DLJ's L.A. office returned, in a sense, to its roots. In 1993, DLJ underwrote over $8 billion of junk--and most of those deals were done out of Los Angeles. Almost overnight, DLJ had become the No. 1 firm for junk bond underwritings.

One thing that sets apart DLJ's L.A. office is that, despite its junk bond expertise, it doesn't specialize in anything. DLJ officials see this as an advantage. "The guys in the L.A. office are really generalists. They can do a debt offering, a takeover, or a restructuring," says Hamilton "Tony" James, the chairman of DLJ's banking group. Peter Nolan believes that the flexibility his group offers is a direct result of their Drexel days. "I think working at Drexel gave us two times the experience of a normal banker because we did so many deals and so many different kinds of deals," he says.

Another thing that marks the L.A. office is that it is a huge profit center for the firm. DLJ won't reveal how much revenue L.A. pulls in, though James boasts that the office "has more revenues than Paine Webber's investment banking business"--which Paine Webber says was $392 million last year. That means DLJ's L.A. office accounts for some 10% of DLJ's total revenues of $3.4 billion.

And that's just the quantifiable effect. Indirectly the L.A. office in some ways drives the entire firm. First, there's the old Drexel attitude, which has rubbed off on the rest of DLJ. Then there are the deals that the L.A. office generates that don't show up on its own P&L. Example: L.A.-based managing director David Dennis helped client Tenet Healthcare sell its kidney-dialysis subsidiary, Total Renal Care, to DLJ's own merchant banking group. On a $10 million investment, Total Renal Care ending up returning close to $200 million to DLJ's merchant bankers over the next year.

Tenet, in fact, exemplifies another way the L.A. office generates business for DLJ. To put it bluntly, when the office gets its hands on a captive client like Tenet, it can spin the company through any number of different transactions (see box).

Tenet Healthcare is the firm's biggest client. Now the nation's second-largest hospital company, after Columbia/HCA, it's a company with a troubled past. Formerly National Medical Enterprises, it was caught engaging in massive Medicaid fraud at its national chain of psychiatric centers in the early 1990s. The scandal involved horrific allegations, such as bounty hunters being hired to corral disturbed patients. In 1994 the company paid the government a $362 million fine, the largest penalty ever paid by a health care company. It also paid another $230 million to settle various lawsuits.

In the midst of all this, a special committee of the board removed founder and CEO Richard Eamer and replaced him with board member Jeff Barbakow, who was a DLJ managing director in the L.A. office. Barbakow, needless to say, still has many friends at DLJ, starting with David Dennis, whom he had hired out of business school.

"We have a very close relationship with Tenet," says Dennis. "I talk to them three, four, five times a week." No wonder. After Barbakow became CEO, the company became almost a fee machine for DLJ. Because of the company's troubles, Barbakow felt compelled to sell assets, namely the psychiatric centers. And because Barbakow wanted to compete with giants like Columbia/HCA, he was buying assets--namely companies that would expand its hospital business. Over the past three years Dennis has raised some $12.5 billion for Tenet, generating tens of millions of dollars in fees, including a $3 billion junk offering in January, which was part of a complicated transaction to purchase OrNda HealthCorp. That deal is the second-largest high-yield underwriting of all time, after RJR Nabisco's leveraged buyout in 1989. As a result of clients--and deals--like that, DLJ now ranks fourth on Wall Street in fee income, up from 13th in 1990.

Which may also explain why rivals, especially at Merrill, Morgan Stanley, and Goldman, now take potshots at the new DLJ. "The work they do is just chickens and pigs stuff. Ken Moelis is great at restructuring and junk, but he's in over his head with ITT/Hilton," sniffs a senior banker whose firm has been cut out of the big takeover battle. Adds another: "DLJ's L.A. office does stuff we would never allow here. They market themselves to clients separately; they recruit on their own. What does that say about DLJ?"

But Barbakow of Tenet objects to the implication of that remark. "It's different from Drexel," he says. "There, the L.A. office was headquarters. New York was the branch. Here New York is definitely in control." And that's not going to change. It's the New York headquarters that has the trading floor and the sales force--and, most important, controls the firm's capital. "Bad stuff happens when there is a lack of oversight of capital," says Moelis. "Here there's definitely oversight of capital."

In effect, they're attempting a tricky bit of Wall Street management at DLJ: giving a powerful office enough freedom to pursue business its own way, but with enough controls to ensure that it remains committed to the larger organization. Which, when you think about it, is another lesson DLJ learned from watching Drexel.