Helped Create Takeover Turmoil : Whiz Kid of Junk Bonds a Figure in Insider Probe

An ordinary-looking 40-year-old, Michael Milken lives the quiet family life in Encino. But his activities have created plenty of noise in corporate America.

He has helped thrust corporations into the turmoil of seemingly endless takeovers, infuriating executives and employees. And he is now at the center of a stunning investigation into the world of Wall Street--one that has shaken the stock market and stirred suspicion and some panic among the nation’s top investment professionals.

Milken, both respected and feared as a financial whiz kid, is the architect of the modern-day market for so-called junk bonds, the high-yield, high-risk forms of corporate debt that have been to used to finance takeovers and corporate restructurings.

Working from a frenzied trading room in Beverly Hills, Milken’s prodigious effort to create a junk-bond market, now valued at about $100 billion, has made him spectacularly wealthy and helped transform his firm, Drexel Burnham Lambert Inc., from an also-ran among investment houses into one of Wall Street’s most formidable firms.

As Drexel has succeeded in taking away business from some of the nation’s most blueblood brokerage firms and creating a whole new market in seemingly risky debt, Wall Street’s view of Drexel has gradually shifted from scorn to envy. So successful has Drexel become that it reportedly earned revenues of more than $2 billion last year. And competitors have scrambled to get into the junk-bond market themselves.

But today Milken faces pressures distinct from those of the securities markets that he seems to have mastered. A widening investigation into the insider trading scandal involving professional speculator Ivan F. Boesky is increasingly focused on Milken and Drexel.

Drexel Burnham and trading by some of its officials are now under investigation by the Securities and Exchange Commission, the government’s watchdog of corporate America. The SEC hopes to learn more about Boesky’s relationship with several other individuals, including Milken.

Describing Milken is often an exercise in hyperbole.

He is sometimes called a modern-day J.P. Morgan, the legendary turn-of-the-century financier, and has variously been described in the financial press as “Milken the Magnificent” and the “Oral Roberts of junk bonds.” Forbes magazine once described Drexel’s operations in Beverly Hills as “Mike Milken’s Marvelous Money Machine.”

Words like “genius” and “smartest guy I know” are common among associates who have grown rich by working alongside Milken during his astonishing ascendancy.

Once a Cheerleader

Milken is probably best described as a a local-boy-made-good who proved, much to the amazement of Wall Street, that you can play in the major leagues of U.S. finance even if the park is far from New York City. He was once a high school cheerleader in the San Fernando Valley, where he grew up, and was graduated with a mathematics degree from the University of California at Berkeley.

He now operates out of an unimposing office building on Wilshire Boulevard, above the elegant gift store, Gump’s, and across the street from swanky Rodeo Drive.

From that vantage point, he has persuaded America’s conservative institutional investors--mutual funds, pension funds, insurance companies--that junk bonds are safe places to put their money.

High returns on junk bonds have proved particularly attractive to money managers, who have seen yields on other investments fall sharply with the general decline in interest rates. But questions about the safety of junk bonds and their network of traders have nagged Milken and Drexel for several years.

Particularly tough questions have been raised about a seemingly tight club of junk-bond clients and the multiple roles played by Milken and his associates. It’s sometimes unclear whether Milken wants to be a broker or private investor.

In one recent instance, a new investment partnership known as Pacific Asset Holdings proposed to buy a controlling interest in Western Union by injecting $250 million in new capital into the ailing firm. Among the limited partners contributing to Pacific Asset’s coffers were the Bass brothers in Texas and Milken and his brother, Lowell, who also works in Drexel’s Beverly Hills office. At the same time, though, Drexel was acting as Western Union’s financial adviser. Pacific Asset said it was operating independently, not working in concert with Drexel or Milken.

Resentment over Drexel’s business methods has run deep in more traditional parts of the corporate and investment banking world. Drexel is sometimes called the investment banking house that Wall Street loves to hate.

One anonymous investment banker recently told Business Week that “Drexel is the Libya of investment banking” because it used “terrorist tactics” to maintain its hegemony in the junk-bond market. Drexel executives label such talk sour grapes.

Drexel does more than just issue and trade in high-yield securities. But the junk-bond operations have provided the money that helped propel Drexel into the role of a major player in municipal bonds and the sale of government and mortgage securities.

The news that Milken is at the center of the SEC’s current investigative efforts has depressed the junk-bond market and battered the stocks of companies with close ties to Drexel. Columbia Savings & Loan Assn. in Beverly Hills, a large junk-bond buyer, saw its stock take a pounding earlier this week before rebounding Wednesday.

Milken oversees a super-active sales and trading staff of 150 people that begins working about 5 a.m. and doesn’t quit for 12 to 13 hours. “No one in America works as hard we do,” a Drexel salesman once bragged in an interview with The Times.

Drexel oversees the initial sale of the bonds, then provides an active but private resale market. It has been said that the market exists largely in Milken’s head because he may be the only one with full knowledge of who owns the bonds and might want to sell. Drexel controls more than half of the junk-bond market.

Should Milken leave Drexel, it would leave a gaping hole in the market that he has labored so hard to create. One junk-bond expert who knows and admires Milken said his departure could depress the value of some junk-bond securities by as much as 10%.

Milken admirers and long-time associates say they would be astonished if he participated in any insider trading scheme, as Boesky has admitted doing. Boesky last week agreed to pay a $100-million penalty and plead guilty to a felony charge of securities fraud because he traded on secret information about impending mergers.

Milken isn’t that dumb, they argue, and insider trading wouldn’t be worth the price. “He just wants to be the best at what he does,” said one financier who spent many hours learning the junk-bond market in Drexel’s Beverly Hills trading department.

‘All-American Type’

“I find it hard to believe Michael has done anything wrong,” said one vice president at Drexel. “He’s your all-American type of guy.”

Although money may not drive Milken, he certainly has enough of it. He reportedly made about $40 million last year and has a net worth that has been estimated to exceed $500 million.

Despite his astonishing success, Milken is virtually unknown to the public, in part because he detests publicity.

One Milken trademark is a dislike for wasting time--and that, he figures, means rarely talking to reporters. Not surprisingly, he has not commented about the reports that he is now under investigation by the Securities and Exchange Commission.

So secretive is Milken that he would not allow his company to take a picture of him for the firm’s 1985 annual report. In fact, despite his importance to the firm, his name isn’t even in the report.

But, the more Milken tries to keep his head down and the more successful he becomes financially, the more curiosity about him has grown and the more the business press has sought to pierce his self-imposed shield.

By these accounts, Milken is a physically unimpressive man who wears off-the-rack suits. He only recently gave up his unstylish American car for a Mercedes, and his home in Encino, although certainly substantial and attractive, is modest, considering his means.

Milken worked in Drexel’s New York offices until the late 1970s, when, as the story goes, he simply tired of the Eastern winters that froze the pipes of his house, iced up his driveway and prevented his children from playing outside.

Milken, the workaholic, knew he could easily add three hours to his workday by working in California. So he simply persuaded Drexel to move the junk-bond operations to Los Angeles.

He has a reputation for making his own rules and doing things his own way.

One hobby is reading bond prospectuses, not exactly light reading. And, although he owns a tennis racket, no one can figure out when he plays. Associates say they have to make appointments to see him, even on weekends.

Milken used to spend several hours a day commuting from his home in suburban Philadelphia to Wall Street. Surprisingly, he commuted by bus so he would have the solitude he needed to work. He wanted to avoid his associates and competitors, who took the train.

Milken has been interested in junk bonds ever since his days at the Wharton School of Finance, where he studied in detail the connection between bankruptcy and low ratings on corporate securities. It was at that time that he became persuaded that the high returns on low-rated bonds more than outweigh the risk of a default.

It is a theme he has been preaching ever since.

Once institutional investors accepted his theory, Milken became a financier with few peers because of his ability to line up billions of dollars on short notice in the securities market. That meant few companies in America were immune from attack if a corporate raider had the formidable resources of Drexel Burnham Lambert behind him.

This has often made Milken a very unpopular figure.

On one Sunday morning earlier this year, a group of flight attendants, in uniform, marched outside Milken’s home because of his ties to corporate raider Carl C. Icahn, who had just taken over Trans World Airline. The protesters carried signs suggesting Milken was greedy and anti-labor. It was a protest that Milken apparently had little sympathy with. Those “stewardesses drove Mike up the wall,” an associate of Milken told Business Week. “He was furious.”

Staff writers Karen Tumulty in Washington and Jane Applegate in Los Angeles contributed to this story.

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