Michael Milken Put Drexel in Big Leagues With ‘Junk Bonds’
Michael Milken, 42, who was charged Wednesday with insider trading, is the inventor of the modern market for high-yielding “junk bonds.”
The profits from his junk bond operation, now based in Beverly Hills, transformed Drexel Burnham Lambert from a nondescript second-tier investment banking firm in the 1970s to one of the nation’s most powerful investment houses. Through the creative use of junk bonds, Milken and Drexel became leading forces in financing this decade’s wave of corporate takeovers, mergers and leveraged buyouts.
Some estimates place his personal net worth at more than $1 billion, although he has never lived flamboyantly. Milken, his wife and children live in a comfortable but not ostentatious house in Encino.
The civil complaint filed against Milken and Drexel in U.S. District Court in New York followed months of speculation. Milken is said to have been responsible for financing a limited partnership for financier Ivan F. Boesky in 1986, thus starting a relationship between Drexel and the man later implicated in Wall Street’s most serious insider trading scandal. Information from Boesky later led the Securities and Exchange Commission and federal prosecutors to open an investigation of Drexel.
Since the investigations began in 1986, Milken has taken a lower profile at Drexel, ceding responsibilities to other members of his junk bond group.
A native of the San Fernando Valley, Milken is senior executive vice president in charge of Drexel’s high-yield and convertible bond department. Milken had joined the Philadelphia office of what was then Drexel Harriman in 1969. He had graduated with top honors from the University of California at Berkeley. He later excelled at the Wharton School at the University of Pennsylvania, from which he obtained a master’s degree in business.
Milken originated the idea of floating high-yield bond issues to raise capital for medium-sized, up-and-coming companies that previously would have had to rely exclusively on bank loans. He also discovered a huge market for these bonds among investors eager for their high interest rates.
Milken in the 1970s developed a loyal coterie of enthusiastic investors and was courted by entrepreneurs and would-be corporate raiders eager for his help in raising millions of dollars in capital. With his ability to raise huge pools of cash to back takeover attempts, Milken and Drexel have turned little-known businessmen into corporate moguls.
Milken’s junk bond group became such a center of profit at Drexel’s New York headquarters that he came to command a great deal of independence. In 1978, Drexel accepted his decision to move the junk bond group to Beverly Hills. Under Milken, the group grew from a handful of employees to about 300.
The firm also allowed him to set up and control a series of independent partnerships for the benefit of himself, certain Drexel employees and other investors. These partnerships have come under scrutiny by a House committee.
Milken established an annual convention at which some of the nation’s wealthiest investors got together with executives from companies eager to raise money by floating high-yield bonds. Known officially as the Drexel Burnham Lambert Institutional Research Conference, the annual extravaganza at the Beverly Hills Hotel became known as the Predators’ Ball, because of the number of well-known corporate raiders in attendance. The name became the title of a recent highly critical book about Drexel and Milken.