‘The Junk Bond King’ : Milken’s Empire Thrived Amid Beverly Hills Glitz
Every weekday, a steady flow of limousines pulls into an alley off Rodeo Drive and Wilshire Boulevard in Beverly Hills to deposit two types of rich people. Some go into Gump’s, the fancy department store. Others enter the far more exclusive, multibillion-dollar empire of Michael Milken.
It is a distinctly Southern California scene where the world of high fashion and glitter rubs shoulders with the world of high finance and business daring.
Even last Wednesday, the day the Securities and Exchange Commission filed a massive civil lawsuit that accuses Milken of being at the center of a giant insider-trading fraud, the limousines were still disgorging executives in pinstripes outside his Beverly Hills enclave.
Ten years ago, Milken turned his back on drab Wall Street and, in an unprecedented move, transferred his fledgling operation to his native Los Angeles.
Initially, he rented a suite of unmarked offices at 1901 Avenue of the Stars in Century City for his specialized, 17-person trading unit of Drexel Burnham Lambert, the New York investment house.
Six years ago, Milken and some partners paid $25.9 million for the five-story Gump’s building on Wilshire across Rodeo from the Beverly Wilshire Hotel. Milken took over the top two floors, charged rent to Drexel, and built a bridge across the alley to connect with Drexel’s growing corporate finance division.
By that time, Milken was becoming “the junk bond king,” and his realm was swelling to megadeals destined to change the face of corporate America. His West Coast troops were growing in number and his influence stretched across the country from the Beverly Hills power base next door to Gump’s.
Wall Street, the Establishment he disdained, was forced to look west to the intensely private, driven man who had tapped an unexploited vein of financing for takeovers that was much larger and more potent than anyone ever dreamed it could be. Along the way, his efforts created enormous wealth for a number of Southern California companies, revived some that were nearly dead and boosted others to the top of their fields.
Junk bonds are issued by troubled companies or those without a track record to sell investment-grade bonds. They pay higher interest rates to buyers because they are riskier investments. Milken systematically built an empire around them.
Corporate Raiders
First, he bought junk bonds at Drexel, then he underwrote them for companies that were unable to raise money through investment-grade bonds. And finally, he used them to unleash the corporate raiders who gobbled up companies big and small throughout the country in recent years.
Samuel L. Hayes III, an investment banking professor at Harvard Business School, likens Milken to J. P. Morgan, the turn-of-the-century financier and empire builder.
“Milken is comparable to Morgan in terms of the capacity to influence broad trends in the private sector of the United States,” Hayes said. “Milken’s creation and domination of the junk bond market does have a comparability to Morgan’s capacity to mobilize large amounts of capital at the turn of the century and be instrumental in shaping large parts of corporate America.”
So the shy son of a San Fernando Valley accountant became “Milken the Magnificent,” as one magazine dubbed him in 1984. The line of limousines outside his offices grew longer as captains of industry and would-be tycoons alike made the pilgrimage to Beverly Hills. Many left far richer, and a lot of the money stayed in Southern California.
Steady Investment Diet
Columbia Savings & Loan, with headquarters a few blocks east of Milken on Wilshire, grew from an ailing institution into a stellar performer on a steady diet of junk bond investments. Its chief executive, Thomas Spiegel, earned $3.9 million last year, more than any other executive in the thrift industry.
Fred Carr transformed a moribund insurance company, First Executive in Beverly Hills, into a financial powerhouse with assistance from junk bonds and Milken. Entertainment giants, such as MGM/UA, Lorimar, Spelling Productions and MCA, were customers of Milken’s services.
Los Angeles businessman Sanford C. Sigoloff used junk bonds to revive the bankrupt Wickes Cos. Malibu-resident Meshulam Riklis expanded his industrial conglomerate using junk bonds.
Lee Rich, an independent movie producer who was formerly a top executive with MGM/UA and Lorimar when they used Drexel’s services, said Milken was straight-forward and honest. “Whatever he promised you, he delivered,” Rich said.
Acquired Ownership
But Milken extracts a fealty from many of these customers. He and his employees acquired ownership interests in many of his deals. They exercised a control over the junk bond market that many felt was an unhealthy monopoly and which the SEC believes was the vehicle for a catalogue of securities law violations.
In her recent book about Milken and Drexel, “The Predators’ Ball,” author Connie Bruck recounts numerous instances in which Milken asserted power far beyond that of the normal financial adviser, including a reported confrontation between Meshulam Riklis and Milken.
In the book, Riklis recalled Milken giving him a business plan for his company over lunch and explaining: “You’re working for me. You own a lot of equity in your companies, but I own your debt. And your equity is not worth the paper it’s printed on unless your bonds are valuable. Riklis is working for Milken.”
From his base in Beverly Hills, Milken also developed enormous power over the operations of Drexel back in New York. After all, it was the roaring profits from Milken’s expanding junk bond business that transformed Drexel from an also-ran into the most profitable investment house on Wall Street.
Rapid Expansion
His junk bond operation grew from 17 to 250 employees, and Drexel’s other West Coast divisions grew, too. Corporate finance went from three people to about 100, and the number of retail brokers tripled to nearly 100.
Milken became one of the richest men in America, earning a spot on Forbes magazine’s list of the 400 richest Americans by 1986. At the time, Forbes said Milken’s net worth “far exceeds $500 million.”
Even as his influence and wealth increased, Milken shunned publicity. He lived quietly and securely in Encino with his family and devoted himself to 15-hour days behind an X-shaped trading desk on the fourth floor of the Gump’s building.
Milken created another layer of privacy by instilling tremendous loyalty among his employees, many of whom became millionaires as a result of working for him. Few have left his employ, and those who remain steadfastly refuse to talk to reporters.
Polite, Thoughtful
Marshall V. Davidson, managing director and head of the financial services group at the New York investment house of Kidder, Peabody, worked with Milken on some transactions before leaving Drexel last May. He described Milken as unfailingly polite and thoughtful to subordinates, even at the height of a trading frenzy when he might have three telephones going at once.
When Davidson resigned, he said, Milken was mildly upset because Davidson had not consulted with him first. When Davidson said he thought Milken had been too busy to be bothered, the junk bond king was slightly annoyed.
“Marshall, there is nothing more important to me than the people who are my friends and colleagues and you should have known that I would stop and talk to you about doing this,” Davidson recalled Milken telling him.
Yet Milken’s dominance of Drexel, particularly on the West Coast, fostered resentment among some of those who were not part of his coterie, particularly those who dealt with the brokerage’s smaller, “retail” customers.
“Retail brokers were viewed as second-rate citizens and we had virtually no contact with Milken and his people,” said John Justice, who left Drexel in January to join the Los Angeles office of Sutro & Co., a regional brokerage.
Kept Tight Watch
As an example of Milken’s isolation, Justice said, security guards kept a tight watch on who used the gangway between Drexel’s two buildings in Beverly Hills, and retail brokers were not allowed to use it.
“Mike Milken is a world in and of himself,” Justice said.
In the fall of 1986, that world came under intense scrutiny.
Ivan F. Boesky, the professional stock speculator in New York and a Milken confidant, agreed to plead guilty to securities law violations and to cooperate with the government’s continuing investigation of insider trading on Wall Street.
The press soon reported that Boesky had implicated Milken and Drexel, and the leaks forced a reluctant Milken to abandon his privacy. With the aid of his personal outside public relations consultants, Milken launched a reluctant offensive to polish his image and that of junk bonds.
“He felt that high-yield bonds were getting a bad rap,” said Steven S. Anreder, Drexel’s chief spokesman. “It wasn’t really for him personally.”
Nationwide Advertisements
Drexel ran nationwide advertisements touting the role of junk bonds in rescuing businesses and creating jobs. Milken began talking about using junk bonds to solve the Mexican debt crisis, and he was accessible suddenly to selected reporters for interviews.
In the months after the disclosures of Boesky’s allegations, the public also learned for the first time of Milken’s philanthropic side. The timing raised another set of questions in some minds.
In October, 1987, the state Department of Education honored 12 educators selected to receive $25,000 each for their accomplishments in a program funded by the Milken Family Foundation. Milken sponsored a luncheon for the educators at the Four Seasons Hotel in Los Angeles. The program is being expanded to five other states.
In September, 1987, the Bernard Milken Jewish Community Campus had opened its doors in Canoga Park. The center, named for Milken’s late father, was financed in part by more than $5 million from the Milken family.
Last March, the Variety Club of Southern California honored Milken with a humanitarian award for his work with handicapped children through their nationwide programs. The dinner in his honor raised a record $1.2 million, much of the money coming from Drexel employees and clients.
‘Involved Personally’
“He was very involved personally,” said Monty Hall, the entertainer and international chairman of Variety Club. Milken brought in Drexel as a corporate sponsor of Variety Club and spent a day himself at Universal Studios with a group of handicapped children.
Despite the sudden publicity, Milken had actually been making charitable contributions through the foundation at least since 1983. Records filed with the state, however, indicate that the contributions were smaller, and they were certainly less public.
Whether they were designed to soften Milken’s public image, his recent accessibility and the higher profile of charitable contributions could not stop the investigators from the SEC.
The allegations contained in the lawsuit against Drexel Burnham, Milken, his brother Lowell and four others constitute a massive enforcement action by the agency. The Milkens and Drexel have denied the allegations and vowed to fight them in court.
If the accusations, along with the criminal charges expected to follow in a matter of weeks, turn out to be true, the impact will ripple far beyond Beverly Hills and the house that Milken built.
