Pioneer, Billionaire--and, Soon, Unemployed : Michael Milken made Drexel a leader in ‘junk bonds.’ Now it has agreed to sack him.
By the time he was a high school student in the San Fernando Valley, it was clear that Michael Milken had a bright future. He was voted most likely to succeed, head cheerleader, king of the senior prom and president of the men’s honor organization. Classmates probably wouldn’t have been surprised if he became a millionaire by the age of 30.
By many estimates, Milken probably achieved that milestone, because by the age of 30 he was a fast-rising star at the fast-rising securities firm of Drexel Burnham Lambert Inc., managing its high-yield “junk bond” operations and reaping huge profits for the firm and himself. Last July, when he hit the age of 42, Milken had become one of the nation’s richest men, with an estimated net worth of close to $1 billion.
The news Wednesday that Milken will be fired by Drexel and will not paid his 1988 bonus of $200 million as part of the company’s settlement of securities fraud charges signals the end to the Milken era at Drexel. But it doesn’t close the book on his impact on corporate America.
Michael Robert Milken, the center of the nation’s biggest securities fraud investigation ever, arguably is the most significant and visionary figure in American business in the 1980s, the J. P. Morgan of his generation who unleashed a revolution in how businesses raise capital to finance growth.
Milken virtually single-handedly pioneered the modern junk bond market, now worth $180 billion in total bonds outstanding, and the fuel that has financed hundreds of small- and middle-size businesses and wave after wave of corporate takeovers. Milken’s actions directly or indirectly touched the lives of millions of Americans, from ordinary workers to high-powered corporate executives.
He also steered Wall Street into a new and far more aggressive role in takeovers--and not just by advising in them or financing them. He actually created and built up entire entities and corporate raiders who launched bids, partly with the aim of reviving the era of the owner-manager and making giant corporations lean and mean again.
“He has indelibly changed the course and face of the investment banking business and the economy as a whole,” said Fredric Roberts, head of a Los Angeles investment banking firm bearing his name and Southern California district director for the National Assn. of Securities Dealers.
Yet, for all his contributions, Milken’s name is hardly a household word. He shunned publicity and did his deal-making in relative secrecy.
He also has been a man of sharp contrasts. He has an unusual recollection of detail and could recite the terms on every high-yield bond in America. Yet he reportedly forgot who was the best man at his wedding. He is an intense workaholic who got to the office by 4:30 every morning and typically worked 15-hour days. Yet he is described by friends as a devoted family man who, until his latest legal troubles mounted, spent long hours with his three children, all of whom have suffered from various health problems.
History has yet to render a final verdict on Milken as a saint or a sinner, or something in between. His crowning achievement--the creation and growth of the modern junk bond market--has yet to weather a serious recession. And while his junk bond machine transformed Drexel from a second-rate securities firm into one of the most powerful on Wall Street, his alleged transgressions as its junk bond chief ultimately could be the firm’s undoing.
While Milken’s junk bonds helped companies create thousands of new jobs, they also led to layoffs of workers at firms taken over by raiders financed by junk bonds. And while Milken’s family foundations donated millions of dollars of his profits to various charitable causes, he also is accused of questionable practices that netted exorbitant profits for himself and colleagues.
But whatever the future of Drexel and its once-star junk bond chief, it is clear that Milken is an exceptional individual who was driven from the very beginning with unusual determination.
Born in the San Fernando Valley as the son of an accountant, Milken gained business experience as a teen-ager helping his father prepare tax returns. Attending Birmingham High School in Van Nuys, he served as head cheerleader on a squad that included future actress Sally Field. He was voted the “most spirited” and “friendliest” member of his graduating class of 1964.
“He was very successful in everything he did, whether it was sports or school service or debate,” recalled Harry Horowitz, a Milken friend since childhood who followed him to Drexel and now serves as a senior vice president there. “He’s always been in a leadership role in anything he’s been involved with.”
Milken then earned an undergraduate degree in business administration at UC Berkeley, avoiding the anti-war campus unrest of the time, serving instead as president of his fraternity. As a sidelight, Milken managed investments for a small group of clients, eating losses himself in exchange for half the profits.
After marrying his high-school sweetheart, Lori Hackel, Milken moved to the Philadelphia area, where he attended the University of Pennsylvania’s Wharton Graduate School of Business, becoming one of its brightest students and working part time in the Philadelphia office of a precursor to Drexel Burnham Lambert.
While at Wharton, Milken began to take an interest in the securities that would make him legendary.
Junk bonds at the time were primarily debt issues that were once highly rated but had fallen in value and increased in risk when the issuing companies fell on hard times. Milken believed that investors were overly pessimistic about these bonds--which often could be bought for as little as 20 cents or 30 cents on the dollar--and that their higher yields more than compensated for their added risk of default. Investors holding diversified portfolios of many junk bonds would earn higher profits, even if some of the bonds defaulted, he reasoned.
Milken’s shrewd trading of junk bonds soon began making millions of dollars for Drexel--and for himself and his band of hard-working traders and salesmen. Finally, in 1978, Milken asked to move the junk bond trading operation from New York to the Century City section of Los Angeles. (It moved in 1983 to its present home on Rodeo Drive in Beverly Hills.) Out West, Milken felt he could work long hours yet still be home in time for dinner with his family. Milken, friends say, also wanted to be close to his father, who was then dying of cancer.
Drexel executives were reportedly uncomfortable with the move because it also would give Milken more independence. But they granted it because they had no choice, given Milken’s megabuck success.
Soon, Milken found that trading junk bonds wasn’t enough. He and Drexel began underwriting new junk bonds, issued by companies that were too small, young or risky to get conventional bank loans or issue conventional high-rated corporate bonds.
Milken viewed the issuance of junk bonds by small- and medium-size companies as part of a crusade to change the face of corporate America. Milken correctly felt that those companies were the economy’s true job creators, and allowing them access to capital markets would unleash a wave of entrepreneurial innovation that would make America more competitive.
To spur this crusade, Milken also created and unleashed a stable of corporate raiders whose hostile takeover bids were made possible by junk financing. Milken-backed entrepreneurs--such as T. Boone Pickens Jr., who launched unsuccessful bids for Phillips Petroleum, Gulf Oil and Unocal; Ronald O. Perelman, who took over Revlon, and Carl C. Icahn, who took over TWA--would displace managements that had grown tired and stale, Milken reasoned.
“Capital is no longer a scarce resource,” Milken told a group of high school students in a 1986 speech. "(The) scarce resource today is management, knowledge, vision, dealing with change, recognizing what people want and need in the future and the ability to work together.”
Showed Genuine Interest
Businessmen were mesmerized by Milken’s broad insight, knowledge and charm.
“The guy was extremely supportive,” said Robert Berglass, chairman and president of Dep Corp., a Rancho Dominguez-based manufacturer of cosmetics and other personal-care products. “I got a feeling that he had a genuine interest in our ideas as to how to grow.” Since Drexel became its investment banker in 1986, Dep’s sales and employment have more than doubled, Berglass said.
“I’d talk to Mike from time to time just to get ideas,” said Eli Broad, chairman and chief executive of Kaufman & Broad, a Los Angeles home builder and occasional Drexel client. “He had a pretty broad window on the world. He must have talked to 200 people a day, so he was a good source of information and ideas.”
Companies ranging from MCI to Metromedia, from Holiday Inns to Levitz Furniture, used Drexel-underwritten bonds to finance growth or takeovers.
“Mike’s a builder; everything he’s touched has been the better for it,” colleague Horowitz said. “These companies didn’t have opportunities to raise money in the capital markets. Some were in industries that didn’t even exist before.” Entire industry segments, such as health maintenance organizations, home building, entertainment and hotels, derived much of their financing through Drexel’s junk juggernaut, Horowitz notes.
Milken also is described by colleagues as a supportive, although somewhat harried, manager. He typically slept only three or four hours a night at his Encino home and was at his desk every morning at 4:30, hours that his staff often kept as well. He had no office, instead occupying the middle of an X-shaped desk where he was constantly on the phone or monitoring his staff of more than 100 traders, whom he saw “as his extended family,” as one colleague put it. Clients or others seeking appointments with Milken sometimes had to meet him at unusual times--like 5 a.m. on Sundays.
Yet Milken took great pains to be with his family, particularly his daughter, who suffers from a form of epilepsy, and his two sons, Horowitz said. This past week, pulled away from his family to New York to plan his legal strategies, he brought an extra set of his childrens’ school books so he could help them with their homework, Horowitz said.
But despite the image of Milken as a devoted father and charitable giver, federal investigators and critics believe that he built his junk bond empire partly on deceit and manipulation.
Investigators believe that institutions and individuals may have been pressured into buying and selling junk bonds through an incestuous system of favors and obligations. Junk bond issuers often were asked to buy junk bonds issued by other corporations. Those that did not often found themselves frozen out of future Milken deals.
Drexel and Milken defenders say such practices were necessary to maintain orderly markets in junk bonds where there were few buyers and sellers anyway.
Regulators might have overlooked such practices were it not also for alleged illegal activities related to Milken’s involvement in corporate takeovers. Although takeovers account for only about a fourth of junk bonds issued, the Securities and Exchange Commission and federal prosecutors charge, among other things, that Drexel’s junk bond operations engaged in an array of securities violations, including market manipulation, inadequate disclosure, “parking” of securities to hide their true ownership and other infractions.
Milken is expected to be indicted separately on these charges soon, possibly this week. And Drexel’s expected guilty pleas will not help his defense, a situation that Milken supporters at Drexel say amounts to a cold betrayal of the man who put the firm on the map.
Repairing His Image
People close to Milken say he is convinced of his innocence and is willing to undergo a lengthy trial to prove it. He also feels misunderstood and maligned by the public and the news media--but his reluctance to talk to reporters reinforced such an image.
Accordingly, Milken has moved in the past year to try to repair his public persona. Once totally inaccessible to the media, Milken recently has granted interviews, often discussing one of his newer interests: how to solve the Third World debt problems by refinancing underdeveloped nations’ bank loans.
He also has taken pains to publicize his charitable activities, which ranged from taking underprivileged children to baseball games to donating millions of dollars to charities. Among his favorite causes: cancer research, youth organizations and Jewish community organizations.
“Mike always had a vision of being successful and wanting to help others from behind the scenes,” Horowitz said.
Yet although Milken’s spirits are high, the legal pressures have taken their toll, colleagues and friends say. “Mike’s worked for Drexel for 17 years, he never worked anywhere else,” one friend said. “Now all that is being taken away from him.”
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