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The INDICTMENT OF MICHAEL MILKEN : COMMENTARY : How Milken Machine Financed Companies, Takeover Raids

Times Business Columnist

So Michael Milken, the fabled “junk bond” king of Drexel Burnham, is now formally charged with violating the securities laws. The smart money said it couldn’t happen. When Ivan F. Boesky was charged with insider trading in November, 1986, a sophisticated New York executive swore that Milken wouldn’t be involved. “Mike’s too smart for that,” the executive said.

Well, however smart he was, the federal government Wednesday charged that Mike Milken was involved. It charged him with racketeering, fraud and securities law violations focusing on the takeover activity of the early 1980s--and asked that Milken personally forfeit more than $1 billion of previous salary and securities gains.

Milken denies the charges and the case could proceed to trial later this year.

But charges aside, questions about Milken arise naturally. What exactly did Milken do that people should revere him and denounce him?

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A Force in World Finance

He made his mark. Through his formidable intelligence and drive, he built a market in high-yield, or junk bonds, that has now grown to $180 billion. He became a force in world finance at an incredibly young age--he is still only 42. He provided financing for Frank Lorenzo’s Texas Air, for Rupert Murdoch’s Fox Television, for William McGowan’s MCI, the giant-killing long distance telephone company.

He provided financing for T. Boone Pickens Jr.'s raids on oil companies and he was at the center of the takeover wave of the 1980s. With good reason, people said Milken had more influence than any financier since J. P. Morgan--the giant who backed Thomas Edison and put together U.S. Steel and American Telephone & Telegraph Co. Will Milken’s legacy be that grand? Possibly not. Much depends on the eventual outcome of the legal proceedings he faces, but his involvement in the takeover game may shadow his brighter accomplishments.

Who is Mike Milken? He’s a natural businessman who understood his times and took advantage of change.

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If you saw him up close, you couldn’t fail to be impressed. He ticks off bond prices of companies he knew years ago, and tells business stories with great relish--of how he financed the wonderful Toys ‘R Us chain out of the bankrupt Interstate Department Stores.

Milken’s eye for value is acute. He made his first millions on real estate investment trusts of the 1960s that had gone bust in the early 1970s. Milken saw through the busted finances to the valuable real estate beyond and bought the bonds of REITs.

With similar insight, he saw residual value behind bonds of industrial companies that had sunk below the investment ratings that traditionally governed debt of corporations. Milken realized that investment ratings were more important in former times when there was not enough capital to go around.

But in the 1970s, Milken saw that financing was more available than many people believed. “Capital is abundant, " he said on more than one occasion.

And that meant that small companies could tap the capital markets that once were restricted to large blue chip enterprises. The proudest boast of Milken and Drexel Burnham Lambert, the firm he went to work for while still studying at the Wharton School, is that they brought financing to entrepreneurs and small companies that had trouble borrowing from banks.

But what made Milken notable was that he went beyond simple financing. He propped up companies in the recession of 1981-82 when small firms were going out of business because they couldn’t keep up interest payments to their banks. But Milken took ownership shares of the companies he backed so that they could continue operating.

Milken Controlled Market

Milken could provide such security because he controlled the market for their debt. Milken organized bond sellers and buyers--borrowers and lenders--into a club that included insurance, finance and industrial companies, all lending to and borrowing from each other and backing whatever investments Milken chose.

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It was this machine that not only financed Texas Air and MCI, but also takeover raids on Phillips Petroleum, Union Carbide and many others. And fear of Drexel’s financing power drove other companies to restructure, laying off employes and saddling themselves with debt.

The effect of the junk bond takeover game will be debated for years, but there’s no denying there was a tax angle at its heart. If a company loaded up with junk debt, its interest costs precluded paying any taxes. So the amount that would have paid taxes became available to pay interest on the junk bonds. In that way Milken made a partner of Uncle Sam’s tax system.

And now the government charges that stock manipulation was part of that machine’s backing for takeovers.

So what can be said of Mike Milken today? That he’s rich, for one thing. Milken made more than $550 million in 1987, according to the government’s charges. Forbes last year estimated his fortune at $800 million.

But he’s also facing very serious charges and the possibility of years in jail.

And what of his legacy? Milken’s importance should not be overstated. In recent years, Milken liked to talk about financing Third World debt the way he financed small business firms.

But the idea is not original. Global markets finance small companies from Hong Kong to Hoboken today without any need for Milken’s insights or his junk bond machine. It should also be remembered that Milken’s financial insight was not the most important force shaping the new industrial age.

Breakthroughs in computers and electronics were far more important, and others did far more than Milken to bring them to America and the world.

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What did Mike Milken do? He saw his chances and he took them. And now a long legal process will decide whether he took them lawfully.


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