PUTTING OUR BEST BANKER TO WORK : If Milken Is Convicted of Stock Fraud, There Is at Least One Suitable Punishment for This Financial Wizard
In his famous review of Salvador Dali’s autobiography, George Orwell wrote of the need to keep in mind simultaneously Dali’s artistic qualities and moral squalor. Artists, he said, cannot be “exempt from the moral laws that are binding on ordinary people.”
The indictment last week of Michael Milken and his departure from the investment banking firm Drexel Burnham Lambert costs American finance the services of the country’s best banker. This is true though the man may well have serious character flaws and may be convicted of the crimes with which he has been charged. Even for those of us who believe that the “junk bond” phenomenon has been on balance harmful to our markets and our economy, Milken has been a reminder of the wonders credit can work, the doors an imaginative but sound banker can open.
Milken can be called a sound banker for the most traditional of reasons--because he never forgot that loans become good loans only when the borrower pays them back. George Moore, the man who built Citicorp in the 1960s, wrote in his memoirs that when he was a lending officer at what was then National City Bank of New York, he had the nickname of “Three-Way-Out” Moore.
Before Three-Way-Out would recommend a loan, he had to assure himself that if the borrower’s cash flow turned out to be inadequate to service the loan, it could still be paid by cutting back on expansion plans or dividends or, ultimately, by selling off assets to repay the bank.
Talking with Moore even today is a lesson in how a railroad keeps track of its rolling stock or a department store collects receivables or an airline markets seats.
Similarly, to hear Milken talk about the operations of Stone Container or MCI Communications or Mellon Bank is an education in how very dissimilar businesses work.
In an age when Wall Street and the most forward-looking commercial bankers know nothing but pieces of paper and tricky ways to package them, Milken concentrated on understanding what the junk bond issuer does for a living. As a result, Drexel to date has the best record of all major underwriters of high-yield bonds, looking at the fraction of issuers who have defaulted on their obligations.
With Milken out of the picture, and with so many commercial banks aggressively in it, we must expect that hunger for yields will be driving out analysis (as it did in the pile-up of Third World Debt and land development lending by the S&Ls;), making our economy’s inevitable fall from grace even more painful than it would otherwise be.
Milken’s initial insight was that the banks and the ratings services were denying credit to companies that could in fact pay more than enough money to compensate lenders for the extra risks involved in extending them credit. The junk bond trade grew out of the long-established business of lending to bankrupt companies that had good prospects if they could shrug off their old debt.
What made it grow, however, was the use Milken found for it as a source of funds for pirates looking to take over corporations that were incompetently run or (it made no difference to our impatient markets) had sacrificed current earnings to make investments in their future.
Many of the players in takeover games, however, were types you would not care to meet on a dark street, and Milken became identified with them. Last spring, he said wistfully that he hadn’t done any business for two years with Victor Posner, Carl Icahn, Boone Pickens or Irwin Jacobs, but people kept regarding him as their banker.
Unfortunately, the identification was not unreasonable. The uncomfortable fact was that Drexel’s and Milken’s earnings were forever being inflated by profits from playing the back-and-forth fluctuations of the market in takeover stocks--fluctuations controlled to no small degree by news stories these fellows generated themselves and by unspoken alliances among them. It was understood that when Drexel raised money for a raider, some of that money would be available to help maintain the price of other Drexel issues.
The corruption of our markets did not start with Ivan Boesky and Milken, whatever can be proved, and will not end with them. The vast majority of people who work in the securities markets today share Falstaff’s view of honor--that it doesn’t fill your stomach. The daily abuse of market inside information by members of the stock exchanges, which the Securities and Exchange Commission has resigned from policing, is cumulatively worse than anything the government has charged against Milken.
But the deepest of Milken’s troubles appear to derive from an idiosyncratic and incomprehensible greed, which hundreds of millions of dollars could not satiate. The street is full of stories of Milken taking advantage not of his customers or the public (the indictment alleges such conduct in considerable detail, but the market is sort of used to that), but of his partners, who found deals altered to direct ever larger shares of the profits away from them and to Drexel and Milken personally.
The hostility of those Milken made merely rich while he became super-rich is the heaviest of the burdens his defense will have to carry.
Nobody is entitled to benefit of clergy these days, not evangelists, not artists, not financiers. But there are real talents here that the country should somehow be able to put to use. Should Milken be convicted or cop a plea, there is a punishment to fit the circumstance, if not the crime: a fine of whatever dimensions can be negotiated, plus 10 years of community service working out the S&L; mess. The Bush S&L; plan is nothing but an ingenious head fake by as insubstantial a bunch of fakers as Washington has seen in years--but Milken has an all-star’s capacity to make baskets from head fakes.
