The Devil Who Made U.S. Business Leaner, Meaner : Finance: How Michael Milken became the junk-bond king goes back to the time when American corporations were gobbling up the world.
What is most disturbing, somehow, is the sheer venality of the crimes that Michael R. Milken, the erstwhile “junk-bond king” of Drexel Burnham Lambert Inc., has admitted to.
Milken, after all, was not your average boiler-room penny-stock manipulator. He was a life force: No single person since J.P. Morgan had as great an impact in reshaping the American business and financial landscape. But the Michael R. Milken that comes slinking out of the federal charge-sheet is no world-class mover and shaker.
A client wanted to cheat on his income taxes, so Milken rigged a series of sham trades to create some fake losses.
Steve Wynn, the head of Golden Nugget, wanted to get out of a large stock position in a takeover target. So Milken arranged with Ivan Boesky to rig the stock price with a flurry of sham-trading activity.
Drexel discovered that its sales agreement with an investment fund didn’t cover all its sales expenses. So Milken overcharged the investors for trading to make up the difference. And so the sorry recitation goes.
None of these offenses, Milken insisted in his guilty plea, go to the heart of his main junk-bond business. But of course he’s quite wrong about that. Milken was the creator and soul of the junkbond market. For most of a decade, he and Drexel exercised almost unprecedented sway over the American financial markets, handling three-quarters, or even more, of annual junk-bond financings.
Such pervasive amorality at the heart of the empire taints the entire enterprise. The entire junk-bond decade is now seen, in the words of one eminent financial journal, as “the biggest private financial scandal of the 20th Century.”
Reality, as always, is much more complicated. The harsh judgments now raining down upon Milken, Drexel and the whole era of glitz and glitter that was Wall Street in the 1980s are both true and deserved--and utterly false.
The beginnings of the story go back almost 30 years to the last Wall Street boom in the mid-1960s. American corporations, like the Japanese today, were taking over the world. American mass-production technology, most of it from Detroit, was generating huge cash flows that large companies were plowing into acquisitions at home and abroad.
Business-school professors flocked to the soaring corporate towers and created huge “planning,” “marketing” and “MIS” bureaucracies. Executives leaned back contentedly in a sleek world of statistics, private jets and exclusive clubs. And John Kenneth Galbraith reported that “the problem of production has been solved.”
That complacent paradise came apart in less than a decade. First came the oil-price shocks of the 1970s, then wave after wave of assaults from leaner, hungrier, more aggressive competitors, mostly from Japan. American executives, panting and red-faced, peered in wonderment through fat-padded eyelids as their stock prices sank like a stone throughout the 1970s.
By the 1980s, as T. Boone Pickens delighted in pointing out, the total of stock prices of most major oil companies was lower than the value of the oil they owned. In other words, raw oil sitting in a well somewhere was worth more by itself than if you attached an oil company to it. That was the measure of the disdain shareholders had for their corporate managements.
And that is the world that gave birth to the junk-bond market. Junk bonds were an instrument of rebellion, an avenue of financing outside the traditional channels controlled by a cozy club of the white-shoe investment banks and the biggest industrial companies. Milken’s contribution was to see the opportunity before anyone else and to assemble a network of like-minded outsiders to keep the new channels flowing.
Junk-bond-financed management buyouts, hostile takeovers and the mere threat of hostile takeovers forced a radical restructuring of most big companies through the first part of the 1980s. Mobil got out of its circus and department-store businesses. Goodyear shed its aerospace holdings and its resort hotels. All the big textile companies refocused on just one or two markets where they could gain a real competitive advantage.
Union Carbide shed a string of consumer businesses and got back into chemicals. During the 1980s, there was a sharp drop in big-company white-collar employment and an equally sharp rise in American manufacturing productivity. American steel is now cheaper than Japanese steel.
Did Milken make this happen? No. No more than J.P. Morgan caused the large-scale reorganization of American industry at the turn of the century. But they both speeded the processes up.
But that, it turns out, is only one side of the story. Gross excess may be an intrinsic feature of American capital markets. Most of the useful corporate restructurings had probably already happened by 1985 or 1986. And, in fact, probably most pre-1986 junk-bond deals have turned out to be quite profitable.
But by 1986, Wall Street had discovered the new golden goose. Buyout fund after buyout fund plunged into the market, buying up lackluster companies at grossly inflated prices. Twenty-five year-olds made millions playing computer games with their Lotus spreadsheets.
And at the center of it all sat Michael R. Milken, with his billion-dollar income and famous X-shaped desk in Beverly Hills, keeping the market rolling and the stakes rising with a network of nouveau-riche S&L; and insurance executives, ready to snap up any piece of paper with his name on it, no matter how foolishly priced, much of which is now being choked back up onto the laps of horrified taxpayers.
So how does one judge Milken and Wall Street? Was Milken a hero or a devil? A financial genius or a crass stock manipulator? Is Wall Street an engine of industrial restructuring or a cheap, glitzy casino? The answer to all of those questions, confusingly enough, is all of the above.
