Taubman, Milken Offer Clues to the ‘90s
Like a lingering illness, the financial excesses of the 1980s continue to hobble the economy of the ‘90s.
Federal Reserve Chairman Alan Greenspan said last week that the economy is “moving forward at a less than desirable rate” because its progress is retarded by the high loads of debt that consumers, corporations and the government took on in the 1980s.
Any household in which loan payments eat up a lot of the paycheck knows the feeling: the loan or credit card debt taken on in better days becomes a ball and chain when times get tough, and folks wonder how they could have been stupid enough to borrow so much in the first place. That’s about where the U.S. economy is today.
The frustrating part is that no one, Greenspan included, seems to know how long the economic stall will go on or how to get out of it.
But last week, if you looked carefully, some answers emerged along with news of two high fliers from the gaudy ‘80s--A. Alfred Taubman, the megamillionaire developer of classy shopping centers, and Michael Milken himself, the evangelist of junk bonds who influenced the business and the thinking of the decade.
Taubman announced he would try to get out from under some of his debt by offering shares in his properties to the public. That’s a sign that the outlook for retail sales, rents and commercial real estate values is still pointing down.
The income of Taubman’s centers, and therefore the dividend on its proposed public stock, depends on rents from the retailers in Taubman’s 19 malls in various parts of the country. And retailers’ ability to pay rents, or rent increases, depends on rising store sales. But with the consumer hunkered down, sales in the nation’s malls are not rising these days. And some major retailers are in Chapter 11 bankruptcy, and so negotiating lower lease terms.
That’s why the economy is stalled, and why Taubman--and the pension funds who loaned him money in the ‘80s--would like to shift some of their burden to public investors. Clearly, the big money doesn’t see a retail upturn coming soon--a point to note for potential stock-buying suckers.
Milken, who is serving a 10-year sentence in federal prison for securities law violations, received a reduction in sentence to 24 months--from a minimum 36 months. He will be out of prison by next March, and then must serve three years probation in community service.
By itself, the reduction in Milken’s sentence--for some cooperation with government prosecutors and for being a model prisoner--tells you only that “Mike’s a trader,” as a skeptical investment pro put it. “For a little cooperation, he gets to keep a $1 billion fortune and he serves only 24 months.” Milken’s true remaining fortune remains unverified, but his bargaining ability was never in doubt.
As is well known, Milken propelled the now-bankrupt firm of Drexel Burnham Lambert to the front ranks of finance in the 1980s by creating a market in the high-interest bonds of distressed or fledgling companies. Before Milken, others thought such bonds too risky to touch, and so called them “junk.”
Milken rejected the term and in doing so defined the decade’s curious financial optimism which held that with few exceptions prices and asset values always go up.
“Why buy ‘high yield’ bonds?,” wrote Milken in 1984. “Because they offer the opportunity for better performance without undue risk.” In any event, if a company’s debt becomes burdensome, “it can be reduced through asset sales.”
But at the end of the ‘80s, owners of department stores, commercial buildings, television stations, junk bonds--and houses in some parts of the country--discovered that finding buyers for “assets” was not always easy or even possible. Bankruptcies are still on the rise.
That Milken quote is from a new book, “Money of the Mind,” by James Grant, that explains not only how sensible people in the 1980s believed outrageous nonsense but that Americans have done so repeatedly in the past.
The book, subtitled “Borrowing and Lending in America From the Civil War to Michael Milken,” relates how enthusiasm for debt among high-rolling financiers and high-minded bankers has recurred over the decades--like malaria. And always there has been the same exhausted aftermath. Borrowing tightens up, prices fall, excessive values are wrung out and sound business starts again.
What that says for the economy’s present predicament is that we have a ways to go before excesses are eliminated and attitudes are chastened. Construction industry experts think, for example, that 25% of the nation’s malls will have to be closed, bulldozed or turned to other purposes--and that hasn’t happened yet. In fact, more malls may become white elephants, as shopping patterns favor discount warehouses that speak more to the price-conscious ‘90s than the stylish ‘80s.
It was not a good sign either that financial experts last week speculated that when Milken gets out of jail he’ll have magic answers for rebuilding Los Angeles or reviving the U.S. economy. If his answers weren’t magic before, why should they be now?
When we give up looking for magic answers, we can get on with business. Proof is that Texas once again is seen as a good place to invest. Texas’ delusions of grandeur, when oil prices rose in ‘70s, and its depression when prices fell in the ‘80s were greater than most regions have experienced. For a while in the ‘80s, Texans looked for oil to rise again. But then they recognized that, no, it wouldn’t and they would have to pursue other business.
As a result, “Houston is a wonderful place to do business today,” says Edward Abbott of Abacus Capital, a California investment company putting money in Texas. “There’s no dreaming or sales talk, it’s conservative and careful.”
If Houston got there, California and the rest of the country will, too--but it takes time.
