Milken Ran a Junk Bond Conspiracy
Michael Milken was the mastermind of the greatest criminal conspiracy in American financial history [columnist Tom Petruno’s “For Junk Bonds, Stain of the Past Is Long Forgotten,” Your Money, March 1].
Milken’s junk bond market was built on the deregulation of the securities and thrift industries during the rich-get-richer Reagan years. This deregulation allowed generous treatment of interest payment on debt. Buying assets with borrowed money shifted a great deal of the cost of junk bond speculation onto the federal government. Huge financial resources could be generated by tax-deductible debt incurred by undervalued companies.
The incredible list of Milken’s securities crimes includes insider trading, false public disclosures, tax fraud, market manipulation, bribing of fund managers, manipulation of thrifts, excessive spreads, illegal bond parking, obstruction of justice and broad conspiracy affecting the control of corporations. The original indictment of Milken in 1989 contained 98 counts including racketeering.
Milken manipulated and undermined the integrity of U.S. bond markets. His was a giant Ponzi scheme that would be illegal if you or I were to run it from our garages. Whenever his bond issuers threatened to default, Milken arranged an exchange offer, restructuring the debt with even more leverage. This process of rolling over weak debt onto new bonds masked credit problems and gave Drexel’s bonds an artificially low default rate. The infusion of new debt could not conceal the financial deterioration forever.
This was not a “free market” enterprise. It was a rigged game for insiders, and the American taxpayer was picking up the tab. Nearly every savings and loan that was a major player in Milken’s group of investors was declared insolvent and placed in the hands of government receivers.
Milken’s crimes amounted to far more than “market manipulation.” And the admission in the Market Beat article that “it was true that he exercised enormous control over who issued junk bonds, and who bought them” clearly demonstrates how Milken’s empire undermined the very idea of a free market.
The now-bankrupt Drexel Burnham Lambert handled $4 trillion in financial transactions, earning $3 billion in fees. The sheer magnitude of the greed, complexity of the deals and enormousness of the resources at their command allowed the Milken players to believe that no ordinary person could ever see through the tangle and grasp what was really going on.
Shifting the blame to “government regulators” is monumental hypocrisy. Savings and loans invested an estimated $8.8 billion in junk bonds. The deregulation of thrifts allowed for the privatization of profits while socializing losses. Milken risked not his own money but funds guaranteed by the U.S. government. To suggest that this man, this billionaire, was somehow a victim of the government that “didn’t like him” is beyond ludicrous. It is patently absurd.
But what a load off my mind that if junk bonds aren’t being “artificially” overvalued and “if” they don’t turn into a “time bomb” and if one is really, really brave about being financially “pummeled” and if one stays away from the “problem bonds,” they’re a heck of a good investment. Right. And for a moment there I was actually worried.
DENISE TYRRELL
Sherman Oaks
