Wall Street History

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Wall Street History

01/28/2000

Michael Milken - Part II

"Debt is an industry in itself, like auto parts."
--James Grant

As we continue our story on junk bond king Michael Milken, this
week we are going to focus primarily on his personality and
discuss the era in which he operated. But first, we''ll have noted
author and pessimist (a man after my own heart), Jim Grant, set
the stage in a piece he wrote back in 1989.

"What is notable about the gilded career of Michael Milken is
that it happened at all. Its timing was a stroke of luck. In the
1950s, when the intense young Milken was almost certainly not
wasting his time watching Lassie on television, interest rates
were low, tax rates were high and the stock market was
moderately valued. In retrospect, it was the perfect time to
launch a junk bond enterprise, except for one important catch.
The shadow of the Great Depression still hung across American
finance."

But by the time Milken started plying his trade, a generation of
Depression-scarred lenders was exiting. Adds Grant, "Their
mental baggage - the trauma of the 1970s debt liquidation - was
not his, and he rediscovered the forbidden fruit of extreme
leverage."

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Milken''s first underwriting of junk bonds was a disaster, Texas
International, an oil-drilling company. In 1977 he raised $30
million in exchange for 11.5% bonds. The company went
bankrupt in 1987. Others, like Flight Transportation (a scam),
American Communications and Grant Broadcasting went under
also. But these proved to be the exceptions. From 1977 to 1984,
Drexel Burnham underwrote 166 junk-bond issues, five of which
wound up in bankruptcy. Others were outstanding; Turner
Broadcasting, MCI, McCaw, Viacom and Cablevision, to name a
few. I will cover some of these in more detail next week.

Milken was never comfortable in New York and so he moved his
operations to Beverly Hills in 1979. And as the 70s evolved into
the 80s, debt was no longer looked at as evil. As author Edward
Chancellor writes, "The individualistic pursuit of wealth had
displaced the communal goals of full employment and equality
of distribution." And no one personified this pursuit of wealth
more than Milken.

Junk Man slept only about 3-4 hours a night, arriving at the
Beverly Hills office before 4 a.m. to catch the morning opening
in New York. His bond salesmen used to say, "We get up at
4 a.m. and we don''t go to lunch, we don''t take calls, we don''t
talk about the ball game. No one in America works as hard as
we do." On a personal note I would add that in my years on
Wall Street I met a number of guys with this kind of personality.
Jerks, every one of them.

As Milken came to dominate the junk market he once
commented, "People and industries of the future are considered
risky.Junk bond users are the industries of the future."

And in another comment, "Everything we like is junk; junk food,
junk clothes, junk records. Everything that stands the test of time
is junk." Except by his definition he''s forgetting that music in
the 80s truly sucked.

Working from his famous X-shaped trading desk, Milken was to
command the financial and corporate worlds. He was revered.
"He only cared about bringing the truth. If Mike hadn''t gone
into the securities business he could have led a religious revival
movement," claimed one former Drexel executive. Another said,
"Michael is the most important individual who has lived in this
century." Huh. Me thinks not.

Milken''s ego is legendary. He began lecturing his visitors on
such topics as the risks of tampering with food packages and
housing the world''s population on floating hotels. [Actually,
that''s no worse than me lecturing on India / Pakistan. It''s tough
to look in the mirror and admit that, you know. I''ll give myself 2
beer credits.] And I just saw this week in a publication
(Investment News) that Milken has named himself the keynote
speaker at his own upcoming conference.

In Connie Bruck''s book, "The Predators'' Ball," a colleague said
of Milken, "Michael is interested in power, dominance, one
hundred percent market share. Nothing is good enough for
Michael. He is the most unhappy person I know. He never has
enough. He drives people by insult. He drives everything -
more, more, more deals." Another said, "Michael is one of the
most avaricious, ruthless, venal people on the face of the earth."

And, of course, the Milken ideal carried over to others at Drexel
Burnham. Colleague Leon Black once said the purpose of the
firm''s dominance of the junk field was "to identify those robber
barons who would become owners of the major companies of the
future, but not to such a degree that Drexel would actually share
the stigma of such clients."

When it comes to Drexel as a firm, Chancellor writes, "There
was a crude, bullying quality to the Drexel organization which
gave the outfit (the) air of a Mafia family." As Milken''s empire
expanded, no one could afford to cross him.

As we entered the summer of ''82, Federal Reserve Chairman
Paul Volcker finally felt his inflation fight was over (the long
bond had peaked around 15% and money market rates
approached 20%). The leveraged buyout (LBO) became a
watchword; acquire companies with a maximum amount of
debt, pay off the interest and principal on the LBO debt as
quickly as possible with the company''s cash flow, reach a more
comfortable level of debt and then attempt to sell the company or
refloat it on the equities market. An example of the latter was
Gibson Greeting Cards which former Treasury Secretary
William Simon purchased in 1981 for $1 million in equity and
$79 million in debt. He then took the company public in the
summer of 1983. The company was valued at $290 million and
Simon''s personal investment of $330,000 had turned into $66
million. And, of course, it didn''t hurt that Simon''s timing was
impeccable as the equity market had finally turned around.

But, next week back to Milken and a look at some individual
deals.

Sources: "Devil Take the Hindmost," Edward Chancellor
"The Book of Investing Wisdom," Peter Krauss
"When Giants Stumble," Robert Sobel

Brian Trumbore

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