Michael Milken
Michael Robert Milken (born
July 4,
1946 in
Encino, California) is a prominent
American financier and philanthropist who almost single-handedly created the market for "
high-yield bonds" (also known as "junk bonds") during the 1970s-1980s.
After he was sent to
prison on finance-related charges, his detractors cited him as the epitome of
Wall Street "greed" during the 1980s, and nicknamed him "The Junk Bond King."
After serving his sentence, Milken launched a
public relations campaign to highlight his role as a great innovator and financier, particularly with regard to popularizing higher-risk alternative investments, while smoothing over his criminal record. He has also devoted much time and money to
charity over the past three decades. With an estimated
current net worth of around $2.0 billion, he is ranked by
Forbes as the
382-richest person in the world.
A
summa cum laude graduate of the
University of California, Berkeley, where he was elected to be a member of
Phi Beta Kappa, Milken went on to receive his master's degree in business administration from the
University of Pennsylvania's
Wharton School.
In January 1969 he went to work for Drexel Harriman Ripley as assistant to the chairman.
When Drexel merged with
Burnham and Company in 1973, Milken headed the non-investment-grade bond department, an operation that earned a remarkable 100%
return on investment. By 1976, Milken's
income was estimated at $5 million a year. In 1978, Milken returned to his home state of California.
During the 1980s he became known as a controversial financial innovator whose work at
investment bank Drexel Burnham Lambert, Inc. greatly expanded the use of
high yield debt (
junk bonds) in
corporate finance and
mergers and acquisitions, which fueled the 1980s
leveraged buyout boom.
Through his business acumen, the network of contacts and clients, and the trust he had earned from "
buy side" investors (buyers of
primary market debt issues) as well as Milken's issuance of the
highly confident letter, he had the ability to raise tremendous amounts of money.
He was a big contributor to the success of Drexel, that largely due to Milken went from $1.2 million in fees to over $4 billion in 1986, making it the most profitable firm on
Wall Street at the time.
In June 1989, Milken resigned from Drexel to form his own company,
International Capital Access Group. This new venture was supposed to help workers and companies in building businesses.
While he is best known for his successful financing through high yield bonds, he also employed
equity-based securities,
hybrids and scores of other
financial instruments in more than a dozen
asset classes to help clients grow.
In 1989,
Rudy Giuliani, future prominent Republican politician and then-United States Attorney for the Southern District of New York, charged him under the
RICO act with 98 counts of
racketeering and
fraud, and he was
indicted by a federal
grand jury.
After a
plea bargain, Milken pled guilty to six lesser securities and reporting violations. He paid a total of $900 million in fines and settlements relating primarily to civil lawsuits. He was banned for life from the securities industry.
Judge
Kimba Wood, at Milken's sentencing, told him:
You were willing to commit only crimes that were unlikely to be detected...When a man of your power in the financial world ... repeatedly conspires to violate, and violates, securities and tax business in order to achieve more power and wealth for himself...a significant prison term is required.Wood recommended a 10-year prison sentence, of which, in her opinion, Milken should have served at least 36 to 40 months.
However, Milken served only about 22 months (from March 1991 until January 1993) before being released. Upon his release, it is estimated he still had over one billion dollars ($1,000,000,000 USD) of his personal fortune intact even after paying $900 million dollars ($900,000,000 USD) in fines and settlements. He is now worth close to three billion dollars ($3,000,000,000 USD) and has long since entered other business ventures.
In 1998, without admitting any guilt, he returned $47 million in fees to settle another SEC lawsuit relating to the 1991 order barring him from the securities industry, which he allegedly overstepped when he advised
MCI/
News Corporation in a 1995 deal for which he received $27 million and when he advised
Revlon chairman
Ronald Perelman on a
Revlon/
New World Communications deal in 1996, for which he received $15 million.
In the same year
Time Warner acquired
Turner Broadcasting, for which Milken received $50 million in advisory fees. That deal was not brought up in court.
*Milken planned or thought to engage in a series of unlawful security transactions.
*Charge involving tax fraud. The charge relates to
Ivan Boesky's false
13-d statement.
*Milken suggested that
Ivan Boesky buy MCA stock to hide that Golden Nugget was selling and to assure him no loss in a sale to Drexel.
*Helped a client reduce his income tax liability by selling him two investments and then buying them back at a lower price.
*Failed to disclose in written form an agreed-upon adjustment in transaction prices between Drexel and a client.
Upon his release, Milken resumed his philanthropic activities, keeping the focus on education and medical research. He had been diagnosed with advanced
prostate cancer in the same month he was released from prison, January 1993.
Judgments of Milken's accomplishments - namely whether they were good for the U.S.
economy or if they were ethical - tend to depend on the
ideology of the observer and usually fall within two groups.
Milken's supporters tend to be
libertarian, including
economist Milton Friedman.
Generally speaking, this group argues (as Friedman did in his 1971 article,
Does Business Have Social Responsibility?), that no special moral obligations apply to businessmen and, since Milken's actions, by and large, were legal at the time, he did nothing wrong.
Generally speaking, they argue:
* Junk bonds were a brilliant innovation, and even today occupy a large part of most
investment portfolios.
* There was a large market for junk bonds after
savings and loan banks were
deregulated.
* Milken was made into a
scapegoat for the Savings and Loans scandal.
* Ambitious government officials such as
Rudy Giuliani practically forced him to plead guilty, although some supporters continue to maintain he was completely innocent.
On the other hand, individuals who believe businessmen should adhere to higher moral standards, such as financier
Warren Buffett or former
Salomon Brothers bond salesman
Michael Lewis, condemn many of Milken's actions. While they acknowledge his useful financial innovations, they generally argue that:
* Junk bonds are a high-risk
investment; any informed investor should only allocate a portion of a well-diversified portfolio to them.
* Milken artificially tampered with the economic laws of
supply and demand. When the demand for junk bonds exceeded the supply, he created more "fallen angels" by promoting corporate raids that reduced the credit ratings of otherwise-sound companies into junk status.
* In manipulating the supply of bonds, he also artificially manipulated its value. When the artificially-inflated junk bond market collapsed, this left policyholders (including employees of many companies who had replaced their pension systems with annuities purchased from the corrupted insurance companies) holding worthless paper.
* He compensated himself out of proportion to his work.
The largest controversey comes over Milken's promotion on "corporate raids" that often allowed smaller companies, executives and financiers to acquire older and more established companies. His supporters claim that, overall, these actions helped the U.S. economy, while detractors claim it hurt it.
This controversy is ongoing - as late as May
2006,
The Economist referred to Milken's reputation as extremely controversial, a status which is unlikely to be resolved anytime soon. Within libertarian circles, Milken is often treated as a
cause celebre, while detractors argue (as
James B. Stewart did) that Milken was a financier who made money by
destroying rather than
building American businesses. The controversy is not lessened by the fact that many writers in support of Milken either are or have been on his payroll in the past, such as
Daniel R. Fischel.
Milken has used his personal fortune and high-level contacts to become an influential voice in economics, education and medical research.
Business leaders including
Ted Turner and
Rupert Murdoch are today counted amongst his supporters. Directors of his nonprofit foundations include former Intel Corp. Chairman
Andrew Grove and retired U.S. Army General
Norman Schwarzkopf.
In 1982, he co-founded the
Milken Family Foundation to support
medical research and
education. In 1991 he founded the
Milken Institute, an economic think tank. In 1993, he founded the
Prostate Cancer Foundation, the world's largest philanthropic source of funds for prostate cancer research.
In 2003, he launched the
Washington, D.C. based
think tank,
FasterCures, which seeks greater efficiency in researching all serious diseases.
The Milken Family Foundation founded the
Milken National Educator Awards in 1985. It has awarded approximately $54 million to honor more than 2,100 K-12 teachers and principals.
Each educator receives an unrestricted $25,000 prize and participates in an annual professional development conference.
He is a major donor to the
Milken Community High School (see [
1]).
Fortune magazine called him "The Man Who Changed Medicine" in a 2004 cover story about his positive influence on medical research.
* Milken originally planned to fight the charges against him, even going to far as to hiring one of
Ronald Reagan's former campaign aides to launch a public relations campaign prior to the trial.
* After his incarceration, Milken hired
Alan Dershowitz to help reduce his sentence.
* During the trial of former
Enron CEO Kenneth Lay, Lay praised Milken while on the stand (Milken's response to such praise is of yet unknown).
* Milken shed his (in)famous hairpiece in prison and has been openly bald since.
See
List of personalities associated with Wall Street.
*
Official website* Connie Bruck,
The Predators' Ball : the inside story of Drexel Burnham and the rise of the junk bond raiders. New York: American Lawyer/Simon and Schuster, 1988, Penguin paperback (updated), 1989.
*
Stewart, James B. Den of Thieves. New York: Simon & Schuster, 1991. ISBN 0-671-63802-5. NOTE: Stewart won the
Pulitzer Prize in 1988 for his coverage of the 1987
stock market crash, as well as his reporting on
insider trading scandals.
*
Fischel, Daniel R. Payback : the conspiracy to destroy Michael Milken and his financial revolution. New York, NY : HarperBusiness, 1995. ISBN 0-887-30757-4. Note: Fischel was at one time Michael Milken's attorney. He is also an economist affiliated with the University of Chicago.
*
Robert Sobel Dangerous Dreamers: The Financial Innovators from Charles Merrill to Michael Milken (1993). ISBN 0471577340. Note:
Robert Sobel is a noted business historian.
