Michael Milken: 15 Years Later

Considering Michael Milken: 15 Years Laterby:
David Silverman

Milken was front-page news for his junk bond indiscretions just 15 years ago. Can he be forgiven?
One recent morning when the markets were slow, the topic of the day among some traders turned to Barry Bonds – specifically whether Major League Baseball should expunge the San Francisco slugger’s extraordinary hitting achievements from the record book because he used steroids. This led to further discussion about whether Bonds should be admitted into the Hall of Fame when he retires. There seemed to be a consensus that he should not be so honored; that severe punishment must be meted out to anyone who breaks the rules of baseball.While I am reasonably certain if an illegal drug were invented that improved trading performance, every one of these Machiavellians would hook themselves to an IV drip at the start of tomorrow’s trading session; this “judge, lest ye be judged first” attitude only mirrors society’s tendency to hold celebrities to a higher standard. It is, of course, in the court of public opinion that public perception is formed, and with the contempt in which he is held by most fans in the wake of the scandal, Bonds could spend the rest of his life working with lepers and still not emerge from disgrace. It is an unfortunate reality in the 21st century that once People magazine renders a negative verdict, it becomes extremely difficult for the convicted to win back hearts and minds. Legacies are subjective judgments, determined in trading rooms, offices and bars, in newspapers, books, on television, and in the case of Barry Bonds, in the right-field bleachers.While I don’t care much about Barry Bonds, this subject is interesting because it has been almost 15 years since Michael Milken walked into a federal penitentiary in November 1990 to begin his sentence for securities fraud, and the similarities between the two cases are inescapable. Like Bonds, Milken accomplished unimaginable feats, got caught breaking the rules of his game, disappointed his friends and colleagues and caused serious economic damage as a result of his transgressions. Public opinion about him is deeply entrenched.But the similarity between Milken and Bonds or any other public figure caught with a hand in the cookie jar must be seen in context. Unlike Milken, none of them created a multi-trillion-dollar market from scratch; none enabled hundreds of companies to grow and prosper; none earned billons in salary and trading profits; none paid more than a billion dollars in penalties; none have contributed hundreds of millions to charity; none are credited with saving thousands of potential victims of prostate and other cancers, and none of them are changing the way that medical research is funded, conducted and shared.Milken is one of those rare individuals whose accomplishments and blunders are so gargantuan that they force us to view him as larger than life. It is one thing to hit 73 home runs; it is quite another to change the world. The true impact of extraordinary human beings can only be properly determined by future generations. But that never stops us in the here and now from taking a crack at it.One Man’s Junk Is Another Man’s TreasureQuestion: What do Ted Turner, Craig McCaw, Sumner Redstone, Barry Diller, Ron Perelman, Michael Eisner, John Malone and Rupert Murdoch have in common, besides a spot on the annual Forbes list of richest Americans? Answer: Michael Milken, who put them there. It should be noted that Milken’s name is on that list as well – and all because of a whole lot of junk.Junk, of course, refers to high-yield instruments companies issue when they do not have sufficient collateral to tap into traditional debt markets. Essentially, companies that have fallen on hard times or start-ups with little revenue are forced to offer investors a higher rate of return than more stable companies whose prospects seem comparatively secure. The term “junk,” which even today is used in place of the more accurate and less pejorative “high-yield,” indicates what Wall Street thinks about this type of financing. Wall Street, as it turns out, was way behind Milken in its understanding of how these instruments could be used to build businesses, motivate managers, promote accountability or stimulate investment in technology and new industries.Milken’s genius was in recognizing two things that seem self-evident now, but which were considered dangerous heresy 35 years ago when he began his career with an obscure investment bank named Drexel. First, following the teachings of academics W. Braddock Hickman and Thomas R. Atkinson, Milken knew that high-yield bonds tend to perform better than highly rated instruments over the long run. But, you ask, what about defaults? It turns out that the principle holds true even after taking into consideration the possibility that some junky companies will fail; the majority won’t, and the premium that is paid over market interest rates is fair compensation for the risk the investor assumes. The second insight seems counterintuitive on its face but is no less empirically valid: the best returns in corporate bonds occur when the market is pessimistic, and the worst, when the market is confident. By determining the degree to which the market is overly pessimistic or overly confident, the prescient investor can buy debt at a discount or sell at a premium to the true value of the instrument. As the market for junk proliferated in the late 1970s and throughout the ‘80s, Milken made his company, himself, the traders who worked with him and his clients fabulously wealthy because he knew the true value of these securities better than anyone on the planet.In general, there were two ways that Milken employed high-yield securities. Most of the deals he created were intended to raise capital for companies that wanted to restructure or grow, but that, for a variety of reasons, could not raise money without paying a premium to investors. High-yield bonds would be issued, and Milken and his salesmen would sell them to investors. Their compensation came in the form of sales commissions, but often Drexel would buy a portion of the offering for its own account and profit eventually if there were gains. In those years, Milken’s bonds performed spectacularly well, and acting as both principal and agent enabled Drexel to extract the maximum profit from Milken’s work.Milken received at least a third of every dollar made. A second purpose was for leveraged buyouts, more commonly known as LBOs. In an LBO, the buyer of a company borrows funds to purchase the company, using the company itself as collateral for the loans. Because some hostile takeovers during the 1980s were financed by means of an LBO, Milken’s name became associated with this sometimes distasteful practice, notwithstanding the fact that only a small percentage of junk bond deals – on the order of three percent of the entire total between 1980-86 – were used in hostile takeovers.When Gordon Gekko, the corrupt corporate raider in the 1987 movie Wall Street, lectured that “greed is good, greed works,” it was the infamous Ivan Boesky who was being skewered. Boesky, who around that time was exposed as a petty thief in an expensive suit, was an associate of Milken’s – one of countless money managers with whom Milken communicated and did deals. Yet when Milken’s compensation of $550 million in 1987 was disclosed, a year in which most Americans saw their own net worth plunge, the country’s collective enmity focused almost exclusively on Milken. When the attorney general of New York, a determined prosecutor named Rudolph Giuliani, took aim at Milken, it was clear that the government would do whatever it took to send the financier to jail.This is not to absolve Milken of responsibility for his downfall. He ultimately plead guilty to six relatively minor counts of securities wrongdoing, and the saga of the legal battles leading to his capitulation is well documented in dozens of books. Some critics excoriate Milken while others allege that he was the victim of a massive government witch hunt: a perfect scapegoat for the stock market crash, for the jobs and pensions lost in corporate raids, for handmade alligator shoes, power ties and silk suspenders decorated with dollar signs.One thing about which virtually everyone agreed is that Milken represented what disgusts people most about Wall Street – the desire to win at any cost. It was difficult for workers who lost their jobs because managers with stock options wanted to boost profits to feel any sympathy for or empathy with a man who made $550 million in a single year. They could not see that junk bonds enabled existing and new companies to flourish instead of wither, to employ thousands of workers who otherwise would have been terminated, to create thousands of new jobs, or to promote exciting new technologies in a dozen industries that improved the quality of life for millions. For those workers, Milken’s paycheck was evidence enough that he must be guilty of some heinous crime. In the end, all they saw were the garish suspenders.Beyond Junk, Beyond Markets: Michael Milken’s Greatest Challenge“It is time to rethink the War on Cancer, moving from a war of attrition to a new plan of attack…the solution lies in a committed and sustained international mobilization…financial and human capital from around the world needs to be mobilized. At the same time we must dramatically expand the level of private sector involvement… to create “virtual laboratories” that will enable researchers to collaborate and pool their resources without wasteful duplication of time and effort.”These are the words of Michael Milken in a speech delivered at the National Cancer Summit in Washington, D.C., in November of 1995, about two years after his release from prison. It also happened to be about two years from the time he was diagnosed with prostate cancer and told he had, at most, 18 months to live.Unwilling to accept the dire prognosis, Milken attacked cancer in the same aggressive manner as he conducted the affairs of his trading operation. A student again, he educated himself about the disease, using his prodigious intellect to devour medical textbooks, journals, mainstream and alternative literature. He studied standard cures and combined his chemotherapy and radiation treatments with homeopathic remedies. He radically altered his diet from a trader’s cheeseburger-centric menu to one that included soy products, colorful fruits and leafy vegetables. He began to practice yoga and set aside time each day for meditation. He also was determined to learn everything he could about the way disease is studied – how it is funded and managed and how researchers turn their findings into practical applications. This was no academic exercise, nor was there a commercial goal in sight. Milken was determined to save his life by eradicating prostate cancer before it could kill him.The more Milken learned, the more appalled he became at the waste and pointlessness of much of the research that was being performed. It became clear to him that he could play a vital role in helping to transform an inefficient system. The 1995 speech to the National Cancer Summit is his manifesto, in which he spells out ten specific principles that will save countless lives and result eventually in the eradication of many kinds of diseases, including various types of cancer. Central to these principles is a fundamental recognition that the United States must lead the way in this massive worldwide mobilization. (Milken’s manifesto and imperatives – in fact, the entire speech, entitled “Rethinking the War on Cancer” – can be found on the Internet at http://www.fastercures.org/sec/war_on_cancer.Milken’s ideas were embraced slowly at first. But as positive results started flowing in – for example, it is estimated that thousands of lives have been saved simply by educating the at-risk population that one needs to be vigilant in searching for evidence of prostate or breast cancer in order to catch it early when it is relatively easy to treat – the medical establishment could not ignore the persuasive logic of Milken’s reasoning.In ensuing years, a decade since his death sentence was delivered, Milken personally contributed and raised hundreds of millions to fund research and educate the public (his Prostate Cancer Foundation is the largest private sponsor of prostate cancer research) and worked tirelessly to convince doctors, researchers and bureaucrats as to the worth of his approach. Amazingly, every personal strength that Milken used to rule the junk bond market played a part in his “takeover” of the medical establishment – his passion to win, intellectual acuity, highly evolved sales skills, vast personal wealth (even after paying over a billion dollars to settle his case in 1990, he still remains a billionaire, according to many sources), and intense desire to prolong his own life.In a recent interview, Milken provided some insight into the connection between his past and present endeavors: “I believe the person who waits for 110 percent of the facts to be in…is a person who is not alive because it’s too late for him. I worked in a field where ten seconds is a long decision process…now people will say, that’s a short period of time, and I say, no, it’s not. I’ve prepared my entire life to make that decision…getting off that inertia of making a decision qualifies well in building something.”In a November 29, 2004, Fortune magazine cover story, entitled “The Man Who Changed Medicine: Thousands of Men are Living Longer and Leaders Everywhere Are Taking Notice,” Milken is praised for galvanizing almost inconceivable progress in the war against prostate cancer. In fact, since he became involved, the death rate has declined four times more than for other types of cancer.Moreover, Milken’s work has been credited with influencing other philanthropists and high profile individuals who have been affected by sickness to commit their own resources and efforts. Bill Gates is intimately involved in a campaign to eradicate malaria; Lee Iacocca is a leader in the war against diabetes; Michael J. Fox is committed to finding a cure to Parkinson’s Disease; the late Christopher Reeve and Dana Reeve have led in the battle to cure spinal cord injuries; Lance Armstrong is known as much for his Live Strong Foundation as for riding a bicycle through the French countryside; and countless celebrities have come forward in the battle against breast cancer, AIDS and many other diseases that might otherwise remain unknown and unresearched. While these are separate efforts, they are all connected by a similar thread. Michael Milken has convinced people that it is not enough to simply write a check, but that fighting a disease is like fighting a war, and no war has ever been won without profound personal commitment and sacrifice.“Michael Milken changed the culture of medical research… what he’s done is now the model,” says Andrew Von Eschenbach, director of the National Cancer Institute. It is interesting to note that if one were to replace the words “medical research” with the word “investing,” the statement would be equally indisputable. Of Redemption and Legacy: Can We Forgive the Sins of Michael Milken?Clearly the work Michael Milken has done in the last decade has earned him a measure of respect and gratitude in the public arena. Perhaps the most interesting thing that has been said comes from Rudy Giuliani, the man who sent Milken to prison and now is his close personal friend. Bound together by history, and in one of those curious coincidences that hints that events are not random, the prostate cancer that afflicts them both, Giuliani says, “I realize now that I didn’t know him then. The man I know now is able to do tremendous things. He took the tremendous talent he had in business and is using it to fight prostate cancer. What more could you ask for?”Notwithstanding the platitudes, there remain many people in the financial world who will never forgive Milken’s transgressions, and it is not so easy to dismiss the criticisms of these naysayers as illegitimate. The Milken saga raises profound existential questions, most notably: Does the end justify the means, and are some crimes so reprehensible that they cannot be excused? These are questions that I am hardly competent to answer, and unless they change the name of this publication to Stock, Futures and Philosophy, perhaps somewhat out of place. But I do know one thing. Whatever you think about Michael Milken, if, at your next checkup, your doctor tells you that your PSA level is elevated, you are extremely fortunate that Michael Milken is no longer locked up in prison serving time for securities fraud.