Michael Milken

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Mike Milken in 1984

Michael Robert Milken is a prominent American financier who almost single-handedly created a market for junk bonds during the 1970s. After he was sent to prison on finance-related charges, he became the epitome of Wall Street "greed" during the 1980s, and was nicknamed "The Junk Bond King."

After he served his sentence, Milken launched a public relations campaign to cast himself as a great innovator and financier, while smoothing over his criminal record. He has also devoted much time and money to charity.

Contents

Biography

Milken was born on July 4, 1946, in Encino, California. He received his Bachelor's degree from the University of California, Berkeley and his MBA from the Wharton School at the University of Pennsylvania. Milken graduated from the University of California at Berkeley with highest honors.

As a Wharton MBA, Milken did substantial research on what he believed to be an underutilized market, high-yield debt. At the time, these were mostly bonds issued by "fallen angels", companies that got into financial difficulties causing the price of their debt and subsequently their credit rating to fall. Even with a higher interest yield, few investors were willing to buy them. Milken's plan was to establish a highly liquid market for these bonds.

While often called a financial genius, Milken has credited W. Braddock Hickman, who studied bonds during the first half of the Twentieth Century, with his initial ideas.

Work on Wall Street

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 his employer, Drexel Burnham Lambert, 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.

Legal charges

In 1989 Rudolph Giuliani the United States Attorney General 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 $200 million fine and another $400 million in settlements relating primarily to civil lawsuits. He was banned for life from the securities industry.

Milken's arrest caused a major change in how the U.S. treats white collar criminals. He turned himself in before he could be formally arrested, or before the media could take pictures of the event. Since then, the U.S. government has taken pains to make sure that future financial criminals are handled more roughly, as they did with the arrest of Kenneth Lay.

Judge Kimba Woods, 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.

Woods recommended a 10-year sentence in prison, of which, in her opinion, Milken should have served at least 36 to 40 months. However, Milken served only about 22 months before being released (from March 1991 to January 1993). Upon his release, it is estimated he still had about $700 million of his personal fortune intact. He has since entered numerous 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 Corp. 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 the court.

Guilty pleas

  • 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 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.
  • Failing to disclose in written form an agreed-upon adjustment in transaction prices between Drexel and a client.

After prison term

Upon his release, Milken resumed his philanthropic activities, keeping the focus on education and medical research. He was diagnosed with prostate cancer in the same month he was released from prison, January 1993.

Assessments of Milken's Accomplishments

Judgments on 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, and include such luminaries as Nobel Prize-winning 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 Loans banks were deregulated.
  • Milken was made into a scapegoat for the Savings and Loans scandal.
  • Ambitious government officials such as Guilliani 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 (albeit highly arbitrary) 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. While they can be part of a portfolio, they should not be used as a single investment strategy (as Milken sold 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.
  • He improperly induced insurance companies to purchase his junk bonds in vast quantities, and 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.
  • While not the sole cause, he nonetheless contributed to the collapse of America's Savings & Loans trusts, which resulted in a massive bailout that ultimately cost U.S. taxpayers billions.
  • He negotiated a favorable plea bargain that left much of his fortune intact, and resulted in less than two years behind bars at a "country club" prison.

The largest controversy comes over Milken's practice of corporate raids. In his work to increase the number of junk bonds, he and his colleagues ruined many companies and put many people out of work. While this practice has been condemned by the general public, libertarians and other free market followers claim this was nothing but "creative destruction" in the marketplace.

Since his release, Milken himself has contributed massively to arguments about his impact, as in writings such as The Democratization of Capital, as well as his public relations campaign. He has also funded independent writers to write accounts of his actions that lean in his favor - actions that journalist Edward Cohn termed Milken revisionism.

With the release - and public image rehabilitation attempts - of such white-collar criminals as Martha Stewart, Milken has been featured in the media more often near the beginning of 2005 as a case study in how such people can rehabilitate and re-fashion themselves.

Charitable and Public Relations Work

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 News Corp.'s 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. 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."

The Milken Family Foundation founded the Milken National Educator Awards in 1985. It has awarded approximately $52 million to honor more than 2,000 K-12 teachers and principals. Each educator receives an unrestricted $25,000 prize and participates in an annual professional development conference.

References

Appearance in books and magazines

Magazines

Books

See also

External links

Third party articles

About the legal charges

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