Michael Milken: Wall Street’s junk-bond king

Junk-bond investor Michael Milken was once sentenced to ten years behind bars. So has he changed his ways?

Tony Blair's 60th birthday this week met with a predictably hostile response from much of the British public. Fortunately for the former PM's ego, he has fans elsewhere. Perhaps none more ardent than junk bond king, Michael Milken.

At a recent session at the annual Milken Conference in Beverley Hills, the reformed financial felon quizzed Blair on everything from European fiscal policy to his old rock group, Ugly Rumours. "His answers must have gone down well," says The Independent. When the session ended, Milken informed his "visibly shocked" guest that he was donating $1m to the Tony Blair Faith Foundation.

Nearly 25 years after being convicted for what was then the biggest fraud case in the history of the US securities industry, the man who brought down one of Wall Street's oldest firms, Drexel Burnham Lambert, "has more leverage than ever", says Reuters Breakingviews.com.

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Milken piled up untold wealth during the 1980s boom years (in 1987 alone his income topped $550m). These days he trades in "intellectual capital". His annual conference attracts everyone from former clients such as Rupert Murdoch, to political grandees, academics and an army of protgs (see below).

It's "a rare accomplishment" to "assemble leaders from so many walks of life" alongside "the custodians of trillions of dollars". Milken, acknowledged as one of America's great contemporary philanthropists, makes the most of it.

Born in Los Angeles in 1946, as a schoolboy Milken helped his accountant father with tax returns; later, at Berkeley, he invested money for his fraternity brothers in return for 50% of the profits. He first saw the potential of unloved "junk" (low grade, high risk) bonds at college and, in 1970, moved to New York to join Drexel.

Milken's focus on high-yielding "fallen angel" firms was unfashionable, says The Economist: in the 1970s, the market was "tiny". But his pitch to clients that "junk was a better bet than investment-grade bonds" came into its own during the financial meltdown of 1974, when "remarkably few junk bonds went bad", setting the stage for the subsequent boom.

"Junk bonds, junk people" was the sneer of many Wall Streeters, "who loathed the upstart bank". The dislike of Drexel spread when it started financing some of the most notorious leveraged buyouts of the 1980s, including Kohlberg Kravis Roberts' purchase of Nabisco. The New York Times reported that "even Wall Street can't stomach" the sums Milken was pocketing.

Few mourned when he met his nemesis a new client called Ivan Boesky. When Boesky was arrested for trading violations in 1986, he fingered Milken, who was charged with 98 counts of racketeering, securities fraud and other crimes, says the LA Times. He got ten years, but was released after two for good behaviour and "deep remorse". Milken's new career in "redemption" had begun.

A role model for reformed white-collar criminals?

When George Bush left office in January 2009, he left Michael Milken disappointed, says the Los Angeles Times. "Despite the support of some of the country's most influential people," he'd been unable to procure himself a presidential pardon.

Supporters, citing the millions Milken has spent on medical research, were outraged. "If Milken isn't a role model of how a convicted white-collar criminal can make amends, then who will ever be?" asked Dean Rotbart in the Jewish Journal.

Others aren't convinced that Milken, thought to be worth $2.3bn, is entirely reformed, says Jeffrey Goldfarb on Breakingviews. Having been banned for life from securities trading in 1990, the US regulator is now investigating his ties with the investment colossus Guggenheim Partners. The probe centres on whether Milken received some sort of compensation for providing investment advice.

The New York Times observed 20 years ago that Milken's "prominent place in the mythology of Wall Street" is assured. The debate about his legacy has become no less heated. In taking junk bonds "from a cottage industry to one of the cornerstones of the financial industry", he achieved three things, says The Economist.

A market that has grown seven-fold since Drexel's demise; firms and industries (from gambling to cable TV) that owe their rapid expansion to his junk bonds; and the influence of the "Drexel diaspora", particularly in LA. The junk market corrects from time to time, but its pros outweigh the cons.

That's open to question, says Francesco Guerrera in The Wall Street Journal. In opening the door to greater risk, Milken arguably stoked the bonfire of the 2008 crash and some of the "bad habits" we witnessed then "are creeping back".

The issuance of junk bonds hit new records in 2012, according to Dealogic. "Ironically, for a conference bearing the name of the father of the junk-bond market", this year's Milken jamboree "was overflowing with financiers expressing concern about cheap debt".