Michael Milken

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Michael Robert Milken (born July 4, 1946 in Encino, California) is an American financier who was highly influential in developing the market for junk bonds (a.k.a. "high-yield debt") during the 1970s and 1980s, which in turn fueled the 1980s boom in corporate raids and hostile corporate takeovers. He has been variously labelled as a financial innovator and the epitome of Wall Street greed during the 1980s. He is often still referred to as the "Junk Bond King".

His reputation was tarnished by an insider trading investigation which culminated in his indictment on 98 counts of racketeering and fraud in 1989. After a plea bargain, Milken was charged with six securities and reporting violations. He was sentenced to ten years in prison, but was released after less than two years. He then launched a public relations campaign to highlight his role as a financial innovator, particularly with regard to popularizing higher-risk alternative investments. He also devoted much time and money to charity over the past three decades. With an estimated net worth of around $2.1 billion as of 2007, he is ranked by Forbes magazine as the 458th richest person in the world.

Contents 1 Education 2 Career 3 Insider trading scandal 4 Assessment of Milken's legacy 5 Philanthropic activities 6 Trivia 7 Links 8 External links 9 References

[edit] Education

A summa cum laude graduate of the University of California, Berkeley, Milken went on to receive his master's degree in Business Administration from the University of Pennsylvania Wharton School.

While at the Wharton School, he was influenced by credit studies authored by W. Braddock Hickman, a former president of the Federal Reserve Bank of Cleveland, who noted that a portfolio of non-investment grade bonds offered "risk-adjusted" returns greater than that of an investment grade portfolio.

[edit] Career

In January 1969 Milken 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 the investment bank of Drexel Burnham Lambert greatly expanded the use of high yield debt (junk bonds) in corporate finance and mergers and acquisitions, which in turn fueled the 1980s boom in leveraged buyouts, hostile takeovers, and corporate raids.

He was a major contributor to the success of Drexel, which went from $1.2 million in fees to over $4 billion during Milken's time there, making it the most profitable firm on Wall Street at the time. Such was Milken's importance to the success of Drexel's ventures, he was given huge salaries and bonuses, one year earning in excess of $500 million. In June 1989, Milken resigned from Drexel to form his own company, International Capital Access Group.

[edit] Insider trading scandal

In 1989, Rudy Giuliani, the U.S. Attorney for the Southern District of New York, charged Milken under the RICO act with 98 counts of racketeering and fraud. Milken was indicted by a federal grand jury, and after a plea bargain, Milken pled guilty to six lesser securities and reporting violations:

• He planned or thought to engage in a series of unlawful security transactions.

• He engaged in tax fraud. The charge relates to Ivan Boesky’s false 13-d statement.

• He advised Ivan Boesky to buy MCA stock in order to hide the fact that Milken's client Golden Nugget Companies was selling MCA, and to assure him no loss in a sale to Drexel.

• He helped a client reduce his income tax liability by selling the client two investments and then buying them back at a lower price.

• He failed to make a written disclosure of an agreed-upon adjustment in transaction prices between Drexel and a client.

At Milken's sentencing, Judge Kimba Wood 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, he still had net worth of over $1 billion, despite having paid a total of $900 million in fines and settlements, relating primarily to civil lawsuits. As of 2007, Milken is worth about $2.1 billion and has long since entered other business ventures.

Milken was also banned for life from the securities industry.

In 1998, without admitting any guilt, he returned $47 million in fees to settle an SEC charge related to the 1991 order barring him from the securities industry. He allegedly breached the order when he advised MCI/News Corporation in a transaction in 1995, for which he received $27 million in advisory fees, and when he advised Revlon chairman Ronald Perelman on a Revlon/New World Communications deal in 1996, with $15 million in fees to Milken. In 1996, he received $50 million when Time Warner acquired Turner Broadcasting. The SEC did not bring up the last deal in the charge.

[edit] Assessment of Milken's legacy

Observers have differing views on the legacy left by Milken - namely, whether his activities were good for the U.S. economy and whether they were ethical.

Milken's supporters argue that:

• Milken's actions, by and large, were legal at the time he committed them.
• Junk bonds were a brilliant innovation that revitalized the economy.
• The corporate raids launched by the underdogs against the established corporations forced the executives of the latter firms who had been safely entrenched in their corporate strongholds to be more vigilant and accountable.
• Junk bonds had, at most, an insignificant role in the savings and loan crisis.
• The government used Milken and junk bonds as scapegoats for the savings and loan crisis.
• Ambitious prosecutors such as Rudy Giuliani practically forced him to plead guilty through indicting his family members.

Milken's detractors argue that:

• Milken used Drexel's power to manipulate the prices of junk bonds.
• When the artificially inflated junk bond market collapsed, bond holders, many of whom were middle-class investors, were left with worthless paper.
• Milken became wealthy by destroying rather than building American businesses. By fostering corporate raids, he made it possible for smaller companies to take over older and larger companies. However, the acquirers rapidly sold off the assets of the acquired firm to pay the debt incurred in financing the raid and in effect left the company in a worsened state.
• Milken exaggerated his own originality, claiming to be a "pioneer" of high-yield debt, even though "original issue" high-yield bonds had been common during and after the Great Depression and in the sovereign bond market for hundreds of years.

[edit] Philanthropic activities

Milken has a long record of philanthropic activity but detractors have suggested that this activity is, at least in part, motivated by a desire to rehabilitate his public image.

In 1982, Milken and his brother Lowell founded the Milken Family Foundation to support medical research and education. Through the Milken National Educator Awards (founded in 1985), the MFF has awarded a total of about $54 million to more than 2,000 teachers.

Upon his release from prison in 1993, Milken founded the Prostate Cancer Foundation, the world's largest philanthropic source of funds for prostate cancer research. Milken himself was diagnosed with advanced prostate cancer in the same month he was released from the prison. His cancer is currently in remission.

In 2003, Milken launched the Washington, D.C.-based think tank called FasterCures, which seeks greater efficiency in researching all serious diseases.

Fortune magazine called him "The Man Who Changed Medicine"[1] in a 2004 cover story about his positive influence on medical research.

Milken is also a major donor to the Milken Community High School, a private Jewish high school.

[edit] Trivia

• Milken originally planned to fight the charges against him, even going as far as to hire 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 shed his famous (or infamous) hairpiece while he was in prison and has been openly bald since.
• Milken and the supposedly light sentence he received is referenced in the Deeelite song The Fuddy Duddy Judge: "You get four years if you are Michael Milken but 10-15 if you rob the milk man."

[edit] Links

• List of personalities associated with Wall Street

[edit] External links

• Mike Milken's official website
• The Boom Generation - Seventh Decade article in the WSJ by Michael Milken, 9/19/2006

[edit] References

• 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.

• James B. Stewart - 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.

• Daniel R. Fischel - Payback: the conspiracy to destroy Michael Milken and his financial revolution, New York, New York: HarperBusiness, 1995, (ISBN 0-88730-757-4). Note: Fischel was Milken's attorney at one time; 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 0-471-57734-0). Note: Sobel is a noted business historian.