Milken Finance

Michael Milken, a figure both lauded and vilified, profoundly reshaped the landscape of corporate finance in the 1980s. His rise and fall are inextricably linked to the rise and fall of the junk bond, also known as high-yield debt.

Milken, a math whiz with a keen understanding of risk assessment, joined Drexel Burnham Lambert in the late 1960s. He recognized an inefficiency in the market: lower-rated, riskier bonds, often issued by smaller or emerging companies, offered substantially higher yields than investment-grade debt. Milken argued that these bonds, if properly analyzed and diversified, could provide attractive returns with acceptable levels of default. This challenged the conventional wisdom that only blue-chip companies were creditworthy.

He built a powerhouse junk bond department at Drexel, becoming a master at underwriting and trading these securities. He cultivated relationships with a network of investors, including pension funds, insurance companies, and savings and loans, convincing them of the merits of high-yield bonds. This created a thriving market for companies previously shut out of traditional financing avenues. Companies like MCI Communications, Turner Broadcasting, and Cablevision were able to raise capital through junk bonds to fuel their rapid growth, thanks in large part to Milken’s efforts.

Milken’s influence extended beyond simply financing emerging companies. He played a central role in the wave of leveraged buyouts (LBOs) that swept through corporate America in the 1980s. He provided the necessary financing for corporate raiders like T. Boone Pickens and Carl Icahn to acquire and restructure established companies. While some viewed these LBOs as disruptive and harmful, others saw them as a way to unlock value and improve efficiency.

However, the success and immense wealth generated by Milken and Drexel Burnham Lambert were built on a foundation that eventually crumbled. In 1989, Milken was indicted on 98 counts of racketeering and securities fraud. The government alleged that he had engaged in insider trading, stock parking, and other illegal activities. While he initially denied the charges, he eventually pleaded guilty to six felony counts related to securities fraud. He served 22 months in prison and was permanently barred from the securities industry.

The downfall of Milken and Drexel Burnham Lambert sent shockwaves through the financial world. It exposed the dark side of the high-yield market and raised questions about the ethics and regulation of the financial industry. Drexel Burnham Lambert filed for bankruptcy in 1990, a direct consequence of the scandal. While the junk bond market initially suffered, it eventually recovered and evolved into a significant part of the modern financial system.

Despite the controversy surrounding his career, Milken’s impact on finance remains undeniable. He democratized access to capital, empowering entrepreneurs and smaller companies. His pioneering work in the high-yield market fundamentally changed the way companies are financed and has influenced investment strategies to this day. Whether viewed as a visionary or a villain, Michael Milken’s legacy continues to be debated and analyzed.