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Michael Milken

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Image:Michael Milken 1.jpg Michael Robert Milken (born July 4, 1946 in Encino, California). He is a American financier and philanthropist who developed, after almost single-handedly having created, the market for "high-yield bonds" (also known as "junk bonds") during the 1970s and 1980s.

After he was sent to prison on finance-related charges, his detractors cited him as the epitome of Wall Street "greed" during the 1980s, and nicknamed him "The Junk Bond King."

After serving his sentence, Milken launched a public relations campaign to highlight his role as a great innovator and financier, particularly with regard to popularizing higher-risk alternative investments, while smoothing over his criminal record. He has also devoted much time and money to charity over the past three decades. With an estimated current net worth of around $2.0 billion, he is ranked by Forbes as the 382-richest person in the world.

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[edit] Education

A summa cum laude graduate of the University of California, Berkeley, where he was a member of Sigma Alpha Mu fraternity, and was elected to be a member of Phi Beta Kappa, 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] 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 Drexel, 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.

While having an illustrious and productive career, his rivals, which combined had minute marketshares, often alleged tactics he and his associates employed bordered on illicit behaviour.

Amongst his detractors have been Martin Fridson formerly of Merrill Lynch and author Ben Stein. Milken's high-yield "pioneer" status has proved dubious as studies show "original issue" high-yield issues were common during and after the Great Depression. Others such as Stanford Phelps, an early co-associate and rival at Drexel, have also contested his credit as pioneering the modern high-yield market.

[edit] Legal charges

In 1989, Rudy Giuliani, future prominent Republican politician and then-United States Attorney 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 total of $900 million in fines and settlements relating primarily to civil lawsuits. He was banned for life from the securities industry.

Judge Kimba Wood, 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.

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 even after paying $600 million in fines and settlements. He is now worth around $2 billion and has long since entered other business ventures.

In 1998, without admitting any guilt, he returned $47 million in fees to settle another SEC charge related to the order in 1991 barring him from 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] Guilty pleas

  • Milken planned or thought to engage in a series of unlawful security transactions.
  • Milken suggested that Ivan 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.
  • Failed to disclose in written form an agreed-upon adjustment in transaction prices between Drexel and a client.

[edit] After prison term

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

[edit] Assessments of Milken's accomplishments

Judgments of 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, including 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.
  • A large market for junk bonds came into existence after savings and loan banks were deregulated.
  • The government made Milken a scapegoat for the savings and loans scandal.
  • Ambitious prosecutors such as Rudy Giuliani practically forced him to plead guilty, although some supporters continue to maintain Milken was completely innocent.

On the other hand, individuals who believe businessmen should adhere to higher moral standards, such as financier Warren Buffett or former Salomon Brothers bond salesman Michael Lewis, condemn many of Milken's actions. While acknowledging the ingenuity of Milken's financial innovations, they also argue that:

  • Junk bonds are a high-risk investment; any informed investor should only allocate a portion of a well-diversified portfolio to 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.
  • In manipulating the supply of bonds, he also artificially manipulated its value. When the artificially inflated junk bond market collapsed, this left policy holders (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.

The most controversial are "corporate raids" Milken fostered to allow smaller companies to acquire older and larger corporations. The critics are mixed as to the economic effect of such brash attacks on the establishment.

The debate is ongoing. In May 2006, The Economist alluded to the disputed legacy of the financier. Within libertarian circles, Milken is often treated as a cause celebre, while detractors, such as James B. Stewart, claim that Milken became wealthy by destroying rather than building American businesses. The controversy is not lessened by the fact that some supporters of Milken, for example, Daniel R. Fischel, are or were employees or co-workers of Milken.

[edit] Charitable and Public Relations Work

Milken has used his wealth and high-level contacts to become an influential voice in economics, education, and medical research.

He counts among his supporters Ted Turner, Rupert Murdoch, and other business executives. Directors of his non-profit 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, an economic think tank. 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, FasterCures, which seeks greater efficiency in researching all serious diseases.

The Milken Family Foundation founded the Milken National Educator Awards in 1985. It has awarded a total of about $54 million to honor more than 2,100 teachers.

Each educator receives an unrestricted $25,000 prize and participates in an annual professional development conference.

He is a major donor to the Milken Community High School (see [1]), a private school in Los Angeles, CA.

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

[edit] Trivia

  • Milken originally planned to fight the charges against him, even going to far as to hiring 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's response to such praise is of yet unknown).
  • Milken shed his (in)famous hairpiece in prison and has been openly bald since.

[edit] Personalities of Wall Street

See List of personalities associated with Wall Street.

[edit] External links

[edit] References

  • Connie Bruck - The Predators' Ball : the inside story of Drexel Burnham and the rise of the junk bond raiders, New York, New York: American Lawyer/Simon and Schuster, 1988, Penguin paperback (updated), 1989.
  • 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 Univ. Chicago.
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