Hustler or Hero?

The Predator's Ball: How the Junk Bond Machine Staked the Corporate Raiders, by Connie Bruck, New York: Simon and Schuster, 385 pages, $19.95

Michael Milken of the investment banking firm Drexel Burnham Lambert is a legend in his own time, a certified financial genius, nearly a billionaire, and considered by many the architect of the corporate takeover wars of the 1980s. He is 42 years old.

In The Predator's Ball, Connie Bruck, a senior reporter for The American Lawyer, has written the first installment of what is essentially a biography of Milken—his modest origins and his meteoric rise to the top. Bruck is candidly ambivalent about her subject. She claims that when she set out to write the book, her "sympathies were more toward Milken and his band of renegades than toward the corporate establishment they were attacking." Yet, at a key point in the book, she piously intones that if "Milken's…actions are not worth prosecuting, then the securities laws were not worth passing." Bruck may have a good point about the securities laws even if it is not the one she intended. For she concedes in the preceding paragraph that seen separately, Milken's actions amounted to trivial violations of the securities laws.

The portrait of Milken that emerges in Bruck's book is impressive regardless of how one views the securities laws. Milken was personally responsible in his 20s for putting to the test an obscure academic thesis developed by W. Braddock Hickman—that a broad-based portfolio of below-investment-grade, high-yield bonds will be, over the long run, a higher-yielding investment than a similar portfolio of investment-grade bonds. Acting on this thesis, Milken literally created an active trading market during the 1970s in high-yield "junk" bonds that previously had been only lightly traded, most of them simply being held until maturity.

In the process, Milken became immensely wealthy. His personal assets, according to Bruck, were in the $25- to $50-million range by mid-1978 when he left Wall Street to open a Los Angeles branch for Drexel Burnham. Milken was only 31 years old, and his self-initiated move was not popular at Drexel. But as his old boss told Bruck, "What could we do? Milken was making one hundred percent of the firm's profits."

In the next few years after moving to Los Angeles, Milken went beyond trading and pioneered the issuance of high-yield bonds to finance growing businesses that would not qualify for an investment-grade rating and would otherwise be denied access to the public-debt market. More importantly, however, Milken and Drexel used junk bonds to finance hostile corporate takeovers and leveraged buy-outs (LBOs).

The results were startling. The new-issue market in junk bonds was $1.3 billion in 1981. By 1986, it was $32.4 billion, with the lion's share belonging to Drexel. And, in the process, Milken transformed the face of the corporate establishment. Not only did his junk bond-financed LBOs "bring the owner-manager back to American business," Bruck writes, but they also dramatically accelerated "the trend toward restructuring, as once-placid managements hastened to take measures—such as selling low-earning assets, pruning work forces, renegotiating labor contracts, closing hundreds of older, outmoded plants—before others did it for them."

Milken's life story to date is a paradigm of what free markets are all about; of how capitalism is, as Peter Berger describes in The Capitalist Revolution, "a force of cataclysmic transformation." Bruck appears at times to have a glimmer of this and obviously admires Milken when she describes some of the influences that shaped his career—from his days at Wharton where he "was made fun of by his pipe-smoking Ivy League classmates," to his early times at Drexel where "he was the Jew at the blueblood [firm] segregated off in a corner of the trading floor," to his 1983 claim at a meeting of investment bankers and lawyers that he could raise $4–5 billion for T. Boone Pickens's attempt to take over Gulf Oil, a claim that "was greeted by snickers from the…aristocrats of the Street."

Bruck recounts a favorite story of Milken's about a fatuous Wharton graduate with a prep school and Ivy League background who, at the tender age of 29, addressed Milken and other Wharton students on the secrets of his success, telling them he was now worth $30 million. Milken's punch line is that the young twit had inherited $50 million when he was 25. As Bruck observes:

"The moral, of course, was that however impressive appearances might be, it was not birth, not a prestige education, and not inherited wealth that counted at the continuing, year-after-year bottom line, but performance. Nothing else. Milken resolved to outperform them all.

"And for him, high-yielding bonds were a custom-made vehicle. They were the outcasts and misfits of the securities world, disdained by the rating agencies and the establishment, many of them victims of misconceptions. In that gap between perception and reality, as Milken liked to say, there was money to be made."

Bruck illustrates other admirable qualities of Milken's. While possessed of an enormous ego, he fosters a team spirit among his employees. He has long refused to have his picture in Drexel's annual report; he has no office, only a centrally located desk on the trading floor; he has no fancy title, and neither do his people; and he works incredibly long hours and expects none of his people to work as hard as he does. Asked for an explanation, he told Bruck to "watch the movie Gandhi. It is harder to motivate people if you are in a limousine and others are walking barefoot."

These attributes extend to Milken's personal life, as well. He speaks with pride of the low divorce rate of the people who work for him. He is married to his high school sweetheart and they live in Southern California's San Fernando Valley near where they both grew up. His mother, brother, and cousin live nearby. As Bruck observes: "Milken speaks often about the importance of remembering one's roots.…Unlike some powerful individuals who assiduously remold themselves in the course of their ascent, Milken made no such effort."

Yet her overall assessment of Milken and his accomplishments is negative. So where does Bruck go wrong? Part of it may be personal. She claims that the publicity-shy Milken attempted in 1986 to pay her not to write her book. He may have been kidding, but Bruck doesn't think so. Her book, however, is too honest in its factual portrayal of Milken's attributes and accomplishments for such a pat explanation.

A better answer is that Bruck became so mesmerized by the intricate details of Milken's deals that she abandoned her initial perspective. While accurately describing the trees of Milken's accomplishments, she is lost in the forest. And unfortunately, her conclusion gives far more weight to the weeds of securities regulations. Yet the book obviously spends much more time on the trees than it does on the weeds. This is good, because the weeds are boring and inexplicable to the layman anyway. As a consequence, however, one finishes the book with a strong feeling that Bruck has not made her case against Milken.

She does little to explain and less to justify the complex field of securities regulations and the "trivial" violations she believes Milken committed. In the process, she has effectively ignored what will prove to be a much bigger and more important story about Michael Milken than his spectacular achievements in the world of high finance at such a young age. That story is the persecution of Milken by the federal government, and it is a national scandal.

The feds have been after Milken for years. The Securities and Exchange Commission conducted at least three formal investigations of Milken in the 1980s prior to the Ivan Boesky scandal. No charges were ever filed. After Boesky began cooperating with the SEC in 1986, the feds opened their fourth investigation of Milken and began taping Boesky's telephone calls.

While the SEC would never confirm a detail like this, you can be sure Milken was high on Boesky's and the SEC's list of calls. And you can be just as sure that any such calls did not directly implicate Milken in Boesky's fraudulent conduct, because the SEC did not file any insider trading charges against Milken until September 1988, nearly two years after they got Boesky. While the charges made headlines, nothing in them will come as a surprise to readers of The Predator's Ball. The SEC's charges, taken individually are small potatoes. Congress has been no better. There has never been a legislative definition of insider trading, and John Dingell (D–Mich.), of the relevant House subcommittee, wants to keep it that way, despite two Supreme Court decisions slapping down the SEC for exceeding its authority in this area. In April 1988, in a performance worthy of the late Sen. Joe McCarthy, Dingell forced Milken to appear before his subcommittee even though he had been advised that Milken, as a target of a criminal investigation, would refuse to answer questions on Fifth Amendment grounds.

Dingell is not the only one treating Milken as if he were a mafia chieftain. The biggest offender is Rudolph Giuliani, the U.S. Attorney in Manhattan who has demonstrated a Captain Ahab–like zealotry in his pursuit of Milken and Drexel.

Giuliani and the feds obviously consider Milken a bigger fish than Boesky. But why? Boesky was a big-time crook who made a lot of money by illegally buying inside information from takeover lawyers and investment bankers—sometimes paying them off with briefcases full of cash. Even Milken's detractors—like Connie Bruck—concede that any alleged securities violations by Milken are comparatively minor. The answer, of course, is that Giuliani is after Milken precisely because Milken has been so successful.

In essence, Giuliani is using "mafia rules" against Milken and Drexel—criminalize any technical violation of the law you can find in order to put these dangerous people away. So what if it is only the securities-law equivalent of littering the sidewalk? It probably was a conspiracy to litter, and they undoubtedly used mail and the phones to advance the conspiracy. It is a technique the feds have been using with varying degrees of success since the 1930s when they got Al Capone for income tax evasion.

This may be an acceptable way to go after thugs who make their living at the point of a gun. But Milken doesn't make money with a gun, and he didn't use one to transform the face of corporate America in the 1980s, returning value to shareholders instead of entrenched management. Yet Giuliani is trying to use federal racketeering laws against the securities industry in an effort to get Milken and intimidate others into testifying against him and Drexel. Congress never envisioned such a use of the racketeering laws, but that doesn't bother Giuliani. Further fame and glory await him—for all his reputation as a scourge of Wall Street, Giuliani has still to try his first insider trading case. Milken will give him that chance. Milken can certainly afford to spend millions for defense against both the SEC and Giuliani. And he will. But why should he have to, and why doesn't Connie Bruck care? Guiliani has been so openly ambitious for higher political office for so long and he is so avidly intent on empire building—increasing the number of securities fraud lawyers from 6 to 17 in the last two years alone—that it is difficult not to feel some sympathy for the Great White Whale in this story. When the next installment of his biography is written—and it will be—Milken deserves a writer more sensitive to civil liberties and free markets.

Contributing Editor Michael McMenamin is an attorney in Cleveland. He wrote the article on insider trading that appeared in the October 1988 issue of REASON.