The Crimes of Wall Street


Eagle on the Street, by David A. Vise and Steve Coll, New York: Scribner's, 395 pages, $24.95

Stealing the Market, by Martin Meyer, New York: Basic Books, 208 pages, $23.00

Merchants of Debt, by George Anders, New York: Basic Books, 328 pages, $23.00

Highly Confident: The Crime and Punishment of Michael Milken, by Jesse Kornbluth, New York: Morrow, 384 pages, $23.00

The latest spate of books about Wall Street tell us more about the culture of publishers and journalists than about the workings of financial markets. Distressingly, the ethics of authors and publishers seem lower than those of the "cowboy capitalists" who allegedly stole the market in the decade of greed and ruined the country with debt. It is almost as if the publishing world is controlled by a puppeteer who pulls a string and out pour scenarios of greed unleashed by Reaganomics.

Books purporting to be factual are laden with novelistic dialogue that no writer could have overheard or remembered if he had. Dialogue intended to convey reality to imagined events leaves the reader with the impression that he is reading a historical novel in which the imagination of the author creates the story. Clearly, publishers want a good story, and its veracity is of no import.

Eagle on the Street, by Washington Post reporters David Vise and Steve Coll, even goes so far as to advertise on the book jacket the "novelistic flair" with which the authors "unravel all the threads of excess that characterized" the decade of greed. "Here, finally," the publisher tells us, "is the complete account of the most infamous economic debacle of our century, the story of how the Securities and Exchange Commission, under the sway of Reaganomics and the leadership of John Shad, brought deregulation to the stock market and helped fuel the great bull market while planting some of the seeds for the 1987 crash."

The 1987 crash? A book published in the 1990s that uses a distant, short-lived event of no lasting import as authority for a portrait of ruin? I well remember how the political left tried to use the crash of 1987 to resurrect itself from the tomb in which the long Reagan expansion had placed it. The left wing was convinced that the Reagan Depression had begun and that it would bring the final demise of capitalism. The rapid recovery of the market and its move to new highs made the left appear even more foolish. Unable to accept reality, the political left has found refuge in a world of pretense created by books.

But did the Securities and Exchange Commission do battle with Wall Street and lose, as Vise and Coll seem to think, or did the giant brokerage firms, with help from the SEC, steal the stock market from investors, as Martin Mayer writes in Stealing the Market? Mayer, who is no fool and has insights, blames the modern technology of the computer age for stealing trading away from open exchanges and diverting it to back alleys. The view seems ingrained in many writers that financial markets are mechanisms for stealing from the public and must be ever more tightly regulated.

Similarly, Merchants of Debt, by Wall Street Journal reporter George Anders, purports to be the story of Kohlberg Kravis Roberts and "the mortgaging of American business." Perhaps it is, but it cannot escape the obligatory role of being also the history of "undemocratic capitalism" that cruelly destroys jobs and companies in order to make a few rich. The 18 million new jobs of the Reagan era and the restructuring of companies that caused asset values to rise faster than debt are lost in the telling. The desperation to pour failure all over the 1980s is the hallmark of the Wall Street literature of our time.

Among the Wall Street books, the contrarian is Jesse Kornbluth, whose Highly Confident: The Crime and Punishment of Michael Milken is a blockbuster. Unlike James Stewart, whose Den of Thieves is based on the false testimony of Ivan Boesky and self-serving leaks from the SEC and U.S. Attorney's Office, Kornbluth digs deeply into the Milken story. What emerges is a picture of U.S. prosecutors as highly unethical scalp hunters determined to get Milken at all costs, irrespective of his innocence or guilt. The federal prosecutors who chased Milken to ground emerge as incompetent scumballs who didn't know the difference between a put and a call but had no qualms about lying to Judge Kimba Wood in their sentencing memo if it would help to nail their man.

Kornbluth's book gets its credibility from 400 hours of interviews with Milken; 10,000 pages of documents; transcripts of Boesky's secretly taped conversations with Milken; personal diaries; lawyers' memos; and interviews with key participants in the prosecution. Although Kornbluth doesn't always tell us exactly what he thinks, the picture that emerges is one of extraordinary prosecutorial abuses that in the end coerced a plea from a broken man. "Welcome to Iran," as one of Milken's attorneys put it.

Milken emerges as a man whose genius and confidence built a financial empire and many flourishing companies, but when it came to his own case he was unable to make a single shrewd decision in five years. Generous in sharing his wealth and time with the unfortunate, he insisted on no public recognition. This isolation left him unknown to the public, a persona to be defined by prosecutors and their shills in the media.

In Kornbluth's account, the persecution of Milken is a replay of the Salem and McCarthy witch hunts in which common vengeance writes the law. To get a better deal from the government, Boesky, a real inside trader who paid with suitcases of cash, lied about Milken. Delighted to have a bigger fish in their net, ambitious prosecutors, who knew nothing about the financial world, got far out on a limb with a case that made no sense to any knowledgeable person. After two years, the prosecutors learned that their case was absurd.

The details made no sense. No one would have the long and short stock positions that were ascribed to the alleged scheme. Moreover, Boesky lost money on trades allegedly based on insider information from Milken. Most striking of all, if Milken controlled Boesky, why in the world would Boesky need Dennis Levine?

Once it became clear to the prosecutors that they could not bring a Boesky-related case against Michael Milken or put Ivan Boesky on the stand as a witness, they launched a terrorist campaign, neutralizing Milken's witnesses with target letters, leaking disinformation to reporters such as David Vise of the Washington Post, and even destroying innocent firms such as Princeton/Newport in order to terrorize Drexel Burnham and its weak chairman, Fred Joseph.

Along the way Milken lost his lead lawyer, Edward Bennett Williams, to cancer. Williams had sized up U.S. Attorney Rudolph Giuliani as "raw political meat—a mediocre lawyer with all the drive necessary to get to the top in a shitty place like New York." "Don't be surprised," Kornbluth reports Williams as warning his client, "if the methods of the government create an atmosphere in which people perjure themselves." In other words, the government would do anything, including suborn perjury, to win the case.

Another blow to Milken was the resignation of Charles Carberry, who headed the securities fraud division in Rudolph Giuliani's office. Kornbluth contends that Carberry "couldn't have had less in common with his boss." Carberry was a member of the old school whose rule was "never sink to the level of the defendants." Uncomfortable with the new office's mentality—"win at all costs, we'll worry about the appeal"—he got out. If Kornbluth's account is even half true, we have to wonder from what cesspool the Giuliani team crawled.

Kornbluth reports that prosecutors told one Milken client that damaging leaks to The Wall Street Journal during the investigation were "part of our strategy." U.S. Attorney General Dick Thornburgh reportedly described the tactic of holding Milken's brother Lowell as a hostage to be released in exchange for a Milken plea as "a brother for a brother."

John Carroll, who prosecuted Milken for Giuliani, has since admitted that in the Milken case "we're guilty of criminalizing technical offenses." Carroll told an audience at Seton Hall Law School that "many of the prosecution theories that we used were novel. Many of the statutes that we charged under…hadn't been charged as crimes before….We're looking to find the next areas of conduct that meets any sort of statutory definition of what criminal conduct is."

Kornbluth notes that the public's view of the Milken case, the most widely publicized business story of the 1980s, "was shaped by just a handful of writers." Their reporting, "with its implicit message that Milken was badly in need of prosecution, had enormous impact on journalists and editors across the country." James Stewart, Steve Coll, David Vise, Connie Bruck, Benjamin Stein, and Michael Thomas were incredibly biased against Milken, with the latter two spewing out venomous hatred.

Kornbluth quotes Stein, of Barron's, as describing junk bonds as a "boiler room scam" sold through a "complex Ponzi scheme" to a fraternity of buyers whose minds were fogged by the "use of drugs." Thomas, a writer for The New York Observer, wanted Milken sentenced to Leavenworth, where "the prospect of having one's sphincter enlarged to the circumference of the Holland Tunnel by the rigors of the prison social calendar often works wonders when it comes to refreshing memories clouded by the Fifth Amendment." Of course, Milken never invoked the Fifth Amendment.

Kornbluth shows that Milken's lawyers made mistakes, because they relied on facts, and facts didn't count. Hostility to the monied—particularly a vulnerable member of the rich who was not protected by the establishment—and careers fed by the collection of scalps played a far bigger role than facts or law. Justice was not even a participant.

Giuliani underling Bruce Baird is quoted as saying that "I have less sympathy for [Milken and his ilk] than for the Mafia." "Bruce never lied," says one Milken attorney, "he always told us he was determined to crush Milken." Other participants in the persecution of Michael Milken—Jess Fardella of the U.S. Attorney's Office and Gary Lynch and Richard Breeden of the SEC—come across as uninformed zealots not overly burdened with integrity.

Liberal academics have done a lot of damage with their propagandistic picture of the economy as a zero-sum game in which riches are based on theft from the deserving. In Kornbluth's view, this description of money making more or less sums up the view of the SEC's enforcement lawyers. The unprecedented scale of the money making in the 1980s suggested massive criminality to them.

As Kornbluth puts it, "Lynch and his associates were thoroughly sick of the mergers and acquisitions orgy of the 1980s. They'd never had any respect for the intellectual underpinnings of this explosion. For them, the economists of the 'Chicago School'—the high priests of what some people called the Reagan 'revolution'—were just political hacks in disguise, outright charlatans who preached dressed-up crap that was credible mostly to number-crunching twenty-six year olds.

"But the SEC's enforcement lawyers understood why ordinarily sober business people parroted this ridiculous free-market, trickle-down supply-side ideology: The immense profits washing over Wall Street had made the players crazy. Formerly sane men now talked as if the markets were not just efficient but morally correct."

Prosecutors clung to their portrait of Milken as the most dangerous criminal on Wall Street, a man who would have to be crushed and removed from the markets. To coerce a plea when they had no case, they used RICO—the Racketeer Influenced and Corrupt Organizations Act. RICO was the work of Robert Blakey, the son of a banker. Blakey, Kornbluth reports, had been "deeply influenced by Edwin Sutherland's 1949 study, White Collar Crime, which argued that there was a continuum between violent street crime and white collar offenses."

Anyone convicted under RICO gets 20 years in prison for each count, even if already tried, convicted, and jailed for the offenses that qualify as racketeering. The law's real power, however, is economic. It permits seizure of all assets prior to trial and can even attach the defendant's lawyer's fees.

Faced with RICO and shaken by the government's highly unethical and unrelenting attack, Milken felt he had no recourse but to meet the government's demand for a plea bargain. His lawyers crafted a carefully drawn one. His lead attorney, Arthur Liman, pointed out that prior to 1986 no criminal prosecution had ever been brought for the offenses that constituted felonies for Milken.

No one had ever been charged with aiding and abetting the filing of a false 13(d) schedule by another party, nor for aiding bookkeeping and record violations by another broker, nor for failing to disclose an attempt to recoup expenses from a portfolio manager. Yet an inexperienced judge, seduced by the prosecutors, aided and abetted the criminalization of petty civil charges by giving Milken an unprecedented 10-year sentence.

Milken had been warned. His brother Lowell advised him never to trust the government. Drexel lawyer Peter Fleming advised him to never give on principle. Lowell Milken's lawyer, Michael Armstrong, recognized early in the case that it rested on Boesky's allegations and proposed a $1-million reward for information that would convict Boesky for lying to the government. This innovative scheme was deep-sixed by Michael Milken's attorneys, who initially believed that the problem was inexperienced government prosecutors unfamiliar with the securities business. Let's just tell them the facts, they reasoned.

Wall Street and the corporate establishment felt threatened by Milken and Drexel and wanted them out of the way. They got their wish. In retrospect, it is clear that the wild charges that Milken's fortune was based on fraud and insider trading are untrue. The image of junk bonds as a Ponzi scheme was a useful prosecutorial illusion, but today's flourishing junk-bond market and junk-bond mutual funds gives the lie to the characterization used to brand Milken a master criminal.

But the myth of Milken's criminality continues to be perpetuated by a media too irresponsible to be informed. Recently, People magazine listed Milken as a celebrity who was imprisoned for insider trading. His attorney Alan Dershowitz wrote to People to correct the mistake. He reports that he received a reply from the magazine's lawyer that he saw no reason to correct the mistake, because the magazine was not a publication of record and its readers did not expect precision or accuracy. Moreover, since Milken had originally been charged with insider trading, it was all right for People to list that as his offense.

The Milken persecution has advanced the criminalization of business to new heights. And this was done by Republicans. Just wait until the left-wing Democrats get into office.

Paul Craig Roberts has the William E. Simon Chair in Political Economy at the Center for Strategic and International Studies in Washington, D.C.