In December 1986, U.S. Attorney Rudolph
Giuliani made one of the most extraordinary deals in the
annals of American justice. It was with Ivan Boesky, the
Wall Street arbitrageur, who had admitted using stolen information
to make over a $100 million. Not only was he was allowed
to plead guilty to a only a single count of securities violations,
but he was permitted to keep secret his foreign bank and
brokerage accounts, even if they had been enriched by his
criminal activity. Similarly, the accounts in his wife and
children's name were protected. This accord was not Giuliani's
work alone: it was initialed by the U.S. Attorneys in both
Washington D.C. and Los Angeles. What Boesky offered to
give in return for this leniency was, among other things,
information about the secret dealings of a reclusive financier
in Los Angeles-- Michael Robert Milken.
Even as Giuliani hammered out the final
terms of this bargain with Boesky, Milken, on the telephone
in his trading room in Beverly Hills, was lining up some
$20 billion in financing for raids on such corporate behemoths
as US Steel, Gillette, and Trans World Corporation. Despite
the scope of his operations, he had tried to remain invisible
to the world at large by denying all press interviews, avoiding
social functions and buying up photographs of himself.
Now, with a stroke of the pen by Boesky
and three U.S. Attorneys, Milken was suddenly in the cross-hairs
of a highly-visible federal investigation.
Despite this new focus on his activities,
and rumors that his indictment was imminent, Milken bravely
appeared in Beverly Hills Hilton Ballroom, for his ninth--
and last junk bond convention in April. He walked amid four
bodyguards, wearing a beige sports suit and defiant red
tie. His Californian sun tan and toothy grin made him look
much more boyish than his forty-one years. So did the well-fitting
hair piece he wore. The hereditary loss of hair he suffered
as a teen-ager added to his painful shyness-- and reclusiveness
from the press.
More than 2000 clients of had shown
up-- many, if for no other reason, then to show their support
for him. They were mainly middle-level money managers from
Life insurers, Savings and Loans Associations, Pension funds,
College Endowments, off-shore banks, mutual funds, financial
syndicates and other institution investors. Over the past
decade, they had invested scores of billions of dollars
in his junk bonds. Many owed their performance record, if
not their careers to him. Even if they had heard his mesmerizing
message before--and pointed jokes-- they watched him intently.
Milken flashed a quick smile the audience--
as if to say the world was still under control. But there
was also a jarring twist in his face-- suggesting the enormous
strain he was under. As he began his lilting, almost preachy
cadence, his deep set eyes grew more intense. Like some
leader at a revival meeting, he looked dead ahead, making
sure he was in total control of his audience.
"We should all recognize from the moment
we wake up in the morning, we don't like change. We don't
like it when our children stop listening to Mary Poppins
and all of a sudden have rock video blasting in the house...we
don't like it when they change their hairdo or dress. People
who run corporations don't like change either."
He hesitated a moment for effect; a
grimace on his face-- as if he could personally feel the
pain these "people" were in. As everyone in the room fully
realized, the staggering change he was talking about was
the one he himself had brought about-- the junk bond revolution.
"One way to insulate yourself is to
deny change is occurring. You lash out at people, and whose
easiest to lash out at...Wall Street."
He is thin body
was suddenly taut with nervous energy. He looked at his
supporters, who knew that he was explaining, in his own
code, why the government was about to come crashing down
"Much of American business has run to
the [government] and said, 'Let's change the rules, we don't
want competition, we don't want pressure....Where the corporate
officer has denied the market place its right of judgment,
and put up barriers to change... and become an ostrich,
eventually change becomes violent.
Milken left the conference mobbed by
supporters. Just as they had put their faith in his new
bonds-- and profited by doing so-- they accepted his message:
the establishment was after him because they feared change.
As one supporter stated, "Corporate America is hoping to
indict Mike Milken...so it can go back to sleep for another
30 years." It was, to them part of "the war" on Wall Street.
Whatever the reason for the powerful
reaction against Milken, one thing was certain: he was no
ordinary financier. In a few short years, he had reshaped
the financial world in a way that no one else had done since
J.P. Morgan in the nineteenth century. What he did almost
single-handily was destroy the dam of traditional restraints
that had effectively penned in a half-trillion dollar reservoir
of capital. When this pool of funds, known as the bond market,
which had been retained for more than a century as the private
fishing pond for Fortune 500 and utility companies, suddenly
was channeled by Milken into new hands-- including non-traditional
entrepreneurs and corporate raiders-- it changed not only
existing relations on Wall Street but the hold of management
over publically-held corporations. For better or worse,
it threatened to irreversibly alter the balance of power
in corporate America. How one man, an outsider without any
connections, could bring about changes of this magnitude,
and make perhaps a billion dollars for himself in the process,
is a story of American capitalism.
Only a decade earlier, Milken was getting
his business degree from the Wharton School. Now, he was
the central figure in a struggle for control of a vast part
of the corporate wealth of America. "I never saw myself
as a revolutionary...all the revolutionaries I know are
dead," he told me.
What Milken had sought throughout his
remarkable rise to power, he explained, was not chaos--
but control over the things around him. "I don't like it
when they change my seat at work, it probably disorients
me for a week," he explained. When he moved his 20 man bond
trading department from New York to Los Angeles in 1978,
he found, when he sat at the center of the new X-shaped
trading desk he found it difficult to see the two employees
on the corners of the desk. He stormed out of the office,
ordering the entire office to be redesigned so that he could
see everyone from his seating, at all times. Subsequently,
he moved his trading room to the building that houses Gump's
on Wilshire Boulevard-- a building that he, and his partners,
own. "I have no private office," he said to me, "I never
had one in my life."
Ever since he had been a teenager in
the San Fernando Valley Milken found one means of getting
control was simply working longer hours than anyone else.
At high school he was both head cheer leader and Prom Chairman,
and earned money for himself working nights at a diner,
at Berkeley, he made Phi Beta Kappa while moonlighting at
the accounting firm of Touche Ross. He then enrolled at
Wharton, where he commuting on a greyhound bus from Philadelphia
to New York to trade bonds at Drexel. He told Frederick
Joseph, who is now CEO of Drexel, "I don't know if I am
smarter than anyone else but I can work 25 per cent harder."
He undertook, as a matter of routine,
to work a fifteen hour day. He usually arrives at the trading
room at 4:30 a.m.-- toting two dog-eared canvas bags full
of reports and memos that he had taken home to read-- and
remains there until at least 7:30 at night. "Lunch," usually
a sandwich and soda, is brought in on a tray for him, and
everyone else, at 10 a.m. He neither smokes or drinks--
not even coffee, explaining, "I don't need stimulants."
Three assistants, who work in relays, starting at 4 a.m.,
try to keep up with him.
He uses the telephone as another means
of extending his control. As young women in jeans move around
the trading room passing scribbled notes to him, he relentlessly
phones clients to tell them the "story" on companies whose
bonds he is "placing." His pitch is often in the form of
Keeping visitors waiting for audiences
is another means of maintaining control. Not uncommonly,
corporate executives begin cuing up in the conference rooms
outside from early in the morning to late at night. They
come typically to discuss borrowing money for their company
in the junk bond market. Often, they then wait for over
an hour. When Milken finally strides into the room, he is
accompanied by a host of his aides, relevant financial experts
and executives from Drexel's corporate finance department.
There is, not uncommonly, more than twenty people sitting
around the oval-shaped table.
According to executives who have gone
through such "audiences," Milken usually listens patiently
and courteously to their case for getting access to junk
bond financing. He then, in another act of control, dismisses
from the room all but four or five participants. In this
smaller group, he then presents his own analysis of, and
strategy for, the company seeking money in the bond market.
One industrialist who sat through such an audience was "stunned"
as he described it afterwards, by Milken's intimate knowledge
of his company's financial situation. Then, suddenly, the
audiences would be over and Milken would disappear back
into the trading room.
Nominally, Milken is merely a minor
executive at Drexel--the vice president in charge of its
Beverly Hills branch office. In fact, in an extraordinary
arrangement, he operates what is tantamount a company within
a company. By moving his staff to LA, he was able to operate
outside of the sought of direct supervision that he might
have to contend with in N.Y. His inner circle includes Lowell
Milken, his younger brother and a lawyer by training, Peter
Ackerman, his right-hand man and a Fletcher School Ph.D.
and Richard Sandler-- his personal lawyer. He also has his
own accountants and consultants. He also takes a large part
of Drexel's profit: In 1986 alone, he, and his staff, reportedly
got over a quarter billion dollars in bonuses-- much of
which was invested in Milken's extramural ventures-- and
highly-aggressive tax-shelters. In these investments, he
has made many of these top aides multi-millionaires in their
own rights and partners of his.