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The story was the same with Thomas Spiegel.
When Milken met him, his family owned a small thrift, Columbia
Savings and Loan, which invested its funds mainly in government-backed
30 year mortgages. As short-term interest rate steadily
rose in the 1970s, S&Ls had to pay progressively higher
rates to get the public to buy their Certificates of Deposits,
which drove many to the brink of bankruptcy. Milken showed
Spiegel that the answer lay in substituting higher-yielding
junk bonds for mortgages in its portfolio. By doing this,
Spiegel had increased his bank's assets from 400 million
to 4 billion dollars-- much of it invested in Milken's bonds.
As the number of converts grew, Milken
created an annual jamboree for them in Beverly Hills. As
part of the logistics, he hired fleets of stretch limos
to shuttle the money managers around; plush restaurants,
such as Chasen's, to wine and dine them, and entertainers,
such as Frank Sinatra, Diana Ross and Kenny Rogers to amuse
them. For his more exclusive clients, there was also stag
parties in bungalow Eight of the Beverly Hills Hotel. As
one participant, who attended in 1985, recalls, about 20
"starlets" were ushered into the room, like " pigeons brought
in a net to a skeet shoot-- and then let loose for the guests
to shoot at." The "starlets" were arranged through a model
agency partly owned by one of his business associates. There
was even a plan to charter the Concorde for a supersonic
outing to Wimbledon, where Milken's top clients would have
their own tennis clinic with Virginia Wade.
But despite such excursions, the purpose
of these multi-million dollar conferences was, as Milken
explained it, to give junk bond buyers "a sense of purpose."
Beginning at 6 a.m, there were presentations by corporations
that were issuing these bonds, followed by "news breaks"
by Milken, where he acted as both a MC and cheerleader.
Among these carefully
orchestrated events were sessions in which speakers stressed
the good junk bonds were doing for the economy. For example,
in 1985, first, Senator Chick Hecht told how the country
needed growth companies, then a series of economists explained
how junk bonds were crucial to growth companies, followed
by Ralph M. Ingersoll, the CEO of Ingersoll Newspapers,
who told how they had made his company more productive.
Finally, to unrestrained cheers, Milken summed up the message.
The change he had brought about through
his crusade was that the 2000 or so money managers in the
audience were no longer limited in the bonds they bought
to a few hundred investment-grade companies; they could
bonds in thousands of unrated companies. He had opened up
a new universe of speculation to them.
Milken accomplished this feat not through
his skill as a bond trader but through his skills as a salesman.
He was Wall Street's version of the Pied Piper-- leading
wayward fund managers from their traditional village. The
main occupation of his "traders" was selling bonds to his
long list of institutional customers, which they "distributed"
according to his instructions-- though they also bought
and sold bonds to support the market (and made the spread).
The bulk of the profit he generated for Drexel came not
from any sort of arbitrage between junk bonds and investment
grade bonds-- which, as he explained it to me, he never
really did-- but from the fees he got from selling previously
unsalable corporate debt.
These money-managers were willing to
go along with Milken not solely because of his mesmerizing
presentations-- though they provided the "doing good" rationale
their superiors might like to hear-- but because of the
track record of his junk bonds. The companies he financed
boomed, rather than defaulted (In 1986, for example, not
a single one of his companies missed an interest payment).
He also provided them with a liquid market in which they
could quickly sell any junk bonds that made them nervous.
Moreover, the prices for these bonds were, despite fluctuations
in other markets, moved very little. This established what
appeared to be a very stable, as well as profitable, medium
for the institutional funds that they had been entrusted
with investing.
The means by which Milken maintained
the appearance of a stable junk bond market was a far less
visible part of his strategy. From the moment he moved to
California, aside from giving his pitch to money managers,
he sought out alliances with larger financiers who personally
controlled other financial companies-- especially insurers
with large portfolios of bonds. Among the allies he made
were Saul Steinberg (Reliance Group Insurers); Fred Carr
(First Executive Life Insurance), Carl Lindner (American
Financial Corporation), Victor Posner (..) and the Belzberg
Brothers ( First National Corporation). Milken's relation
with these financiers went beyond merely selling them bonds.
In the case of some, such as Carr and Steinberg, he became
their partner in other joint ventures. He also acted as
their financier when they need to raise their own money
to acquire other companies. What he created was a common
set of interests between himself and others controlling
financial companies. Fred Carr's First Executive alone invested
most of its 1.4 billion dollar portfolio in junk bonds (as
well as setting up an offshore re-insurance company, First
Stratford, in partnership with Milken. The extent to which
he depended on a handful of financiers was revealed by Milken
in a deposition he gave in a law suit involving the Green
Tree Acceptance Corporation. He acknowledged that "I would
not consider it unusual to find six or seven institutions
buying anywhere from 50 to 70 per cent" of his junk bonds.
Moreover, Milken, together with present
and former Drexel employees, became a heavy investor in
his own junk bonds. The resources at his disposal included,
among other entities, his personal trading account, estimated
to be over 150 million dollars, the Milken family foundation
( which in 1984 reported buying $104,621, 379 worth of securities)
and a half-dozen partnerships, he had organized with his
employees, some dating back to the mid-1970s, in which they
re-invested much of the profits and bonuses they had receive
at Drexel.
In addition, Milken,
with a few top aides, had a controlling interest in First
Stratford, the off-shore re-insurance company, which had
734 million dollars in assets .Milken was also a partner
in two investment vehicles run by his former trading assistants--
Bass Limited Investment Partnerships, with two billion dollars
in assets; and Pacific Asset Holding, run by his former
chief aide, Gary Winnick ( who himself invested $30 million),
which engages in everything from risk arbitrage of take
over stocks to Leveraged Buy Outs. It reportedly has a billion
dollars in capital with which to trade junk bonds.Then,
Offshore in Bermuda, along with First Stratford, there is
Garrison Investments, operated by still another of his former
aides, Guy Dove III. It reportedly re-invests over three
billion dollars in municipal holdings, pension plan and
other institutional funds-- much of it in junk bonds.
Finally, Milken also has a powerful
voice in Drexel's own $3 billion bond portfolio, if not
total control. He is its third largest share holder-- after
Bank Lambert in Brussels and its own pension plan. According
to estimates of former associates of Milken, all these funds--
either controlled by Milken, his former aides or Drexel,
may be as much as 10 billion dollars. If effectively traded
back and forth between issues, this sum could do much to
create the image of a stable market.
Milken thus became, aside from a bond
salesman, a market maker for all junk bonds. His Beverly
Hills office did, according to a deposition he gave, 250,000
transactions a month. Within this system, money was commonly
moved from one coded account to another without the name
of the buyer or seller being identified, even to his own
employees. "He didn't respect any conventional boundaries,"
an arbitrageur, who knew Milken well, observed. "It all
may have been out of control," a competitor at Morgan Stanley
suggested. On the other hand, such formulations, based on
orthodox precepts about bond trading, may have seriously
underestimated the leverage over the market that wasn't
visible to outsiders. With billions of dollars flowing through
his various entities, and acting himself, under different
hats, as buyer, seller, market-maker and investment banker,
Milken had an extraordinary tight grip not only over the
prices of bonds in his market-- but over the perception
of the entire phenomena.
By 1986, the small stream of money he
had diverted from the investment-grade market in the late
1970s quickly turned into a torrential river of funds. Entire
industries, such as cable television, health care and regional
airlines were developed through the proceeds. And it nurtured
a whole new class of entrepreneurs-- men like Henry B. Kravis,
who, through his firm, Kohlberg, Kravis Roberts, organized
over $30 billion in leveraged buy outs; Rupert Murdoch,
who through his "fourth network" and other innovations,
forged a global media empire; William McGowan, who, through
MCI, built a competing phone system to ATT, Ted Turner,
who developed 24 hour cable news and Frank Lorenzo, who,
through competition and mergers, created the largest airline
in the United States.
If this new source of financing had
only been used for helping medium size companies, the corporate
establishment might have more easily accepted it. But as
it poured in at an accelerated rate, Milken, and his associates
at Drexel, began using it to finance corporate raiders,
such as Carl Icahn, Ronald Perlman and T. Boone Pickens.
Up until the junk bond market became available, few financiers
could borrow sufficient capital to get control of multibillion
dollar corporations. Now A single client of Milken's, Perlman,
who had already taken over Revlon, was now bidding $9 billion
for three different companies. Icahn, who had taken over
TWA, and going after US Steel, compared management to "gardeners"
who had come to think they had owned the estates were paid
to take care of." Pickens, who had attacked some of the
largest oil companies in the world--including Gulf, Phillips
and Unical-- was now spearheading a political movement,
the United Shareholders of America, to fight the "corpocracy."
All three raiders were seen, for good reason, as "Milken's
creations." These raids-- and the leveraged buy outs and
restructuring they led to-- rapidly began to change the
balance between owners and managers.
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