Michael Milken cried in court when he pleaded guilty in 1990 to violating US security laws. After his pardon this week by Donald Trump, Wall Street’s one-time junk bond king was more measured. He issued a statement mentioning his wife of 51 years, thanking the US president and expressing his commitment to philanthropy.
If that response seemed rehearsed, perhaps it was. Now 73, Mr Milken had spent the better part of his adult life preparing for that day. Since being banned from the securities industry, paying $600m to the government and investors and serving 22 months of a 10-year prison sentence, he has worked as relentlessly to burnish his image — funding cancer research and starting a think-tank — as he once did to push high-yield debt securities.
Few people in Wall Street history have a more complicated legacy. Today’s world would be unimaginable without Mr Milken’s contributions — which are reflected in the size of the junk bond market and the ubiquity of the leveraged buyout. But he was a man who bent the rules in a “greed is good” era, and that has tended to overshadow his innovations, leaving him feeling under-appreciated.
“I regret that the American public didn’t understand,” Mr Milken said recently when asked about his career. “Almost every person is high-yield junk . . . The American public didn’t understand that they were talking about themselves — 60m jobs being created by non-investment-grade companies in the latter third of the 20th century.”
Mr Milken found financial enlightenment in an unlikely place — the University of California, Berkeley in the 1960s. While his contemporaries were fighting to end the Vietnam war or letting their freak flag fly, Mr Milken, the son of a southern California accountant, became a devotee of W Braddock Hickman’s 1958 opus Corporate Bond Quality and Investor Experience.
After examining all corporate bonds sold in the US from 1900-43, Hickman found that investors would have done better with a portfolio of riskier credits than supposedly safe ones. As LSD was to Timothy Leary, Hickman was to Mr Milken: he set out to turn the world on to his countercultural discovery.
Setting up shop at Drexel Burnham Lambert, Mr Milken found a Wall Street that was far from hip, however. Although high-yield bonds were numerous in the 1920s and 1930s, the category in the 1970s consisted of a small number of “fallen angels” — higher-rated bonds that had been downgraded.
So Mr Milken created a market of his own, graduating from the trade in fallen angels to underwriting junk bonds and then unleashing the power of high-yield debt in the service of buyouts and hostile takeovers. A letter from Drexel saying it was “highly confident” of securing financing for a corporate raider was the 1980s equivalent of a Trump tweet in its power to scare chief executives.
Mr Milken’s market might was immense — in the 1980s, Drexel regularly accounted for half of junk-bond issuance. His personal share was enormous — $550m in 1987. And his intensity was legendary. After moving from New York to Los Angeles in 1978, he started at 4:30am and worked into the night at an X-shaped desk.
The problem was that like many pioneers, Mr Milken had the opportunity — and the tendency — to play by his own rules. He pleaded guilty to six criminal counts ranging from filing a false regulatory report to mail fraud and securities fraud. In return, prosecutors dropped 92 other counts against him and all charges against his brother, Lowell, a lawyer at the Beverly Hills Drexel office.
With Mr Milken gone, Drexel collapsed, and the high-yield bond market faltered. “Junk bonds lived up to their name,” Warren Buffett told his shareholders at the time.
But Mr Milken’s junk revolution continued without him and the market is now bigger than in his day. Drexel veterans also play an outsized role on Wall Street. David Solomon, chief executive of Goldman Sachs, worked there, as did the leaders of firms including Apollo, Moelis and Jefferies.
After leaving prison in 1993, Mr Milken faced new allegations over compliance with his ban from the securities industry. In 1998, he paid $47m to settle allegations that he came too close to his old trade.
He still plays the role of grandee at the think-tank he founded, the Milken Institute, which hosts 200 events every year. Last April, he singled out SoftBank’s Rajeev Misra for praise, saying: “There is no one that has the understanding of financial markets and capital markets and the hundreds of different types of instruments that you do.”
Many people outside finance know Mr Milken and his family foundation, founded with his brother, for their good works.
A prostate cancer survivor, he has become a campaigner against the disease. The Milken Educator Awards have provided cash grants to thousands of US teachers. There is even a Milken Archive of Jewish Music.
Probably the most poetic manifestation of the family’s largesse can be found in Fort Scott, Kansas, home of the Lowell Milken Center for Unsung Heroes, which introduces children to role models who “have made a profound and positive impact on the course of history”.
The dozens of people honoured at the exhibit do not include any bond traders, but it is easy to imagine how the Milkens were attracted to the idea.