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Widespread misunderstanding persists about the facts of Mike Milken's life. Out of the dozens of myths, here are some of the more common falsehoods in approximately the order of their prevalence. Every one of the following statements is false. Click on the myth to read the facts.
Myth: Milken was a financier who turned to philanthropy.
Myth: Milken was involved in insider trading. Fact: He never was. Some news organizations have muddied this with statements such as "Milken pleaded guilty to reporting violations in connection with a government investigation of insider trading." Readers then erroneously assume that the violations to which he agreed to plead included insider trading. In 1992, The Wall Street Journal noted that "things have changed since Milken's plea. The SEC simply fined 98 brokerage firms and banks for Milken-like technical reporting violations." He was not guilty of insider trading and was never convicted of it. Noting this fact, the Journal's editor, Robert L. Bartley in a May 2002 column, said, "The 1990 recession did shake out a real insider-trading ring...Its mastermind, Ivan Boesky, got off with a three-year sentence by offering to cooperate...fingering Mr. Milken and others; cases based on his information collapsed." (Emphasis added.) At the pre-sentencing hearings, the prosecution was invited to show its best evidence, after more than four years of intensive investigation, of more serious violations, including insider trading. Hearing the prosecution's determined efforts, the judge said they had failed to prove the more serious charges. What, then, did Milken plead? Against the advice of those who urged him to carry on the fight (as some others did successfully), Milken admitted conduct that resulted in five violations of complex securities/reporting regulations. None of these violations involved insider trading. In April 1992, the lead prosecutor, assistant U.S. attorney John Carroll, speaking at Seton Hall Law School, admitted that with Milken, "we're guilty of criminalizing technical offenses...Many of the prosecution theories 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 meet any sort of statutory definition of what criminal conduct is." Professor Norman Barry wrote in his book, Business Ethics (Macmillan, 1998), "Like many innovators before him, Milken had to pay the price for his success. The pursuit of Milken was an affront to the rule of law. He originally faced a 98-count indictment (including insider trading charges), which the Justice Department knew would not stick. So the department managed to coerce Milken to plead guilty to trivial offenses. If they want you, they will get you. Milken's problem was his success." Another Wall Street Journal column added: "Mr. Milken was coerced into a plea bargain involving trading violations elevated into felonies...Prosecutors and politicians want scapegoats, and often have the collaboration of businessmen. With Milken, business competitors egged on prosecutors. And the truly culpable parties can get off lightly by conning prosecutors with the promise of bigger fish." Myth: Milken paid a $1-billion fine. Fact: It was $200 million. There were other payments, primarily to dispose of civil litigation, but there was no adjudication of wrongdoing in those suits. It is misleading and erroneous to combine negotiated civil payments with mandatory criminal sanctions. Civil settlements are not a measure of criminal liability and signify no more than a civil defendant’s desire to move on with his life whether or not the claims have merit. Other defendants in similar cases fought for a decade and prevailed. Milken could afford the settlements and he had better things to do - like addressing America's serious education and medical research issues - than to spend a decade in court. Myth: Money that Milken gives to charity is tainted, part of the ill-gotten gains of his securities violations, which had a large economic impact. Fact: Four of the five violations were found by the judge to have had zero economic effect. The fifth involved a failure to disclose a commission of a transaction that, if disclosed, would be legitimate. This type of non-disclosure has never before or since been the subject of a criminal prosecution. Even though Milken had traded more than a billion dollars a day in securities-several trillion dollars at that point in his financial career - the total economic effect of the violations found by the judge was just $318,082 - about three ten-thousandths of a single day's trading; and that amount was spread over a period of several years. In fact, even this small "economic effect" of $318,082 is entirely theoretical since the transactions were executed within the spread of the bid and asked prices and it has never been shown that any investor lost anything. In the civil lawsuits, all of the plaintiffs settled and took their money without any admission of wrongdoing by Milken. Any remaining money retained by Milken was earned fairly during his spectacular business career beginning in the 1960s. Even the prosecutors admitted to Milken's attorneys that his wealth was earned legitimately. None of the Milken family's $750,000,000-plus in charitable contributions is in any way "tainted." In fact, the fastest increment to Milken's wealth was in 1974-76, when he earned the base of his family wealth by correctly calling a major turn in the market. Subsequently, he earned perfectly legitimate payments from his firm pursuant to an employment contract that had been negotiated years earlier. The Milken Family Foundation was established years before any of the activities occurred that were later found to violate securities regulations. Myth: Milken associated with the crooked Ivan Boesky. Fact: Milken never socialized with and had only brief and sporadic contact with the notorious Mr. Boesky, who was described as a "pathological liar" on a 2001 CNBC broadcast. That program was based on the book, "The Great Game - The Emergence of Wall Street," by business historian John Steele Gordon, who suggests that Milken may have been "the victim of jealousy, self-serving crooks like Boesky, and ambitious prosecutors who lusted after so high-profile a case." Noting Boesky's crimes, Gordon says, "Michael Milken was a different matter altogether." He calls the infractions to which Milken pleaded "minor" and notes that "the judge said she could not find more than a few hundred thousand dollars in discrepancies." In July 2002, Mr. Gordon appeared on MSNBC's The News with Brian Williams and said, "Ivan Boesky was just a plain crook. He showed up in people's offices with suitcases full of cash." Gordon then contrasted Boesky with Milken, whom he described as "a highly creative financier who did a great deal of good and helped the American economy in many ways." A man of modest behavior, Milken is the antithesis of Boesky. Myth: Milken was involved in the savings and loan crisis. Fact: Not only was he not involved in this crisis of the late 1980s, but as early as 1985 he warned that the S&Ls faced big problems and urged a three-point program to address those problems. Furthermore, it is now widely accepted by most independent scholars that the fundamental causes of the S&Ls' problems were federal deposit insurance, the structure of the real-estate financing market in the 1980s, and the disastrous FIRREA Act that Congress passed in 1989. Myth: Milken is the "former junk bond king." Fact: Repetition of this hackneyed epithet plays into the hands of the PR departments of Milken's old competitors. When these companies were having trouble competing with him back in the 1970s and '80s, they dreamed up "junk-bond king" to disparage him. This term was picked up by The New York Times and has been repeated ever since. Given the breadth of Milken's activities before and after his appearance at the center of a media frenzy, it's a mindless phrase that makes no sense. It ignores both his three decades of leadership in medical-research advocacy as well as his use of complex capital-structure strategies involving equity-based financial instruments and other securities. Although his firm was the largest in the field, it handled no more than 33% of the trading in high-yield securities, which had been used in America for more than 200 years. Between 1969 and 1989, Milken employed approximately 50 different securities types in a dozen major asset classes (only one of which was high-yield debt) to help finance the growth of more than 3,200 companies. This created millions of jobs. (What exactly is a "junk bond king"? Does the press refer to Bill Gates as the "software king" even though he controls more than 90% of the operating system market? Most responsible publications have concluded that "junk bond king" is a clichè - like "Panamanian strongman" or "intrepid traveler" or "the powerful House Ways and Means Committee" - that good writers should avoid.) Mike Milken is a philanthropist, financier, medical research innovator, author, foundation executive, corporate officer, husband, father and grandfather. He's not - and was not - king of anything. Myth: Milken appeared on the financial scene in the 1980s. Fact: His most important financial work was in the 1960s and 1970s. All his theories of credit risk and capital structure were developed at Berkeley and Wharton in the 1960s. These theories, thought revolutionary at the time, are now taught in every business school. They came into play in the early '70s and were fully vindicated during the severe market drop of 1974, which Milken considers the most-important year of 20th-century financial history. By 1975, he was independently wealthy and never needed to work again. Milken considers 1976 to be the peak of his financial career because the markets had affirmed everything he believed and predicted. (Ironically, it was in that year that Milken said he felt "powerless" after learning that his father's cancer was terminal - a fact that accelerated his involvement in medical research initiatives.) By the late 1970s, Milken had made major strides in democratizing capital access for below-investment-grade companies and entrepreneurs. In the words of Wharton School management professor Daniel Raff, "the capital markets roused from their critical slumber." Unfortunately for Milken, this process infuriated the Establishment. "By forcing open the sluice gates of capital," wrote Alvin Toffler in his 1990 book PowerShift, "Milken had rattled the entire structure of smokestack power in America." Before Milken, the greatest financier had been J.P. Morgan, who saw markets as a zero-sum game in which he tried to be the winner at someone else's expense. For example, when he financed AT&T, Morgan used his enormous Wall Street and banking influence to make sure that potential AT&T rivals lacked access to capital. Milken did just the opposite, opening up access to capital for thousands of smaller companies. Milken showed that it was possible to align the interests of all corporate stakeholders - investors, entrepreneurs, debtors, creditors, consumers, management, employees and society - to create jobs, wealth and economic growth. The key was his profound understanding of capital structure and how it must change as exogenous conditions change. [See Milken's article "The Corporate Financing Cube" under "Articles".] By the late 1970s, he had already shown that it was possible to unlock great potential value hidden in accumulated assets. As others began to exploit this insight, Milken turned increasingly to such issues as education, wage disparity, expanding human capital, and medical research. Myth: Milken's most important work was in junk bonds, which were used to finance corporate raiders. Fact: Those who repeat this myth have little or no understanding of his work or its complex theoretical underpinning. Simply stated, Milken believes that capital structure matters. The choice of capital structure can significantly affect the valuation of a company and the risk of investing in it. There is no one right way to capitalize a corporation, says Milken, nor can any one structure be correct at all times. Sometimes, as in the late 1980s, most companies would have been advised to de-leverage by issuing equity. For much of the 1970s, conditions generally favored debt financing. Yet, Milken believes, for certain companies - such as airlines in the 1960s and dot.com startups in the late 1990s - even a dollar of debt is too much because risk in capital structure should vary inversely with business risk. Unthinking references to the "junk bond king" perpetuate a one-dimensional caricature of a multi-dimensional financial innovator. Consider the variety of divisions reporting to him at Drexel Burnham Lambert:
His most important work was financing entrepreneurs who had good ideas for building companies that became engines of job creation. Based on his studies during the 1960s and his practical experience in the 1970s, Milken was determined to focus, first, on cash flow rather than reported earnings; and second, to consider human capital part of the balance sheet. He played this out by backing such pioneers as Bill McGowan (telecommunications), Ted Turner (cable television), Craig McCaw (cellular telephones), Steve Wynn (resorts), Len Riggio (book retailing) and Bob Toll (homebuilding). They earned Milken's respect and backing because they had greater vision than the sclerotic, risk-averse managers who had always counted on banks for financing. When the banks ran into problems in the 1970s and turned off the capital spigot, Milken stepped forward and made capital available for thousands of dynamic, growing companies that created jobs and shareholder value. This was an epic decision that helped make the U.S. economy the envy of the world in the last quarter of the 20th century. Milken didn't just head a lot of different departments in his work at Drexel. He and his colleagues created what is today a major part of the structure of global finance based on their innovations in the 1970s. This structure - taken for granted today and taught in every business school - powered job growth in America for a quarter century and is now moving around the world through the efforts of the Milken Institute. So it was no surprise that Milken was introduced at an investment firm's 2007 executive retreat as "the father of modern capital markets" and "the man who created modern private equity." There was a relatively small corner of Milken's business that later helped dislodge less-efficient, non-stockholder managers as part of the normal process of business rationalization. These takeovers improved the quality of management at less-efficient companies and helped the economy, making it more dynamic and innovative. In a June 26, 2002 opinion column, the dean of the George Mason School of Law, Henry G. Manne, called takeovers "the most powerful market mechanism for displacing bad managers...just the threat of a takeover provides incentive for managers to run companies in the interest of the shareholders." Professor Manne called the supposed abuses of takeover activity "largely mythical." Writing in The American Spectator [June 2005], Stephen Moore, former senior economist of the Congressional Joint Economic Committee, wrote: "The economic literature is clear that the biggest gainers from M&A activities are not the acquiring firms, but the owners of the acquired firms. One value of the raiders is that they serve as the ultimate cops on the financial market beat, searching out and destroying flab and inefficiencies. For all the vilification of Michael Milken, his firm Drexel Burnham easily created more wealth for American shareholders single-handedly than all the trustbusters in American history combined. Practically every hostile takeover, even those financed with junk bonds, made hundreds of millions, if not billions of dollars, for stock owners." A May 2007 article in the Sunday Times of London said:
These takeovers were an important trend and clearly helpful to the economy, but what has been missed in press accounts is that they were merely a natural outgrowth of Milken's revolution in capital access for entrepreneurs with ability. That revolution broke the stranglehold of the Establishment lenders and shifted power from non-stockholder corporate managements to stockholders. This led to enormous job creation by the 99.9% of small and medium size firms that are not "investment grade" and are usually managed by owners. These companies created 62 million jobs in the last 30 years of the 20th century while the Fortune 500 "investment grade" firms laid off more than four million. But no good deed goes unpunished. Milken underestimated the political clout of corporations with bloated managements that suddenly had to compete with vigorous new players. There was a furious reaction from the Establishment through their friends in Congress and on the editorial pages of major newspapers. Rather than congratulate Milken for enlivening an economy gone dormant, they launched a public relations campaign to attack him as an enabler of "raiders" who were "destroying America." The politicians to whom these corporations made large contributions and the publishers in whose papers they bought substantial advertising were quick to join the chorus. As the late U.S. Senator Daniel Patrick Moynihan said, "We are all entitled to our own opinions, but not to our own facts." One fact often overlooked by the press is that takeovers were not a large part of Milken's two decades on Wall Street. And because the public didn't understand takeovers, it was a convenient target for the corporate old-boy network to use in shifting attention away from their own failings. According to a March 4, 1992 article in The Wall Street Journal, "Junk bonds have been blamed for takeovers, yet they provided no more than 5% of takeover financing." Ironically, most takeover financing was provided by banks, not the capital markets. Myth: Milken's financial impact was bad for the economy. Fact: Because Milken challenged the status quo, many business and financial institutions had reason to feel threatened by his revolution in democratizing capital access. Before Milken, banks and insurance companies pretty much controlled the money spigot and provided very little growth capital to firms that weren't among the tiny minority considered "investment grade." Milken innovated a wide range of financing techniques previously unavailable to these companies. This not only created millions of jobs; but it also made bank loans almost superfluous, infuriating a large segment of the financial community. (Today, ironically, banks are what Drexel was in the 1970s and 1980s - originators of loans who package and sell them in the public markets.) Insurance companies also saw Milken as a threat because they were generally required by regulators to carry only investment-grade securities. Their share of the market declined as Milken financed thousands of below-investment-grade companies. The research departments of virtually every brokerage firm were focused on stocks and did little or no research on bonds and other types of debt. Between 1968 and 1976, Milken had established unrivalled credibility and trust by building up the quality of Drexel's debt research. As a result, Drexel became the largest firm not only in debt originations, but also in private placements and several other areas at the expense of the "bulge-bracket" firms. Finally, non-competitive but entrenched corporate managements who used stockholders' assets inefficiently had much to fear from stockholders who wanted to replace them with managers who could allocate company resources more effectively. Fearing for their jobs and the perks they had lavished on themselves, existing managers turned to regulators, legislators and the press for relief. In a public relations campaign that obfuscated their own parasitic behavior that had so bloated expenses, they claimed they were victims of "greedy raiders" financed by Milken. In fact, the Milken-financed entrepreneurs who were most successful at building companies and creating jobs - Ted Turner, Craig McCaw, John Malone, Bill McGowan and hundreds of others - were focused on their own businesses, not taking over others. The bigger threat wasn't takeovers; it was faster-moving competitors that threatened large, established businesses. These businesses were the largest contributors to political campaigns and their armies of employees could be mobilized to write their Congressional representatives in defense of the status quo. In the 1970s and early 1980s, for example, AT&T controlled more than 98 percent of the telecommunications market and, with more than one million employees, was the largest employer in the United States. When Milken's financing allowed a tiny competitor to announce that they would build the first national fiber-optic network, it was seen as a major threat to AT&T, which would be forced to spend $10 billion to replace its obsolete technology. Is it any wonder that politicians felt pressure to stop Milken's revolution? Alvin Toffler, the futurist and author of Future Shock, summarized the entire Milken phenomenon of success and retribution in his 1990 book PowerShift: "[Milken] made bitter enemies of two extremely powerful groups. One consisted of the old-line Wall Street firms who previously had had a stranglehold on the flow of capital to American corporations; the other consisted of the top managers of many of the largest firms. Both had every reason to destroy him if they could. Both also had powerful allies in government and the media." Finally, in a September 2006 Financial Times column, Norman Barry, professor of social and political theory at the University of Buckingham, wrote: "In retrospect, most American economic observers say that Mr. Milken was good for the economy; his actions led to the break-up of conglomerates and the necessary reorganisation of American business. His prosecution was more of a persecution." Myth: Milken's financing cost workers jobs. Fact: Milken's financial revolution helped build this nation's current industrial and commercial infrastructure. He financed more than 3,000 companies that became engines of job creation starting with his very first deal, in 1969, which helped assure Boeing's market leadership through the rest of the century. In several industries, Milken built many of the leading companies through his financing. He changed entire industries where smaller players simply did not have access to capital until he provided it. In home building, which employs millions of people directly and through subcontracting, he financed KB Homes, now the largest company in the industry, as well as Toll Brothers, MDC Homes, Hovnanian Enterprises, Oriole Homes, U.S. Home and many others. These are companies that literally built the American dream and he drove the industry. In entertainment, MGM, News Corp., Viacom and AOL Time Warner were all Milken-financed. In the toy industry: Toys-R-Us, Mattel and Hasbro. In hospitality: Hilton, Days Inn, Holiday Inns and others. Convenience stores include 7-11 and Circle K. Safeway is a company with 200,000 employees in almost 1,800 stores across the U.S. and Canada. Every one of those employees can thank Milken for helping build the company that provides their paychecks. His financing was crucial to Chrysler when they most needed it to stay in business and grow. The cable television industry would not be in anywhere close to four-fifths of American homes if he hadn't financed several of the major companies. Occidental Petroleum wouldn't have jobs for its 8,000 current employees without Milken. Cell phones are in just about everyone's pockets today. The industry started early in the 1980s when Milken financed a small company called McCaw Cellular Communications. That company became AT&T Wireless, which served 22 million subscribers and employed 31,000 people producing more than $16 billion in sales before its acquisition by Cingular Wireless. Another way to look at the impact Milken has had is to consider just one state. Nevada, the fastest-growing state in the nation, was kick-started by Milken financing of its casinos, newspapers and homebuilders. The rule of thumb in the gaming industry is that every job created within the industry creates more than three additional jobs in the local economy. By that measure, his financing of MGM Mirage, Mandalay Resorts, Harrah's Entertainment and Park Place accounts for something like 600,000 jobs. Some of the other names among the companies Milken financed: AMC Entertainment, Bally Manufacturing, Bally's, Barnes & Noble, Beatrice, Cablevision, Caesars World, Calvin Klein, Chiquita Brands, Duracell, Filene's Basement, GAF Corp., General Host Corp., Hasbro, Kay Jewelers, Knoll Int'l., MCI, Medco, Mellon Bank, Metromedia, Philadelphia Electric, Playtex, Southland Corp., Sunshine Mining, TCI, Uniroyal Goodrich and Telemundo. Milken was a sparkplug who helped ignite the economic boom of the last three decades. He created millions of jobs. Myth: Milken's philanthropy is just a case of a rich guy trying to cure his own disease. Fact: Milken's prostate cancer was diagnosed in 1993. His philanthropy started two decades earlier and involved many diseases. Programs and contributions by the Milken Family Foundation have made a difference in the battle against several grave diseases, including breast cancer and epilepsy. Some two decades ago, Milken endowed a chair at the Dana Farber Cancer Center, was the primary benefactor of the Venice (Calif.) Family Clinic (which serves tens of thousands of people), and gave his time and resources to a wide range of medical causes. The Milken Family Medical Foundation was established in 1982 and provided grants to keep many young cancer researchers in their labs when they were tempted to pursue more-lucrative clinical practices. Mike has said, "Of all the programs we've supported over the last generation, the biggest payoff in terms of social benefit has come from the awards to young investigators." Among those who received awards in the 1980s were Dr. Dennis Slamon, who later discovered Herceptin, a revolutionary breakthrough in the treatment of one type of breast cancer; Dr. Steven Rosenberg, who recently reported a major breakthrough in the development of successful gene therapy that for the first time in history harnesses the body’s own immune system to shrink tumors; Dr. Bert Vogelstein, who did pioneering work on the incalculably important p53 gene whose mutant form is believed to be involved in more than half of human cancers; Dr. Owen Witte, whose subsequent work provided the basis for the development of the breakthrough drug Gleevec, now used as a frontline therapy for patients with chronic myelogenous leukemia; Dr. Lawrence Einhorn, who as the developer of a highly successful chemotherapy regimen for testicular cancer, later treated seven-time Tour de France winner Lance Armstrong; Dr. Philip Leder, a pioneer in molecular biology who contributed to the deciphering of the genetic code; Dr. Charles Myers, who went on to become Chief of the Clinical Pharmacology branch of the National Cancer Institute; and many more. In addition to his family's contributions of more than $750 million, Milken has been tireless in raising some $300 million from the public to support medical research around the world. Myth: The recent wave of accounting scandals (Enron, WorldCom, etc.) is reminiscent of the 1980s scandals that involved Milken. Fact: It's quite a stretch to link these two situations since they are, in fact, logical opposites. The more-recent scandals grew out of managerial abuse by executives acting in their own interests rather than in the interests of stockholders. This is an example of what academics call "the agency problem," which removes incentives to use stockholders' assets efficiently. It has been a corporate governance issue ever since A.A. Berle and Gardiner Means published their classic text The Modern Corporation and Private Property in 1932. Periodically, managers place self-interest above that of relatively powerless shareholders by lavishing themselves with perks. "That situation was partially corrected," said Weekly Standard contributing editor Irwin Stelzer (July 22, 2002), "when Mike Milken and his debt-financed raiders snatched control of many companies from the worst abusers of shareholders' interests, grounded fleets of corporate jets, sold off hunting lodges, and generally sweated the fat out of expenses - a wonderful example of markets working to correct abuses that seemed beyond the reach of regulators." The previously cited Professor Norman Barry, author of the book "Business Ethics," wrote a September 1, 2002 column in a group of British newspapers citing "at least two waves of moralising about capitalism in the 1980s and the early 21st century." "Both are condemned for their greed, but it is important to distinguish the economics and ethics of the two eras," Barry wrote. "In the 1980s, as always, personal self-advancement was essential to the allocation of economic resources. It advanced shareholder value from which everybody gained. In the early 21st century, the same motivation badly damaged shareholders' interests." Another difference is the scope of the cases. WorldCom's Bernie Ebbers perpetrated what is being called the biggest fraud in corporate history - more than $11 billion. In contrast, as noted above, four of the five Milken violations were found by the judge to have had zero economic effect. The total economic effect of the violations found by the judge was just $318,082. By this measure, the Ebbers case is more than 34,000 times bigger than Milken's. |
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