Milken, Boesky, and the Demise of Drexel Burnham Lambert

Milken, Boesky, and the Demise of Drexel Burnham Lambert

The rise of our stock market to new highs seemingly every week can be attributed to many factors, many of which were based upon the easy money policies of the previous administration.  Combine that with the expectation of tax reform and pro-growth policies from the current government, and you can see the on-going optimism on Wall Street.

While artificial stimulants and animal spirits can make for bull markets, it reminds you of a great era of corporate titans, corporate raiders, as well as the scandals of the junk bond kings.  Those were the days of Michael Milken, Ivan Boesky, and the investment banking firm of Drexel Burnham Lambert …. grand titans of Wall Street.

Milken, Boesky, and the Demise of Drexel Burnham Lambert

It was a cautionary tale of unrestrained greed, and prosecutorial power driven by political ambition (see:  Rudy Giuliani).  It gave us the infamous line, “Greed is good”, from the Oliver Stone’s movie classic “Wall Street”. Old terms became new to the public such as the “junk bond” and insider trading.  Michael Milken, the king of Wall Street and the head of Drexel Burnham Lambert’s “high-yield” (see:  Junk Bonds) debt department, became the poster boy of 1980s greed and excess.  He was the king of the “junk bond” on Wall Street.  Ivan Boesky was an arbitrageur who became Milken’s client, friend and confidante who gave him up when the feds came calling.

The crimes are now well known:  Boesky became rich as an arbitrager, someone who trades on the stock of companies rumored to be near a takeover.  He often obtained inside information from his close relationship with Michael Milken, and most of his deals by that time were financed by Milken and Drexel.  His dealings with Milken were uncovered when a banker at Drexel, Dennis Levine, was caught trading on inside information with off-shore accounts.  The feds then moved in.

How much do you remember of the late-80s Wall Street Junk-Bond Scandal?

 

10 Fun Facts Regarding Michael Milken, Ivan Boesky, and the Last Days of Drexel Burnham Lambert:

  1. High Yield Debt helps save old companies on hard times. Many established brands such as J. Crew and other smaller but well-known companies have used high yield debt, known as “junk bonds”, to help finance their way out of difficult times.  It does not always work, but investors achieved 5.3% returns on short term “junk bonds” in 2016.  While given a bad name thanks to the Drexel scandals, they do serve a purpose in the marketplace.

 

  1. The hottest party ticket on Wall Street was ‘The Predator’s Ball’. Ironically, the annual gala/convention hosted by Michael Milken and Drexel Burnham Lambert was held in California and brought together the biggest names on Wall Street out to the West Coast.  While many see the titans of high finance as living hedonistic lives, the Predator’s Ball – despite its title – was considered one of the most important deal making conventions in the industry.  Some of the biggest names on Wall Street to include corporate raiders T. Boone Pickens and Henry Kravis were annual attendees.  The name of the event did help contribute to the negative reputation of Milken and his firm.

 

  1. Rudy Giuliani’s pursuit of Drexel could have been politically motivated. Michael Milken, as head of Drexel’s high-yield debt department, was charged primarily under the RICO statute – laws used to bring down the mob.  The investigation into Drexel started from insider trading violations which ensnared Drexel traders and Milken client Ivan Boesky, but Milken himself was declared by the judge that she found no evidence of securities violations, and that he was only guilty of misleading investigators and preventing their lawful attempts at conducting their investigation.  In the end, Judge (Kimba) Wood only found some $300,000.00 in losses in Mr. Milken’s dealings – and those mostly occurred after bad publicity from the initial investigation.  Since the trials (1989-1990), it has been widely discussed that Giuliani pursued Wall Street titans to help augment his resume for the New York City Mayoral race.  While big fans of Mayor Giuliani, politics does often drive prosecutorial decisions.

 

Rudy Giuliani's pursuit of Drexel Burnham Lambert

 

  1. Michael Milken hated being called the junk bond king. He preferred to be called high-yield debt financier.  High-yield debt (meaning greater risk, but greater reward), mezzanine debt, and entire product lines were basically invented, marketed, and sold by Michael Milken.  He was the new genius wunderkind of Wall Street, and the original market-maker for junk bonds.  He was a graduate of University of California at Berkeley, and also received his MBA from the Wharton School of the University of Pennsylvania. While at Berkeley, Milken was influenced by credit studies authored by W. Braddock Hickman, a former president of the Federal Reserve Bank of Cleveland, who noted that a portfolio of non-investment grade bonds offered “risk-adjusted” returns greater than that of an investment grade portfolio.   Milken would eventually be convicted of racketeering and securities fraud due to insider trading, but as stated above, Judge Wood only found him to be guilty of obstructing the investigation.  Most supporters recognized that Milken has helped finance the massive expansion of capitalism and American business success during the 1980s and that the legal system did not know how to handle this new form of debt financing.  As author George Gilder stated in the year 2000:   “Milken was a key source of the organizational changes that have impelled economic growth over the last twenty years. Most striking was the productivity surge in capital, as Milken…and others took the vast sums trapped in old-line businesses and put them back into the markets.”

 

  1. What is the leveraged buyout?.  The Leveraged Buyout (LBO), was the method of choice for many corporate raiders during the 1980s.  As defined by Investopedia, the LBO is – “the acquisition of another company using a significant amount of borrowed money to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loans, along with the assets of the acquiring company. The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital.”  The “junk bond” was often a set of packaged assets from companies in distress, and those company’s assets being collateralized by someone who was seeking to buy the company.  The company would often then be broken up, and each part sold to pay off the debt.  LBO’s financed by Milken, and utilized by Henry Kravis, T. Boone Pickens, and others, rightfully were scorned by those losing jobs in the process.

 

  1. The biggest deals were legendary. RJR Nabisco, Ted Turner and CNN, Creative Artists, Revlon … some of the biggest deals in the history of modern finance were executed by Milken and Drexel Burnham Lambert.  Junk bonds helped finance the economic expansion of the 1980s.

 

  1. They were the ‘Stars of the Junkyard’. As referenced by The Economist magazine, some of the best and the brightest of 1980’s Wall Street are still leading figures in the industry.  Leon Black was a Milken acolyte, now the Head of Apollo Global Management; Mark Attanasio worked in capital markets at Drexel Burnham and who has since founded Crescent Capital and owns the Milwaukee Brewers; Marc Faber ran Drexel’s Hong Kong office, and is now infamous for his “Gloom and Doom” report as the perennial perma-bear; and T. Boone Pickens, one of Milken’s best clients, founded BP Capital Management and is today a well-known billionaire.

 

  1. Dennis Levine – the greed leads to the crime. From Lehman Brothers, to American Express, to Drexel, Dennis Levine had created a network of friends inside the business who regularly traded on inside information – deals about to go through which would affect the stock of companies the broker would represent.  Using the Bank Lieu – an off-shore Swiss bank in the Bahamas – Levine was privy to deals Milken was set to make, and made a tidy sum trading on that information.  Bank Lieu officials spotted the pattern, and began “piggybacking” on Levine’s trades so they could make some money as well.  They then used a Merrill Lynch trader in Chicago – who also noticed how the trades were made right before a deal went through, and who then also piggybacked in his own account.  And that is when the SEC noticed what was happening.  Eventually, U.S. District Attorney Rudy Giuliani was called in, and the investigations commenced.  But for Dennis Levine (and Boesky’s) carelessness and greed, the trail may have never led to Drexel or Michael Milken.

 

  1. Setrag Mooradian, Ivan Boesky, and the uncashed check. Setrag Mooradian was Boesky’s book-keeper, adding to the long list of shady characters involved in the Drexel conspiracy.  He inadvertently left an unrecorded check – in the amount of $5.3 million – on the books that was inspected by the SEC.  In deposition, he indicated the check was meant for Michael Milken, but had no explanation as to what a check for $5.3 million dollars was for.    This was sufficient to get a judge to approve a wiretap and get a wire on Boesky himself for communication with Milken.  At this time, the circle closed in on the junk bond empire.

 

  1. Greed is good. Michael Douglas’ Gordon Gekko character in the movie “Wall Street” was loosely based upon Ivan Boesky.  In the movie, Douglas gives a speech in New York in which he says the famous line – “Greed is good.”  It personified unrestrained market capitalism and to many people what was wrong with American big business at the time … lacking the moral center necessary for market capitalism to survive long term.  Ironically, it wasn’t just a movie line.  Ivan Boesky actually said a related phrase during a commencement speech at Stanford: “I think greed is healthy. You can be greedy and still feel good about yourself”.  Boesky’s father in law famously referred to his daughter’s husband: “He has the hide of a rhinoceros, and the nerve of a burglar.”

 

Boesky, Milken, Levine and dozens more went to jail for the crimes of securities fraud and insider trading.  Rudy Giuliani used the never-before-used RICO statute – previously used for mob crimes – to convince the courts that Milken et al had formed a criminal racket.  From 1986, when the investigations began, to the final court hearings in 1990, Wall Street’s heaviest hitters paid a significant price for trading on information not available to the public.  It was one of the biggest scandals in financial history.

Ivan Boesky - Drexel Burnham Lambert

michael milkin - Drexel Burnham Lambert

Drexel Burnham Lambert was one of the older, elite firms on Wall Street.  Not the heavy player of a Morgan Stanley, JP Morgan, or Merrill Lynch, but was treated as part of elite club of top of the line investment banks going back to its founding in 1935.  Its downfall was complete in 1990 when one of it’s old deals came back to haunt it.  T. Boone Pickens had used Milken junk bond financing to raid and takeover Unocal.  Unocal at the time was managed by Nicholas Brady.  In 1990, with Drexel asking the Feds for a government bailout, it fell on deaf ears.  Nick Brady was now the Treasury Secretary, and he never forgave Drexel for funding the takeover of his company.  Fed officials advised Drexel to file bankruptcy, which they did February 12th, 1990.

While the tale of greed and excess of the Drexel scandals of the late 1980’s is well-told, from books to movies to popular culture, hindsight has also offered an additional perspective.  Milken and “high yield debt” helped finance billions of dollars of projects, and provided a new method for companies in tough times to find financing.  For each company raided and broken up, with the resultant jobs lost, there were just as many companies saved, and employees who kept their livelihoods.  Most financial historians and economists now believe that “junk bonds” are a necessary component of the financial market place, and the “junk bond” market is today ten times larger, and profitable, as it was during the Milken era.

New innovation will always face resistance from the old order.  And combined with the political aspirations of an ambitious prosecutor, high finance will always be in the cross-hairs of its competition.  The Drexel era participants paid for their sins, but they also helped forge an expansion of finance that has benefitted market capitalism to this day.

As those markets go up and down, it’s critical to evaluate your financial situation. Are you taking more risk with your money than you are comfortable with? Call our expert advisors to find out the best way to keep your money safe, protected and growing! 877-912-1919

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