Milken's Impact on U.S. Corporate Culture Yet to Be Seen
Passell, Peter, THE JOURNAL RECORD
Why does the mere mention of Michael Milken's name bring a snarl to the lips of some of America's mildest-mannered corporate executives?
That may seem a foolish question. After all, the Los Angeles investment banker has been indicted on 98 federal charges ranging from fraud to racketeering. If the charges stick, Milken could face decades in prison.
But there is more to the executives' venom than a simple dislike of a man who allegedly lied and cheated his way to great wealth, while barely hiding his contempt for business adversaries.
Milken's greater offense to the court of corporate opinion makers was apparently not his betrayal of capitalism but of a specific set of managerial capitalists.
The ``junk bond'' market he almost singlehandedly created has allowed a new class of entrepreneurs to shove aside ``the white shoe crowd'' at the top of the investment banking houses.
More important, it has stripped away the insulation protecting corporate managers from the market's opinion of their worth.
Like Ivan F. Boesky, the prosecution's star witness, Milken is accused of a variety of illegal and ethically unsavory practices.
For example, the prosecution says that while he was helping the Maxxam investor group take over Pacific Lumber for $36 a share, he was also striving to create the impression that other bidders wer waiting.
Maxxam ended up paying an extra $4 a share. The deal generated $20 million in fees for Milken and his firm, Drexel Burnham Lambert, plus $1 million in gains on Pacific Lumber shares that prosecutors say were secretly owned by Drexel.
But unlike Boesky, Milken also provided a uniquely valuable service to many clients. Before he came on the scene in the late 1970s, the market for the debt of companies without strong earnings records was extremely thin.
While it was possible to underwrite low-grade bonds, the interest premiums demanded by purchasers were enormous. As a practical matter most such borrowers had to rely on short-term financing from banks.
Milken's entrepreneurial genius was to convince relatively conservative institutions that the extra return on a diversified portfolio of high-yield junk bonds far exceeded the statistically likely losses from defaults. …