Photo: AP Images/ Gerald Herbert
Today we learned that it’s likely that the government will not press criminal charges against Jon Corzine, the former New Jersey Governor and head of the collapsed firm, MF Global.We also learned that he’s considering starting a hedge fund.
That would be such an incredible Wall Street comeback that he might even unseat Wall Street’s current come-back master, Michael Milken.
In case you don’t remember, Milken, the infamous “junk bond king” of the 1980s. In 1990, though, he plead guilty to 6 counts of securities fraud.
As of late, though, Milken’s reputation has changed from a junk bond underwriter and white collar criminal to that of a heavily involved philanthropist.
He attended the University of California, Berkeley and graduated with highest honours in 1968.
While in college, he learned about non-investment grade bonds and risk-adjusted returns.
Milken then received his MBA from the Wharton School.
During his time at Wharton, he worked part-time in New York at Drexel Harriman Ripley, and commuted between Philadelphia and New York on a Greyhound Bus.
At the age of 22, he married his girlfriend Lori, who he had been dating since the ninth grade.
Milken started trading junk-bonds at Drexel. He believed they were a smart investment because their return offset their risk.
Milken began to trade junk-bonds at Drexel in the early 1970s. In 1976, he received a $5 million bonus and was earning over 100% on the capital he was given to trade junk-bonds.
He believed that junk-bonds were a better investment because their provided return was worth the risk and that investment-grade bonds could only see their quality fall.
During the late 1970s, interest rates were quite volatile, and many companies looking to fix their cost of capital, issued corporate bonds.
Even with economic turmoil in the 1970s, very few junk-bonds defaulted and investors received very high rates of return.
Milken and Drexel began to underwrite junk-bonds in 1977. They also committed to keeping the market liquid.
Starting in 1977, Milken and Drexel began to underwrite junk-bonds.
By 1981, Drexel Burnham Lambert issued over 60% of US junk-bonds.
The most important aspect was that Milken committed to buy or sell junk-bonds that Drexel had underwritten, offering liquidity and security to the market. This allowed for junk-bonds to become more accurately priced and it brought new investors and their money into Milken's junk bond market.
Source: The Economist
In an effort to be closer to his family in California, on July 4, 1978 (Milken's birthday) he moved his trading desk from New York to Los Angeles, bringing with him about 20 traders.
In the new office, he created his famous X-shaped trading desk, allowing for better contact and control of his traders.
As of 1999, Milken and his wife Lori still lived in the same house in Encino, CA which they bough in 1978 for $700,000.
In that home, they raised their three children.
As a young trader, Milken would work 15-hour days in the office and would bring reports home to read at night. He would typically work from 4:30 a.m. until 7:30 p.m.
Milken doesn't smoke or drink and claims to not even drink coffee or soda.
Milken's office completed as many as 250,000 transactions per month.
From the The Milken Family Foundation:
The Purpose of the Milken Family Foundation is to discover and advance inventive and effective ways of helping people help themselves and those around them lead productive and satisfying lives. The foundation advances this mission primarily through its work in education and medical research.
The junk-bond craze that Milken started in the 1980s would benefit many young companies that needed investors in order to grow. By offering capital to young companies by requiring a high cost of capital due to default risk, several investors received healthy returns while innovators saw their products succeed.
Milken and Drexel helped funnel capital to innovators including Craig McCaw(cellular phone pioneer), Steve Wynn(CEO of Wynn Resorts), John Malone(telecommunications pioneer), Ted Turner(creator of CNN) and Rupert Murdoch(media).
Barnes & Noble was also a product of Milken's financing.
In the late 1980s, while Milken was under federal investigation, Mitt Romney used Milken and Drexel to raise $300 million in junk-bonds. Romney's Bain Capital needed Milken's junk-bond selling expertise to complete the financing for the purchase and merger of two Texas based department store chains into Specialty Retailers, Inc.
Specialty Retailers later filed for bankruptcy.
Source: Vanity Fair
In 1989, Milken and Drexel raised $6 billion in funds from investors to buy debt from private equity giant KKR's leveraged-buy-out of food and tobacco producer RJR Nabisco for $25 billion.
At $25 billion, this was one of the largest LBOs in history.
Source: The Economist
Because he could raise money so fast, he was a leveraged buy-out king. Drexel Burnham became the U.S.'s leading investment bank.
Milken's extensive connections and knowledge of the junk-bond market allowed him to quickly find buyers for his junk-bonds that were used to purchase fading and cheap companies in leveraged-buy-outs(LBOs).
His ability to raise money for stealthy LBOs, threatened cheap companies that were considered targets of LBOs, and this forced companies to cut costs and improve their returns in order to raise their share value to escape from easy LBOs.
Milken reached his peak in 1986. At the time, more companies were issuing junk bonds than investment grade bonds. In 1986, Drexel was the US' leading investment bank with over $1.5 billion in pre-tax profits.
In 1987, Milken would personally bring home $550 million from Drexel Burnham.
Source: The Economist
By that time, American big business and government feared leveraged buy-outs and started taking action against the junk bod market.
The takeover frenzy needed to be stopped. Corporations were asking state and local government for protection.
Congress had proposed some 30 bills by 1986 to implement anti-takeover laws.
To slow the junk-bond market, the Fed raised margin requirements on junk bond financing and Congress called for improved restrictions on junk-bond purchases.
Source: Edward Jay Epstein
From the book Three Felonies A Day: How the Feds Target the Innocent(p.98):
Milken's biggest problem was that some of his most ingenious but entirely lawful maneuvers were viewed, by those who initially did not understand them, as felonies, precisely because they were novel -- and often extremely profitable.
Milken was indicted in 1989 by Rudy Giuliani, and was charged with insider trading, securities fraud and racketeering.
In 1989, Milken was indicted with 89 charges including insider trading, securities fraud and racketeering.
On the second page of Milken's 110-page indictment, it stated that he had made $550,054,000 in 1987. This humongous number made people question Milken's business and how someone could legally make that much money.
The man who persuaded the grand jury to indict Milken in 1989 was Rudy Giuliani, the U.S. attorney in Manhattan.
In 1990, Milken struck a deal to plead guilty to six charges that primarily involved tax and securities fraud.
The Department of Justice accused Milken's brother Lowell of wrong doing and they even interviewed Michael's 92 year-old grandmother. The DOJ knew that Milken would give up and surrender if too much pressure was placed on his family.
The government gave Milken the option that they would drop charges on his brother Lowell, if Michael would plead guilty to six felony counts and would pay $600 million in fines.
In April of 1990, Milken accepted the offer and plead guilty to six charges that primarily involved securities and tax fraud. Three of the charges were linked to the convicted inside trader and arbitrager Ivan Boesky. He was also banned from the securities industry.
Many believe the government was standing up for American big business in defeating Milken, the man who gave money and power to emerging and incumbent challenging companies.
Milken was originally sentenced to a 10 year prison term. But, by cooperating with authorities and the fact that several other cases found other financiers not guilty of similar crimes, Milken only served 22 months in federal prison.
In 1991, a federal judge stated that Milken's crimes cost only $318,000, which was far below the government's original estimate of $4.7 million.
He was released to a Los Angeles halfway house on January 3, 1993.
After paying a total of $1.1 billion in penalties and serving his time in prison, Milken was diagnosed with prostate cancer a week after his release from prison.
A week after his diagnosis, he was on his Gulfstream jet flying to a prostate cancer research conference.
His doctors gave him 12 to 18 months to live. However, he proved them wrong, and with a strict diet, yoga and meditation, his cancer went into full remission.
Source: Bloomberg Businessweek
Now barred from the securities industry, Lowell and Michael Milken spend their time and money on philanthropy.
With Milken's close call with cancer, he decided to devote his time and money to medical prevention and research.
He raised $75 million for cancer research and prevention in the 1990s and created a public campaign that earned him spots on popular TV talk shows.
In 1996, Milken and his brother Lowell, founded the education company Knowledge Universe(KU).
KU owned the educational toy maker Leapfrog and the information-technology training company CRT Group. KU now operates early learning institutes. In 2010, KU brought in $1.6 billion in revenue.
Source: Bloomberg BusinessWeek
Milken launched a Washington, D.C. think tank in 2003 called FasterCures, which works to improve research efficiency for dangerous diseases.
In 2007, Milken launched the Melanoma Research Alliance, an organisation that researches the deadly form of skin cancer.
In 2004, Fortune magazine called Michael Milken, 'The Man Who Changed Medicine'.
Source: CNN Money
Michael Milken's impact is currently felt by industries spanning from finance to medicine to technology.
Drexel has left three enduring legacies: a junk-bond market that has grown at least sevenfold since the firm's demise; the firms and industries, from gambling to cable television, that owed their rapid expansion to the investment bank's junk bonds; and the influence of the 'Drexel diaspora', the young MBA graduates who worked in the 1980s under Mr Milken, on the finance industry in Los Angeles and elsewhere.