A few kind words about Mike Milken.
Q. I understand that Michael Milken, the investment banker, has been indicted on 98 federal charges, ranging from fraud to racketeering. But I don't understand the nature of his crimes.
A. You don't have to. According to the indictment, he made $550 million in 1987 alone. As The Wall Street Journal noted, that's more than it costs to launch a space shuttle or build a B1 bomber. As Russell Baker put it in The New York Times, that's a $10 million payday every Friday. Or as Calvin Trillin observed in his syndicated column, "If Milken had been a corporation ranked by annual sales, he would have finished just behind McDonald's."
Is it a crime to make a lot of money?
No. But the amounts made by Milken were obscene. He must have done something wrong. In the widely quoted words of Notre Dame law professor G. Robert Blakey, "Nobody else made that much in the history of the country except Al Capone."
Actually, Milken made much more than Capone. But does it necessarily follow that he resembles Capone in other respects?
Of course not. But you must admit it's a pithy analogy.
Well, is it true? Did Milken make more in one year than any other American in history?
Maybe, maybe not. In 1987 - the year Milken reported earnings of $550 million - his personal net worth probably increased by about $100 million. (Figure one-third of his income went to taxes, one-third to charity, and much of the remainder to living and other expenses.)
By comparison, that same year Forbes magazine found literally hundreds of Americans whose personal wealth increased by more than $100 million during the same period. What's more, the Forbes list includes at least 20 Americans who that year increased their net worth by more than $550 million - that is, by more than Milken's total earnings.
Chain-store tycoon Sam Walton increased his estimated net worth by $4 billion that year. The brothers Don and Si Newhouse each picked up an extra $2.4 billion. Trammell Crow's worth advanced by $1.5 billion, Rupert Murdoch's by $1.3 billion, and Ray Hunt's by $1.1 billion.
And let's not overlook Ewing Kauffman, whose net worth that same year grew by $975 million, William Gates ($935 million - and he was only 31!), David Packard ($870 million), Harold Simmons ($850 million), Edgar Bronfman and Lester Crown ($800 million apiece), the brothers Jay and Bob Pritzker ($750 million each), Warren Buffett, Alfred Taubman, Leslie Wexner and the sisters Barbara Cox Anthony and Anne Cox Chambers ($700 million each), and Milton Petrie ($600 million).
Next to these folks, Milken is Beetle Bailey. And remember, these comparisons apply only for 1987, which was Milken's best year. In Forbes' most recent rich list (fall 1988), Milken's net worth ranked only 64th in the nation.
To be sure, to some extent we're comparing apples and oranges here: There's difference between Milken's earned income and the other tycoons' appreciated assets. But sophisticated Wall Street observers will tell you that Milken's income, while high, isn't all that extraordinary these days.
Then why are the media so exercised about Milken?
As Richard Cohen put it in The Washington Post, "The man produces nothing. He manufactures nothing. He has dug no wells, cut no record, made no movie."
Couldn't the same thing be said about any financier? How come Cohen doesn't talk that way about David Rockefeller?
Rockefeller headed a respectable commercial bank, whereas Milken made his bucks in the "junk bond" business. As Russell Baker observed, "It was so called, I suppose, because Milken's bonds enabled corporate raiders to turn big pieces of American business into junk."
Is it a crime to sell junk bonds?
No. The term "junk bonds" is a nickname for debt issued by smaller and newer corporations. Because these entrepreneurs lack the high-grade credit ratings of established blue-chip corporations, they must offer higher interest rates on their bonds to attract capital.
Milken discovered, about 10 years ago, that these so-called "junk bonds" really weren't all that risky - that the extra return paid out by junk bonds far exceeded the likely losses from a default. He found that many companies issuing junk bonds were vigorous and creative, whereas many highly rated blue-chip corporations were actually complacent and stodgy.
So he started investing and trading in junk bonds. By convincing many investors that junk bonds were sound, Milken created a hug market for the bonds of small, entrepreneurial companies that had previously been despised by the capital markets.
So why did Milken become a media villain?
Richard Cohen again: "Without him, the recent wave of hostile corporate takeovers may never have happened."
What do junk bonds have to do with hostile takeovers?
While Milken was raising capital for small companies, he also began raising capital - again, through junk bonds - for individual entrepreneurs who used the proceeds to buy control of existing large companies. Milken's clients included such takeover artists as Ronald Perelman (who took over Revlon), Lawrence Tisch (CBS) and Carl Icahn (TWA).
He also bankrolled such speculators as T. Boone Pickens, Saul Steinberg, Ivan Boesky, Irwin Jacobs and Oscar Wyatt, who terrorized the corporate establishment by buying up stocks on the open market and using the threat of a takeover to "greenmail" managements into buying the raiders out at a big profit.
Finally, Milken provided financing for numerous leveraged buyouts, which enabled executives at such giant firms as Safeway and Beatrice to use borrowed funds to become owners of those companies instead of mere hired hands.
Is there anything wrong with corporate takeovers, stock speculation and leveraged buyouts per se?
Not necessarily. Most economists contend that merger activity is either benign or downright healthy. To economists, mergers can help enable industries to function more efficiently.
In my home city of Philadelphia, the best thing that ever happened to the Inquirer was its acquisition in 1970 by the Knight-Ridder chain - and the worst thing that ever happened to the now-defunct Bulletin was not being sold until it was too late.
Some mergers fail, of course. But in such cases the solution is to break up the merger and find more compatible partners for the divisions involved, which is what a takeover artist does.
Stock speculators contribute to the liquidity - and thus to the efficiency - of the stock markets by risking their own capital (and that of their lenders): Without them, it would be much tougher for stockholders to buy and sell their shares.
Besides, takeovers aren't really caused by "raiders"; they're caused by corporate managements that willingly offer their stocks for sale to the public. A man who sells his house has no right to complain when the new owner asks him to move out.
As for leveraged buyouts - debt can be a blessing or a burden, depending on the borrower. But executives and employees usually perform better when they own a piece of their company. A management leveraged buyout takes the company off the market's trading floor and thus frees the executives from the market's preoccupation with short-term profits.
To be sure, excessive debt and excessive speculation can be dangerous. But corporate executives can't eat their cake and have it too. Either they must issue stock and subject themselves to the fickle tastes of the market, or they must borrow to buy back the stock and subject themselves to a preoccupation with debt management. There's no free lunch.
But all the chaos caused by all those mergers....
Blaming economic change on mergers is like blaming the rain on people who put up their umbrellas. After two decades of conglomerating, many large firms find themselves owning divisions that they don't know how to run. The market realizes this and punishes the stock price accordingly. Such "bastard divisions" would function better on their own or under different ownership - which is what usually happens when a takeover artist gains control.
But all those workers laid off after takeovers....
They probably would have been laid off without a takeover, and in greater numbers. Their companies were up for grabs because the market held them in low regard. If nobody bought the stocks of depressed companies, millions of American workers would really be in trouble.
But how can corporate executives plan for the future when they're constantly worrying about takeovers and greenmail? As The Philadelphia Inquirer editorialized, "That short-term focus promotes neglect of long-term research and investment essential to boosting long-term global competitiveness."
The virtue of long-range planning is a favorite media myth, but one which remains to be proven. Today's corporate long-range thinkers could be the same sort of visionaries who 20 years ago built all those unwieldy conglomerate empires whose inefficiencies got our economy into much of its present mess. Besides, as syndicated economics writer Robert J. Samuelson has observed, "The distinction between the short and long term, which so intrigues management analysts, isn't especially meaningful in the real world. Executives have long-term goals but, like all of us, they can't know the future... Not surprisingly, the things that most disrupt business - changes in the economy, technology or consumer tastes - are least predictable."
Come to think of it, when I worked at The Wall Street Journal 20 years ago, its executives attributed the Journal's success to their refusal to get bogged down in long-range planning.
Obviously, there's a need for both long- and short-term planning in any endeavor. But neither is a panacea.
I still don't see why the media are so angry at Milken.
Actually, the business press and the business sections of daily papers demonstrated a pretty good grasp of the forces that gave rise to the junk bond market - specifically, the country's shift from an industrial society that's short of capital into a service economy where capital is more plentiful. And business writers possess a more sophisticated understanding of the constructive role of greed in a capitalist society. It was only the general columnists and editorial writers - the so-called deep thinkers - who trivialized Milken's role and his motives.
His image was too blatantly crass. As columnist Richard Reeves put it, "The greed decade ended as soon as it found its lasting symbol. Not Ronald Reagan ... not Margaret Thatcher ... [but] Michael Milken, who began work at 4:00 a.m. each day."
If Milken is driven by blind greed, why shouldn't the media's commentators object?
Any enterprise, to succeed, requires three basic elements: a good idea, talented people to carry it out, and capital. Of the three elements, capital has traditionally been the toughest part of the equation.
Milken made a lot of money because he was able to raise this precious commodity for people who couldn't raise it elsewhere. But the interviews he has given to the media suggest a fervent desire on his part to change the traditional equation so that capital would be easily available to anyone endowed with talent and/or a good idea.
He argued - with good reason - that entrepreneurs are the true creators of jobs in our economy, and that allowing them access to capital markets would unleash a wave of innovation that would make America more competitive. He portrayed himself as a man helping to mobilize capital and channel it from relatively sterile uses to newer and more productive uses.
The millions he made for himself were merely a tool with which to pursue that vision. As author George Gilder has observed, "Wealth to the business person is what freedom of speech and access to the public are to a writer or to a politician. Therefore, to cap his wealth would be like capping the number of readers or followers allowed to a journalist, a thinker or a politician."
Above all, Milken seems to have perceived of himself as an agent for change. Without the ability to change, he argued, the American system would stagnate.
So the people who resented him were living in an earlier world?
That's right. Entrenched defenders of the status quo. Fortune 500 executives, sitting on fat salaries and perks, who were answerable to no one until Milken bankrolled a whole new generation of takeover artists. The clubby "white shoe" crowd who used to run the investment banking business until Milken lured away their clients and their capital by outperforming them. The credit-rating services, like Moody's and Standard & Poor's, whose arbitrary and shortsighted judgments Milken exposed.
But why would journalists resent Milken? I thought a journalist's function was to comfort the afflicted and afflict the comfortable. Isn't that sort of what Milken was doing?
After a fashion....
All right. Come on. Milken must have done something wrong. After all, he was indicted on 98 charges.
True enough. The indictment alleges that the junk-bond market created by Milken ultimately evolved into something like a chain letter - that is, Milken pressured some of his junk-bond clients to buy the junk bonds of other corporations, thus falsely creating the illusion that the market for junk bonds was sounder and more liquid than it really was. If true, this would be a deceptive and illegal practice. The indictment also charges that Milken illegally benefited from inside stock information that he possessed by virtue of his access to all those takeover artists.
These charges remain to be proven, of course. But even if they're true, they are peripheral to Milken's central activity. There was nothing wrong with his selling junk bonds or with his help for corporate restructuring. Quite the contrary.
Yet these are the very activities for which he is so reviled by people who instinctively fear change - which includes most of us, even though change is inevitable in life.
In the long run, Milken's junk bonds promoted a more efficient and positive sort of change in society than we'll get from clinging to the status quo of fat, complacent conglomerates. In that sense, Milken the Hustler actually displayed more foresight and understanding of society than his heavy-thinking critics in the media.
Are you trying to tell me that Milken is ... an idealist?
Let's not go overboard. Milken's business serviced greedy clients. The staggering sums he enabled them to make virtually overnight warped the values of everyone he touched, including - perhaps - Milken himself.
(In an effort to suppress The Predators' Ball, an unflattering book about his firm's activities, Milken reportedly offered the author an amount equal to her anticipated royalties in exchange for the book's withdrawal. As the author, Connie Bruck, described the offer, Milken seemed to assume that her sole motive in writing the book was the money she would make from it.)
Milken apparently came to believe himself to be so brilliant and indispensable that he could flout society's rules. He may have freed up capital for previously despised outsiders, but some of his clients - like the convicted Ivan Boesky - richly deserved to be despised. My point is that Milken's enemies - the pillars of the entrenched business establishment - were no less greedy and probably much more malevolent than Milken and his crowd. Milken wanted to sell off the old threadbare furniture in the house and buy new furniture; they wanted to hang onto the old furniture.
Milken constituted a threat to them not because he was more evil than they were, but because he was brighter and more energetic. Yet the insiders managed to portray themselves as the nation's protectors and to paint Milken as an enemy of society - and the media swallowed the scenario.
Does this suggest any general conclusions about the daily media?
I can think of several. First, when confronted with complicated subjects. they fall back on caricatures. They tend to reduce conflicts to heroes vs. villains, when most of the time it's a matter of a villain vs. a worse villain, or an honest difference of opinion between two heroes.
Second, under pressure of time and space constraints, the daily media tend to confuse the surface with the substance, and thus they confuse effects with causes.
Third, while the daily media like to envision themselves as forces for progress, when the chips are down they instinctively side with the status quo, with stability against disorder.
Any lessons for Mike Milken?
At least one: Journalists lack the time - and, often, the inclination or the education - to assimilate new ideas. Next time you want to shake up the status quo, cover yourself: Hire a PR firm, throw some press lunches, fund a ghetto housing co-op, sponsor a few PBS programs, and endow a wing of an art museum.
Don't take my word for it; ask your rivals in the establishment. They will tell you that it works every time.
Dan Rottenberg is editor of the Welcomat, a weekly opinion forum in Philadelphia. He writes frequently on business subjects.
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|Date:||Jul 1, 1989|
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