Milken: driven junk-bond king

THE man the United States government is after - Michael Milken - may be the J.P. Morgan of the 1980s. Like Mr. Morgan, who financed such giants as AT&T, General Electric, and US Steel, Mr. Milken has changed the financial landscape. A senior executive vice-president at Drexel Burnham Lambert Inc., Milken has transformed a little-used method of financing, called ``junk bonds,'' and used it to tweak the establishment by providing funding for corporate raiders.

According to Drexel, Milken has been responsible for a significant number of Wall Streets's junk bonds. These long-term bonds, which are available to small and medium-sized companies, compensate for lower credit ratings by offering higher yields. In large part because of Milken, the junk-bond market, which Drexel dominates, has swelled to an estimated $160 billion to $200 billion.

Like Morgan, who one congressional committee in 1912 said ``controlled the bloodstream of the very economy,'' Milken has become a symbol of questionable financial power to some US officials. In charges filed Wednesday, the government charged that Milken, along with Drexel, schemed with convicted inside trader Ivan Boesky to violate securities laws at the expense of Drexel clients.

Rep. John Dingell (D) of Michigan says, ``We've had questions about the propriety of some of his activities and practices for some time.'' However, Rep. Thomas Bliley Jr. (R) of Virginia says, ``Anyone who talks with him must be favorably impressed.''

Outside the government, opinions are also strong about Milken. Connie Bruck, author of ``The Predators' Ball,'' a recent book on Milken and on corporate raiders he has financed, calls him ``utterly driven, obsessed, visionary.'' Even coworkers at Milken's Beverly Hills, Calif., office consider him to be ``intense,'' starting work at 4:30 a.m. so he and other key Drexel employees can work East Coast hours on the West Coast.

Milken's capacity for work, in fact, is legendary. In a rare interview, he says he finds traveling between Tokyo and Los Angeles an ``invigorating experience.'' Why? Because he gets to work a full day in Tokyo, then he gets to work on the flight back to California, and then, after crossing the international dateline, he has a chance to work the same day twice. When he vacations, he often chooses to go to Hawaii in part so he can begin work at 1 a.m. The time difference gives him several hours of uninterrupted work while his family sleeps.

Even though he is demanding, Milken's employees are extraordinarily loyal - an uncommon trait on Wall Street. Harvey Eisen, president of Integrated Resources Asset Management Corporation, who has done business with Milken, compares the ``junk-bond king'' to a good drill sergeant in the Army. ``While you're going through it, you hate the guy. But at the end you realize you have grown as a person. I have never seen anyone better than he is.''

But those same drill-sergeant attributes scare Ms. Bruck. ``Given his incredible compulsion to control and his enormous greed, I think he's a very dangerous individual,'' she says.

The son of an accountant, Milken grew up in southern California, not far from his current house in Encino. Seeds for Milken's deeds go back to his undergraduate days at the University of California, Berkeley, where he found a study that showed a portfolio of high-yielding, low-quality bonds that outperformed higher-rated bonds. But it wasn't until after he got his masters in business administration from the University of Pennsylvania's Wharton School of Business and went to work full time for Drexel that he got to prove the thesis.

Milken began by trading high-yield bonds and developing customers for them. Eventually, Drexel and Milken started underwriting the high-yield bonds. The bonds filled a gap in the portfolios of some investors.

Drexel calls this use of junk bonds the ``democratization'' of capital. Prior to Drexel's push into such lending, small- to medium-sized companies would borrow money from their local banks at prevailing interest rates. If the company wanted to borrow over a long term, it would have to go to insurance companies or banks and agree to tough restrictions on how they ran their business. Milken's bonds freed them to run their companies with the long-term capital they needed.

Many finance professors applaud Milken for the effort. Says Michael Jensen, a professor at the Harvard Business School, ``I think the high-yield bonds are one of the most important innovations in the last three decades.'' Today, Milken and Drexel are trying to figure out ways to use this concept to bail out ailing thrifts in Texas and spend-thrift Latin American countries.

But some critics complain that the proliferation of such high-yield bonds is an ``overleveraging'' of America. Complains Sen. William Proxmire (D), of Wisconsin, ``Companies have to use so much of their cash flow paying interest, that they can't spend the money they should on research and development.''

While only time will tell who is correct, there are still more critics of the way Milken used the junk bonds to further the takeover business. A decade ago, it was unusual for unfriendly takeovers to occur because it was difficult to get banks to provide the financing. Drexel, however, by the early 1980s, found that if it issued a letter saying it was ``highly confident'' it could fund a takeover, investors would take its clients' overtures seriously.

The brokerage house's confidence stemmed from its ability to sell the high-yield bonds to its satisfied customers. There was greater demand for the bonds than there was supply. One of Milken's favorite sayings is, ``Capital is not a scarce resource.''

Milken had found a crack in the corporate armor. Most companies are run by professional managers, who own only a small percentage of stock in their companies. Thus, when takeover battles ensued, raiders such as Carl Icahn, who now owns TWA, could demand that shareholder interests come before those of management - even if shareholders had bought the stock a few weeks earlier. ``I call it the regreening of America - forcing management to own its own stock,'' says Richard Jenrette, head of the Equitable Life Assurance Society.

For Milken and his crew in Beverley Hills, this shift in corporate America has been very enriching, when Drexel's annual bonuses - which are based on a percentage of the profits - are handed out. Forbes Magazine counted Milkin's wealth at ``far over $600 million.'' According to congressional documents, it appeared there were times Drexel employees also got to buy ``hot'' issues before the clients - a practice Drexel now bans. Bruck maintains that Milken made his fortune by inhabiting such gray areas of the law. However, Mr. Eisen disagrees: ``In my dealings with him he has always been a stand-up guy.''

In person, the 44-year-old Milken seems confident but inquisitive. Like Morgan, he is very private, rarely giving press interviews. He is known as a family man, with traditional values. He lives in a modest house in Encino. And he has in recent years become more philanthropic. The Milken Foundation is actively involved in education, and he is a major contributor to the Variety Clubs International, a non-profit group that raises money to help needy children.

One of his latest efforts is to try to find ways to get businesses to move to the depressed areas of Detroit. ``Some people look at things and see problems,'' says Milken, ``But, I see opportunities.''