The Systematic Harassment of Michael Milken
The eighties have been called the decade of greed, the "Me" decade, and the decade of excess. Never in all these assertions is there an explanation present of why greed is bad, self-interest is wrong, and moderation is good. The data paint a much more real portrait of the decade, since they are relatively uncolored by biases and opinions. Job creation proceeded at a clip unprecedented in the twentieth century. The Dow Jones Industrial Average, even with Black Tuesday's drop of 508 points in one day, rose two thousand points. The gains on equity to shareholders caused by the takeover and restructuring from 1976 to 1990 totaled over $750 billion.1 The economic picture was rosy. To say that the decade of greed caused this is to recognize the true nature of self-interest in a free market: productive effort. When corporations are free to make their own decisions without governmental interference, society will benefit. This is the "invisible hand" of capitalism. The government in the eighties, while imperfect in its implementation of non-interference, kept its claws out of the economy.
The pundits and historians of the eighties single out one man as the epitome of the eighties: Michael Milken. To them, he was excess writ large: making $550 million in his last year of employ at the investment bank Drexel Burnham Lambert. To them, that was more than any man needed or should have; that was greater than the gross national product of some nations at that time. The amount of his compensation indubitably damned him to the envious as recklessly greedy.
However, Michael Milken was the greatest financier since J.P. Morgan. He almost single-handedly elevated Drexel Burnham Lambert from a second-tier investment bank to a force that even Goldman, Sachs—Wall Street's largest and most powerful investment bank—feared. Throughout much of Drexel's post-Milken history, he accounted for one hundred percent of its profits. He had done so by recognizing the value of the so-called "fallen angels," companies whose investment-grade status was in question with the bond rating agencies. In reality, Milken noticed, these companies were being unfairly punished because they turned out to be quite strong performers. At one point, his High-Yield Bond Department accounted for forty-three percent of all high-yield bond—the debt of the "fallen angels"—issues in the whole of the investment world. To many companies, Milken's instrument was the only source of lending money available. When the power of high-yield bonds was made available to the infamous entrepreneurs of the eighties, such as Victor Posner and T. Boone Pickens, it enabled stockholders of companies to evict directors more interested in padding their compensation package than profitably running a corporation using a process called a takeover. These entrepreneurs valued cost-cutting and recognized that the opulent perks enjoyed by boards of directors and other executives were, by far, the easiest costs to cut. Milken allowed them to exercise these options very quickly, to the point where he could raise tens of billions of dollars within forty-eight hours.
In a sense, then, one could say that Michael Milken epitomized the decade of greed; if by greed, you mean productivity and self-interest. The previous passage outlines in detail the nature of his productivity. Because of his immense wealth and success, Milken inspired those envious few to become ever more vocal and persistent in their belief that something must be done to stop him. By the time of his fall, there were two major camps clamoring for his sacrifice: the government and the media. By the time of his plea, literally everyone had jumped on the anti-Milken bandwagon. He had been blamed for the savings and loan crisis, the recession of the early nineties, and, probably, the stock market crash of 1987. Indirectly, James B. Stewart's book, Den of Thieves, showed that Milken was the target of a nationwide vendetta. Furthermore, Milken's treatment by the three aforementioned groups should be considered an obstruction of the virtue of justice.
In the government, the four perpetrators of injustice against Milken were the Securities and Exchange Commission (predictably), the United States Attorney's Office in New York City, Congress, and Judge Kimba Wood. Collectively, these three agencies put the virtually unlimited force of the government onto the back of Michael Milken in a combined effort to make snap. Their tactics are commonplace in any banana republic dictatorship or communist nation, but are totally anathema to the letter and spirit of the United States Constitution. Of the three, Congress is the most culpable in the attack on Milken, the United States Attorney's Office was the most tenacious, and the SEC was the most punitive.
Congress set the backdrop for the Milken witch hunt. When it enacted laws against insider trading, it failed to define the term. In so doing, it gave the SEC the carte blanche it needed to prosecute just about anyone for anything. For example, Milken was charged with insider trading in regards to the Caesar's World debt-for-equity swap of 1983. However, Milken had committed to buying the debt much earlier. Moreover, at the meeting where Milken was supposed to have gleaned inside information, no decisions were arrived at and the debt-for-equity plan was one of many alternatives discussed. In fact, the SEC had investigated the transaction in 1985 and found no grounds for charges. Since the government wanted a conviction for insider trading, every transaction was guilty until proven innocent. The other law Congress put into effect that had a significant impact on the downfall of Milken was the Racketeering-Influenced Corrupt Organizations Act. This statute too was left undefined so as to give the prosecutors ample room for usage. Because a racketeering-influenced and corrupt organization was never specifically defined, Congress allowed it to be used very liberally. In fact, it was used by Rudolph Giuliani to hobble Drexel Burnham, a respected investment bank. Never mind that it was originally designed for the Mafia and drug dealers. It was criminally irresponsible to abrogate the basic rights of the accused to due process and to know with what he is being charged.
The SEC eventually received over $3 billion in the shakedown of Drexel, Milken, and others. It did so in an enterprising manner, too. Previously, if you engaged in stock parking, failing to file the required Schedule 13d in a timely manner, or other such regulatory offenses, you were slapped on the wrist and fined a nominal sum. In Milken's and Drexel's case, the fine and punishment were ratcheted up several hundred levels. For example, stock parking had traditionally been a low-priority offense at the SEC. The SEC has focused on those actions that indubitably accompany such parking, like net-capital, margin, and record-keeping regulations. However, in the Fischbach transaction, which led to felonies for Michael Milken, Ivan Boesky, Drexel Burnham Lambert, Victor Posner, and his son, the government alleged that Milken and Boesky conspired to break an existing standstill agreement between Posner and Fischbach. But the felony relies on Milken's guarantee of Boesky against loss, a premise that Boesky testified Milken never provided.2 Without an explicit stock-parking arrangement or any guarantee against loss, the transaction stands out as nothing more than Milken's willingness to help a profitable client. What is despicable is the SEC's repeated use of this transaction to club Milken, Boesky, Drexel, and the Posners. In fact, in Drexel's plea agreement, Milken was singled out by the SEC for termination and withholding of compensation. Clearly, the Securities and Exchange Commission had it in for Milken.
Nothing that the SEC or Congress did compared to the heavy-handed, police-state tactics of the United States Attorney's Office, primarily during the reign of Rudolph Giuliani. The reign of terror began with Dennis Levine, who implicated Ivan Boesky in his insider trading ring. Ivan Boesky, sensing that Giuliani had bigger fish to fry, agreed to become a coöperating government witness in exchange for pleading guilty to only one felony (for the Fischbach "stock-parking" scheme), $100 million, and his choice of sentencing judges. This began the slew of Boesky-influenced indictments. In Giuliani's ninety-eight count indictment of Milken, most of the charges were inspired by Boesky's coöperating testimony. Apparently, it never occurred to Giuliani that Boesky might be implicating others in wide swaths to save his own skin. Despite the fact that Boesky had been stashing money in Swiss bank accounts for years without declaring or disclosing said fact to the government3 or his involvement in Cobalt, a Boesky holding company which did much of his insider trading,4 Giuliani was so enamored of Boesky that he made him the linchpin of the government's case. The trouble was, after two and a half years of investigation, coöperating witnesses, and Drexel's coöperation, the government's case still relied almost exclusively on the testimony of Boesky, a convicted felon with a history of deceit. If Giuliani had stopped there, injustice still could be considered to have occurred, but an injustice that could have been corrected. When Giuliani unveiled his plans to use RICO to attack Michael Milken and his brother, Lowell, his obstruction of justice bordered on criminal. Lowell Milken had absolutely no involvement in any of the charges of the indictment. It was clear that the thought of Lowell swinging from a tree with the RICO noose around his neck would put the fear of Giuliani in Michael. The treble damages levied by RICO meant that the Milken brothers were left exposed to many billions of dollars in potential lawsuits. When the government started threatening every potential Milken defense witness with RICO indictments, it looked like the government was coercing witnesses to come over to Giuliani's camp. The final straw, or ultimatum, came when Giuliani revealed that a superseding indictment of even greater scale was forthcoming. Michael Milken was backed into a corner so deep that he had no choice but to cop a plea. But Giuliani was not going to let Milken off easy, not after the sweetheart deal Boesky got (and the corresponding negative press Giuliani received). Milken had to plead guilty to six felonies, pay the $600 million fine they requested, and become a coöperating government witness. In return, Lowell Milken would be protected from further prosecution and the government would not recommend any specific sentence.5 Later, when Judge Kimba Wood called a Fatico hearing to decide on Milken's character, Giuliani's crew could not even make the charges stick. Wood stated that neither the defense nor the prosecution made their cases.
Judge Kimba Wood, admittedly, did not have the opportunity to decide on the veracity of Milken's guilty plea. She did not have the privilege of a jury trial, with its weeks and weeks of testimony. So, she decided Milken's sentence based on fairly scant information. However, of what little information she did have, it indicated that the government's case against Milken was less than comprehensive. She conceded that Milken's sentence should not be given as a symbol; a sentence on the decade of greed. Rather, he should be sentenced according to his own merits. It sounded as if Milken was finally going to get a fair shake. Then, Wood started in on the "buts." But, Milken should have known his responsibility to police the others in Drexel. But, Milken's offenses were very technical and minor, indicating that the big stuff was missed. But, Milken was the symbol of the decade of greed. So, she sentenced him to ten years in prison, compared to two years for Boesky and three years for Levine—two "real" criminals. Later, a fellow judge in a different case, upon hearing the testimony of Milken, decided that one of the "crimes" Milken plead guilty to was not really a crime at all. Wood, citing Milken's "substantial coöperation" as a government witness, commuted his sentence to two years total. The truth was that Milken's testimony, far from coöperative, was actually damaging to the government's cases in the trials in which he testified. Judge Wood, obviously recognizing the error of her earlier, severe sentence reduced it to make amends to the light of history.
It is about this time that Den of Thieves, by James B. Stewart, was published. Stewart, the front-page editor of The Wall Street Journal, was the reporter who covered the Wall Street "crimes" during the eighties for the Journal. Apparently, Stewart hated Milken. While Ivan Boesky had been one of Stewart's most fertile source as a reporter, Milken had rebuffed his requests many times. As evidenced by Stewart's recent book Bloodsport about the Whitewater scandal, Stewart is not a man who reacts positively to being spurned or pushed aside. Stewart was also the willing recipient of countless government leaks. To Stewart, the case against Milken was airtight. No contradictions existed and the prosecutors were white-hatted. Stewart does not even mention the Fatico hearings and the concession they represented to Milken's case, except in a footnote buried deep in the back. He dismisses the overturning by the Second Circuit Court of Appeals of all charges against Princeton/Newport, John Mulheren, and others as unimportant. Further, he never revealed the conflict of interest caused by his writing of front-page stories about Milken's guilt while writing a book on the same subject. This acted to incite public opinion, which would lead to bigger sales.
However negative and one-sided Stewart's account of the eighties on Wall Street, Benjamin Stein outdid him. The bile and venom spewed forth from this reporter who Milken once rejected for employment is unprecedented and unprofessional. He went so far as to call Milken's high-yield bonds a "Ponzi scheme of incredible proportions."6 He also compared the fall of the house of Drexel to the fall of Nazi Germany. Stein's vitriol echoed the sentiments of many of America's most envious citizens.
The net effect of such diatribes on public opinion was incredible. People who had not an inkling of what a high-yield bond was, or bonds for that matter, were blaming Milken for the savings and loan crisis. People today, even if they do not remember the pertinent details of the story, remember Milken as the "king of junk bonds" with a dim sense that he was a very bad man. These sort of feelings and senses cannot be argued with or convinced. This is the nature of the vast injustice heaped on Michael Milken. His name has been sullied and the thing that mattered most to him, productive effort, has been taken away. He has lost most of the fortune he spent fifteen years of sixty plus hour work weeks to create. What has come of his assailants? Giuliani is Mayor of New York City, a position he achieved partly by riding the wave of envy into office. The prosecutors of the SEC have moved into wildly successful securities law with established firms. Judge Kimba Wood made a run for the Supreme Court, was rejected, and now is back on the federal bench. Congressman John Dingell, Milken's most virulent foe in Congress, is still going strong. James Stewart has become a very successful author. Den of Thieves became a best-seller. Benjamin Stein has appeared in countless television sitcoms and regularly writes business columns for various periodicals. He also has capitalized on Milken's demise through several attack books.
1 Fischel, Daniel R. Payback: The Conspiracy to Destroy Michael Milken and his Financial Revolution. New York: Harper-Collins, 1995. pages 76-78.
2 Kornbluth, Jesse. Highly Confident: The Crime and Punishment of Michael Milken. New York: William Morrow and Co., 1992. pages 268-269.
3 Ibid., page 276-277.
4 Fischel, page 162.
5 Fischel, page 151.