The Predators' Ball

1. Michael Milken: The Junk Bond King Who Revolutionized Wall Street

"Michael is the most important individual who has lived in this century."

Milken's rise. Michael Milken, a brilliant and driven financier, transformed Wall Street in the 1980s through his innovative use of high-yield "junk" bonds. Starting at Drexel Burnham Lambert, Milken saw opportunity in low-rated corporate debt that others dismissed. He built a powerful network of investors and issuers, creating a market for these bonds that fueled corporate takeovers and leveraged buyouts.

Unprecedented success. Milken's success was staggering:

• By 1986, Drexel's revenues soared to $4 billion
• Milken personally earned an estimated $550 million in 1987
• The junk bond market grew from $10 billion in 1979 to $125 billion by 1986

Work ethic and vision. Milken was known for his intense work ethic, often starting his day at 4:30 AM and working 20-hour days. He had an encyclopedic memory for bond details and a unique ability to see value where others didn't. This combination of skills and drive allowed him to build an empire that reshaped corporate America.

2. The Rise of Drexel Burnham Lambert: From Obscurity to Power

"Drexel is like a god in that end of the business and a god can do anything it wants. . . . They are awesome. You hate to do business against them."

Meteoric ascent. Drexel Burnham Lambert, a relatively obscure investment bank in the 1970s, rose to become the most powerful firm on Wall Street by the mid-1980s. This transformation was largely due to Milken's junk bond operation, which generated enormous profits and gave Drexel unparalleled influence in corporate finance.

Key statistics:

• Drexel's revenues grew from $150 million in 1977 to $4 billion in 1986
• The firm's capital increased from $75 million to over $1 billion in the same period
• By 1986, Drexel was the most profitable investment bank in America

Cultural shift. Drexel's success led to a cultural transformation within the firm. It became known for its aggressive deal-making, enormous bonuses, and a willingness to work with clients that other Wall Street firms shunned. This "outsider" mentality, combined with its financial muscle, allowed Drexel to dominate the mergers and acquisitions landscape of the 1980s.

3. Junk Bonds: Transforming Corporate Finance and Fueling the Takeover Boom

"Capital is not the scarce resource," Milken had been instructing his followers for several years and, to their delight, proving over and over again.

Redefining corporate finance. Milken's innovation was to create a liquid market for high-yield, high-risk corporate bonds. These "junk bonds" allowed companies with less-than-stellar credit ratings to access capital markets, fundamentally changing how businesses could finance growth and acquisitions.

Takeover fuel. Junk bonds became the rocket fuel for the 1980s takeover boom:

• Enabled smaller companies to bid for larger rivals
• Financed leveraged buyouts (LBOs) of unprecedented size
• Allowed corporate raiders to threaten even the largest companies

Market growth. The junk bond market exploded under Milken's guidance:

• 1977: $1.22 billion in new issues
• 1983: $7.31 billion in new issues
• 1986: Over $50 billion outstanding

This rapid growth transformed corporate America, making hostile takeovers and leveraged buyouts commonplace and forcing even the largest companies to restructure to avoid becoming targets.

4. Milken's Network: Building a Loyal and Lucrative Client Base

"Mike is always saying, 'If we can't make money from (that means overcharge) our friends, who can we make money from?' "

The inner circle. Milken cultivated a network of loyal clients, including corporate raiders, savings and loan institutions, and insurance companies. This network allowed him to quickly place billions in bonds and orchestrate complex deals. Key members included:

• Carl Icahn
• T. Boone Pickens
• Ronald Perelman
• Fred Carr (First Executive)
• Thomas Spiegel (Columbia Savings and Loan)

Mutual benefits. Milken's network operated on reciprocity:

• Clients bought each other's bonds
• Participated in each other's deals
• Received preferential treatment in hot offerings

Control and loyalty. Milken maintained tight control over his network through:

• Offering lucrative investment opportunities
• Providing liquidity in times of market stress
• Using his influence to reward loyalty and punish defectors

This system allowed Milken to dominate the junk bond market and exert enormous influence over corporate America.

5. The Predators' Ball: Showcasing Drexel's Power and Influence

"It's the Academy Awards of business!"

Annual showcase. The Predators' Ball, Drexel's annual high-yield bond conference in Beverly Hills, became the ultimate display of the firm's power and influence. It evolved from a small gathering in the late 1970s to a must-attend event for corporate America by the mid-1980s.

Key features of the conference:

• Presentations by Drexel clients and takeover targets
• Deal-making and networking opportunities
• Lavish parties and entertainment

Symbol of an era. The Predators' Ball epitomized the excesses and power dynamics of 1980s Wall Street. It showcased how Milken and Drexel had transformed finance, bringing together:

• Corporate raiders
• CEOs of major corporations
• Institutional investors
• Politicians and regulators

The conference's evolution mirrored Drexel's rise, becoming more extravagant and influential each year, until it became a symbol of the firm's dominance and the changing face of American business.

6. Hostile Takeovers: Reshaping Corporate America

"What I've been saying all these years," declares Icahn, referring to his polemics on the ills of American corporate management, "I never knew how true it was."

New era of corporate warfare. Milken's junk bonds fueled a wave of hostile takeovers that reshaped corporate America in the 1980s. These raids, often led by Drexel clients, targeted even the largest companies, forcing widespread restructuring and changes in corporate governance.

Key takeovers and attempts:

• T. Boone Pickens' bid for Gulf Oil
• Carl Icahn's acquisition of TWA
• Ronald Perelman's takeover of Revlon

Impact on corporate America:

• Forced companies to focus on shareholder value
• Led to widespread restructuring and asset sales
• Challenged the entrenched power of corporate boards and management

These takeovers, while controversial, were seen by supporters as necessary to shake up complacent management and unlock shareholder value. Critics, however, argued that they led to short-term thinking and excessive leverage.

7. Milken's Controversial Methods: Blurring Ethical and Legal Lines

"Mike plays very tough," he said. "He doesn't get in there and do it himself—I've never heard him raise his voice. But he has people who do."

Pushing boundaries. Milken's success was partly due to his willingness to operate in ethical and legal gray areas. His methods often blurred the lines between aggressive business practices and potential misconduct.

Controversial practices:

• Using inside information to trade bonds
• Pressuring clients to buy bonds in other deals
• Manipulating stock prices through coordinated buying
• Circumventing regulatory restrictions

Justifications and defenses. Milken and his supporters argued that:

• His methods were necessary to create liquidity in the junk bond market
• He was disrupting an entrenched and inefficient financial system
• His actions ultimately benefited shareholders and the economy

However, these practices eventually drew scrutiny from regulators and prosecutors, leading to investigations that would ultimately bring down Milken and Drexel.

8. The Fall of an Empire: Insider Trading and Legal Troubles

"Dennis Levine was arrested, handcuffed and taken off to spend the night at the Metropolitan Correction Center. He was accused by the SEC of having made $12.6 million in illegal profits through insider trading in fifty-four stocks."

Unraveling. The Drexel empire began to crumble in 1986 with the arrest of Dennis Levine, a senior Drexel investment banker, for insider trading. This arrest led to a wider investigation that eventually implicated Milken and other key Drexel employees.

Key events in the fall:

• 1986: Dennis Levine arrested for insider trading
• 1986: Ivan Boesky, a key Milken associate, pleads guilty to securities fraud
• 1988: Drexel indicted on racketeering and fraud charges
• 1989: Milken indicted on 98 counts of racketeering and securities fraud
• 1990: Drexel files for bankruptcy
• 1990: Milken pleads guilty to six felony charges

Aftermath. The fall of Milken and Drexel marked the end of an era on Wall Street. It led to increased regulation and scrutiny of financial practices, particularly in the areas of insider trading and securities fraud.

9. Legacy and Impact: Milken's Lasting Influence on Wall Street

"Milken was the proven prophet."

Lasting impact. Despite his legal troubles, Milken's influence on Wall Street and corporate America has been profound and enduring. His innovations in the junk bond market and corporate finance continue to shape business practices today.

Key aspects of Milken's legacy:

• Democratization of capital: Made financing available to a wider range of companies
• Corporate restructuring: Forced companies to become more efficient and shareholder-focused
• Financial innovation: Pioneered new financial instruments and strategies
• Entrepreneurial finance: Enabled the growth of many new businesses

Continued debate. Milken's legacy remains controversial:

• Supporters argue he created value and improved market efficiency
• Critics claim he encouraged short-term thinking and excessive leverage
• His methods continue to be debated in discussions of financial regulation and ethics

Regardless of one's view, Milken's impact on modern finance and corporate governance is undeniable, making him one of the most influential figures in 20th-century business history.

Last updated: August 15, 2024