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01/21/2000

Michael Milken - Part I

We now start a series on the career of Michael Milken; junk bond
king, convicted felon, prostate cancer survivor, and
philanthropist. It''s a complicated story. Is he a dirtbag? Or was
he one of the great financiers of this or any generation? The truth
is, he''s both. And through it all, number one he was a
tremendous salesman.

Born into a middle class family and the son of an accountant,
Michael Milken wasn''t an extraordinary student in his early years
but he did attend Berkeley. This was in the mid-late ''60s when
the school was a hotbed of political turmoil, though Milken
wasn''t part of that scene. Upon graduation he took a job at an
accounting firm, Touche Ross, and married his childhood
sweetheart. He then decided to attend the prestigious Wharton
School of Business, not so much out of ambition, but rather
because that school was willing to grant credits for some exams
he intended to take.

In his book "When Giants Stumble," author Robert Sobel notes
that Milken''s professors at Wharton didn''t predict superstardom
for him. "With his shy grin, incapacity for small talk, and interest
only in work and family, (Milken) did not seem the kind of person
intended for greatness." [This may not be fair, but doesn''t that
seem a little like AOL''s Steve Case?]

In 1969 one of his Wharton professors found Milken a summer
job at Drexel, an old-line investment firm, and he continued on as
a part-time trainee when he returned to school. Upon completing
the M.B.A. in 1970, he went to Drexel''s New York headquarters
as director of research for "low-grade bonds" at a salary of
$25,000 a year. [Drexel was now Drexel Firestone, a result of
swapping a 25% interest in the firm to Firestone Tire & Rubber
for $6 million.]

Back in 1970, director of research for low-grade bonds was not
exactly a plum position. The action on the Street was in equities,
not bonds. Bonds were dull. But Milken saw an opportunity and
he took advantage of it.

Michael Milken thought investors had an inaccurate concept of
what constituted risk and how it had to be reflected in securities
prices. He applied his thinking to bonds.

From Robert Sobel, "(Milken) believed ratings agencies were
correctly concerned with balance sheets and related data, but
assigned such matters far too much importance. How about the
management talents, works in progress, research and
development, and the like, that advocates of common stock
discussed in the late 19th century? He felt this was particularly
true for the knowledge companies then coming into being, young
or restructured firms long on intangibles but short on tangibles.
The assets of these rested more on the abilities of managers and
researchers than on the production of factories." [This is a great
description of today''s investors as they struggle to properly value
such high tech sectors as the Internet.]

Steve Ross, one time CEO of Warner Communications, then an
entertainment conglomerate that became one of Milken''s clients,
liked to tell the story that every week day, in the late afternoon,
he would look out of his office window and see his inventory
drive away. Ross said he hoped they would return the following
day, since without them, he had no business.

In 1973 Drexel Firestone became Drexel Burnham, upon
receiving an infusion of cash from Burnham & Co., a small
brokerage that "Tubby" Burnham founded in 1935. But it was
the oil crisis of 1973 which caused a flow of red ink, as well as
mergers and dissolutions in the brokerage business. But Drexel
survived and Milken''s unit was beginning to generate profits. His
pay was hiked to $52,000 plus a portion of the profits his unit
generated. [This last part proved to be the source of his future
wealth.]

At this point Milken took some steps to catapult himself into the
national spotlight. First, he sold his idea that his bonds were not
as risky as believed. In the mid-1970s he told a buyer that the
bonds of MCI, then an improbable competitor for AT&T, were
safer than government bonds issued by Argentina. "How could
this be so?" he was asked. "You can seize MCI for failing to pay
interest," Milken replied. "You can''t seize Argentina." And
while stock in a failed company often went to zero, bonds did not,
since in the reorganization the bondholders often received shares
in the reconstituted company.

Milken told potential buyers (his cronies) that his junk bonds were
not to be viewed as long-term investments, but rather were to be
purchased for capital gains. He also made it clear that since he
was the one who knew these companies so well, he would tell
them when to sell (wink wink).

Next week.lights, camera, action!

Primary Source: "When Giants Stumble," Robert Sobel



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Wall Street History

01/21/2000

Michael Milken - Part I

We now start a series on the career of Michael Milken; junk bond
king, convicted felon, prostate cancer survivor, and
philanthropist. It''s a complicated story. Is he a dirtbag? Or was
he one of the great financiers of this or any generation? The truth
is, he''s both. And through it all, number one he was a
tremendous salesman.

Born into a middle class family and the son of an accountant,
Michael Milken wasn''t an extraordinary student in his early years
but he did attend Berkeley. This was in the mid-late ''60s when
the school was a hotbed of political turmoil, though Milken
wasn''t part of that scene. Upon graduation he took a job at an
accounting firm, Touche Ross, and married his childhood
sweetheart. He then decided to attend the prestigious Wharton
School of Business, not so much out of ambition, but rather
because that school was willing to grant credits for some exams
he intended to take.

In his book "When Giants Stumble," author Robert Sobel notes
that Milken''s professors at Wharton didn''t predict superstardom
for him. "With his shy grin, incapacity for small talk, and interest
only in work and family, (Milken) did not seem the kind of person
intended for greatness." [This may not be fair, but doesn''t that
seem a little like AOL''s Steve Case?]

In 1969 one of his Wharton professors found Milken a summer
job at Drexel, an old-line investment firm, and he continued on as
a part-time trainee when he returned to school. Upon completing
the M.B.A. in 1970, he went to Drexel''s New York headquarters
as director of research for "low-grade bonds" at a salary of
$25,000 a year. [Drexel was now Drexel Firestone, a result of
swapping a 25% interest in the firm to Firestone Tire & Rubber
for $6 million.]

Back in 1970, director of research for low-grade bonds was not
exactly a plum position. The action on the Street was in equities,
not bonds. Bonds were dull. But Milken saw an opportunity and
he took advantage of it.

Michael Milken thought investors had an inaccurate concept of
what constituted risk and how it had to be reflected in securities
prices. He applied his thinking to bonds.

From Robert Sobel, "(Milken) believed ratings agencies were
correctly concerned with balance sheets and related data, but
assigned such matters far too much importance. How about the
management talents, works in progress, research and
development, and the like, that advocates of common stock
discussed in the late 19th century? He felt this was particularly
true for the knowledge companies then coming into being, young
or restructured firms long on intangibles but short on tangibles.
The assets of these rested more on the abilities of managers and
researchers than on the production of factories." [This is a great
description of today''s investors as they struggle to properly value
such high tech sectors as the Internet.]

Steve Ross, one time CEO of Warner Communications, then an
entertainment conglomerate that became one of Milken''s clients,
liked to tell the story that every week day, in the late afternoon,
he would look out of his office window and see his inventory
drive away. Ross said he hoped they would return the following
day, since without them, he had no business.

In 1973 Drexel Firestone became Drexel Burnham, upon
receiving an infusion of cash from Burnham & Co., a small
brokerage that "Tubby" Burnham founded in 1935. But it was
the oil crisis of 1973 which caused a flow of red ink, as well as
mergers and dissolutions in the brokerage business. But Drexel
survived and Milken''s unit was beginning to generate profits. His
pay was hiked to $52,000 plus a portion of the profits his unit
generated. [This last part proved to be the source of his future
wealth.]

At this point Milken took some steps to catapult himself into the
national spotlight. First, he sold his idea that his bonds were not
as risky as believed. In the mid-1970s he told a buyer that the
bonds of MCI, then an improbable competitor for AT&T, were
safer than government bonds issued by Argentina. "How could
this be so?" he was asked. "You can seize MCI for failing to pay
interest," Milken replied. "You can''t seize Argentina." And
while stock in a failed company often went to zero, bonds did not,
since in the reorganization the bondholders often received shares
in the reconstituted company.

Milken told potential buyers (his cronies) that his junk bonds were
not to be viewed as long-term investments, but rather were to be
purchased for capital gains. He also made it clear that since he
was the one who knew these companies so well, he would tell
them when to sell (wink wink).

Next week.lights, camera, action!

Primary Source: "When Giants Stumble," Robert Sobel