What is Wrong With Our World? Michael Milken, S&Ls and “Junk Bonds”

photorandy2023

2 years ago

I started this current series to discuss what is wrong with our country and what we need to do to fix it. I have since expanded this series to not only include the United States but the rest of the world as well. While I have discussed some of the topics that I will be including in this series, they have been included in other articles. In this series I will concentrate on a single topic. This will also mean that some of the articles may be slightly shorter than my readers have grown accustomed to, however they will still be written with the same attention to detail. This series will have no set number of articles and will continue to grow as I come across additional subjects.

Michael Milken is a billionaire financier best known as the man behind the junk bond boom of the late 1970s and 1980s. Milken found a way to lend money to riskier companies struggling to access credit, leading parts of the economy to boom and Milken to make a fortune.

Greed eventually got the better of Milken and he was sent to prison for securities fraud. Since getting released, the “junk bond king” has remained in the spotlight, this time mainly for his charitable donations and focus on education and medical research.

Early Life and Education

Michael Milken was born on July 4, 1946, in Encino, California. Michael, whose father was an accountant, was said to be reclusive from an early age and reportedly stood out by working harder and longer than his peers. He was head cheerleader of Birmingham High School and went bald in his early teens.

In 1968, Michael earned a bachelor’s degree from the University of California, Berkeley. He then pursued an MBA at the University of Pennsylvania.

In 1969, while studying at the University of Pennsylvania’s Wharton School of Finance, Milken joined Drexel Burnham Lambert. Two years later, he became head of the company’s bond trading department. Milken would remain with Drexel Burnham Lambert for 17 years, during which he took a keen interest in junk bonds.

Notable Deeds

The Junk Bond King

At Drexel Burnham Lambert, Milken initiated a high-yield bond trading department, an idea that would eventually earn a 100% return on investment. Envisioning a path for investors to garner high returns by buying bonds issued by companies with low credit ratings, Milken helped Drexel Burnham Lambert launch an effort to underwrite junk bonds by convincing companies to issue them.

The bonds provided capital for companies unable to access credit and Milken raised a large amount of money from a sizable base of interested investors. Milken led Drexel Burnham Lambert’s lucrative practices of leveraged buy-outs, hostile takeovers, and “junk” bond issues.

70%

The percentage of the junk bond market controlled by Drexel Burnham Lambert in the 1980s.

Milken’s compensation topped $550 million in 1987 and exceeded $1 billion over four years. Milken was nicknamed the “junk bond king” and, at its peak, Drexel Burnham Lambert was one of the largest investment banks in the U.S.

Wall Street leaders pondered how Drexel Burnham Lambert could allow one executive to gain unregulated power. ”Such an extraordinary income inevitably raises questions as to whether there isn’t something unbalanced in the way our financial system is working,” said David Rockefeller, retired chairman of the Chase Manhattan Bank. ”One has to be concerned when the norms that have been accepted over the years suddenly become so distorted.”

Crimes

In 1986, one of Drexel Burnham Lambert’s clients, Ivan Boesky, was convicted of insider trading and implicated Milken and Drexel Burnham Lambert in his illegal financial dealings. Two years later, in 1988, Milken and his employer were charged with securities fraud.

In 1990, Milken pleaded guilty to six felony counts of violating securities laws and was sentenced to ten years in prison and fined $600 million. He was also banned for life from the securities industry by the Securities and Exchange Commission (SEC). In that same year, Drexel Burnham Lambert declared bankruptcy.

Milken’s sentence was later reduced to two years for good behavior and for cooperating with testimony against former colleagues.

Following his release from prison, Milken worked as a strategic consultant, which violated his probation, and he was subsequently fined. He was pardoned by President Donald Trump in February 2020.

$6.5 billion

Milken’s estimated net worth, as of December 12, 2023.

What Is The Milken Family Foundation?

The Milken Family Foundation is a private foundation established by Michael Milken and his brother in 1982 that primarily focuses on supporting education and medical research.

Is Michael Milken an Author?

After being diagnosed with prostate cancer, Michael Milken wrote a series of books, including The Taste for Living Cookbook: Mike Milken’s Favorite Recipes for Fighting Cancer with Beth Ginsberg.

Has Michael Milken Donated to Education?

Education is a key focus of the Milken Family Foundation. Among other things, the foundation awards prizes to hardworking K-12 teachers and principals and offers financial support to college-bound students in need of assistance.

The Bottom Line

Michael Milken is a billionaire and philanthropist mainly known for pioneering the junk bond craze of the 1980s. Nicknamed the “junk bond king,” Milken, while working as an executive at the investment bank Drexel Burnham Lambert, became famous for getting companies with lower credit ratings access to capital.

Milken’s work turned him into one of Wall Street’s highest earners and a symbol of the greed and growth of financial markets in the 1980s. By 1990, he was behind bars for securities fraud.

Many people believe in myths lacking any demonstrably factual basis. Put “urban legends” into a search engine and hundreds of such irrational beliefs appear. So perhaps it’s not surprising that widespread misunderstanding persists about the facts of Mike Milken’s life. For an interesting view of how and why such myths about Milken arose, read the Introduction by Harvard law professor Alan Dershowitz in the 1992 book, Fall From Grace. A more recent book by Boston attorney Harvey Silverglate, Three Felonies a Day, includes an equally revealing nine-page section about Milken’s legal prosecution.

Among dozens of myths, some of the most common are discussed below:

When Milken became a philanthropist: A common error often repeated in the press is that Milken was a financier who “turned to” philanthropy. (Variations on this myth are that he ‘reinvented’ himself as a philanthropist following his 1993 cancer diagnosis and that his old legal problems led to an effort to ‘redeem’ himself.) Saying that Milken is “now a philanthropist” is like saying the Pope is now a Catholic – technically true but misleading. Milken’s medical and public health philanthropy began in the 1970s and paralleled his business career. This was 20 years before his cancer diagnosis and a decade before any legal issues arose. He formalized his individual efforts in early 1982 (when he was relatively unknown to the general public) with the formation of the Milken Family Foundation, which was endowed with several hundred million dollars. Over the span of more than 35 years, the Milken Family Foundation has been one of America’s most innovative forces for the advancement of education, public health and medical research. These health and educational advocacies have been Milken’s longstanding pursuits and have nothing to do with ‘redemption.’ His Wall Street career spanned 19 years, but his philanthropic passions have been life-long.

The role of leverage: Milken has advocated a sound capital structure – the relative levels of equity and debt on corporate balance sheets – throughout his career. Among other points, he has always said that risk in capital structure should vary inversely with business risk and volatility. He first said this while still a student at Wharton in the 1960s. When he was on Wall Street between the 1960s and 1980s, his business rarely used leverage and when it did, it was not more than 4:1 – far from the 30:1 or higher that Wall Street institutions used leading up to the 2008 financial crisis. In various Wall Street Journal op-ed articles, Milken has noted:

“There is no optimum capital structure – X percent equity and Y percent debt – that can be applied to different organizations, or to the same corporation at different points of time. Just as you can’t make real money by putting a dollar bill on a copying machine, you can’t successfully copy the financing technique that once worked for a particular company and transfer it to another time or another company. That’s why I have always said that finance is a continuum with infinite variations and hybrids. It takes deep understanding of a company, its environment, and the financing tools available to build sustainable growth that will reward shareholders and create jobs.””When your business depends on technology – whether it’s aerospace, computer and electronics firms in the 1960s or Internet, telecom and networking companies in the 1990s – volatility is a fact of life. Unlike slower-changing industries like supermarkets, which can appropriately assemble a balance sheet with more debt, technology is an inherently risky business and needs a strong balance sheet to survive. In fact, risk in capital structure should vary inversely with business risk.””The decision to increase or decrease leverage depends on market conditions and investors’ receptivity to debt. The period from the late-1970s to the mid-1980s generally favored debt financing. Then, in the late ’80s, equity market values rose above the replacement costs of such balance-sheet assets as plants and equipment for the first time in 15 years. It was a signal to deleverage. In this decade, many companies, financial institutions and governments again started to overleverage, a concern we noted in several Milken Institute forums.””The [2008] recession started in real estate, just as in 1974. Back then, many real-estate investment trusts lost as much as 90% of their value in less than a year because they were too highly leveraged and too dependent on commercial paper at a time when interest rates were doubling. This time around it was a combination of excessive leverage in real-estate-related financial instruments, a serious lowering of underwriting standards, and ratings that bore little relationship to reality.””Grave illness is often more life-threatening when it follows years of bad habits – overeating, drinking to excess, failing to exercise, and abusing substances that create dependence. The recent economic boom reflected a similar lack of discipline – overindulging on credit, leveraging assets to excess, failing to maintain enough equity in the capital structure, and disregarding the consequences of dependence on foreign oil.””When doctors tell patients to adopt healthier habits following a heart attack, the patients have no one to blame but themselves if they fail to comply. And when markets tell companies it’s time to deleverage following an economic downturn, the companies have no one to blame but themselves if they fail to change their balance sheets.”

What happened in Milken’s legal case: Some news organizations have confused the pleas in the government prosecution of Milken with statements such as “Milken pleaded guilty to reporting violations in connection with a government investigation of insider trading.” Readers then erroneously assume that the violations to which he agreed to plead included insider trading. They did not. In 1992, The Wall Street Journal noted that “things have changed since Milken’s plea. The SEC simply fined 98 brokerage firms and banks for Milken-like technical reporting violations.” He was not guilty of insider trading and was never convicted of it. Noting this fact, the Journal’s late editor, Robert L. Bartley, wrote in a May 2002 column, “The 1990 recession did shake out a real insider-trading ring … Its mastermind, Ivan Boesky, got off with a three-year sentence by offering to cooperate … fingering Mr. Milken and others; cases based on his information collapsed.” (Emphasis added.) At pre-sentencing hearings, the prosecution was invited to show its best evidence, after more than four years of intensive investigation, of more serious violations, including insider trading. Hearing the prosecution’s determined efforts, the judge said they had failed to prove the more serious charges. What, then, did Milken plead? Against the advice of those who urged him to carry on the fight (as some others did successfully), Milken admitted conduct that resulted in five violations of complex securities/reporting regulations. None of these violations involved insider trading. In April 1992, one of the prosecutors, speaking at Seton Hall Law School, admitted that with Milken, “we’re guilty of criminalizing technical offenses … Many of the prosecution theories we used were novel. Many of the statutes that we charged under hadn’t been charged as crimes before … We’re looking to find the next areas of conduct that meet any sort of statutory definition of what criminal conduct is.” Professor Norman Barry wrote in his book Business Ethics (Macmillan, 1998), “Like many innovators before him, Milken had to pay the price for his success. The pursuit of Milken was an affront to the rule of law. He originally faced a 98-count indictment (including insider trading charges), which the Justice Department knew would not stick. So the department managed to coerce Milken to plead guilty to trivial offenses. If they want you, they will get you. Milken’s problem was his success.” Another Wall Street Journal column added: “Mr. Milken was coerced into a plea bargain involving trading violations elevated into felonies … Prosecutors and politicians want scapegoats, and often have the collaboration of businessmen. With Milken, business competitors egged on prosecutors. And the truly culpable parties can get off lightly by conning prosecutors with the promise of bigger fish.”

The 2009 book Three Felonies a Day: How the Feds Target the Innocent, by civil liberties attorney Harvey Silverglate, says: “Had Milken not been famous and wealthy, critics might have taken a closer and more dispassionate look at the fabricated case against him and the methods used to force him to plead guilty. As is so often the case with federal criminal prosecutions, the fabrication consisted, in part, of dubious testimony given by rewarded witnesses, and felony charges for conduct (admitted to by Milken) that, to informed and objective observers, did not appear to constitute crimes.” Citing Silverglate’s book in The Wall Street Journal, columnist and lawyer L. Gordon Crovitz said: “This is a common problem in securities laws, which Congress leaves intentionally vague, encouraging regulators and prosecutors to try people even when the law is unclear. Prosecutors identify defendants to go after instead of finding a law that was broken and figuring out who did it.”

In a 2012 Bloomberg TV interview, author Jesse Kornbluth, who wrote the 1992 book “Highly Confident,” discussed how the prosecutor used Milken’s wealth as a public relations weapon. Kornbluth said the public assumed anyone with Milken’s level of compensation “had to be guilty.”

“You take a very rich man and you hit him with a club. Hitting a rich man in those days was a very smart thing for a guy like [federal prosecutor and future New York Mayor] Rudy Giuliani. He made his name indicting criminals – he broke the Mafia by using the racketeering act. And then he discovered he could use that on Wall Street. It’s an unbelievably powerful weapon because it means you have no credit, you can’t function, so the mere threat of it means you have to come in and plead.”

Kornbluth then described how insider traders have become more sophisticated over the past 20 years:

“It’s no longer guys with briefcases [of cash] like Ivan Boesky. The deals are different now. Ivan Boesky made a sweetheart deal with the government – he fooled the government completely because Giuliani had no idea about anything. [Boesky] talked about a ‘Mr. Big’ –Milken. But Boesky was ‘Mr. Big.’ Milken never committed insider trading. The total economic damage Milken committed was about $300,000 – a piker. We’re talking about people making billions of dollars a year now.”

Journalists who don’t know the history sometimes conclude that he really did engage in insider trading but got the charge dropped as part of a plea deal. This is false – he did not commit this crime and there was no deal. The judge threw out the insider trading charge.

Was there a fine? Milken paid a $200 million fine. There were other payments, primarily to dispose of civil litigation, but there was no adjudication of wrongdoing in those suits. It is misleading and erroneous to combine negotiated civil payments with mandatory criminal sanctions. Civil settlements are not a measure of criminal liability and signify nothing more than a civil defendant’s desire to move on with his or her life, whether or not the claims have merit. Other defendants in cases similar to Milken’s fought charges for as long as a decade, and eventually prevailed. Milken, financially able to afford the settlements and concerned about the stress on his family, felt his time would be better spent on efforts such as helping address America’s serious education, medical research and public health issues – instead of spending a decade in court.

The source of charitable contributions. Milken’s wealth grew during his business career beginning in the 1960s. Even prosecutors conceded to Milken’s attorneys that his wealth was earned legitimately. None of the Milken family’s $1.25 billion in charitable contributions is in any way “tainted.” In fact, the fastest growth increment to Milken’s wealth was in 1974-76, when he earned the base of his family wealth by correctly calling a major turn in the market. Subsequently, he earned entirely legitimate payments from his firm pursuant to an employment contract that had been negotiated years earlier. The Milken Family Foundation was established years before any of the activities occurred that were later found to violate securities regulations.

The violations to which Milken pleaded had little economic effect. In fact, four of the five were found by the judge to have had zero economic effect. The fifth involved a failure to disclose a commission of a transaction that, if disclosed, would be legitimate. This type of non-disclosure has never before – nor has it since – been the subject of a criminal prosecution. Even though Milken had traded more than a billion dollars a day in securities – several trillion dollars at that point in his financial career – the total economic effect of the violations found by the judge was $318,082 – about three ten-thousandths of a single day’s trading; and that amount was spread over a period of several years. In fact, even this comparatively small “economic effect” of $318,082 is entirely theoretical; the transactions were executed within the spread of the bid and asked prices, and it has never been shown that any investor lost anything as their result. In the civil lawsuits, all plaintiffs involved settled and took their money without any admission of wrongdoing by Milken.The majority of the Milken family wealth, however, has been earned since the mid-1990s. It is derived from a broad portfolio of investments including many companies in such areas as biotechnology and other growth sectors. It is unrelated to his previous work on Wall Street. In 2009, he said, “I never thought we’d see an opportunity like 1974 again, but here it is.”

Financial career relationships: Much has been made of Milken’s brief and sporadic contacts with the notorious Ivan Boesky. Milken never socialized with Mr. Boesky, who was described as a “pathological liar” on a 2001 CNBC broadcast based on the book, The Great Game: The Emergence of Wall Street, by business historian John Steele Gordon. Gordon suggests that Milken may have been “the victim of jealousy, self-serving crooks like Boesky, and ambitious prosecutors who lusted after so high-profile a case.” Noting Boesky’s crimes, Gordon writes, “Michael Milken was a different matter altogether.” He calls the infractions to which Milken pleaded “minor” and notes that “the judge said she could not find more than a few hundred thousand dollars in discrepancies.” In July 2002, Mr. Gordon appeared on MSNBC’s The News with Brian Williams and said, “Ivan Boesky was just a plain crook. He showed up in people’s offices with suitcases full of cash.” Gordon then contrasted Boesky with Milken, whom he described as “a highly creative financier who did a great deal of good and helped the American economy in many ways.” A man of modest behavior, Milken is the total antithesis of Boesky.

The savings and loan industry.Milken was one of the early prominent voices warning about impending problems in the S&L industry. In the second half of the 1980s, Milken repeatedly called for regulatory reform and warned companies and financial institutions to deleverage their capital structures. The S&Ls problems were caused not by Milken, but by unwise real-estate loans, federal deposit insurance and regulatory mismanagement. Junk bonds comprised less than one percent of S&L holdings and thus could not cause the S&L crisis. Indeed, they were the best-performing S&L assets in the 1980s.

The ill-conceived Financial Institutions Reform Recovery and Enforcement Act of 1989 forced some S&Ls to sell their junk bonds. That caused a temporary drop in the junk-bond market – less than 10% in 1990. It roared back 46% percent in 1991. Exhaustive research by independent scholars over the past 20 years shows that Milken created tremendous economic value that was partially destroyed for some S&Ls by misguided government action. An October 2010 article in The Economist said Milken was “a useful scapegoat for the savings-and-loan crisis.”

Milken’s title. Milken is a philanthropist, financier, medical-research innovator, author, foundation executive, public health advocate, corporate officer, husband, father and grandfather. The hackneyed epithet “junk bond king” was coined by Milken’s old Wall Street competitors from the 1970s and ’80s to dismiss the significance of his work. It was then picked up by The New York Times and has been parroted ever since. Given the breadth of Milken’s activities before and after the flurry of media attention to his Wall Street career, it’s a phrase that overlooks four decades of leadership in medical-research and public health advocacy, not to mention Milken’s pioneering use of complex capital-structure strategies involving equity-based financial instruments and other securities. Between 1969 and 1989, Milken employed approximately 50 distinct securities types in a dozen major asset classes (only one of which was high-yield debt) to help finance the growth of more than 3,200 companies. This created millions of jobs.

Writing in Forbes magazine (Dec. 21, 2015), financial columnist Martin Sosnoff said, “Mike Milken was termed the junk bond king, again and again by headline copy editors, but he was of course much more. Mike was one of the great investment bankers of the 1980s.”

What exactly is a “junk bond king”? Did the press refer to Bill Gates as the “software king” because he controlled more than 90% of the operating system market? Although Milken’s firm was the largest in the field, it handled no more than 33% of the trading in high-yield securities, which incidentally had been used in America for more than 200 years. Recognizing these facts, responsible publications have come to consider “junk bond king” a lazy clichè – like “Panamanian strongman” or “intrepid traveler” or “the powerful House Ways and Means Committee.” Milken is not – and was not – king of anything.

When Milken first appeared on the financial scene.His most important financial work was in the 1960s and 1970s when his theories of credit risk and capital structure were being developed at Berkeley and Wharton. These theories, thought revolutionary at the time, are now widely taught in business schools. They came into play in the early ’70s and were validated during the severe market drop of 1974, which Milken considers the most important year of 20th-century financial history. By 1975, he was independently wealthy and never needed to work again. Milken considers 1976 to be the peak of his financial career because the markets had affirmed what he believed and predicted. (At this peak, ironically, Milken said he felt “powerless” after learning that his father’s cancer was terminal – a fact that accelerated his involvement in medical research and prevention initiatives.) By the late 1970s, Milken had made major strides in democratizing capital access for below-investment-grade companies and entrepreneurs. In the words of Wharton School management professor Daniel Raff, “the capital markets roused from their critical slumber.” Unfortunately for Milken, this process agitated the establishment. “By forcing open the sluice gates of capital,” wrote Alvin Toffler in his 1990 book PowerShift, “Milken had rattled the entire structure of smokestack power in America.”

Before Milken, the greatest financier had been J.P. Morgan, who saw markets as a zero-sum game in which he tried to be the winner at someone else’s expense. For example, when financing AT&T, Morgan used his enormous Wall Street and banking influence to ensure that potential AT&T rivals lacked access to capital. Milken did the opposite, opening access to capital for thousands of smaller companies. Milken showed it was possible to align the interests of all corporate stakeholders – investors, entrepreneurs, debtors, creditors, consumers, management, employees and society – to create jobs, wealth and economic growth. The key was his profound understanding of capital structure and how it must change as exogenous conditions change. [See Milken’s articles “Why Capital Structure Matters” and “The Corporate Financing Cube“.] By the late 1970s, he had already shown it was possible to unlock great potential value hidden in accumulated assets. As others began to exploit this insight, Milken turned increasingly to such issues as public health, education, wage disparity, expanding human capital, and medical research.

Uses of high-yield (“junk”) bonds. Invoking the myth that Milken’s finance work was limited to high-yield instruments – and that these were used to finance corporate raiders – shows poor understanding of his work or its complex theoretical underpinning. Simply stated, Milken asserts that capital structure matters – and matters to a degree more profound than commonly acknowledged. The choice of capital structure can significantly affect the valuation of a company and its risk as an investment. There is no “one right way” to capitalize a corporation, Milken has repeatedly said, nor can any single financial structure be correct at all times. Success through good times and bad depends on building a strong capital structure that limits risk where business conditions are volatile. Getting the right balance requires deep understanding of social and regulatory trends, management competence, industry conditions, capital markets cycles, and the economy. Sometimes, as in the late 1980s, many companies likely would have been advised to de-leverage by issuing equity. For much of the 1970s, conditions generally favored debt financing. Yet, Milken believes, for certain companies – such as airlines in the 1960s and dot.com startups in the late 1990s – any debt is excessive because risk in capital structure should vary inversely with business risk. Glib references to the “junk bond king” perpetuate a one-dimensional caricature of a multi-dimensional financial innovator.

He used more than 50 distinct types of securities in some dozen asset classes to help finance corporate growth for his clients and adapt their capital-structure needs to changing market conditions. At various times this included convertible bonds, preferred stock, high-yield bonds, collateralized loans, equity-linked instruments, securitized obligations and derivatives. But he recognized that in a changing society, “The Best Investor is a Social Scientist” (the title of his first talk on Wall Street in 1969). In his book How the Markets Really Work (Crown, New York, 2002), former Harvard Business Review editor Joel Kurtzman wrote:

“Milken’s real contribution was far greater than simply to sell portfolios of bonds. His real contribution was to get investors to understand that the stock and bond markets were not really separate markets. Milken created a tremendous pool of liquidity and guided its use with surgical precision. He did it in a way that took an often bloating and ailing American economy and made it lean, mean and resilient. Much of the strength and resilience of the economy today – including its ability to rebound in times of adversity – is due to the way people using Milken’s financing vehicles remade ailing companies or put their entrepreneurial zeal to work.”

His most important work was financing entrepreneurs who had good ideas for building companies that became engines of job creation. Based on his studies during the 1960s and his practical experience in the 1970s, Milken was determined to focus, first, on cash flow rather than reported earnings; and second, to consider human capital part of the balance sheet. He played this out by backing such pioneers as Bill McGowan (telecommunications), Ted Turner (cable television), Craig McCaw (cellular telephones), Len Riggio (book retailing) and Bob Toll (homebuilding). They earned Milken’s respect and backing because they demonstrated greater vision than the sclerotic, risk-averse managers who relied on banks for financing. When banks encountered problems in the 1970s and shut down the flow of capital, Milken stepped forward and made capital available for thousands of dynamic, growing companies that created jobs and shareholder value. This helped make the U.S. economy the envy of the world in the last quarter of the 20th century.

Milken didn’t simply head a variety of departments in his work at Drexel. He and his colleagues created what is today a major part of the structure of global finance, based on their innovations in the 1970s. This structure – taken for granted today and widely taught in business schools – powered job growth in America for a quarter-century and is now moving around the world through the efforts of the Milken Institute. It’s no surprise Milken was introduced at an investment firm’s 2007 executive retreat as “the father of modern capital markets” and “the man who created modern private equity.”

There was a relatively small sector of Milken’s business that later did help dislodge less-efficient, non-stockholder managers as part of the normal process of business rationalization. These takeovers improved the quality of management at less-efficient companies and helped the economy, making it more dynamic and innovative. In a June 26, 2002, opinion column, the dean of the George Mason School of Law, Henry G. Manne, called takeovers “the most powerful market mechanism for displacing bad managers … just the threat of a takeover provides incentive for managers to run companies in the interest of the shareholders.” Professor Manne called the supposed abuses of takeover activity “largely mythical.”

In The American Spectator [June 2005], Stephen Moore, former senior economist of the Congressional Joint Economic Committee, wrote:

“The economic literature is clear that the biggest gainers from M&A activities are not the acquiring firms, but the owners of the acquired firms. One value of the raiders is that they serve as the ultimate cops on the financial market beat, searching out and destroying flab and inefficiencies. For all the vilification of Michael Milken, his firm Drexel Burnham easily created more wealth for American shareholders single-handedly than all the trustbusters in American history combined. Practically every hostile takeover, even those financed with junk bonds, made hundreds of millions, if not billions of dollars, for stock owners.”

A May 2007 article in The Sunday Times of London said:

“Nobody loves a revolutionary. Roosevelt was hated by entrenched business interests for passing the antitrust laws. Milken was hated by the corporocrats for making it possible for social outsiders – many of them ‘young, aggressive and Jewish,’ according to one description, and therefore ineligible for membership in the better clubs – to take over sleepy companies. They grounded corporate jets and sold off company wine cellars in order to increase profits.”

As an October 2010 article about Milken in The Economist put it, the mere threat of buyouts “forced many big companies to slim costs and increase returns to shareholders.”

These takeovers were an important trend and clearly helpful to the economy, but what has been missed in press accounts is that they were merely a natural outgrowth of Milken’s revolution in capital access for entrepreneurs with ability. That revolution broke the stranglehold of “establishment” lenders and shifted power from non-stockholder corporate managements to stockholders. This led to enormous job creation by the 99.9% of small- and medium-size firms that are not “investment grade” and are usually managed by owners. These companies created 62 million jobs in the last 30 years of the 20th century while the Fortune 500 “investment grade” firms laid off more than four million.

But Milken underestimated the political clout of corporations with bloated management structures that suddenly were obliged to compete with vigorous new players. There was a strong reaction from the establishment through their Congressional representatives and on the editorial pages of major newspapers. Rather than credit Milken for enlivening an economy gone dormant, they launched a public relations campaign to attack him as an enabler of “raiders” who were “destroying America.” Politicians to whom these corporations made large contributions, and the publishers in whose papers they bought substantial advertising, were quick to join the chorus.

As the late U.S. Senator Daniel Patrick Moynihan said, “We are all entitled to our own opinions, but not to our own facts.” One fact often overlooked by the press is that takeovers were not a large part of Milken’s two decades on Wall Street. And because the public didn’t understand takeovers, it was a convenient target for the corporate old-boy network to use in shifting attention away from their own failings. According to a March 4, 1992 article in The Wall Street Journal, “Junk bonds have been blamed for takeovers, yet they provided no more than 5% of takeover financing.” Ironically, most takeover financing was provided by banks, not the capital markets.

Milken’s impact on the economy. Because Milken challenged the status quo, many business and financial institutions had reason to feel threatened by his revolution in democratizing capital access. Before Milken, banks and insurance companies largely controlled the flow of available funding and provided very little growth capital to firms that weren’t among the tiny minority considered “investment grade.” Milken’s innovations opened a wide range of financing techniques previously unavailable to these companies. This not only created millions of jobs; it also made bank loans almost superfluous, agitating a large segment of the financial community. (Today, ironically, banks are essentially what Drexel was in the 1970s and 1980s – originators of loans who package and sell them in the public markets.)

Insurance companies also saw Milken’s innovations as a threat because they were generally required by regulators to carry only investment-grade securities. Their share of the market declined as Milken financed thousands of below-investment-grade companies.

The research departments of virtually every brokerage firm were focused on stocks and did little or no research on bonds and other types of debt. Between 1968 and 1976, Milken had established unrivaled credibility and trust by building up the quality of Drexel’s debt research. As a result, Drexel became the largest firm not only in debt originations, but also in private placements and several other areas at the expense of the “bulge-bracket” firms.

Finally, non-competitive but entrenched corporate managements who used stockholders’ assets inefficiently had much to fear from stockholders who wanted to replace them with managers who could allocate company resources more effectively. In fear for their jobs and (often lavish) perks, incumbent managers turned to regulators, legislators and the press for relief. In a public-relations campaign that glossed over their own behavior that had inflated expenses, they claimed they were victims of “greedy raiders” financed by Milken. In fact, the Milken-financed entrepreneurs who were most successful at building companies and creating jobs – Ted Turner, Craig McCaw, John Malone, Bill McGowan and hundreds of others – were focused on their own businesses, not on taking over others.

The bigger threat wasn’t takeovers; it was faster-moving competitors that challenged large, established businesses. These large businesses were major contributors to political campaigns, and their armies of employees could be mobilized to write their Congressional representatives in defense of the status quo. In the 1970s and early 1980s, for example, AT&T controlled more than 98 percent of the telecommunications market and, with more than one million employees, was the largest employer in the United States. When Milken’s financing allowed a tiny competitor to announce they would build the first national fiber-optic network, it was seen as a major threat to AT&T, which would be forced to spend $10 billion to replace its obsolete technology. Is it any wonder that politicians felt pressure to stop Milken’s revolution?

Alvin Toffler, the futurist and author of Future Shock, summarized the entire Milken phenomenon of success and retribution in his 1990 book PowerShift:

“[Milken] made bitter enemies of two extremely powerful groups. One consisted of the old-line Wall Street firms who previously had had a stranglehold on the flow of capital to American corporations; the other consisted of the top managers of many of the largest firms. Both had every reason to destroy him if they could. Both also had powerful allies in government and the media.”

In a September 2006 Financial Times column, Norman Barry, professor of social and political theory at the University of Buckingham, wrote:

“In retrospect, most American economic observers say that Mr. Milken was good for the economy; his actions led to the break-up of conglomerates and the necessary reorganisation of American business. His prosecution was more of a persecution.”

An October 2010 article on Milken’s legacy in The Economist quoted Kenneth Moelis, head of the investment bank Moelis & Co.:

“These days, with firms such as Google and Apple, everyone takes dynamism for granted. But Mike Milken started out in the 1970s when capitalism was struggling. In those days, there was very little innovation. Along comes Drexel, a firm with a visionary purpose, and suddenly you could get capital.”

Milken financing and job creation. Milken’s financial revolution helped build this nation’s current industrial and commercial infrastructure. He financed more than 3,000 companies that became engines of job creation starting with his very first deal, in 1969, which helped assure Boeing’s market leadership through the rest of the century.

Milken built many industry-leading companies through his financing. He helped transform entire sectors where smaller players simply did not have access to capital until he provided it. In home building, which employs millions of people directly and through subcontracting, he financed KB Homes, now the largest company in the industry, as well as Toll Brothers, MDC Homes, Hovnanian Enterprises, Oriole Homes, U.S. Home and many others. These are companies that literally built the American dream, and Milken drove their industry.

In entertainment, MGM, News Corp., Viacom and AOL Time Warner were all Milken-financed. In the toy industry: Toys-R-Us, Mattel and Hasbro. In hospitality: Hilton, Days Inn, Holiday Inns and others. Convenience stores: 7-11 and Circle K.

Safeway is a company with 200,000 employees in almost 1,800 stores across the U.S. and Canada. Those employees can thank Milken for helping build the company that provides their paychecks. His financing was crucial to Chrysler when it most needed funding to stay in business and grow. The cable television industry would not be in anywhere close to four-fifths of American homes if Milken hadn’t financed several major provider companies. Occidental Petroleum wouldn’t have jobs for its 8,000 current employees without Milken.

Cellphones are in just about everyone’s pockets today. The industry started in the early 1980s when Milken financed a small company called McCaw Cellular Communications. That company became AT&T Wireless, which served 22 million subscribers and employed 31,000 people producing more than $16 billion in sales before its acquisition by Cingular Wireless.

Another way to look at the impact Milken has had is to consider just one U.S. state. Nevada, one of the fastest-growing states in the nation, had its economy kick-started when Milken financed its casinos, newspapers and homebuilders. The rule of thumb in the gaming industry is that every job created within the industry creates more than three additional jobs in the local economy. By that measure, his financing of MGM Mirage, Mandalay Resorts, Harrah’s Entertainment and Park Place accounts for some 600,000 jobs.

Other names among the companies Milken financed include: AMC Entertainment, Bally Manufacturing, Bally’s, Barnes & Noble, Beatrice, Cablevision, Caesars World, Calvin Klein, Chiquita Brands, Duracell, Filene’s Basement, GAF Corp., General Host Corp., Hasbro, Kay Jewelers, Knoll Int’l., MCI, Medco, Mellon Bank, Metromedia, Philadelphia Electric, Playtex, Southland Corp., Sunshine Mining, TCI, Uniroyal Goodrich and Telemundo. Milken was a sparkplug who helped ignite an economic boom. His financial innovations created millions of jobs.

Why Milken supports medical research and public health. A very cynical, though uninformed view, suggests that Milken’s philanthropy is just a case of a rich guy trying to cure his own disease. This ignores the fact that his philanthropy started two decades before he was diagnosed with cancer in 1993. During the intervening 20 years, he was involved in research to fight many diseases. Programs and contributions by the Milken Family Foundation have made a difference in the battle against several grave conditions, including breast cancer and epilepsy. In the 1980s, Milken endowed a chair at Harvard’s Dana Farber Cancer Center; was the primary benefactor of the Venice (Calif.) Family Clinic (which serves tens of thousands of people); and gave his time and resources to a wide range of medical causes. The Milken Family Medical Foundation was established in 1982 and provided grants to keep many young cancer researchers in their labs when they were tempted to pursue more-lucrative clinical practices. Mike has said, “Of all the programs we’ve supported, the biggest payoff in terms of social benefit has come from the awards to young investigators.” Among those who received his awards in the 1980s were Dr. Dennis Slamon, who later discovered Herceptin, a revolutionary breakthrough in the treatment of one type of breast cancer; Dr. Steven Rosenberg, who reported a major breakthrough in the development of successful gene therapy that for the first time in history harnesses the body’s own immune system to shrink tumors; Dr. Bert Vogelstein, who did pioneering work on the incalculably important p53 gene whose mutant form is believed to be involved in more than half of human cancers; Dr. Owen Witte, whose subsequent work provided the basis for the development of the breakthrough drug Gleevec, now used as a frontline therapy for patients with chronic myelogenous leukemia; Dr. Lawrence Einhorn, who developed a virtual cure for testicular cancer; Dr. Philip Leder, a pioneer in molecular biology who contributed to the deciphering of the genetic code; Dr. Charles Myers, who went on to become Chief of the Clinical Pharmacology branch of the National Cancer Institute; and many more. In addition to his family’s contributions of $1.25 billion, Milken has been tireless in raising some $600 million from the public to support medical research around the world. In the 1990s, Milken supported the pioneering work of Dr. James Allison, whose development of immune checkpoint therapies – an immune-system “off-switch blocker” – provided a remarkable breakthrough in metastatic melanoma and, later, several other cancers. As a result of this work, Allison was awarded the Nobel Prize in 2018.

Beneficiaries of Milken’s philanthropy. His philanthropy began in the 1970s and was originally focused on breast cancer, melanoma and childhood neurological disorders. When the Milken Family Foundation was established in 1982, the focus broadened to more life-threatening diseases as well as education reform and public health. It wasn’t until 1993 that Mike founded the Prostate Cancer Foundation (PCF); and today, the PCF is only one of more than 50 disease-specific organizations that participate in the TRAIN program of FasterCures, the Milken Institute center that he launched in 2003 to remove barriers to progress against all serious diseases. While the PCF has done magnificent work and saved countless lives, Mike works with many other research and advocacy groups to accelerate medical solutions. The myth that Mike’s main philanthropic concern is prostate cancer probably got started because of press reports about his diagnosis with that specific disease. In 2014, George Washington University announced the renaming of what is now the Milken Institute School of Public Health in recognition of a major gift from the Institute.

Wall Street events in the 1980s and today. It’s quite a stretch to link accounting and money-management scandals in the 2000s to the financial turmoil of the 1980s. These two situations are, in fact, logical opposites. The more-recent scandals grew out of managerial abuse by executives acting in their own interests rather than in the interests of stockholders. This is an example of what academics call “the agency problem,” which removes incentives to use stockholders’ assets efficiently. It has been a corporate governance issue ever since A.A. Berle and Gardiner Means published their classic text The Modern Corporation and Private Property in 1932. Periodically, managers place self-interest above that of relatively powerless shareholders by bestowing themselves with perks. “That situation was partially corrected,” said Weekly Standard contributing editor Irwin Stelzer (July 22, 2002), “when Mike Milken and his debt-financed raiders snatched control of many companies from the worst abusers of shareholders’ interests, grounded fleets of corporate jets, sold off hunting lodges, and generally sweated the fat out of expenses – a wonderful example of markets working to correct abuses that seemed beyond the reach of regulators.” The previously cited Professor Norman Barry, author of the book Business Ethics, wrote a September 1, 2002, column in a group of British newspapers citing “at least two waves of moralising about capitalism in the 1980s and the early 21st century.”

“Both are condemned for their greed, but it is important to distinguish the economics and ethics of the two eras,” Barry wrote. “In the 1980s, as always, personal self-advancement was essential to the allocation of economic resources. It advanced shareholder value from which everybody gained. In the early 21st century, the same motivation badly damaged shareholders’ interests.” Another difference is the scope of the cases. WorldCom’s Bernie Ebbers perpetrated what had been called the biggest fraud in corporate history-more than $11 billion. In contrast, as noted above, four of the five Milken violations were found by the judge to have had zero economic effect. The total economic effect of the violations found by the judge was $318,082. By this measure, the Ebbers case is more than 34,000 times bigger than Milken’s. But, of course, even the enormous Ebbers fraud was dwarfed by those of Bernie Madoff, whose $65 billion scheme exceeds the Milken violation by a factor of more than 200,000.

Culture, fiction and Milken. Some uninformed reports have confused the fictional character of Gordon Gekko in the Wall Street movies with Milken. On the contrary, the fictional Gekko character is based on Ivan Boesky, who in a famous 1986 speech at the University of California, Berkeley, said, “I think greed is healthy. You can be greedy and still feel good about yourself.” Such a cynical philosophy is the antithesis of Milken’s view. Over the decades since 1972, Milken has given away the overwhelming majority of his wealth in pursuit of his many philanthropic initiatives. (Along with Warren Buffett, Bill Gates and others, he has signed The Giving Pledge, committing to distribute most of his wealth to charities during his lifetime.) A 2017 Broadway play that fictionalized the activities of Wall Street financiers in the 1980s purported to be “inspired” by events in Milken’s life. In fact, it displayed only a few superficial similarities to Milken’s real life. Most of the plot bore no resemblance to historical facts.

Late last summer, the organizers of an annual convention called TechLearn ’99 announced that two of the most famous icons of the 1980s would keynote the event. The first was Bill Cosby, one of the decade’s most popular entertainers; the second was Michael R. Milken, the “junk bond king” who became a symbol of the decade’s greed when he was sentenced to prison for securities fraud. Until recently, Milken’s presence on the stage with Cosby would have seemed like a bizarre joke.

But that juxtaposition is just one sign of an amazing comeback. When Milken was sentenced to prison on November 21, 1990, he was one of the most reviled men in America. But today, nearly a decade later, the 53-year-old Milken is everywhere. A survivor of cancer, he is the founder and chairman of CaP CURE (the Association for the Cure of Cancer of the Prostate) and the author of a best-selling cookbook featuring recipes for fighting cancer; he has also expanded the Milken Family Foundation, a philanthropic venture best known for its education awards, and is a lead investor in Knowledge Universe, a family of companies specializing in early childhood education, Internet commerce, technology consulting, and educational testing. Milken, it seems, has made the classic American transformation from despised villain to “controversial” figure; he’s now the subject of debate, not an object of scorn. It’s a transformation that would have made Richard Nixon proud. But the role of his think tank, the Milken Institute, raises questions about where rehabilitation ends and self-promotion begins.

Today the public has only a dim recollection of what sent Milken to federal prison. Milken’s defenders portray him as a financial genius who changed the country’s capital markets for the better, but was caught up in the hysteria of the 1980s and unfairly scapegoated as a criminal. His critics more plausibly describe him as a crook–a man who used his financial know-how to fraudulently enrich himself and his associates, and whose machinations undermined the integrity of the market.

A quick refresher: At the investment firm Drexel Burnham Lambert, Milken virtually reinvented junk bonds–securities that are considered speculative and below investment grade. Before Milken, most junk bonds were “fallen angels,” bonds for companies that were once investment grade but had fallen on hard times. Milken had two key insights. First, a diversified portfolio of junk bonds could have extremely impressive returns since the high interest paid by the successful firms more than offset the losses resulting from defaults. Moreover, such bonds could be a perfect source of capital for risky start-ups. During the 1970s and 1980s, Milken ran with these insights, personally creating an enormous new market for high-yield securities. This is the achievement for which his defenders hail him as a financial genius. But Milken did not stop there. He and his accomplices allegedly conspired to engage in insider trading, arrange illegal take-overs, and defraud their customers. It was this activity that helped make him a billionaire–and sent him to prison.

Greed is Good

Milken became a double-edged symbol of his time, an embodiment first of the “booming ’80s” and then of the “decade of greed.” Milken’s x-shaped desk at the center of Drexel’s Beverly Hills office became an object of legend, around which multimillion-dollar deals were negotiated by the hour. The junk bond market kept expanding, and with it Milken’s net worth: In 1987 alone, he earned a whopping $550 million. Milken’s junk bonds helped fuel new ventures such as MCI and Turner Broadcasting, but also helped destroy established corporations by funding corporate raiders. And with the advent of deregulation, junk bonds became entwined in the savings and loan mess.

Ultimately, Milken was the target of a 98-count criminal indictment and a massive civil case filed by the Securities and Exchange Commission (SEC). The charges against him included insider trading, price manipulation, falsifying records, filing false reports, racketeering, and defrauding customers; the heart of the indictment accused Milken of “stock parking,” or arranging to swap securities with his accomplice Ivan Boesky to hide their true ownership. In essence, Milken used Boesky as a front to trade stocks in companies in which Drexel had a confidential interest–earning millions for both men. In one representative case, a Milken client named Victor Posner wanted to take over a construction company called the Fischbach Corporation, but had signed an agreement barring him from attempting a take-over unless someone else either tried first or filed a form showing ownership of 10 percent of Fischbach’s stock. Milken allegedly instructed Boesky to begin buying Fischbach stock and guaranteed him against any losses he might incur–in short, Milken, Posner, and Boesky conspired to achieve a take-over through fraudulent and deceptive means. The victims were Fischbach’s shareholders, and Posner was eventually convicted of fraud in the case. But Milken himself never went to trial on the many charges against him: In return for pleading guilty to six relatively minor securities violations, he was fined $600 million, sentenced to prison for a decade (he served 22 months), and barred from the securities industry for life.

Milken’s supporters have put forward a new theory of the 1980s–a school of thought best described as Milken revisionism. Daniel Fischel, a law and economics scholar who recently became dean of the University of Chicago Law School, has emerged as Milken’s most vocal scholarly defender; his 1995 book Payback argues that Milken did nothing wrong, but that his “financial revolution” threatened the Wall Street elite and provoked an unruly coalition of the “management establishment,” old-line investment bankers, change-resistant labor unions, and unscrupulous prosecutors. If Milken actually broke the law, revisionists say, his crimes were trivial technicalities that had no real victims, and emblems of an outmoded legal framework. Belief in Milken and his financial brilliance have become articles of faith among right-wing commentators. The ubiquitous conservative pundit Dinesh D’Souza has even claimed that Milken deserves much of the credit for creating Silicon Valley.

Buying Respectability

The Milken Institute is ostensibly a nonprofit, nonpartisan think tank, based in Santa Monica, California, and founded by the Milken family in 1991. Its stated goals are to study the dynamics of economic growth and to examine deep-seated social problems through the lens of finance. The institute now encompasses four core research areas–global studies, regional and demographic studies, labor markets and human capital studies, and capital studies.

Tactically, the institute has two basic operating principles: recruiting a cadre of high-profile superstars and working closely with government and business on attention-grabbing projects. Donald Straszheim, the institute’s president, joined the staff after working as Merrill Lynch’s chief economist; New York Times economics columnist Peter Passell and former Harvard Business Review editor Joel Kurtzman joined last year to launch the institute’s new magazine. Milken himself is the institute’s chairman, working (in Straszheim’s words) as a “hands-off manager” who helps set the institute’s priorities.

Cooperation with state and local governments has been another of the institute’s hallmarks. In 1997, it produced the final report for “Rebuild L.A.,” the city’s official response to the 1992 L.A. riots; more recently, it has worked closely with the Commerce Department’s Minority Business Development Agency (MBDA) and the California treasurer’s office on ways to increase access to capital for minority-owned businesses. The institute even has an ongoing project helping the Israeli government privatize state services, reform capital markets, and decentralize the peace process. Just this January, Glenn Yago, the institute’s director of capital studies, spoke at the convention of Jesse Jackson’s Wall Street Project, where he met briefly with President Clinton to discuss ways to expand the minority business community, and Hilton Root, the acting director of global studies, spent a week in Washington advising the International Monetary Fund (IMF).

And each spring, the institute hosts its Global Conference, a three-day event that draws over 1,000 attendees and dozens of top-name speakers. At last year’s conference, for instance, the panel on Russia featured an all-star cast of experts: Marshall Goldman of Harvard, Princeton’s Stephen Kotkin, the Nixon Center’s Dimitri Simes, and even Boris Berezovsky, the controversial Russian financier. Milken, California Governor Gray Davis, and former Indiana Congressman Lee Hamilton delivered keynote addresses; publisher Mort Zuckerman and Los Angeles Mayor Richard Riordan also attended. The centerpiece was the Nobel panel, a round table moderated by Milken himself and featuring no fewer than four Nobel laureates in economics.

The institute’s actual research delves into several distinct areas. Alec Levenson, the institute’s acting director of labor markets and human capital, focuses on temporary work, welfare reform, and the factors that determine the success or failure of job-skills programs; the institute’s global studies division has written about Korea’s need for comprehensive reform, the impact of a country’s size on its economic growth, and the ways in which economic incentives encourage world leaders to mismanage their countries’ economies and maintain their hold on power. Another division focuses on California’s economy, comparative regional economics, demographic changes, and technology’s role in economic growth. The division recently published a study that ranked the nation’s metropolitan areas in terms of technology growth and argued that cities failing to develop a technology base were risking stagnation. Another recent report focused on the effects of the Asian economic crisis on California. The institute also coordinated a November conference on the “state of the state,” featuring California Attorney General Bill Lockyer, Oakland Mayor Jerry Brown, and former HUD Secretary Henry Cisneros.

At the same time, some people familiar with the institute’s inner workings paint a picture of low morale and high staff turnover. One outside economist, who asked to remain anonymous, described the institute as “continually changing direction,” and called the quality of its output “very mixed.” The Global Conference, some insiders complain, diverts the think tank’s energies away from serious, long-term research. “The Global Conference was originally intended as a way to spotlight the institute and give visibility to its work and staff, but year by year, it has threatened to swallow everything else the institute is doing,” notes Ted Van Dyk, the institute’s former executive vice president. Institute staffers are routinely asked to put aside their research and help, say, prepare a slide or raise money for the conference, which sucks up roughly half the institute’s budget and energy.

Capital Ideas

The centerpiece of the institute’s work is what Glenn Yago calls the “democratization of capital”: the idea that national prosperity and world economic growth depend on increased access to capital markets and investment dollars. And it is here that the institute’s role in promoting Milken’s rehabilitation coincides with its goal of promoting his market-based solutions to economic problems.

One recent policy brief, “The Jobs/Capital Mismatch,” calls for a broad program of deregulation and the elimination of the capital gains and estate taxes. A report commissioned by the MBDA and published by the institute last March, “Mainstreaming Minority Business,” argues for changes in regulation and the creation of a new secondary loan pool (like Fannie Mae) to help minority-owned businesses find investment capital. The capital studies division also produces a Capital Access Index with Forbes Global, ranking countries around the world in terms of the openness of their capital markets. Other initiatives include work in the field of environmental finance–seeking ways to decrease pollution by marketizing the problem–and a joint initiative with the Israeli government to reform the country’s capital markets, privatize certain government services, and push forward the peace process by developing markets for water rights and other commodities.

The institute’s basic approach is also exemplified by its new quarterly magazine, The Milken Institute Review. The magazine’s advisory board includes such famous names as Paul Krugman of MIT and Jagdish Bhagwati of Columbia University; the publication’s style is informal, even irreverent. “I want our writing to scream, ‘We’re friendly–give us a try!'” explains Peter Passell, the editor. Each issue includes the cartoon Ekinomix, a “puzzler,” and a “charticle” (which describes an economic trend in graphical form) as well as a section called “Research FYI” (describing academic work in the field) and a range of articles by well-known economists like Harvard’s Jeffrey Sachs and the Cato Institute’s Stephen Moore. Recent articles have discussed the “myth” of the savings crisis, the economics of collegiate sports, and the IMF’s impact on Brazil.

The economists interviewed for this article agreed that the Milken Institute is a nonpartisan think tank with no overarching political agenda. Walter Russell Mead, a fellow at the Council on Foreign Relations, recalls a discussion he had with several participants at the 1999 Global Conference. “Some people felt that the institute was right wing, and others considered it left wing,” he says. “We discussed this for a while but never came to a consensus.” Glenn Yago rejects the idea of giving the institute any particular ideological label, calling it “post-partisan” instead.

Nonetheless, the institute has not quite been able to resist taking on issues that seem intended less to expand knowledge than to help transform a felonious businessman into a respected public intellectual. On several occasions, the institute has moved beyond Mideast peace and minority businesses and delved into subjects in which its founder has a clear interest, including junk bonds, savings and loans, securities litigation, and tort reform.

This spring, for instance, the Milken Institute plans to convene a retrospective conference on the lessons of the savings and loan debacle, a scandal that featured financier Michael Milken in a major role. Outside experts and Milken Institute analysts will seek to demolish several of the “myths” of the crisis and to “set the record straight” about the role of junk bonds, according to Yago.

The institute’s work with securities litigation reform adds an ironic twist to the same basic theme. In a policy brief published last June, Yago argues that “frivolous” class-action lawsuits are a threat to capital formation and economic growth because they scare off investors and thus impose a dangerous “tax” on growing companies. But the central issue in these “strike suits” is securities fraud–the crime that landed Milken in prison. Congress has already narrowed the scope of such lawsuits. Contrary to what the institute alleges, further restricting securities lawsuits would threaten capital formation far more than any court battle, since there’s no incentive to invest if you can’t recoup your losses when you’ve been cheated.

The Milken connection runs deeper still. Last June, the institute co-hosted a round table called the “Lessons of Lexecon,” discussing the implications of a recent court battle for the future of tort reform. In the case under discussion, Lexecon–a law and economics consulting firm based in Chicago–successfully sued a law firm that had included it in a class-action suit. The Milken Institute hailed the decision, arguing for tort reform, tougher judges, and defendants willing to fight back in court.

There was one problem with the round table, however: Lexecon has ties to Michael Milken running back to the early 1980s. Milken was a client of the firm during the SEC’s Drexel investigation; Lexecon’s president is Milken revisionist Daniel Fischel; and early last year, Lexecon was sold to Nextera, an educational firm owned by Milken. What’s more, Lexecon was originally sued for fraud when it testified in court that Lincoln Savings and Loan–run by Charles Keating, who invested heavily in Milken’s junk bonds–was in sound financial shape. None of these connections make the institute’s work unethical, but they raise the question of how independent the think tank really is.

Yago argues that the institute’s work in these areas has been completely objective. “We have to understand that history in order to examine the issues of the future,” he says. But, like Milken’s business record, the institute’s Lexecon round table and S&L conference are riddled with conflicts of interest. And that isn’t the only connection between the institute’s work and Milken’s past. In 1990, Yago himself appeared on Crossfire the night Milken was sentenced to prison, and denounced the “witch hunt” against Drexel. That same week, USA TODAY asked Robert Sobel, a professor of business history at Hofstra who ended his career as a fellow at the Milken Institute, what Milken’s sentence should be. “He should be sentenced to five years as U.S. secretary of the Treasury,” Sobel responded, before likening the Justice Department to Saddam Hussein.

Milken’s Shrewdest Investment

Institute officials ask that their work be judged on its merits and deny that they’re part of a Milken PR machine. “Our scholarship stands on its own,” says Straszheim. “Material should be judged on what it does and what it is,” Passell adds. “If people want to say that Michael Milken is trying to improve his reputation by publishing a first-rate magazine, then all power to him.” But in practice it can be extremely difficult to separate Milken’s life and work from the institute’s mission.

Milken, after all, has done more than found a think tank; he has also bought himself a new public forum, at a cost (institute insiders say) of more than $5 million a year. That spending has bought credibility. Several well-known economists acknowledge that they would never have written for The Milken Institute Review if Passell hadn’t been its editor. And like the Global Conference, many institute events give Milken the chance to reach out to the public. They enable him to share the podium with Nobel laureates, to cast himself as a public intellectual, and to portray his life in the most favorable light. Milken uses these speeches to discuss the importance of expanded education and health care, to call for the “democratization” of capital, and to refer to his own life story–a series of topics that couldn’t have been better chosen to help his own rehabilitation.

Consider, once again, the institute’s Global Conference. This year’s event will convene in March with a schedule that places Milken at the center of the action. It will begin and end with Milken-moderated panels of Nobel laureates; in between, Milken himself will deliver the keynote address. Fifteen hundred people are expected to attend, and through it all, Milken will stand at center stage, a smiling, benevolent visionary leading the discussion and masterminding the event. In short, even the conference’s structure drives home the idea that this is Michael Milken’s conference, for Michael Milken’s institute, discussing Michael Milken’s favorite issues. It will even be held at the Beverly Hilton, the site of the notorious junk-bond conference known as the “Predators’ Ball.”

The problem with the institute can be summed up in six words: too much Milken, not enough institute. Far too much of the think tank’s business seems designed to advertise its own importance–and, by extension, that of its founder. “Mike Milken is a genuine financial genius, who has been hurt and frustrated by his inability to do what he does best, so his activities in large part are devoted to redeeming his reputation and giving him positive exposure,” notes Van Dyk.

M ilken’s investment, seemingly, is money well spent. Government officials who have worked with the institute are generally complimentary. The MBDA’s Anita Cook Wells, for instance, describes the institute’s work with emerging domestic markets as “innovative and creative.” The Milken Institute Review has won plaudits as a well-edited and thoughtful magazine. And after attending last year’s Global Conference, Walter Russell Mead wrote in Worth magazine that the institute was “hotter on the trail of a global economic cure than anybody I heard at Davos.”

The Milken Institute may never reshape the policy debate–but if all goes according to plan, it could change the way we think about Michael Milken. To a remarkable degree, it has succeeded in attracting blue-chip intellectuals and building relationships with government officials just a decade after its founder and namesake went to prison. “The Milken name means different things to different people,” notes Ross DeVol, the institute’s regional studies director. “When some people think of Milken, they think of junk bonds and greed; others think of financial innovation.”

Resources

investopedia.com, “Michael Milken: Philanthropist, Chair of Miliken Institute.” By James Chen; mikemilken.com, “The Mythology of Michael Milken.”; prospect.org, “The Resurrection of Michael Milken.” By Edward Cohn;