The Milken Way

“The scarce resource in our society is not money but people.”

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Legend has it that in 1970 a young trader sat in the early morning commuter bus from New Jersey to Manhattan with a miner’s headlamp strapped to his head. The lamp allowed him to read financial filings in the darkness before arriving at the office. This story about Michael Milken may be apocryphal, but his commitment to his work was without question. Milken often arrived at the office at 4:30 a.m. and prided himself on making hundreds of phone calls a day. He was on a mission to make high yield bonds a household name and acted as the nerve center for a burgeoning network of investors and entrepreneurs.

Capital is a lot less scarce today than when Milken set out to “democratize” it. On the other hand, access to the right people and deals is more valuable than ever. That presents a challenge for introverts like me whose eyes roll over at the mention of networking.

We can count ourselves lucky that Milken’s life provides a blueprint to authentically connect people, ideas, and capital and benefit from the resulting ecosystem. Milken mastered this process both out of personal ambition and necessity. Starting out in a niche market, his objective was to grow the pie and ensure that the pieces were passed around the table, allowing his trading desk to take a cut of the transactions. Before his downfall, he had turned a stale backwater into a gushing fountain of fortunes.

Despite a presidential pardon, Milken, who spent time in prison, remains controversial to many (just compare the reactions to the pardon in the Journal and the Times). However, if you are interested in building enduring networks of shared information and opportunities, I recommend you study his career.

In this piece I will focus on the process Milken applied in both business and philanthropy. I will keep the recap of his background short and perhaps follow up another time with a piece on the interesting people he worked with. You can find more on Milken’s career in books like Predator’s Ball, Den of Thieves, and Highly Confident: the Crime and Punishment of Michael Milken (the latter taking a more favorable view of him).

The Drexel days

Milken was born in 1946 and grew up in Encino, an LA suburb. His father was an accountant and started teaching his son at a very young age with the words: “Now that you're 8 years old, it's time to learn how to analyze a balance sheet.”

Milken attended Berkeley and Wharton and picked up a study on bond performance called Corporate Bond Quality and Investor Experience by professor Braddock Hickman. The study showed that markets were mispricing bonds: adjusted for losses, non-investment grade bonds performed better than highly rated ones.

In 1969, Milken worked the summer at the prestigious but ailing investment bank Drexel and joined after receiving his MBA. He started in research before moving to trading low-grade bonds – which eventually became known as high yield or junk bonds (though Milken hated the term).

When Drexel merged with Burnham and Co., Burnham’s founder asked whether the wasp-y Drexel employed any Jews. He was told there were “three or four,” out of 250 employees. “They’re all bright, and one of them is brilliant. But I think he’s fed up with Drexel, and he may go back to Wharton to teach. If you want to keep him, talk to him.”

What was the issue, Burnham asked? “They won’t give me capital,” Milken complained. That changed after the merger and Milken was given capital on which he earned staggering returns (100 percent on his $2 million in 1973). He proceeded to build out Drexel’s high yield desk, which became known as “The Department,” into the dominant player in the space. He moved his team to a new office in Los Angeles to be close to his family. It speaks to his importance within Drexel that he could run his own firm within a firm on the West Coast.

At the peak of his power in 1986, the high yield market had grown to some $125 billion in outstanding value. Milken himself reportedly earned $550 million in salary and bonuses that year.

How did he do it?

To grow and stimulate an inefficient and sluggish market, Milken had to add liquidity. A more liquid market would be attractive to more investors whose demand would lower the cost for issuers. A lower cost of capital would unlock more deals for Drexel’s bankers to underwrite and for Milken’s desk to trade.

Milken spun up a flywheel and placed himself in the middle. The sequence looked something like this:

  • He built deep domain expertise and an information edge that made him valuable to every player in the market.

  • By taking inventory he increased liquidity and turned his trading desk into the market’s hub.

  • He spread the gospel and highlighted the attractive risk-reward profile to attract a more diverse roster of investors.

  • He backed entrepreneurs and takeover operators hungry for capital.

This is how a young Howard Marks described the “yin/yang” of Milken’s operation: “He had the issuers. He had the buyers. He had the most trading capital of any firm. He had the knowhow. He had the best incentive system for his people. He had the history of data—he knew the companies, he knew their trading prices, probably their daily trading prices going back at least to 1971. He had boxed the compass.”

He built deep domain expertise and an information edge that made him valuable to every player in the market.

Milken became a walking database, carrying around briefcases stuffed with research reports and providing investors with much-needed research coverage. He told one fund manager: “Every bond you want to talk about is either in here’ (pointing to the files) ‘or in here’ (pointing to his head).” The manager commented that Milken “could tell you the name of the chairman’s cat. He cut the wheat from the chaff. ‘This is what’s good about these guys, this is what’s bad.’”

Milken later invested in a minicomputer trading system and a database to track thousands of securities. He claimed his database had near complete information on the market, including ownership and trading history of all relevant bonds, essentially “where every security might be in the Western world.” Milken’s team could “call up the customer’s history, the amount of his potential profits or losses, his ability to buy new issues and investment philosophy.” Milken invested his time and capital to build and maintain an information edge.

By taking inventory he increased liquidity and turned his trading desk into the market’s hub.

The ability to take bonds off his clients’ hands immediately, rather than looking for a counterparty, opened the market up to investors who had avoided it for fear of getting stuck with illiquid paper. Once Milken’s desk became Drexel’s most important profit center his capital base expanded rapidly. At the end of his reign, Drexel reportedly held up to $5 billion of junk bonds.

He spread the gospel and highlighted the attractive risk-reward profile to attract a more diverse roster of investors.

Milken’s in-depth knowledge of the market and its players yielded a stream of investment opportunities. In the 70s, he and his early clients invested in the distressed debt of railroads, REITs, and conglomerates. Being part of Milken’s inner circle was a ticket to valuable opportunities that could serve to build a track record and help an investor spin out and start their own asset manager.

Some of Milken’s early clients were financial operators with control of insurance companies, including individuals such as Carl Lindner, Saul Steinberg, and Laurence Tisch. Over time, he expanded and diversified his universe of buyers. He needed a diversity of risk appetite and time horizon. By overfunding his clients, raising more capital than was immediately required, he created war chests that could be recycled into his next offering.

His most aggressive clients would provide capital to back the “highly confident” commitment letter for a takeover attempt. Once the bonds were issued, Milken could rotate them to his long-term oriented buy and hold clients: savings and loans, insurance companies, and high yield mutual funds. His best clients could flip the bonds, earn fees, and free up capital for the next deal. And Milken’s desk benefited from the trading volume. 

By “creating” players and sharing profitable ideas, Milken was owed favors which he could call in to pull off a difficult trade or issuance. In Predator’s Ball, one mutual fund manager recalled Milken calling to offer introductions to investors: “Mike would say, ‘Want to run some private accounts?’ And if you said yes, then you’d owe him.”

He backed entrepreneurs and takeover operators hungry for capital.

When Milken started, a lot of non-investment grade credit belonged to “fallen angels,” downgraded paper of struggling companies. Milken expanded the market by backing entrepreneurs and the emerging buyout players. Industries like gambling, cable, and wireless came to rely on the high yield market to fund their growth. Casino developer Stephen Wynn once said Drexel had “made” him.

"In financing growing companies, I always looked for human value that didn't appear on the balance sheet — the quality of management, especially its entrepreneurial drive. I saw that quality in executives like Bill McGowan of MCI, Bob Toll of Toll Brothers Homebuilders, cell-phone pioneer Craig McCaw and hundreds of others, including Reg Lewis, Ted Turner, Steve Ross, Rupert Murdoch and John Malone."

Milken also staked raiders and takeover artists such as T. Boone Pickens, Saul Steinberg, Carl Icahn, Nelson Peltz, Ronald Perelman, and KKR. Leon Black, then a young banker at Drexel, came up with the idea of the “highly confident” commitment letter which allowed raiders to make takeover bids without first raising the capital. The letter was backed by Milken’s reputation and effective only because of his ability to issue billions of dollars of bonds on short notice.

Milken cultivated a new ecosystem of players who owed him their success. He placed himself at the center of a dense web of relationships and encouraged idea generation through events like his annual high yield conference, the infamous Predator’s Ball. There, investors, CEOs, and entrepreneurs mingled and dreamed up new deals and ventures that would require Milken’s backing. At the beginning of his career, Milken traveled and cold-called to spread the gospel and find players for the game. Towards the end, investors and CEOs alike made the trek to Beverly Hills to meet him.

A forced reinvention

In a bull market fueled by takeovers, merger arbitrage became a big business. And it became tempting for bankers and lawyers to profit from their inside knowledge of impending transactions. In 1986, prosecutors started to unravel one such ring which led them to arbitrageur Ivan Boesky (the template for Gordon Gecko and the “greed is good” quote). Boesky pleaded guilty and cooperated in an investigation of Milken.

In 1989, Milken’s career came to a crashing end with a grand jury indictment. In 1990, he pleaded guilty to six charges (however, as his own website points out, he was not convicted of insider trading). Milken was sentenced to ten years in prison (later reduced to two years) and agreed to pay $200 million in fines (and hundreds of millions more in other settlements). Drexel Burnham filed for bankruptcy in 1990 and the diaspora of its former bankers and traders built a number of credit and private equity firms.

Around the time of his release from prison in 1993, Milken was diagnosed with prostate cancer (he had already lost multiple relatives to cancer). To his dismay he discovered that prostate cancer lacked funding and innovation. “We were this quiet corner no one wanted to be associated with,” a doctor recalled.

Again, Milken sponged up information and people. He reached out to scores of doctors and sifted through documentation of traditional and non-traditional treatments. His own cancer was cured after a combination of radiation treatments, hormone therapy, and changes to his diet (Milken even co-authored a cookbook).

About a decade later in 2004, Fortune called him “The Man Who Changed Medicine” with a “Manhattan Project for cancer.” What exactly had Milken done? Well, it looked a lot like his approach to the high yield market.

  • He identified another underfunded and illiquid ecosystem: prostate cancer treatment. Researchers spent too much time in lengthy and uncertain fundraising processes. Rivalry and uncertainty around capital impeded cooperation and the free sharing of ideas and information. 

  • Milken still controlled vast amounts of capital. This time he could jumpstart the process himself and did not need to look for outside capital first. He set up the Prostate Cancer Foundation in addition to his existing Milken Family Foundation.

  • He created a fast-track funding mechanism to cut down on uncertainty and paperwork: “we will let you know whether you're going to be funded in six months and we will fund you within 90 days, so the waiting period was over.” However, in exchange for access to capital, researchers would have to share their data immediately. Milken’s goal was to remove barriers to collaboration.

  • With a supply of talent and information, his next step was to create a forum that would allow exchange and spawn new ideas. The annual scientific retreat was a new iteration of his high yield conference. Call it the Healers’ Reception instead of the Predators’ Ball.

  • Lastly, he again diversified funding sources by promoting greater public awareness. For example, he asked his old friend Ted Turner to arrange for airtime with CNN’s Wolf Blitzer and donated to a new novel series of marches and demonstrations for cancer research in 1998.

Today, the Prostate Cancer Foundation describes itself as the “leading philanthropic organization dedicated to funding life-saving prostate cancer research,” having raised $800 million for research. It is a very different kind of market but it relies on the same capital: talent (human capital), financial capital, and information (intellectual capital). It seems hard to argue that Milken’s efforts to improve this ecosystem were anything but a resounding success.

“Human capital is just as important in the non-profit sector as it is to businesses and nations. In the four decades of philanthropy that have paralleled my business career, I've found that the same principles apply whether you're providing access to capital to grow a business, creating a new paradigm for medical research, or pioneering innovative approaches to education: Empower the most talented people in each field and encourage them to pursue their passions.” (Emphasis mine.)

Using Milken’s formula

There is a trope that venture capitalists routinely ask founders how they “can be helpful” without ever being helpful. Sharing value and igniting reciprocity is a good idea. But the words ring hollow if one has neglected to create the conditions to be able to be helpful.

Milken’s thinktank, the Milken Institute, organizes a coveted annual conference. Its ‘practice areas’ are a proxy of Milken’s interests and areas of engagement: healthcare, finance, education, technology, and public policy. Imagine someone person who could:

  • Help you make money. Either directly by sharing ideas or indirectly by introducing you to the right people.

  • Connect you and your loved ones to the world’s best healthcare practitioners and institutions.

  • Introduce you to interesting people in the world of education, politics, and technology.

There simply isn’t any question whether Michael Milken could be helpful. I would argue that he spent a lifetime creating conditions that ensure that he has access to something of value to practically anyone he meets.

For example, the 2004 Fortune profile included a quote from Rudy Giuliani, Milken’s former prosecutor. The former mayor of New York City had been diagnosed with prostate cancer which sparked a conversation with Milken. Giuliani recalled their new relationship: “He knew more than any doctor. I realize now that I didn't know him then. The man I now know is able to do tremendous things. He took the tremendous talent he had in business and is using it to fight prostate cancer. What more could you ask for?” An old foe had turned into a new friend.

And I don’t think having a well-capitalized foundation is the secret sauce behind the attendance of some of the best minds at the Milken Institute’s conference. Rather, it is a testament to Milken’s ability to create such value in his network that it becomes irresistible. His conferences are an embodiment of this effort.

In his Drexel days, Milken was a fierce competitor who played a zero-sum game with other banks for market dominance. But he also played a positive sum game by staking new players and helping them build their companies. The second half of his life has been even more collaborative. The enduring lesson is about the value created through financial and social liquidity. Milken continuously worked to connect people, ideas, and capital into a flourishing ecosystem.

You can replicate this concept in your own life:

  • Go deep in an area of passion or interest. Do the work: collect and unearth valuable information. Identify the key players. Share what you learned.

  • Increase social liquidity. Introduce the old hands and the young guard. Figure out who would benefit from an introduction. Create a venue for the open exchange of ideas and information, whether that’s an email chain, a slack or discord channel, a happy hour, or mountain retreat.

  • Increase capitalization and stake new players. If you find yourself with capital (financial, social, intellectual) or influence with those who allocate capital, use it to back deserving new players who will grow the pie for everyone.

  • Maintain an abundance mindset. Be willing to contribute without expecting anything directly in return. Trust that the success of the entire ecosystem will carry you with it.

If there is one obvious force I underestimated all my life, it is social capital and the power of making connections. A mentor of mine likes to remind me that introducing two smart people is one of the highest leverage activities we can do. I used to worry that two friends, newly introduced, would go off on their own and leave me behind (scarcity mindset alert!). Well, that does happen. But guess what: when you connect two people and they get along well, you will probably be the first one to hear about their new ideas.

And keep in mind that social capital, just like financial capital, compounds. The earlier you start improving the liquidity in your ecosystem, the better. If you make an effort to plug new players into your network, their growth and success might carry you with them. All of that is, I believe, the most valuable and enduring lesson we can learn from Michael Milken.

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