Michael Milken And The Rise Of The Junk Bond Market

It all began back in 1981. That’s when Michael Milken had the great idea of developing a real market for high-yield or “junk bonds“, so they would be liquid and could be leveraged as financial assets by corporate raiders and investment banks. Michael Milken took the idea to Drexel Burnham Lambert’s Fred Joseph, and the rest is history.

BloombergBusiness published an article titled Renegades of Junk: The Rise and Fall of the Drexel Empire last week. Although Michael Milken refused to speak on the record for the article, authors interviewed 17 of the key players involved Drexel’s building of a junk bond empire in the 1980s, including Marc Faber, T. Boone Pickens and Ken Moelis. The interviews paint a picture of Michael Milken as a man possessed, and “the story of invention, conquest, greed, and defeat in their own words. Most of them, even the ones who concede laws were broken, describe Drexel as nothing less than a triumph of capitalism.”

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The magic of Michael Milken

Here’s what some of his compatriots had to say about junk bond king Michael Milken.

Richard Sandler, consultant and personal lawyer for Michael Milken:

“We grew up together. … In high school he was head cheerleader, he was prom king. We were in the same fraternity in college. He was president of the fraternity Sigma Alpha Mu.”

Gary Winnick, high-yield bond executive:

“Mike was on a mission. I’ve never seen anybody in my career who has unbridled brilliance and unbridled ambition and total conviction.”

Don Engel, Drexel investment banker:

“He would speak in parables. … It became almost like mystical.”

Lorraine Spurge, secretary who became head of Drexel’s capital markets group:

“I would pick him up in the morning, and I would take him home at night because he’s a lousy driver—a really bad driver. And when you saw him in the morning, he’d be reading the paper. He’d be looking at the spreadsheets, the trading sheets, and there would be very, very little conversation or anything personal. At night he’d be giggling and laughing”

Drexel was not a top tier IB before Michael Milken

According to the players, Drexel was a second tier IB until Michael Milken came along. There is general consensus he pretty much single handedly turned Drexel from a wannabe into a top dog.

Ken Moelis, Drexel managing director:

“I remember one person actually saying to me, “Don’t worry, maybe you’ll get a real job at a real investment bank one day.””

Lorraine Spurge, secretary who became head of Drexel’s capital markets group:

“We were definitely second or third tier as an investment bank. We were not considered the elite.”

How the junk bond market got started

It turns out the Drexel team didn’t even like the term “junk bonds”. In their minds they had created a legitimate high-yield bond marketplace that had not existed before, and given the major role of the junk bond market now three decades later, few people will argue with them.

Richard Sandler, Michael Milken’s personal lawyer:

“High-yield bonds at that time were basically bonds that had been high-grade bonds of companies that had run on rougher times. Their ratings were lowered, and they became high-yield bonds—fallen angels.”

Gary Winnick, senior exec at Drexel:

“High-yield bonds! We never called it junk bonds, our competition did. … Nothing happened in that marketplace that we didn’t have tentacles into. We were the creator of making it a real marketplace. There were some people that dabbled in it before Mike, but nobody had ever done it in such an organized fashion.”

G. Chris Andersen, board member and investment-banking head:

“They’d go, “Oh, we don’t trade that stuff. That’s junk, call Drexel.” So they sent the market to us, right, because they didn’t understand it.”

Stephen Weinroth, chief of Drexel’s underwriting committee:

“We financed a couple of insurance companies, and they became converts. So for their investment accounts, they’d start buying junk bonds.”

Mark Attanasio, employee in capital markets:

“He touched a nerve on both sides. It addressed a need that corporate issuers had, and it touched a need that investors had.”