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Helped Create Takeover Turmoil : Whiz Kid of Junk Bonds a Figure in Insider Probe

November 20, 1986|TOM FURLONG | Times Staff Writer

An ordinary-looking 40-year-old, Michael Milken lives the quiet family life in Encino. But his activities have created plenty of noise in corporate America.

He has helped thrust corporations into the turmoil of seemingly endless takeovers, infuriating executives and employees. And he is now at the center of a stunning investigation into the world of Wall Street--one that has shaken the stock market and stirred suspicion and some panic among the nation's top investment professionals.

Milken, both respected and feared as a financial whiz kid, is the architect of the modern-day market for so-called junk bonds, the high-yield, high-risk forms of corporate debt that have been to used to finance takeovers and corporate restructurings.

Working from a frenzied trading room in Beverly Hills, Milken's prodigious effort to create a junk-bond market, now valued at about $100 billion, has made him spectacularly wealthy and helped transform his firm, Drexel Burnham Lambert Inc., from an also-ran among investment houses into one of Wall Street's most formidable firms.

As Drexel has succeeded in taking away business from some of the nation's most blueblood brokerage firms and creating a whole new market in seemingly risky debt, Wall Street's view of Drexel has gradually shifted from scorn to envy. So successful has Drexel become that it reportedly earned revenues of more than $2 billion last year. And competitors have scrambled to get into the junk-bond market themselves.

But today Milken faces pressures distinct from those of the securities markets that he seems to have mastered. A widening investigation into the insider trading scandal involving professional speculator Ivan F. Boesky is increasingly focused on Milken and Drexel.

Drexel Burnham and trading by some of its officials are now under investigation by the Securities and Exchange Commission, the government's watchdog of corporate America. The SEC hopes to learn more about Boesky's relationship with several other individuals, including Milken.

Describing Milken is often an exercise in hyperbole.

He is sometimes called a modern-day J.P. Morgan, the legendary turn-of-the-century financier, and has variously been described in the financial press as "Milken the Magnificent" and the "Oral Roberts of junk bonds." Forbes magazine once described Drexel's operations in Beverly Hills as "Mike Milken's Marvelous Money Machine."

Words like "genius" and "smartest guy I know" are common among associates who have grown rich by working alongside Milken during his astonishing ascendancy.

Once a Cheerleader

Milken is probably best described as a a local-boy-made-good who proved, much to the amazement of Wall Street, that you can play in the major leagues of U.S. finance even if the park is far from New York City. He was once a high school cheerleader in the San Fernando Valley, where he grew up, and was graduated with a mathematics degree from the University of California at Berkeley.

He now operates out of an unimposing office building on Wilshire Boulevard, above the elegant gift store, Gump's, and across the street from swanky Rodeo Drive.

From that vantage point, he has persuaded America's conservative institutional investors--mutual funds, pension funds, insurance companies--that junk bonds are safe places to put their money.

High returns on junk bonds have proved particularly attractive to money managers, who have seen yields on other investments fall sharply with the general decline in interest rates. But questions about the safety of junk bonds and their network of traders have nagged Milken and Drexel for several years.

Particularly tough questions have been raised about a seemingly tight club of junk-bond clients and the multiple roles played by Milken and his associates. It's sometimes unclear whether Milken wants to be a broker or private investor.

In one recent instance, a new investment partnership known as Pacific Asset Holdings proposed to buy a controlling interest in Western Union by injecting $250 million in new capital into the ailing firm. Among the limited partners contributing to Pacific Asset's coffers were the Bass brothers in Texas and Milken and his brother, Lowell, who also works in Drexel's Beverly Hills office. At the same time, though, Drexel was acting as Western Union's financial adviser. Pacific Asset said it was operating independently, not working in concert with Drexel or Milken.

Resentment over Drexel's business methods has run deep in more traditional parts of the corporate and investment banking world. Drexel is sometimes called the investment banking house that Wall Street loves to hate.

One anonymous investment banker recently told Business Week that "Drexel is the Libya of investment banking" because it used "terrorist tactics" to maintain its hegemony in the junk-bond market. Drexel executives label such talk sour grapes.

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