TIME: Almanac 1993/TIME Almanac 1993.iso/time/caps/88/88capbus.2

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                ¡^                                                          December 5, 1988

BUSINESS

A Heap of Woe for the Junkman


Bond wiz Milken prepared for criminal charges


The battle to control RJR Nabisco has pitted some of Wall
Street's most powerful investment houses against one another,
but the financial muscle behind the bidding is really the
legacy of one man: Michael Milken. It is not just that Milken's
firm, Drexel Burnham Lambert, is bankrolling the Kohlberg
Kravis Roberts bid to the tune of $5 billion. Milken's role is
much grander and far more controversial. The boyish moneyman
with the tousled toupee and the obsessive work habits has
almost single-handedly sparked the frenzy of takeovers and
buyouts that has given the Roaring Eighties their name. And his
tactics along the way may put him behind bars as a result.

It is Milken who created and has dominated the market for junk
bonds, the high-octane financial fuel that powers many of
today's most daring Wall Street deals. The volume of these
bonds has zoomed from less than $1 billion in 1981 to more than
$175 billion today. In the process, Milken, 42, has amassed a
fortune of at least $500 million and a reputation as the most
influential financier since J.P. Morgan.

The RJR Nabisco showdown may prove to be one of Milken's final
moments of glory. He and Drexel are expected to be slapped any
day now with criminal indictments accusing them of
racketeering, mail fraud and other crimes. The charges would
stem from two years of federal investigations that prompted the
Securities and Exchange Commission to a file a civil suit
against Milken and Drexel in September, accusing them of 18
transactions including stock manipulation and other
securities-law violations. Says a close associate of the
embattled dealmaker:  "Two years ago, Milken was on top of the
world. Now it has crashed down upon him."

The expected criminal charges could heavily damage Drexel, the
fifth largest U.S. investment firm and the fastest-growing
powerhouse on Wall Street. Rudolph Giuliani, the U.S. Attorney
for the Southern District of New York, is likely to follow the
SEC in accusing Drexel and Milken of collaborating with
convicted arbitrager Ivan Boesky to defraud the firm's clients,
trade on insider information and conceal the true ownership of
stocks--all, presumably, in the pursuit of greater profits and
power. Milken's lawyers, for their part, accuse the Government
of a vindictive campaign based solely on self-serving testimony
by Boesky. The potential racketeering charges against Drexel
could hit the firm even harder than the civil suit, because
federal law--the Racketeering-Influenced and Corrupt
Organizations Ace, or RICO--would enable prosecutors to freeze a
major portion of Drexel's assets.

The charges have triggered a vigorous debate over Milken's role
in 1980s finance. Is he a megalomaniac who has built a
tottering tower of corporate debt?  Or is he a financial genius
whose funding of unsung, mid-size industries greatly
overshadows his role as a takeover player?  He has many
defenders among buyers and users of his junk bonds. Says MCI
chairman William McGowan, whom Drexel helped raise $2.4 billion
for building long-distance telephone lines:  "When we first went
to Milken, we were not even qualified for junk bonds, but he was
able to help us. People went to him because the rest of the
financial establishment was turning away companies like ours."

The son of an accountant, Milken grew up in California's San
Fernando Valley, only about a dozen or so miles from his
current headquarters. In high school, after he was benched as
a member of the varsity basketball team, he became head
cheerleader instead. Reflecting on those years during a recent
interview with TIME, Milken mused, "When things look their
worst, you always have the seed of great improvements."  At
Berkeley during the mid-'60s, Milken concentrated on math and
business courses rather than on protest. It was there that he
first considered the far-reaching idea upon which he built his
empire. Milken came across a study showing that junk bonds,
which at the time were often called fallen angels because they
were the downgraded debt of ailing companies, actually
represented a lucrative investment for those who bought them.

As a graduate business student at Pennsylvania's Wharton School,
Milken made junk bonds a focus of his scholarship. Despite their
reputation for high risk, he found that the securities showed
a history of few defaults. Milken believed the securities'
relatively high yields, typically 3% to 5% more than an
investment grade corporate bond, were more than enough
compensation for that slightly increased risk.

Milken never put his big idea or his ambition aside. As a
trader for the old-line Philadelphia firm of Drexel Firestone in
the mid-'70s, he scorned colleagues who hewed to tradition and
"spent from 11 o'clock to 2 o'clock at the racquet club." The
dogged Milken soon discovered that junk bonds could provide much
needed capital for medium-size companies that were unable,
because of their size, to issue investment-grade debt. Other
firms, notably Lehman Bros., had already tried minting bonds
that were high yield from the outset. But Milken was the first
to build a market for the bonds by finding hungry customers
among institutional money managers, who must constantly search
for higher returns on their investments.

Milken's junk bonds remained innocuous until the mid-'80s, when
he began using the securities to raise mountains of money for
hostile takeovers. In fact, the preferred opening salvo of
corporate raiders became the dreaded letter from Drexel in
which the firm stated it was "highly confident" of coming up
with the necessary cash. In some cases, like T. Boone Pickens'
failed bid in 1984 for Gulf Oil, Drexel charged a hefty fee for
lining up money that it never had to deliver. But in many other
raids, including Donald Perelman's 1985 takeover of Revlon,
Milken raised billions through his network of buyers. Before
long, Milken's annual junk-bond conference became known as the
Predator's Ball.

Milken's junk-bond department, which he moved from Manhattan to
Beverly Hills not long after he formed it a decade ago, quickly
became the engine of the Wall Street firm's furious growth.
One reason is that junk bonds earn hefty fees:  Drexel charges
3% to 4% of an offering's total value, compared with a fee of
less than 1% for a higher-grade issue. Milken's web of buyers
and sellers for the bonds has given him a virtual lock on the
market, though the entry of such competitors as Morgan Stanley
and First Boston has whittled Drexel's market share from a
monopoly in the late 1970s to about 50% today. For his huge
contribution to Drexel's bottom line, Milken has pocketed
bonuses of as much as $200 million in a year and accumulated the
largest individual stake in Drexel:  a 6% share consisting of
stocks and warrants worth $90 million.

Though Milken's title is only senior executive vice president,
he has set Drexel's tone and direction during the past decade,
according to many who deal with the firm. But his yen for
control and lack of regard for convention, which served him so
well in staking out his new financial realm, may have been what
led him to allegedly illegal tactics. Says journalist Connie
Bruck, author of the 1988 book on Drexel titled The Predator's
Ball:  "For years he's been a law unto himself. He had disdain
for the way the world works. He figures he's waging a holy
war."

Milken now spends nearly a third of his time working on his
legal defense but otherwise maintains his characteristic
workaholic schedule. After arriving at his office at 9560
Wilshire Boulevard by 4:30 a.m. each day in a chauffeur-driven
Mercedes, Milken holds forth in a trading room the size of a
basketball court. He has no private office, preferring to sit
at one of three huge, X-shaped desks, where 30 bond traders and
other workers shout into telephones and scramble to execute the
orders that he barks out or scrawls on yellow legal pads. On
the computer terminal next to his, a co-worker has posted a sign
reading MENTAL ILLNESS IS ESSENTIAL TO SUCCESS.

The barrage of negative publicity during the past two years,
starting when the Boesky case broke in 1986, has been tough on
Milken's family. "The Michael Milken portrayed in the press is
not the man I know and live with," said his wife Lori. Milken
and Lori, who was his high school sweetheart, live quietly with
their three children (Greg, 15, Lance, 12, Bari, 7) in Encino.
Their five-bedroom house, which might sell for $3 million, was
once occupied by Clark Gable and Carole Lombard. It is a
suburban idyll trimmed by red and white Impatiens, finished
inside with dark oak paneling and filled with photographs of the
children.

Once extremely private, Milken has sought to improve his public
image by appearing at charitable functions and bidding reporters
to "call me Mike."  Last year Milken and his wife donated $198.1
million to the family's three charitable foundations, more than
a sixfold increase from the previous year. Less than $15
million of these funds was actually disbursed, going to some 200
organizations. The remainder was invested by the foundations.
That is perfectly legal, but the California attorney general's
office began this month to investigate the Milken foundations'
activities for possible irregularities.

If Milken is indicted on the racketeering charges, his workdays
may become devoted to legal defense. Drexel could ask him to
resign or take a leave of absence, while the investment firm
would pay a fine to settle its own charges. The company has set
aside more than $500 million for legal costs, and could spare
$1 billion without dipping into its bare minimum of capital.
Under racketeering charges, the Government could freeze so much
of Drexel's assets that the company would be paralyzed, but
prosecutors may want to avoid a punishment that would cost
innocent workers their jobs. Drexel is taking no chances:  the
firm already has 115 lawyers assigned to its case, compared with
a total of about 35 at the SEC and the U.S. Attorney's office.

The investment firm may also be contemplating major changes in
its executive suites. Drexel officials have approached former
Senator and White House chief of staff Howard Baker with the
idea that he become Drexel's chairman. According to one rumored
scenario, Baker would take over after both Milken and Drexel
chief executive Fred Joseph stepped aside.

Milken's legacy will take years to come fully into focus.
"Behind every great fortune there is a great crime," Balzac
once said. "Great fortunes are made by solving problems" is the
way Milken has preferred to see it. The Government's view
should be known in a few weeks. The true value of junk bonds
will take longer to determine.

--By Barbara Rudolph. Reported by Scott Brown/Los Angeles and
Frederick Ungerheuer/New York.