I had read this book when I was in college but I decided to pick it up because it explains a lot about today's economic situation. In the 1970s Michael Milken joined a fledgling second tier investment bank called Drexel Burnham where he began as a low level associate but quickly rose through the organization because he was very smart and because he created the concept of the levereged buyout or LBO which brought in a lot fees for the firm. His idea was that you could buy a company by borrowing a lot of money and using that borrowed money plus a little bit of your own cash to do the deal. He would do this by issuing junk bonds which are unrated bonds that carry a very high interest rate to compensate the lenders for the risk they are taking.
He began doing these deals at a modest pace to finance friendly take overs but then he hit on the idea of doing these kinds of bond issuances to finance hostile take overs and that's when his business really started moving. By the early 1980s he ran a huge junk bond business which had catapulted Drexel Burnham from relative obscurity to one of the stars of Wall Street. He had built such a franchise that in most years he did at least 75% of the junk bond issuances that were completed. To a large degree he was responsible for putting buyout funds like KKR, Blackstone and others into business.
The book paints him as an egocentric self dealing control freak. I find it difficult to trust these editorial type books on these kinds of matters but from what I remember I agree that he was at least a control freak. But then his and the Drexel Burnham empire both came crashing down when he was charged with insider trading, found guilty, had to pay a huge fine and go to jail for a few years. The book is a good story about excess financed by too much debt which is analogous to the causes of today's problems.
5 comments:
I read Den of Thieves, which is a compelling narrative about that whole scandal. Incredible that these guys can get away with so much. And such large scale scams still happen: Bernie Madoff!
You know, I never really understood the whole junk bond scandal. Your first paragraph summed it all up quite nicely. It seems like the problem with these techniques is not the technique themselves, but that the users are allowed to push them to such limits, where they become the primary source of income for the firm and put way too much strain on the overall system. And always there is an ideology that goes along with it, justifying the excess, pushing them forward until it bites us all in the ass.
Is it entirely appropriate to revisit these earlier scandals? What I mean is are these guys committing the same mistakes over again - just 25 years later.
One of the reasons we are in the situation we are in today (although by no means the only reason) is that there was excessive lending to both individuals and corporations. So, the common theme in both situations is excess. Otherwise the facts of the mistakes are quite different.
I think Olman Feelyus sums it up correctly when he writes "it bites us all in the ass" — because that’s the problem with these scandals. If the brokers and bankers and corporate execs want to reach into each other’s pockets and steal their money, that’s one thing; and if they want to do the same with investors too foolish for due diligence, more power to them. But instead what we keep getting is a plutocracy that’s busy grabbing dough while the market’s on the way up, then looting the treasury when their schemes don’t pan out.
It should be noted in this regard that it wasn’t excessive lending that created the current crisis; it was excessive leveraging combined with a fanatic free market ideology — so fanatic, in fact, that you have Greenspan standing in front of a House committee in October with his jaw flapping in the wind saying he doesn’t understand what happened ("I have found a flaw" he says, in answer to Waxman’s question about whether this doesn’t suggest his free-market ideology isn’t firing on all cylinders. Oh yeah? A flaw? Maybe just a wee tiny one). Meanwhile at Treasury, three former Goldman Sachs execs distribute the largest government handout in the history of the world — literally — to the bankers who plunged us into this mess — and let’s not bother with oversight, transparency or regulation. Here! As much as you need! Mission accomplished! Heck of a job, fellas!
And what do we get for the money? See the article in yesterday’s NY Times, titled "What Red Ink?": New York financial company employees paid $18.4 billion in bonuses! Of course! They deserve it after slaving day and night to scuttle our economy on the worst downturn since the Great Depression. $18 billion! In cash! We’re not even including stock option awards here. This is for companies that lost more than $35 billion in 2008 — triple their losses in 2007, also not a banner year. But job well done! We’re not paying you enough! Have more!
Merrill Lynch gets $25 billion from Congress to "shore up" the country’s financial system, then hands out $4 billion of it in bonuses — Mission Accomplished! Then — get this — it pleads for another $20 billion a few weeks later to absorb unforeseen fourth-quarter losses — and we give it to them! Well, say the execs, there’s no way we can continue attracting the best and the brightest without handsome bonuses.
What the fuck? Am I missing something here? Apparently the free market only functions when brokers are grabbing fistfuls of cash. In case of shortfall, cf. centralized economy. It’s insane. And how beautifully the WSJ covers this story. Do they note the irony of truckloads of cash being handed to brokers in the aftermath of the worst malfeasance ever? No. Do they point out that hundreds of billions of taxpayer dollars has been dumped on the banks without the least bit of review? No. This is the story to the Journal: “Wall Street’s New York City Bonuses Fell 44% in ’08.” Bonuses fell 44 percent! (But really 37 percent, see graph 5.) Brokers hit hard! We feel the pain too! And buried in the last paragraph? “The financial-services industry has posted hundreds of billions of dollars in write-downs and credit losses over the past year, and several firms either went bankrupt or were acquired by competitors.” Holy shit! The whole story turned on its head.
Fuck, you could really go on forever here; it’s all just so absurd and pointless and mind-numbingly unbelievable. You’d think after the savings and loan scandal, after the junk bond scandal, maybe we’d get at least a few years’ respite before it all started all over again. But no, no respite. Six months go by, maybe a year, and the lobbyists are at again getting Congress to strip away regulation, repackaging shifty investments. The free market knows best! Don’t stand in the way of innovation! Just fucking shoot me now.
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