Thursday, May 9, 2019

Milken History for Younger Generations


Zerohedge reported on the interview with an interesting question:

Q:  "Why do younger generations seem to be losing faith in the free enterprise system?" -- Host Michael Milken
A:  "This is an entire (group of people) that don't know history." --  Ken Griffin
They may not know Cold War history but they lived through a significant financial event.  The young adult generation were children during the 2008 economic crisis.  They could sense the stress their parents, family, community and our society experienced during that crisis.  President George W. Bush and his advisors were clearly rattled and mobilized trillions ($) to save Wall Street. 

Conference host Michael Milken was part of an earlier economic crisis, one handled by President George H. W. Bush.  Before we enter that period of history consider Milken's bio which states:

Between 1969 and 1989, he revolutionized capital markets by pricing and rewarding risk more efficiently and democratizing access to capital. He financed thousands of companies that collectively created millions of jobs.
Had Mr. Milken achieved his claim he would not have gone to jail nor would the federal government have to bail out the Savings and Loan industry.  Consider his history:


The NYTimes reported in 1990:

Savings and loans played a central role in the development of the junk bond market, and many of Mr. Milken's largest clients were savings institutions that invested heavily in junk bonds underwritten by Drexel. In the rescue legislation signed by President Bush last summer, savings and loans were required to sell their junk bond holdings by 1994. The junk bond market has since collapsed, and institutions are having trouble unloading their holdings.

Last fall Drexel pleaded guilty to six criminal charges that described Mr. Milken as being at the crux of schemes which allowed the firm to cheat a client, trick a corporation into being taken over and manipulate the marketplace. In early February, faced with mounting financial pressure, Drexel collapsed and is now liquidating.

The move that led to Mr. Milken's downfall was his decision to provide hundreds of millions of dollars in financing to Mr. Boesky's stock trading corporation. Because Mr. Boesky was betting on takeovers, many of which Drexel put together, the relationship was viewed on Wall Street as questionable if not a clear conflict-of-interest.

According to the Government charges against Mr. Milken, Mr. Boesky was frequently called by the financier and instructed on investments to make. Those instructions were intended to benefit Drexel, sometimes to the disadvantage of the firm's clients.
That does not sound like pricing risk more efficiently or democratizing access to capital.  For his criminal deeds Milken paid a $600 million fine and was sentenced to ten years in jail.

Judge Wood said the former financier had to be sentenced to a long jail term to send a message to the financial community, and also because he chose to break the law despite his advantages of position and intelligence.\
"When a man of your power in the financial world, at the head of the most important department of one of the most important investment banking houses in this country, repeatedly conspires to violate, and violates, securities and tax laws in order to achieve more power and wealth for himself and his wealthy clients, and commits financial crimes that are particularly hard to detect, a significant prison term is required," she said.
Milken served 22 months.   Congress estimated in 1992 a $215 billion cost to clean up the Savings and Loan Crisis.  The report said this amounted to $800 for every man, woman and child in the U.S.  

The full extent of Mr. Milken's wealth has never been publicly disclosed. But he is expected to remain a very rich man despite the fine,
Reformed crook Michael Milken helped democratize government bailouts for the financial industry while maintaining his ill begotten gains.  He is the poster child for the private equity underwriter (PEU) class.  The greed and leverage boys believe unconstrained free markets (with significant government subsidies) are the solutions to all of America's ills.

The younger generations know this not to be true.  It's in their lived childhood experience.  The older generation should know better but greed is an tantalizing, unrelenting taskmaster.