UNIDENTIFIED PERSON: This is PLANET MONEY from NPR.
ROBERT SMITH, HOST:
For connoisseurs of financial crime, this was a (imitating kiss) week.
MARY CHILDS, HOST:
On Tuesday, Donald Trump granted presidential pardons to a ragtag crew of criminals and B-list celebrities.
SMITH: Which I picture as a sort of "Ocean's Eleven" film situation - "Ocean's 2020," right? President Donald Trump sits down, and he says, we've got to sign some pardons. We've got to get the team back together for one last hurrah.
CHILDS: There's the disgraced governor with a Senate seat for sale.
SMITH: Bring me Rod Blagojevich.
CHILDS: The real housewife who was part of a stolen vehicle ring.
SMITH: Angela Stanton - we're going to need her.
CHILDS: And the brains - the guy who at one time was making more money than anyone else in America - Michael Milken.
SMITH: Michael Milken. When I was growing up in the 1980s, I knew nothing about finance. I knew nothing about who was making money or not or why. But I did know that name - Michael Milken. Everyone knew he was the junk bond king, even though we had no idea what a junk bond actually was.
CHILDS: It wasn't just a story of some guy getting incredibly rich, though. Michael Milken helped to create entirely new industries fueled by all this corporate growth. His story is a story of innovation, genius - yes, pushed by greed but in a way that transformed the economy and also his life. He went to prison for 22 months.
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CHILDS: Hello, and welcome to PLANET MONEY. I'm Mary Childs.
SMITH: And I'm Robert Smith. Who is this Michael Milken? How'd he make so much money? Why did he end up in prison, and how did he get that pardon?
CHILDS: Today on the show, the rise and fall and rise again of Michael Milken - 20 years on Wall Street, two years in prison and a never-ending search for redemption.
SMITH: Wall Street in the 1980s was a wild time. No longer was finance just boring bankers taking long, boring lunches. Finance had become ruthless, extravagant. There were parties, big hair, wide lapels, massive shoulder pads, so much cocaine - and best of all, corporate raiders.
CHILDS: Corporate raiders - they were rich investors who used money and bullying to take over giant companies - companies that did not want to be taken over.
SMITH: And the money for these hostile takeovers - that money came from a man named Michael Milken.
CHILDS: James B. Stewart was a reporter at The Wall Street Journal back in those days. He was covering mergers and acquisitions, and he desperately wanted to follow the money to learn more about Mike Milken.
JAMES B STEWART: Well, nobody knew everything about him, but everybody knew who he was. I mean, he was so well-known as the financier for all of these corporate raiders. I was dying to find out more about him, and so I went out to one of his conferences, which had become known as the predator's ball because there were so many corporate raiders gathered there.
So a friend of mine who was a takeover guy - he sneaked me in. And, you know, I worked through the crowd. And amazingly, 15 minutes in there, I came face to face with Milken himself. And Milken said, who are you? And I said, I'm James Stewart. I'm a reporter at The Wall Street Journal. The next thing I knew, like, a big security guard was behind me with his hand on my collar. And I literally got dragged and thrown out of the Beverly Hilton.
CHILDS: You wrote the book about this golden era of financial innovation. But you didn't call your book "Golden Era Of Financial Innovation."
STEWART: (Laughter) No. It's called "Den Of Thieves."
SMITH: But if you call it "Den Of Thieves," we know how the story's going to end.
STEWART: Well, I - yeah. But, you know, often you know what the end of the story is, but you don't know how you get there, and that's where the suspense is.
SMITH: All right. Well, let me do the short version of how it gets there. Michael Milken started on Wall Street in 1969 working corporate bonds at a firm called Drexel - later would become Drexel Burnham.
CHILDS: Corporate bonds are just corporate IOUs. A company borrows money from people who have money and promises to pay it back with little bits of interest along the way.
SMITH: I would call it a safe, predictable bond created by safe, predictable companies and sold by safe, predictable bankers.
STEWART: It was a clubby, white, male, old-fashioned, somewhat rigid world of privilege and inherited wealth. And the world that he took up, which were these low-grade bonds - they became known as junk bonds for a variety of reasons, partly because the kinds of companies that use them were - well, some of them were, like, casino operators and, you know, kind of marginal things that, you know, the white-shoe Wall Street firms didn't really want to go near.
SMITH: Now, this sounds terrible. I mean, just the very name junk bonds feels like a bunch of guys with sharp lapels and stubble huddled in a back alley, you know, throwing money around on the ground. So what was Michael Milken's insight into these bonds?
STEWART: Well, Michael Milken discovered some research that showed despite this sort of kind of bad image they had, junk bonds actually performed better than investment-grade bonds.
CHILDS: And this is the holy grail in investing, right? Like, you have a bucket of these gross, bad junk bonds. They're actually going to do better. They're going to make you more money than a bucket of those boring, fancy investment-grade bonds. And you're getting so well compensated for that extra risk that it's not even that much more risky anymore. And that's what everybody wants.
STEWART: It comes up in different contexts. Decade after decade after decade, somebody says, I can earn you a higher rate of return at lower risk. And then people flock around it. And in Milken's case, he said, this is true of what are known as junk bonds. And investors started lining up.
SMITH: He had discovered a market that was undervalued.
STEWART: And that's correct.
SMITH: And to the person who discovers such a market, immense riches come.
STEWART: Yes. He became astonishingly rich because he benefited not only from the fact that this was an underserved niche market, but it did have this taint about it. At the time, the major competitors were still - you know, they didn't want to deal with these kinds of people. They didn't go to the same schools. They didn't go to the same country clubs. And so they stayed out. They really turned their backs on it. And that - for years and years, that really left the market pretty much to Milken and his colleagues at Drexel Burnham to run away with this - what became an immense market.
CHILDS: And it wasn't just casino operators either. It was a lot of legitimate businesses that previously just didn't have access to big pools of money, like early telecom companies and homebuilders.
SMITH: Or biotech.
CHILDS: Biotech is one. There are a lot of these industries that kind of owe their success, existence, to Mike Milken's invention.
SMITH: OK, so let's just jump forward. Michael Milken in the 1980s is rich and famous, and he has a second big insight. He sees that, sure, you can get rich off of trading junk bonds, but junk bonds can also be tools. They could be tools for things like corporate takeovers, which is, you know, a rich individual - say he wants to buy up an even richer company worth billions of dollars. He wants to attack it, buy a bunch of shares, take it private. In order to do that, you have to have access to a lot of money.
STEWART: Right. You have to have enormous amounts of capital.
SMITH: And this is where Michael Milken came in.
STEWART: This was where Milken stepped in.
SMITH: He could easily raise tons of money for corporate raiders by creating and selling junk bonds.
STEWART: One of Milken's great innovations was - and it was a measure of his market power - was called the highly confident letter. Milken didn't even have to find the buyers of the bonds. All he did was put out a letter that said, I am, quote, "highly confident" that I can place this debt. And that was enough. That wave of the highly confident letter and the corporate raider was good to go.
SMITH: It's an amazing trick. That is - he's essentially saying, I'm going to give you a sort of speculative claim on this company that I don't even own yet, selling these junk bonds to buyers that don't exist yet.
SMITH: But I have beautiful letterhead, and I've written this on a piece of paper, and I've signed the now-famous name Michael Milken to it.
STEWART: Right, and that letter struck terror into the hearts of established corporate America. I remember it very vividly, and it was - there was tremendous hostility towards him among the corporate elite. And I have to say that in many ways, this was a healthy thing. You know, it - there were a lot of companies that were being run for the benefit of the CEO, not the shareholders. And suddenly, you get a corporate raider stalking you, and they - believe me, there were changes. You know, shareholders did gain a lot from that.
SMITH: At this moment, you, James Stewart, are a reporter at The Wall Street Journal.
SMITH: And you start to notice that there's something that doesn't quite add up about this situation.
STEWART: Well, I covered mergers and acquisitions, and I would hear over and over again about these upcoming deals before there was any public announcement. I think it's important to recognize that there are strict laws about how you launch a bid for another company. It's all regulated by the Securities and Exchange Commission for the obvious reason that if word gets out, the stock is going to go leaping upwards. And I was thinking, wait a minute. It's nice that I'm getting all these scoops, but it's not supposed to work that way. How - I mean, I knew I was the last stop in the food chain before the public announcement because the people investing in it wanted the word to get out so the stock would go up. I was kind of a tool of this crowd.
CHILDS: You're like, I'm the last stop. I think that's really...
STEWART: I was under no illusions, really.
CHILDS: You're like, thanks for the scoop.
SMITH: I'm either the world's greatest reporter or...
STEWART: And, I mean, look. I did nurture, you know, sources.
CHILDS: You did work.
STEWART: And I worked hard, and - but I knew that, you know, obviously, there was something really wrong with this.
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CHILDS: Coming up after the break, crime and punishment.
At this point in the story, Mike Milken is making a ton of money. Things are really going his way.
SMITH: And, James Stewart, you are getting a bunch of scoops at the Wall Street Journal, and you're suddenly thinking that something is wrong here.
CHILDS: What was the first shoe to drop?
STEWART: Well, I remember vividly the day in May 1986 when the news came over the old ticker that this investment banker at Drexel - Milken's firm - Dennis Levine had been arrested on charges of insider trading. I knew Dennis Levine. He was one of these people that was in my orbit. But the SEC, when they arrested him, put out a list of something like 35 deals that he had insider traded on. And I looked down the list, and he had - he, Dennis Levine, hadn't worked on any of them. And I thought, if he hadn't worked on any of those deals, how did he know to insider trade? Where was he getting the information?
So I knew immediately there was a network. There was a conspiracy. It was more than just Dennis Levine. There were other people in the orbit, and they were feeding him information that he was then investing on. And, presumably, he in turn was feeding them the deals. He wasn't - they weren't so, you know, brazen as to actually trade in the deals they were working on. That was too obvious.
SMITH: And the prosecutor for the government is a familiar name - Rudy Giuliani...
STEWART: Rudy Giuliani, yeah.
SMITH: ...Who was prosecuting this like the mob cases which he was famous for.
STEWART: Yes, exactly. And, you know, there were many similarities except, at least from what people tell me, that it was much easier to kind of flip these, you know, Ivy League-trained, white-collar bankers and lawyers than it is, you know, mafia lieutenants. But yes, Rudy Giuliani was running this. He was getting immense publicity. He was getting a lot of public acclaim for this crackdown on Wall Street crime. And he did oversee the prosecution of this, which led straight to Milken.
CHILDS: So what did they end up getting Milken on?
STEWART: You know, the - Milken and his defenders have long said, well, wait, wait. We didn't do any insider trading. But in some ways, what they ended up getting Milken on was more insidious than insider trading. Insider trading is a very discreet crime. What Milken was doing once he crossed the line into the hostile takeovers - as I said, the Securities and Exchange Commission has strict laws about how you have to announce a takeover bid, when you have to announce that you've acquired certain numbers of shares. And Milken was helping his clients and organizing his clients to buy up shares, amass these positions that could be used to then threaten the company without going through any of the disclosures. One - it was - a common name for it at the time was called parking, that you would get a friendly investor to buy, say, you know, 4.9% of the target company. Five percent was the threshold at which you had to make a public disclosure. Then you get another friend to do another 4.9%. And so you'd organize these people, and you're way over the 5%, but no one of them had it. And that was a violation of these requirements. There were other elements of this. He ended up pleading guilty to six felonies. One of them was a tax count. But they were essentially violations that were used to further the takeover efforts of his clients.
CHILDS: So they never got him on insider trading. He...
CHILDS: ...According to the government, never insider traded.
STEWART: The government had evidence, they claimed, of insider trading, but it was - it never came to trial. It was never - by pleading guilty, he avoided broader charges, and he was never convicted of insider trading. And, by the way, I've, you know, personally always felt that if there was any insider trading, it was almost kind of incidental. I mean, he - first of all, Milken did not need to insider trade to make an immense amount of money. He made in one year, I believe, $550 million by doing, you know, his bond business. One of the big questions is - I've often wondered - is, did he ever need to do any of this illegal stuff? I doubt it.
CHILDS: Just to be clear, he did plead guilty to six felonies, including conspiracy and securities fraud.
SMITH: And, Mary, you've tried to get an interview with...
SMITH: ...Michael Milken.
CHILDS: I have.
SMITH: And what did we get back?
CHILDS: I got many emails from his spokesperson, Jeff (ph). They basically enumerated the ways in which Milken disrupted finance writ large, democratized access to capital and has been giving philanthropically his whole life.
SMITH: And just to jump back into the story, he was sentenced to 10 years in prison, diagnosed with cancer and released early.
CHILDS: And when he got out, he couldn't trade because he was banned from securities trading for life.
STEWART: For life, yes.
CHILDS: And then he realized his new mission in life - rehabilitating his image.
STEWART: I would say that started the day he walked out of prison, and it's been a multi-decade effort. When he came out of prison, he was still a billionaire, maybe a multibillionaire. And he started launching a number of philanthropic missions. One of them was related to education and teaching. One of them, now that he himself had cancer, was aimed at health care and prostate cancer in particular. And then he started this sort of think tank, Milken Institute. But I think it's also important to recognize that within a very short period of time, the FCC later alleged, he was violating his lifetime ban. And I did a lot of work on this as well.
CHILDS: OK. So you published "Den Of Thieves," and his lawyer sued you.
STEWART: One of his lawyers sued me for libel over one paragraph in what was a roughly 500-page book, and I can't tell you how many pages of legal documents that spawned. The case went on for many years.
CHILDS: What did that feel like?
STEWART: Well, the first couple of years, it bothered me a little bit. I would go - it was very interesting. I'd go, like, to get a mortgage, you know, to buy a place to live or something like that. And so on the application form, there's a line that says, do you have any contingent liabilities? And I would say, yes. And then they'd say, how much? I'd say, $35 million. Well, that was the - that was always the end of that, although then, they'd always say, well, we're going to have to get our supervisor, you know? So I - fortunately, once I explained it all, they - I was able to get a mortgage.
And then ultimately, we did win a really resounding victory because in libel law, there are two defenses - one, that you weren't - now, even if you were wrong, as long as you weren't negligent, you get off. But the judge not only said I wasn't negligent. He said that I was correct, that the book was accurate. And he even went and said I could have said something worse, but the truth was worse than I actually wrote. So it was quite a remarkable opinion.
SMITH: Blurbed (ph) your book.
SMITH: But this is symbolic of what, essentially, Milken's been doing since he got out of jail, which is marshalling both his money and his friends and the finance forces to silence critics but also to eventually get what he got from President Trump - to get a pardon.
STEWART: He had an unrivaled network of very, very wealthy and influential supporters who immediately started beating the drums that this was all unfair, that, you know, people were just jealous of him; it was just the Wall Street elite trying to bring him down - and started efforts to get him a pardon.
CHILDS: I've actually seen this in all the years I spent covering bonds. People on Wall Street love Mike Milken. They think he's a genius. They think he revolutionized finance by creating this whole market. And they think all of his philanthropic works also changed the world. And clearly, Milken felt that the conviction was this huge wrong that needed to be righted, even if it meant people like us are talking about all the bad stuff again.
SMITH: So if we were to tell the story of Michael Milken to young kids who perhaps dream of going to business school someday, what's the moral of the story?
STEWART: I used to say that the Milken story showed that even if you're the richest man in the world, you can't buy your way out of legitimate criminal charges. And now I'm going to have to change that narrative because it looks to me like in granting him a pardon, Trump has sent the message that if you are the richest man in the world and you have enough powerful, well-connected friends and donors to my campaign, yes, you can buy the result that you want.
SMITH: James B. Stewart is a columnist at The New York Times. He is a professor at Columbia University and the author of the book "Den Of Thieves." Do you have to change the title now?
STEWART: I'm not changing the title (laughter). Maybe I'll write a little epilogue, but I'm not changing the title. You know, you may be able to buy a pardon, but you cannot rewrite the facts.
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SMITH: We always love to hear what you think of the show, so you should write us - email@example.com. Or on the socials, we're everywhere @PlanetMoney.
CHILDS: Today's show was produced by Nick Fountain, edited by Brian Urstadt. Our senior producer is Alex Goldmark.
SMITH: For the nerdiest Tuesday read around, may I suggest you subscribe to the PLANET MONEY newsletter - npr.org/planetmoneynewsletter? And if you'd like to spend your days tracking down the Michael Milkens of this world and leaving them voice messages, may I suggest applying to be our next intern? Applications are open now, and you can find them on our website. I'm Robert Smith.
CHILDS: And I'm Mary Childs. This is NPR. Thanks for listening.
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