Michael Milken and the Conspiracy to Bilk the Nation

From page 20:
While Milken was at Berkeley, he made a phenomenal and unique "discovery." This "discovery" was supposedly made by Milken while he was browsing through a famous book about bonds and bond default rates, presuming that a great discovery can be made by one person reading another person's already published book. The book was and is Corporate Bond Quality and Investor Experience, by Walter Braddock Hickman

(...)

From page 32:
Hickman pointed out repeatedly that the time period he studied was extremely unusual in that it included the worst depression in history followed by the largest boom in history (the rearmament boom of World War II). This, as Hickman was at pains to explain, meant that bonds bought in the trough of the Depression showed fantastic gains in the wartime period, when there were essentially no defaults, there were many, many calls at above par, and some securities that had been exchanged for defaulted bonds rose spectacularly in value.

From pages 49 to 50:
But how to make it all happen? How to make a market in the random, bizarre creations of the junk world? After all, a true market cannot exist without a substantial degree of knowledge of the product by both buyers and sellers

(...)

There can be a world market in grain or oil, because everyone knows what a bushel of winter wheat is and everyone knows what Libyan sweet crude is and how many gallons are in a barrel. But how can there be a national market in such varied and mysterious products as Riklis bonds or warrants or preferreds or convertibles?

Answer: There can't. But there can be a righteous facsimile created by a group of good fellows getting together to take in each other's laundry. There might not be the possibility of a real market, but there could be an illusion good enough to help make the sale. To create that illusion, who better than other players who want it and would profit by it?

From pages 76 to 78:
When Milken began with his issues of virtually unknown companies' bonds, he knew that these companies were not flush, and indeed often were explicitly incapable of making their interest payments through current income. He knew that, except through him, there was no liquid market in these bonds. But he also knew a great deal about accounting, the movement of money back and forth, and the financial market's many equivalents of three-card monte.

Faced with the problems of high default rates and illiquidity, Milken realized that if he could keep funneling money into his bond scheme, he could obscure, more or less indefinitely, the facts about his bonds. The process was deceptively simply. If, for example, one issuer cannot raise the money to pay its coupon by its operations, it can sell more bonds and use the proceeds to pay off the first bond issue. If it then uses the proceeds of a third offering to pay off the coupons on the second offering, the process is well and truly rolling.

(...)

Milken boasted that for his borrowers he liked to raise more than they originally asked for so they would have a "cushion" of cash to fall back on. He was as good as his word. For his good friend (and major George Bush fund-raiser) Larry Mizel of MDC (Mizel Development Corporation), Mlken offered in the palmy 1980s to raise a mere $250 million to build homes, search for oil, and do the other things Mizel's company did. Within days or weeks at most, Milken had instead raised a whopping $506 million, at least $113 million of which was promptly invested in more Drexel junk of other issuers. Some of that junk can be traced directly or indirectly to Mizel's Silverado Savings, a federally insured S&L that later collapsed and cost taxpayers well over a billion dollars to bail out.

(...)

Just as a matter of fairly straightforward arithmetic, Milken's overfunding should have set alarm bells ringing in Washington and on Wall Street. His borrowers were financially weak, even if they were large companies. If they were financially robust, obviously they would not be issuing into the junk world at all, but would be selling investment grade bonds at a far lower coupon rate. But if they were financially shaky, how then could they afford the coupons on twice as much (or more) debt as they had originally contemplated? If the answer was that the excess would be invested in bonds that paid even more than the cost of junk borrowing, then a whole other series of alarms should have gone off.

From page 85:
All financial scams basically work out to a simple equation: the trading of promises (that are not kept) for money.

Insurance is a legitimate example of the taking in of money today in exchange for a promise to pay out money in the future. The insured pays premiums in the sure and certain expectation of getting future benefits. A forty-year-old pays money for an annuity upon retirement twenty-five years hence. A fifty-year-old pays for life insurance down the road. The insurer does not expect him to die for twenty-five years, and there is actuarial data to back up that figure. Meanwhile, the insurer has twenty-five years to play with that money before he has to pay any of it out.

In every way, this is a situation ripe for abuse. That's why there is supposedly stringent regulation of the insurance business.

From pages 152 to 153:
Although a damning mountain of research about Drexel was accumulated by SEC staff attorney John Hewitt as early as the beginning of the 1982, and said mountain showed convincingly that Milken was engaged in stupendous price fixing and bond-price rigging within his empire, the SEC took no action against him.

(...)

How could this have happened? How could the largest securities fraud of all time have been committed without the SEC getting involved at an early stage?

The answer was part ideology. The Reagan-era SEC was programmed to let the financial markets function without "interference." The wicked slogan of the Reagan campaign was "government is the enemy," which, as Michael Thomas sagely pointed out, many in the business world soon interpreted to mean "law is the enemy." The Reagan appointees at the SEC were convinced that some kind of magical purifying water would heal whatever was wrong at the nation's marketplace of finance if they only stood back.

From pages 176-177:
In any event, by January of 1990, Drexel was a goner. (...)

In New York, Drexel's lenders stopped rolling over its commercial paper as of the first week of February. (...)

Then, in typical Drexel fashion, the firm paid out several hundred million dollars in bonuses and bond buybacks to its high-ranking employees--while it knew it would have to delay or cancel payment to various labor union pension funds that had advanced money to the firm. It was, in legal terms, a "fraudulent conveyance" in that the "conveying" or transferring of something had resulted in a fraud being perpetrated on an innocent party. It was deeply revealing indeed that Drexel approved these payments while two former chairmen of the SEC sat on its board of directors.