The Predators’ Ball

The Predators’ Ball

Michiael Milken, a unique investment genius, was famous as the king of junk bonds and had built his own junk bond empire from 1970s to 1980s, which has actively contributed to the transformation of the American business community and the financial world. A book, Predator’s Ball, tells the inside story of Drexel Burnham and the rise of the Junk Bond Raider, Michael Milken. In this book, the author described Milken more like a passerby in the choppy, fluctuating financial market, a plain, unremarkable, obsessive, persistent and understated ordinary person, and did not emphasize the aura or shortcomings of Milken, leaving us with more room for comments and judgment.

Background introduction of Michiael Milken and his empire of junk bonds

In 1971 Milken became head of Drexel Burnham’s bond-trading department. He saw great potential in the neglected area of “junk bonds”. Junk bonds, also known as high-risk bonds, are bonds issued by companies that are lower than the standards of rating agencies. In fact, junk bonds are not necessarily rubbish, and some are even undervalued investment products. High income is usually inseparable from high risks. The risk allows conservative large financial institutions and investors to stay away from it, and Milken, who has a keen insight, sees the market's blind spots and the value concealed by risks. He can see the undervalued future of SMEs, and he believes that many troubled SMEs will regain their potential under the magic of finance and will eventually become a success. When the market is running well, Milken seeks that the funds on the market are abundant and cheap, and by diversifying the investment to diversify risks and centralize financing, he can obtain a large amount of cheap funds to help small and medium-sized enterprises to swallow large enterprises and let him and his team gain his profit, his high-yield strategy succeeded. Drexel Burnham' profits are high, and it expanded faster than everyone else.

However, if a bond issued by a company defaults and cannot repay the principal and interest of the bonds in time, not only will Milken’s reputation be damaged, but investors will naturally lose confidence in junk bonds. It was strange that Drexel Burnham had the lowest rate of default among many underwriters. The secret of this is that Milken will issue new bonds again for customers with financial problems and continue to repay old debts with new debts, even if its financial situation has deteriorated, and ordinary investors are often difficult to find in a short time. It's like a ball, rolling and becoming larger. There are new debts coming in and repaying old debts. It's only going to wait until the day when the bubble bursts.

The contributions of Milken to the US economy

Countless companies, financed by investment banks other than Drexel Burnham, wouldn't exist without the high-yield market Milken created. In the 1980s, the US industrial structure faced tremendous opportunities for upgrading and adjustment. At that time, many large enterprises in traditional industries were caught in operational difficulties due to lack of competitiveness. Milken helps small and medium-sized enterprises to issue junk bonds, and then through the method of fundraising to acquire large enterprises, thus directly creating a large amount of junk bonds, and solving the economies of scale of SMEs issuing bonds. For example, Mr McCaw was head of McCaw Cellular Communications, an early entrant to the mobile-phone business, which had 2 million subscribers by the time AT&T bought it in 1994 for $11.5 billion. Drexel also funded Bill McGowan's MCI, the firm which successfully challenged AT&T's fixed-line telephone monopoly. Drexel financed Mr Wynn's Golden Nugget casino in Atlantic City and the Mirage in Las Vegas, replete with a fake volcano. His firm now owns several luxury hotels in Las Vegas, a city whose rapid growth owed much to high-yield finance. Malone's Tele-Communications Inc became the biggest cable-TV firm in the world. Its growth was financed by Drexel-issued junk. He helped create Viacom, Time Warner Cable, Telemundo, and Metromedia. Milken got billionaire Ron Perelman the money he needed to buy Revlon-the deal that put him on the map-and got Ted Turner the $1.4 billion he needed to buy MGM and start his cable TV empire.

Michael Milken asserts there is no one right way to capitalize a corporation, and that no single structure can be correct at all times. New approaches and financing methods were brought by Michael Milken. Ratings from the ratings firms obviously fail for the conflicts of the facts that the rating services are paid by the companies who issue the securities they rate and the rating services admit in their fine print that their ratings are based on the data supplied by the companies seeking the ratings. Milken stated the importance of focusing on cash flow rather than reported earnings, and considering human capital part of the balance sheet. He played this out by backing such pioneers as Bill McGowan (telecommunications), Ted Turner (cable television), Craig McCaw (mobile phones), Steve Wynn (resorts), Len Riggio (book retailing) and Bob Toll (homebuilding).” He also financed T. Boone Pickens, Saul Steinberg, Carl Icahn, and Ronald Perelman. 

Mike recognized that in a changing society, "The Best Investor is a Social Scientist". In his book How the Markets Really Work (Crown, New York, 2002), former Harvard Business Review editor Joel Kurtzman wrote:

"Milken's real contribution was far greater than simply to sell portfolios of bonds. His real contribution was to get investors to understand that the stock and bond markets were not really separate markets. Milken created a tremendous pool of liquidity and guided its use with surgical precision. He did it in a way that took an often bloating and ailing American economy and made it lean, mean and resilient. Much of the strength and resilience of the economy today – including its ability to rebound in times of adversity – is due to the way people using Milken's financing vehicles remade ailing companies or put their entrepreneurial zeal to work."

The Threats of Milken to US economy

Because Milken challenged the status quo, many business and financial institutions had reason to feel threatened by his revolution in democratizing capital access. Before Milken, banks and insurance companies largely controlled the flow of available funding and provided very little growth capital to firms that weren't among the tiny minority considered "investment grade." Milken's innovations opened a wide range of financing techniques previously unavailable to these companies.