Wednesday, 19 February 2020

Trump’s Politics and White-Collar Criminals: Michael Milken Pardoned

President Trump’s time in office is undoubtedly one of the more unique periods in American political history, and recently he has turned his attention to righting what he sees as wrongs within the financial sector. That attention, in the past few days, has been directed to providing clemency for convicted criminals – often referred to as ‘white collar criminals’. There are few of particular note and, probably chief amongst them all, is the so-called ‘Junk Bond King’ of the 1980s Michael Milken, the former head of the high-yield department at Drexel Burnham Lambert. In this post we will get to know these figures a little more and look at President Trump’s almost-revisionist agenda.

Michael Milken’s story is truly fascinating and there are a number of accounts of this story in the literature. One such book is The Predator’s Ball that attempts to provide an account of the incredible world oh high-yield high-risk finance that took hold in the late 1980s. The ‘Predator’s Ball’ was the name associated with Drexel’s annual High Yield Bond Conference and it attracted many high-profile financial figures, like Ivan Boesky the renowned arbitrageur and Carl Icahn, the legendary corporate raider. However, at the core of the story is a financial pioneer that is still revered by a proportion of the modern financial field even to this day.

Born in 1946, Milken read for degrees at the University of California, Berkeley and then the University of Pennsylvania at its renowned Wharton Business School. It has been noted that, whilst at Berkeley, Milken was influenced by the works of W. Braddock Hickman, a former director of the Corporate Bond Research Project at the National Bureau of Economic Research, and in particular his work entitled Corporate Bond Quality and Investor Experience. Essentially, Milken’s genius was to realise that investors could make much more money, investing on a risk-adjusted basis, by investing in bonds issued by ‘non-investment grade’ or ‘junk-status’ companies than they could investing in ‘investment-grade’ companies, as determined by the largest credit rating agencies. However, the issue was that these non-investment grade were not issuing much debt because, quite frankly, there was not a large enough market that had the appetite to make it viable to do so. It is within this space that Milken, with Drexel supporting him, would so successfully operate. Drexel began to create a new supply of these so-called ‘junk bonds’ by underwriting the bond issuances, which then created the market for this method of financing. In addition, Milken began to engineer pioneering financial products that would allow financial heavyweights like Icahn to purchase companies and the like. The development of the now widely understood Collateral Debt Obligation (CDO) financial product is attributed to Milken – the idea is that the CDO is issued by SPE (Special Purpose Entity [or Vehicle]) and this then purchases the junk bonds from a client’s balance sheet, thereby cleaning up the client’s balance sheet for all sorts of purposes. The CDO was not operational when Milken was arrested and convicted, but was ready to go and has become a piece of the financial furniture since. What this process did was being financing to the masses, in theory. Yet, the real beneficiaries were corporate raiders. Corporate raiders, technically, use financing streams to purchase shares in companies that are deemed to be undervalued. Then, the purchasing of shares that give them a majority position allows them to implement decisions that will see the value of those shares rise, and then often the shares are sold at a premium – the company may be repositioned to be included in a merger, for example. However, this practice proved to be exceptionally controversial, with the corporate raiders being known also as asset strippers; ‘Reagan’s laissez-faire economic policies meant that once these asset strippers had a toehold in corporate America, there was nothing to stop them becoming dominant. Revlon, Disney, Gulf, Phillips… one by one, the giants were “downsized” – that is, disembowelled – from the inside out’. Yet, this field of finance has become incredibly important to the modern marketplace, and is said to be worth over $2 trillion with nearly $250 billion of new high-yield securities being issued each year in the US. Despite Milken’s criminality – he was charged with insider trading, manipulation of stock prices, inaccurate record keeping, fraud, and racketeering and was eventually convicted on six counts of securities and tax violations (which he pled guilty to in a plea bargain) ranging from aiding and abetting another’s failure to file accurate statements, selling stocks without disclosure, and failing to notify that commissions would be included in transactions – he is still revered by portions of the financial community.

This is proven by the recent clemency that has been granted to Milken by President Trump (amongst others). A number of high-profile financial heavyweights have come out in support of Trump’s decision, including: Sheldon Adelson (Casino owner and Republican donor); Elaine Chao (US Transport Secretary and Wife of Mitch McConnell); David Rubenstein (chairman of the Carlyle Group); Sean Parker (major Facebook Investor); Rudy Giuliani (the President’s personal attorney who was the US Attorney for the Southern District of New York who had investigated Milken during his downfall), and Rupert Murdoch (the media mogul who Milken had helped consolidate his News Corp. empire). Additionally, even though Milken was barred from ever working in the financial industry again upon conviction, he has become a mentor and guide to a number of high-profile financial players, including Josh Harris of Apollo and Josh Freidman of Canyon Capital, and also David Solomon, CEO of Goldman Sachs. These people, and many more besides, have supported the decision to pardon Milken, with the White House itself adding that Milken is ‘one of America’s greatest financiers’ and that he had ‘democratised finance’. Further still, the White House declared that ‘Mr Milken was charged in an indictment alleging that some of his innovative financing mechanisms were in fact criminal schemes’ and that ‘these charges filed against Mr Milken were truly novel’. Interestingly, the statement does not cover the massive damage that was caused to Drexel and its non-superstar employees who lost employment and pension pots as a result, and also every entity connected to Drexel that suffered as a result. One element that is given a lot of credence by his supporters is his decision, post-conviction, to apply himself to philanthropic endeavours. His world-renowned Milken Institute is widely regarded for having provided genuine good, and his personal battles with cancer have caused him to invest incredible amounts in the fight against the disease. Milken is perhaps identified as somebody slightly different in the financial world, in that money was perhaps not the overriding objective for his efforts; at the height of his powers, Milken lived in a modest house in California and drove a humble Oldsmobile – it has been noted that ‘there seemed to be no personal use for the fortune Milken had built’. For Milken, the suggestion was that he always just wanted to be regarded as better than his peers. Even though Milken is today tremendously wealthy, this still seems to be the case when we consider his philanthropic endeavours. Yet, the question remains as to whether this should be the basis of a Presidential pardon.

President Trump has not just pardoned Milken. Alongside him people such as former Illinois Governor Rod Blagojevich (who served 8 years of a 14 years sentence for attempting to sell a US Senate seat), former New York Police Commissioner Bernie Kerik (convicted for tax fraud and lying to officials), and Eddie DeBartolo Jr. (the former owner of the San Francisco 49ers NFL team who pleaded guilty to failing to report a felony in a bribery case in 1998). The thought within the media that this granting of clemency to a number of high-profile convicted criminals is a direct response to the President’s acquittal in his recent impeachment case in the Senate; CNN report that his reduction of Blagojevich’s sentence was even unpopular amongst his own aides and Republican supporters, but that he did it anyway. Yet, in the case of Milken, Trump is almost guaranteed a victory. He has given a number of Wall Street heavyweights what they have wanted (when Presidents Clinton and Bush Jr refused to) just as the re-election campaign gets going. Perhaps he may not need their support with the way he structures his campaigns, but it certainly will not hurt and will certainly not be rejected. The granting of clemency to Milken also feeds into a revisionist agenda that President Trump is determined to see through in an image that he sees America – the ‘Make America Great Again’ moniker is based upon championing the genius of somebody like Milken, but also based upon revising the actual truth about his excesses and abuse of his position, driven by the need to be powerful, or at least considered to be – this granting of clemency is a very good microcosm of the Trump agenda. Yet, it has been suggested today that the SEC will not be influenced by this decision with regards to lifting his lifetime ban on entering the financial industry, and a spokesperson for Milken confirmed that, for now, returning to finance was the ‘farthest thing from his mind’. How the future unfolds for Milken will be interesting to watch, but recent events are simply just another mile-marker in what is the fascinating life-story of Michael Milken.

Keywords – Michael Milken, clemency, white-collar crime, Trump, @finregmatters

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