The Predators’ Ball (13 page)

As though hearing the ring of the despot in his words, Milken quickly added, “I don't expect anyone to do any more than I do. I sit among them, my desk is the same as theirs.”

Milken doubtless did inspire by his example. In an SEC deposition in 1982 he described what generally happened in his workday—which started a little later then than it would in later years and was not as frenetic as it would become. “I come in in the morning sometime between four-thirty and five,” Milken began. “I generally read
The Wall Street Journal.
I generally write notes for the people
in the department, put them on an administrative person's chair. By five-fifteen she's put them on everyone's chair in the department, so if they're not in they can't sit down without picking up their note.

“I then direct administrative people to make phone calls for me and get people on the phone, and that generally runs till around two o'clock in the afternoon.

“Sometime around ten forty-five to eleven-fifteen they put some food on my desk which I eat in anywhere from one to five minutes. Sometime in the afternoon it's possible corporations would come in for meetings and there would be meetings in the department with representatives from various corporations.

“Sometime between four and six a position sheet is put out as to what the position is for the department at the end of the [day], which I start to review. And if I'm not too tired, I then start writing out notes for the people in the department, asking them why they bought or sold a security, if I have an opinion, or I don't think that's a good idea, or that it might be a good idea.

“When I'm exhausted, I go home and I get ready for the next day.”

Milken also made it clear that whatever happened on that trading floor was under his control. “I have good hearing, and over the years it developed that I can hear most conversations in the department. It's a small area they're going on. I might overhear someone doing a trade that I don't think's a good idea and might scream at them before they've completed that trade, or try to provide direction.”

For Milken, weekends were an extension of his weekday treadmill. Maurits Edersheim, who had been at Burnham and Company since the forties and was deputy chairman of the board, recalled that he had a friend who was so eager to meet Milken that he agreed to the only time Milken had available: 5:30
A.M
. on a Sunday. “Then Mike called me,” Edersheim said, “and said that he hadn't realized that the clocks would be moved that Sunday for Daylight Saving Time, and could my friend come at four-thirty instead?”

Sometimes it seemed that the very notion of his taking time off was so at odds with his self-image that it offended him. In the above SEC deposition, the government attorney was questioning Milken about having been in Sun Valley, where Milken had seen Steve
Wynn. “. . . I'm not quite sure what the circumstances are here. Were you on a holiday?” asked the lawyer.

“I took off Friday and was there Friday, Saturday and Sunday,” Milken replied.

“Okay, and at some point you saw Mr. Wynn at this holiday?”

“. . . I had my briefcases with me, so I was reading at the time. I don't know if you want to call it a holiday—one has their own interpretation.”

The example Milken set must have done much to bind his people to him—an example of sublimation of all things personal, and utter consecration to his mission, which was framed not just as money-making but challenging the prevailing misconceptions of the financial world with respect to low-rated debt and moving capital into the hands of a new order of manager-owners. But when all is said and done, the real glue was probably the money. Milken had made his key people fortunes that made the incomes of the investment bankers at Drexel—or at any firm on Wall Street—seem penurious. And this was true despite the fact that incomes for Wall Street's investment bankers were skyrocketing. In 1983 the top earners in Drexel's corporate-finance department were making over a half-million dollars—and that was roughly double what they had made the year before.

By this time, the discrepancy in income between the bankers in New York and the Milken group had spawned internecine rivalries. Many of the bankers envied the gold mine in Beverly Hills, while Milken's group—at their desks at 5:15
A.M
., under their master's lash—disdained the bankers as lazy. Indeed, it became customary for bankers arriving at their New York offices at 7:30 or 8
A.M
. to find that Milken had already called; they would return his call, and start the day with a Milken harangue. As one former member of the Milken group remarked, voicing the common West Coast bias, “The corporate-finance guys in New York are yentas—they have nothing to do but sit and talk all day.”

And much of that talk, he believed, consisted of speculation about just how much lucre was being amassed in Beverly Hills. “They didn't know how much we were making, but they suspected. Even within our group, no one knew what anybody else was making.”

I
T WAS NOT
only within the Drexel enclave that lives were being transformed by Milken's Midas touch. By 1983, Fred Carr, of First Executive, a life insurance company, and Thomas Spiegel, of Columbia Savings and Loan, were building powerful, fast-growing institutions—each a maverick within its industry, each based upon and thriving with Milken's product.

In the late sixties Fred Carr racked up stellar returns as head of a go-go mutual fund called the Enterprise Fund and then departed in 1969—just months before the fund's collapse. His timing may have saved money and pride, but not his reputation; the Enterprise Fund failure would dog him for years. Then, in 1974, he was hired to run First Executive, a company with about thirty employees, teetering on the verge of bankruptcy. Friends wondered what the lure in a moribund insurance business could be for this shrewd equities analyst.

But “the fact that it had the name ‘insurance business' had nothing to do with Fred's going to First Executive,” declared Naftali Teitelbaum, who worked with Carr for years at that company. “He went there because he would have the opportunity to exercise his concepts in investments unfettered.”

Carr quickly allied himself with an actuarial consultant, Alan Jacobs, who provided Carr with the insurance business expertise that he lacked himself. Over the next twelve years Jacobs would quietly, very much behind-the-scenes, design many of First Executive's innovative insurance products.

In 1975 the company began marketing the single-premium deferred
annuity, or SPDA, in which the buyer made one payment and then collected the payout, tax exempt, a given number of years later. The SPDA and the other annuity products that followed it over the next decade—including structured settlements and guaranteed investment contracts, or gics—were custom-made for Carr's desires, since they brought in large sums of money up front for him to invest. And if Carr could promise a higher return than the next annuity-marketer, he would dominate this burgeoning business. All he needed, then, was a crackerjack investment strategy.

By 1977–78, he had it. He would eschew real estate, common stocks, mortgages, all the traditional investment instruments of the stodgy old insurance giants (many of which would have shown enormous losses, if they had had to mark their portfolios to market, showing their current market value), and he would go into bonds in a big way. Junk bonds. Indeed, according to an associate of Milken, Milken was convinced that one of the many benefits of his moving to L.A. would be his ability to cultivate a relationship with Carr and First Executive.

In 1978, the year that Milken moved to the West Coast, First Executive bought some portion of 66.7 percent of all the public junk issues Drexel offered. In 1979 it bought in 73.3 percent of the issues; in 1980, 86.7 percent; in 1981, 100 percent; in 1982, 92 percent; and in 1983, 100 percent.

In little more than a decade, Carr's investment strategy would turn First Executive from a nearly insolvent company to a pioneer in new-wave insurance products, with assets of $12 billion and a net worth of about $1.3 billion. Not surprisingly, Carr's investment portfolio would be yielding nearly 13 percent, compared to an industry average of 9.9 percent. And by the time First Executive's assets reached that $12 billion mark in late 1986, the amount invested in junk would fluctuate from about $5 billion to $7 billion.

Thomas Spiegel would seem to owe Milken even more than Carr did. Carr at least had a track record replete with highs as well as lows, before his and Milken's needs converged so perfectly. Spiegel, on the other hand, had not distinguished himself before Milken took him in hand.

In the early seventies Spiegel was a salesman in Drexel Burnham's retail department in New York. One Drexel executive recalled that Spiegel excelled as a playboy. “He would be out till four
A.M
., never got in to work until ten-thirty or eleven—then he was
hung over.” Spiegel then tried his hand at real estate, marketing condominiums in Iran for Starrett Corporation. In 1974, Spiegel's father, Abraham Spiegel, bought an ailing thrift in Beverly Hills, Columbia Savings and Loan Association, and in 1977 brought his son Thomas in as its president and chief executive officer. Its net worth was then $3 million. Under Thomas Spiegel's aegis, it continued to flounder.

Of course, Columbia was not the only thrift in trouble. By 1980–81 a large majority of the nation's three thousand S&Ls were caught with the same devastating mismatches that Columbia was: it had made long-term, fixed-rate mortgage loans, with funds provided by passbook and other short-term savings accounts. Those mortgage loans had been made at rates like 4 and 5 percent. And when interest rates in 1980–81 spiraled to 15 percent, thrifts had to compete with the new money-market mutual funds and thus were forced to shift from passbook accounts to certificates of deposit with adjustable rates.

Deregulation, in an effort to aid the failing thrifts, came with the Garn–St. Germain Depository Institutions Act in 1982. Congress authorized federally chartered thrifts to make commercial loans and invest in corporate-debt securities as well as other assets. Some state legislatures then passed similar bills, affecting state-chartered thrifts.

Thus, Congress provided Milken with a brand-new pool of capital to tap: the nearly $1 trillion in portfolios of savings and loans. While federally chartered thrifts would have ceilings (not more than 10 percent of their assets) on their junk investments, some state-chartered thrifts—including California's—would have virtual investment autonomy. And thrifts, moreover, make great investment vehicles because they have enormous built-in leverage: they can take in $100 of deposits for every $3 of equity or subordinated debt.

Spiegel's new strategy was to achieve a high yield from his investments (moving from a mortgage-loan portfolio to junk bonds) and to cure the mismatch of the maturities of his assets and his liabilities. To this end, over the next several years Columbia floated several billion dollars' worth of intermediate and long-term, non-withdrawable certificates of deposit, sold through a retail distribution network by stockbrokers nationwide. The average maturity of Columbia's liabilities increased from 3.6 months at December 1982
to 2.9 years at March 1986. So now Spiegel had capital he could rely on, that couldn't be withdrawn overnight. He then invested a substantial portion of those deposits in junk bonds, locking in an enormous spread.

In December 1981, Columbia had $373 million in assets; by year-end 1986, it would have roughly $10 billion—with at least 26 percent of its total assets invested in junk.

One former Columbia employee recalled that Spiegel bought his first junk bond for Columbia in 1982 and quickly began investing hundreds of millions in them. “But Tom was a newcomer to this market. It was all Mike—there was no research staff at Columbia, no documentation, everything was in two file cabinets.”

By 1986, Columbia would have a full research staff working on its junk investments. Spiegel, now a hard-working executive, would point to that staff and claim that Columbia made its own investment decisions, independent of Milken. He would, however, tell
Business Week,
“Mike has really been the major influence in expanding my business perspective.” He would have expanded, too, from junk to include major investments in mortgage-backed securities, and also equities in a risk arbitrage operation.

Spiegel's high-risk investment practices would earn him the displeasure of the Federal Home Loan Bank Board. Thrifts theoretically exist to finance the housing industry. And Spiegel was playing the junk game with federally insured funds. The Bank Board would conduct a review of thrifts' investments in junk, considering setting a ceiling on those investments for Spiegel and all other state-chartered institutions, but by the end of 1987 it had taken no action. At the insistence of that agency, Spiegel's 1985 compensation would be reduced from nearly $9 million to $5.1 million—which still made him the thrift industry's highest-paid executive.

Spiegel was no favorite of the government, but he had—with Milken's product and guidance—created one of the most profitable and best-capitalized thrifts in the country. By the end of 1986, while Columbia's profits continued to grow, nearly one of every four federally insured savings and loans had lost money for the year, and their losses had more than doubled from 1985.

In speeches Milken gave in 1986, he took pleasure in alluding to these successful upstarts, First Executive and Columbia, which had flouted conventional industry practices. Milken was the proud progenitor of both institutions. And his relationships with them continued to be incestuously close as they came of age. He sold
them the junk bonds that were the engine of their phenomenal growth. He raised capital for them. And he was their substantial shareholder. According to one former member of Milken's group, Milken and some group members provided Carr with much-needed capital by buying his stock and warrants when he was starting to build First Executive. By the end of 1981, Milken and a Drexel group owned 50 percent of First Executive's reinsurance subsidiary, later renamed First Stratford. By December 1984, Milken—through his children's trusts, in a purchase of securities for which the only named individual was his lawyer Richard Sandler, as trustee for those trusts—would own 9.9 percent of Columbia's stock. Also in December 1984, the Drexel Burnham Lambert Group would control 10.3 percent of Columbia. In effect, then, Milken and Drexel would control over 20 percent of the institution.