The Predators’ Ball (55 page)

There was a sort of truth to this. The 95 percent figure is somewhat obfuscating. Drexel's reasoning went this way: There are
about 23,000 companies in the United States with sales over $25 million. Only 800 of them, however, qualify for investment-grade ratings. Therefore, that leaves some 22,000—or 95 percent—that are in the junk bailiwick. The problem with this arithmetic is that the vast majority of those 22,000 companies have not applied for ratings and have not issued junk bonds. From 1977 to 1986, about 1,200 companies, not 22,000, became issuers, of over $114 billion of junk bonds.

The job-formation claim suffered from a similar vulnerability. In the last three years, Drexel stated in 1987, America's largest companies have been cutting their work force; they have decreased employment by 4 percent. Junk issuers, however, have expanded employment by over 24 percent. What was left unsaid was the fact that the employment rolls at some of those large companies had been cut after defensive restructurings—undertaken to fend off Drexel-backed bidders.

Sometimes Drexel attacked the problem head on, as in ads stating that a prevalent “misconception” is that junk bonds are “responsible for the recent proliferation of hostile takeover activity.” On the contrary, Drexel asserted, less than 10 percent of successful tender offers (1981–86) were funded by junk bonds. True enough, except that the junk-bond-financed hostile takeover had only two preliminary runs (Mesa-Gulf and Reliance-Disney) prior to 1985. And this statistic also omits, of course, all those raids which threw off hundreds of millions in profits to the bidder, the shareholders and Drexel, which intensified the fever of restructuring through corporate America—but which did not take their targets.

In the last few months of 1987, however, Drexel forsook such didacticism in favor of a softer, more impressionistic approach. One full-page ad in
The Wall Street Journal
featured a photograph of a group of workers at an Arkansas steel plant, where Drexel claimed to have saved jobs through its financing for the plant's parent company, Quanex; another showed a picture of a couple (the wife pregnant) and their toddler in front of a house under construction, being built by Hovnanian—a company which, without its access to junk bonds, would not have been able to “provide 50,000 people with a living room and 20,000 people with a living.”

Drexel also took its campaign to television, spending some $4 million. In late '87 two 60-second commercials, in the same soft, sentimental vein as the recent print ads, appeared. One of them
featured an energy plant in Vidalia, Louisiana, whose construction was financed by Drexel's junk bonds—with a resultant reduction in unemployment in Vidalia by over 20 percent. Before the plant was built, the commercial stated, over 16 percent of the residents of Vidalia had been unemployed. Among the problems here, as pointed out in an article by
Wall Street Journal
reporter Laurie Cohen, was that the commercial was not shot in Vidalia; that unemployment statistics for Vidalia, as distinguished from the surrounding parish, do not exist; that a Louisiana Department of Labor official stated he disagreed with the claim that the plant had helped to reduce unemployment by 20 percent; and that moreover most of the people who worked at the plant didn't live in Vidalia.

In its eagerness to alter its image radically—from the host of decadence at the Predators' Ball, the raiders' money machine, the firm that in 1985–86 gave new meaning to greed on Wall Street, to a wholesome, civic-minded provider of capital (and thereby jobs) to this nation's little people—Drexel was fudging facts. The problem, however, was not so much these specific obfuscations as the overall image.

Drexel
had
provided financing for growth to small and medium-sized companies which would have had trouble finding capital elsewhere. It
had
built a thriving market of this original-issue debt where none had existed before. It could reasonably sustain the claim made in its '87 ad campaign that it had furthered the “democratization of capital.”

But if Drexel had limited itself to that initial source of supply—never financing the buyouts, or the leveraged acquisitions of 1985–86—it would have remained one of the second-class citizens of Wall Street, highly profitable, because of those 3–4 percent spreads, but barely noticed by the premier firms and their clients. It would have been an outsider in the M&A world, instead of its hot center. Without that new supply source, the junk market—the best barometer of Drexel's influence—would never have increased in size so quickly. In 1981, before Drexel had started issuing junk for LBOs, the new-issue market was $1.3 billion. In 1986—a year when the new-issue market increased by 52 percent—it was $32.4 billion (not including private placements). And all junk debt outstanding was approximately $125 billion.

While Drexel was striving to expunge from history its period of triumph and sovereignty, it was not disowning the King. It is true
that in the early months of the investigation, when Drexel employees feared that indictments and perhaps the firm's collapse were imminent, there had been some sentiment in New York that Milken and his troops should be cut adrift. But as time passed without indictments, hope grew that the government was having difficulty making its case, and solidarity took hold.

As one Drexel employee claimed in the summer of 1987, when hope was probably at its high point, “The government is right in principle, and maybe in fact, but they won't be able to prove it. No one is going to tell on Mike—who didn't take bags of money like Marty [Siegel, who took satchels filled with money from Boesky in return for inside information], but broke the securities laws. And who made them very rich.”

Issues that had been sore points within Drexel prior to Boesky Day—such as Milken's flouting the decisions of the UAC—now were put aside in favor of a united front. The “Troubled Deals” list seemed to have evaporated. In a
New York Times
article by James Sterngold in November 1987, Joseph insisted that Milken had lost arguments before the UAC. Joseph was supported in this claim by other, unnamed Drexel executives, who said that Milken had pushed hard to do an underwriting for Rooney, Pace, for example, and that that deal nonetheless had been rejected. True enough—except that that was the deal, listing Rooney, Pace itself as the underwriter, which was then placed by Milken. (The judgment of the UAC was vindicated, moreover, inasmuch as within one year of that offering Rooney, Pace was all but broke and it had defaulted on the second interest payment on the bonds.)

In its now fully engaged struggle for survival, an attitude had evolved at Drexel which might win the day—or at least mitigate defeat—if successfully imparted by its defense lawyers to a jury. It could be summed up with this statement: a 13D violation isn't murder. Translated into strategy, it meant attempting to fragment any pattern of conduct, isolating its particulars—an alleged 13D violation here, a claimed parking violation there—and then minimizing their significance.

Indeed, if seen separately, Milken's actions could be effectively trivialized. Assume, for the moment, that the following were true: the “mass distribution” of privately placed bonds; Milken's buying bonds and alerting favored customers (such as Tom Spiegel, Fred Carr and Jay Regan) to do so before an announcement of an exchange
offer, such as in the Caesars World issue; the failure to disclose (except to some favored investors, who may then have bought the stock) that the Pantry Pride “blind pool” was actually intended for the acquisition of Revlon; an undisclosed arrangement with Boesky in Fischbach; and an undisclosed arrangement with Saul Steinberg in Wickes.

Any one of the above, by itself, might seem an offense which, if proven, could be plea-bargained away without severe sanction. But seen in concert—and in concert is how they must be seen if any true sense of Milken's machine is to be grasped—these individual acts take on different dimensions. Their gravity becomes inescapable. Indeed, it seems plain to this writer that if the above or some similar assortment of Milken's and, by extension, Drexel's actions are not worth prosecuting, then the securities laws were not worth passing. Assuming these actions occurred, it is difficult for this writer to imagine a manipulation of the securities markets that is more broad, more powerful or more frightening.

What Drexel could be banking on, of course, was that the fully integrated, multidimensional picture would remain forever shrouded in Milken's legendary secrecy, and that those bits and pieces that did emerge could be kept separate and trivialized. As 1987 drew to a close, however, despite the firm's united, defiant front, the hope of the summer that indictments might not come had ebbed away. Morale, again, was sagging. Reserves of at least $500 million had been set aside in expectation of a civil fine that the firm would have to pay, according to several sources close to Drexel. And the future of Drexel as envisioned by some had begun to bear a grim resemblance to its distant past. “Drexel is dead,” commented one banker in the firm. “Not in the short term, and I don't mean literally dead—but Drexel as we have known it is gone. Even if we win at trial, our reputation, already so tarnished, will be so much more tarnished that it will hardly matter. We won't be doing the big deals anymore. We won't be making the same money. And the good people, little by little, will leave—because if you're not going to make that kind of money anymore, why not at least be at a firm with a good reputation, where you can be involved in big deals?”

Asked whether Joseph shared this view—that Drexel would now fall back to the point from which its meteoric rise had started a decade ago—this banker shook his head. “Fred is still fighting,” he said.

And Milken was in the vanguard of that fight. By the summer of '87, officials at Drexel had apparently decided that as a countervailing weight to Milken's violations on the scales of justice there should be Milken himself. He had long been the firm's single greatest asset. He had briefly been perceived as its single greatest liability. But wasn't he still the best thing Drexel had? Shouldn't they play from their strength, however flawed? Lawyers for Drexel started referring to him as a “national treasure.”

Before the start of the government investigation, some of Milken's admirers had spoken wistfully of harnessing his energy to the federal government. They pictured him, for example, as the Secretary of the Treasury—his obsession with increasing his fortune and his influence over corporate destinies in this country replaced by an obsession with the budget deficit, the trade deficit, Latin-American debt. The idea of Milken in the Cabinet would remain sheer fantasy, but Milken's lawyers needed to convince the government that he was a human being so visionary, and so willing to serve in a private capacity, that he was simply not expendable.

At about the same time that his lawyers began referring to Milken as a “national treasure,” Milken had let it be known that he would be devoting up to 25 percent of his time to the Latin-American debt crisis. He made trips to Mexico to discuss international debt with President Miguel de la Madrid. This was not a new project at Drexel—a Latin-American debt team from Citibank, headed by Gerald Finneran, had been hired in 1985—but it was certainly being given new emphasis.

In October '87, Drexel announced that the DBL Americas Development Association had been capitalized with $170 million of equity, raised from forty U.S. corporations. Its aim was to invest principally in equity and convertible debt securities of Latin-American businesses; it might also purchase debt securities and use them in debt-for-debt or debt-for-equity swaps. If Drexel possessed any original solution to the crisis, however, it was being kept under wraps; and $170 million would hardly make a substantial dent in a $600 billion problem. Skeptics referred to this as Milken's missionary work.

Milken also made his press debut. Under carefully controlled conditions (he would not discuss the investigation, and he would have the right to approve the use of any quotes, in context), he met with a handful of journalists. That he did so at all served to under
score his plight. He had always distrusted the press—it was inimical to his penchant for secrecy, and outside of his control. Happily for him, considering that distrust, he had not needed it for his business. As he used to say to Steve Wynn, “You can't make a dime off publicity.”

In the early days, his investors had been glad that Milken and his arcane bonds kept a low profile—the better for the spread. Once Drexel entered the spotlight as the backer of the junk-bond takeover and needed a spokesman, Fred Joseph had assumed the role. But now the mystique that had long surrounded the cloistered Milken was suggestive of secret, illicit dealings. He had to come into the light. Moreover, it was hoped that as a “national treasure” personally revealed for the first time, Milken might be Drexel's hidden ace.

That was unlikely. Years of reclusiveness coupled with Milken's extraordinary feats had engendered a legend that was larger than the man. He had been widely portrayed as a profoundly enigmatic and mesmerizing figure who caused even nonbelievers to fall under his spell. In a long interview and subsequent conversations with this reporter in late '87, however, Milken was deeply knowledgeable about his twenty-year obsession but not spellbinding, and more transparent than enigmatic. If Drexel officials were hoping for magic as Milken went public, he would disappoint them.

Milken speaks often about the importance of remembering one's roots. He certainly has done so. He married his high-school sweetheart. He left New York for California when it was unthinkable that someone who aspired to success on Wall Street should do so. He moved back to his old neighborhood in the unfashionable San Fernando Valley, where he remained after accumulating his hundreds of millions of dollars. He brought his brother and high-school friends into his group. Unlike some powerful individuals who assiduously remold themselves in the course of their ascent, Milken made no such effort.