The World According to Milken

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The World According to Milken

Economic, Charitable Pursuits Driving One-Time Dealmaker

By MARK LACTER

Staff Reporter





These should be uncomfortable times for Michael Milken.

The collapse and ongoing investigation of Enron Corp. represents the biggest financial scandal in over a decade, going back to when Milken pled guilty to securities violations and served almost two years of a 10-year sentence.

The collapse and ongoing investigation of Global Crossing Ltd. also has been awkward because that company’s chairman, Gary Winnick, used to work under Milken at the trading desk of now-defunct Drexel Burnham Lambert. Though Milken has no involvement with Global, news reports about Winnick invariably bring up his Drexel time.

But during a 90-minute interview with the Business Journal, Milken steadfastly avoided any reference to those scandalous days, even as he retraced his role in transforming the financial system during the 1980s the period in which Drexel was at its height.

“It is not a coincidence that in the year that I think was the zenith for access to capital in our country’s history, 1986, Oracle went public and Microsoft went public,” said Milken. “You then had a backlash of regulation and other issues to shut down capital that took six or seven years to play out.”

He dismisses the current accounting controversies, saying that U.S. reporting standards are the best in the world. “I think they’re isolated for the most part,” he said of the alleged financial misdeeds. “Accounting has not changed. GM wrote off $60 billion one year in unfunded pension and medical. I don’t think these issues have ever changed. The issue I would address is common sense.”

Milken described Washington’s Enron-related debate as “this year’s issue. All these things pass because the world goes on and the economy goes on. I don’t believe these stories are dominating people’s lives.”

He only indirectly addressed Global Crossing, by suggesting that overcapacity in the telecommunications industry a primary reason behind that company’s bankruptcy filing should have been recognized much sooner. “You just have to step back and understand that certain things can’t happen,” said Milken, referring to the over-optimistic growth rates promised by telecom firms.

Fiercely protected

Milken rarely talks to the press and when he agrees to be interviewed it’s typically in a controlled setting, such as on “Larry King Live” to discuss his CAP CURE organization that’s dedicated to prostate cancer research.

In advance of the interview with the Business Journal (which co-sponsors Milken’s Global Conference, a three-day economic forum noted for the number of Nobel laureates it brings together), a spokesman said Milken “prefers not to discuss any specific companies.” He also wanted a chance to discuss the conference.

Though he routinely speaks at public events, Milken is fiercely protected from the past. (He told Business Week in 1999 that talking about the old days “would be so time-consuming to deal with. It is better to focus on the future.”) Even connecting him with Winnick gets some of his staff jumpy.

In the 1980s, Milken arguably was the most influential person in American business. He and his Beverly Hills office of Drexel oversaw a revolution in the use of high-risk (or junk) bonds to provide capital for companies considered too risky to receive financing through bank loans or conventional bonds. Milken made his name and fortune by using junk bonds to help finance takeover bids many of them hostile. In 1987, Drexel gave him a bonus of $550 million, prompting David Rockefeller to note that “such an extraordinary income inevitably raises questions as whether there isn’t something unbalanced in the way our financial system is working.”

Around that time, questions began surfacing about Milken’s relationships with corporate raiders like Ivan Boesky and Victor Posner. In 1988, the Securities and Exchange Commission alleged that Milken had conspired to engage in various securities violations involving billions of dollars.

Two years later, he pleaded guilty to six felonies and after serving two years at a minimum-security prison in Pleasanton, was released in 1993. (His own handout carefully notes that the six counts “resulted primarily of violations of regulations that before his case had not been subject to criminal prosecution.”)

Under terms of an earlier consent agreement, he was barred for life from the securities business. Then, in 1998, the SEC accused Milken of violating an earlier consent decree by serving as a paid consultant involving deals with News Corp. He wound up returning half of the consulting fee, or $47 million, but there was no penalty or admission of wrongdoing.

‘He is indefatigable’

Much of Milken’s time has been spent on philanthropy, especially CAP CURE, which he founded around the time he was diagnosed with prostate cancer (now in full remission). He also has established a scholarship program to provide college aid to needy students.

There forever will be whispers that Milken is trying to bankroll his way to redemption; Forbes Magazine puts his net worth at $770 million. But Milken’s 7-day-a-week, 15-hour-a-day schedule goes well beyond writing checks. His schedule and work demands routinely tax the staffs at his various organizations. “He is indefatigable,” says his chief spokesman, Geoffrey Moore.

For much of the interview, conducted at the Milken Institute think tank in Santa Monica, he spoke at length about cancer, education and world economics. Typically, his answers were indirect and loaded with historical references and economic extrapolations.

In discussing health care, for example, he noted that one-tenth of the entire U.S. economy, or roughly $1 trillion, “is related to how a person is eating, exercising or conducting their life. If you solve that problem, you dramatically increase the productivity in the country.”

How does he come up with that number? Moore later explained it this way: the U.S. Surgeon General has estimated that 70 percent of U.S. health care costs stem from preventable diseases. Total healthcare costs are estimated to be 14.5 percent of gross domestic product. Since GDP is $10 trillion, 70 percent of 14.5 percent of $10 trillion is about $1 trillion.

‘Presumption of correctness’

Such numerical sleight of hand is second nature to Milken, even if his assumptions are not always indisputable. Gene Epstein, the longtime economics editor of Barrons, has suggested that Milken stop engaging in “data demagogy, especially since it conjure(s) up certain P.T. Barnumlike qualities.”

The best example is Milken’s claim that it’s worth $47 trillion to the U.S. economy to cure cancer a headline-catching proposition that instills currency to his research efforts. But the number is based on a huge assumption that, in economic terms, each human life is worth $5 million, a number designated by two University of Chicago economists and based on additional assumptions that might or might not be valid.

It’s a classic technique used by Milken what one former colleague called a “presumption of correctness” that traces back to his days at Drexel.

That said, Milken’s instincts about the economy have proven more reliable than the conventional wisdom last fall about a serious recession. In early November he told CNBC that “the economy is going to do better than most people think.” Reminded of that comment, he said: “The world is amazingly resilient. If you had elected to invest in firms involved with security or technology, testing, sampling, imaging, you haven’t seen a boom market like this. So there’s no recession. These are boom times for those areas,” he said.

Wearing a blue blazer and blue turtleneck shirt, Milken was frequently reflective during the interview, but again, on his own terms. He recalled the morning of Sept. 11 when he was in New York and impulsively postponed a speech he was to give across the street from the World Trade Center and then thought about his son, who lives downtown. “It’s impossible to forget that experience,” he said. “But it’s impossible to forget the experience of the day you were told you had cancer.”

He gets choked up at personal moments, such as the 1968 film version of “Romeo and Juliet,” which came out around the time he became engaged to his wife of 34 years, Lori. “All I have to do is hear the soundtrack from that (director Franco) Zeffirelli film and I start crying and thinking that that’s me and my wife,” he said.

Much of that reflection, say friends and associates, stems from his 1993 diagnosis of prostate cancer. Cancer, in fact, is a central component in Milken’s life. The interview began with him noting that several family members of his staff had been recently diagnosed with the disease. “You know, it’s life,” he said. “You just never know what a person has gone through when you interact with them.”

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