The meteoric ascent and abrupt downfall of the junk bond king: How Michael Milken transformed $550 million in 1987 into prison time just two years later.

Michael Milken stands as a pivotal figure in the annals of finance, embodying brilliance and controversy in equal measure. From revolutionizing corporate finance to facing imprisonment and later receiving a presidential pardon, his story is one of highs and lows, innovation and recklessness.

The Rise of the Junk Bond King

Born in Encino, California, in 1946, Michael Milken exhibited exceptional academic prowess early in life, attending Birmingham High School alongside actress Sally Field and earning the title of prom king. He graduated with high honors from the University of California, Berkeley, in 1968, later obtaining an MBA from the Wharton School at the University of Pennsylvania, where he developed a keen interest in low-grade corporate bonds.

In 1969, Milken began his career at Drexel Harriman Ripley, which would soon be rebranded as Drexel Burnham Lambert. Tasked with overseeing low-grade bond research—a niche area at the time—Milken swiftly recognized the value of “junk bonds,” which he believed were both undervalued and underutilized. Within a short period, he was generating impressive returns, often exceeding 100 percent annually.

By 1976, Milken’s financial success had skyrocketed to a salary of $5 million, equivalent to about $30 million today, coupled with an additional $5 million bonus, bringing his total earnings to around $60 million that year alone. He established an operational base in Beverly Hills, designing an innovative X-shaped trading desk that became the epicenter of the junk bond market.

The Engine of Financing

Milken’s influence allowed Drexel to issue “highly confident letters,” essentially informal assurances that financing would be secured. This was akin to a bank assuring a seller of a property that they could provide funding for a buyer who lacked the immediate capital. For instance, a $20 million home could be financed with a letter of confidence, enabling subsequent transactions and profit opportunities.

One landmark instance of this financing strategy was the 1988 acquisition of RJR Nabisco, valued at $25 billion, marking the largest leveraged buyout at the time. When Kohlberg Kravis Roberts & Co. (KKR) required substantial capital to secure their bid, Drexel’s promise of funding through a highly confident letter played a critical role, cementing their status in the corporate finance realm.

The Pinnacle of Earnings

Under Milken’s leadership, Drexel flourished, becoming one of the most profitable investment banks in the U.S., largely due to the success of its junk bond division located in Beverly Hills. His earnings during this period were astounding:

• In 1984, he earned approximately $122 million, equivalent to around $370 million today.
• By 1986, his earnings had risen to $296 million, or about $790 million adjusted for today’s inflation.
• In 1987, Milken reached his pinnacle with earnings of $550 million in one year, valued at more than $1.4 billion today.

Milken came to wield significant influence, commanding a network of loyal investors and clients reliant on his capital for their ventures. He was viewed by some as a catalyst for growth, enabling access to financing for startups and acquisitions. However, critics believed his strategies fueled unsustainable market risks, leading to excessive corporate consolidation.

The Collapse

The system that had propelled Milken and Drexel to success eventually faltered. His strategies hinged on leveraging high-interest debt for corporate acquisitions, expecting that companies could swiftly pay down debts through restructuring. However, when defaults began to rise and companies struggled, the financial model unraveled.

The cumulative pressures culminated in the market crash of October 19, 1987, known as Black Monday, when the Dow Jones Industrial Average fell over 22% in a single day. As confidence waned, heavy borrowing caused many companies to falter, triggering widespread defaults and leaving the junk bond market in crisis.

Downfall and Redemption

In March 1989, Milken faced a major legal reckoning, indicted on 98 counts of racketeering and securities fraud. He ultimately pleaded guilty to six felony counts and received a ten-year prison sentence, along with a $600 million fine. Despite serving only 22 months, he emerged with his career and reputation in tatters, banned from the securities industry.

Upon his release in 1993, Milken confronted a new challenge: a diagnosis of advanced prostate cancer. This experience was transformative, prompting him to shift focus from finance to philanthropy. He established the Prostate Cancer Foundation and championed various medical research initiatives while actively contributing to education through ventures like Knowledge Universe and K12 Inc.

Legacy and Impact

In 1998, Milken founded the Milken Institute, a think tank dedicated to economic policy, health, and education. His philanthropy has since expanded significantly, providing substantial contributions to educational and health initiatives, including an $80 million donation that led to Washington University renaming its public health school in Milken’s honor.

In 2020, President Donald Trump granted him a full pardon, allowing Milken to rebuild his legacy. Currently, his net worth stands at approximately $6 billion, after he has donated over $1.5 billion to various causes. While his reputation has seen some revival, opinions about him remain polarized; some view him as a visionary while others see a cautionary tale of ambition and ethical dilemmas.

Michael Milken’s narrative encapsulates the complexities of ambition intersecting with morality, serving as a reminder of the potential consequences when financial ingenuity collides with ethical boundaries.