Payback: The Conspiracy to Destroy Michael Milken and His Financial Revolution. - book review

Public Interest, Summer, 1996 by Jay P. Lefkowitz

In Payback: The Conspiracy to Destroy Michael Milken and his Financial Revolution,(*) Daniel Fischel sets out to refute one of the most popular myths of the Reagan era: that Milken, the media's poster boy for the "decade of greed," was a crook who used "junk bonds" to help unscrupulous financiers plunder corporate America and bankrupt the savings and loan industry. According to Fischel, Milken was victimized by three groups with complementary agendas: politically ambitious government prosecutors, old-line establishment bankers, and congressional regulators of the banking industry. And all of their efforts were supported by the popular press, which seemed to take the position that anyone who made as much money as Milken (more than $500 million in 1987) had to be dishonest. Written with the persuasiveness of a legal brief, Payback is a powerful indictment of the U.S. government for meddling with the marketplace and scapegoating Milken for its own failure to save the savings and loan industry.

Few authors have either the credentials or experience of Fischel to write such a revisionist history. In addition to serving on the law and business faculties of the University of Chicago, Fischel has long been affiliated with an economic consulting firm, Lexecon, Inc., that has been associated with numerous players in the financial and legal battles of the 1980s. He has served as a consultant or advisor to the Department of Justice, the Federal Deposit Insurance Corporation, the Resolution Trust Corporation, the Securities and Exchange Commission, and the Office of Thrift Supervision. And his former clients include Charles Keating, David Paul, and Milken, all of whom served jail time after government prosecutions.

Payback begins with an examination of what Fischel calls the "criminalization of regulatory offenses" and "technical violations" in the financial industry during the late 1980s. Fischel explains how the U.S. government, led by former U.S. Attorney Rudolph Giuliani, now mayor of New York City, garnered numerous indictments, guilty pleas, and convictions of Wall Street professionals, even though in many instances the prosecutors had to bend the law and were unable to define with any particularity what "crimes" these individuals had committed, much less identify any victims.

Giuliani is, in fact, one of the chief villains in Payback, and Fischel believes that he was largely motivated by a desire to use the power of the prosecutor's office to launch a political career, just as Thomas Dewey had done before him. Indeed, Giuliani received public acclaim for securing guilty pleas from Dennis Levine and Ivan Boesky; but he became a political superstar only when he began investigating Milken.

Milken and his upstart investment bank Drexel, Burnham, Lambert were simply too aggressive and too successful to have any friends on Wall Street. In 1975, two years after Milken joined Drexel, the firm earned a grand total of $1.2 million in corporate-finance fees. Eleven years later, Drexel had revenues of over $4 billion and earnings of $545.5 million - far and away the most profitable firm on Wall Street.

The key to Drexel's success was Milken's ability to raise enormous sums of money very quickly and make them available to entrepreneurs interested in buying and selling companies. Milken was in touch with a network of entrepreneurs who scoured the country looking for undervalued companies. Once a company was targeted, Milken would arrange the financing for the purchase of the company by selling high yield bonds, backed either by one of Drexel's clients or by the target company itself. Once the takeover occurred, the new management would begin to sell the company's underproductive assets and, if necessary, use the excess proceeds to retire the debt that was required to finance the transaction. In this way, Milken created vast profits for his network of clients, a fortune for Drexel and himself, and, of course, great wealth for the shareholders in these companies.

One result of Milken's efforts, however, was the displacement of numerous executives at the staid Fortune 500 companies that were "restructured" by Milken's clients. Likewise, the old-line investment bankers, "who avoided involvement with hostile takeovers and leveraged buyouts for fear of offending [their] blue chip corporate clients ... were left on the sidelines." Those bankers became some of the harshest critics of the restructuring revolution. Moreover, hostile takeovers and "merger mania" were easy targets for the media, largely because corporate restructurings - even when they are absolutely essential to corporate productivity and growth - always caused some initial dislocation of workers who can be portrayed as sympathetic "victims" of wealthy and aggressive "raiders."

With public opinion against him, and Giuliani and the government hot on his heals, Milken eventually plead guilty in 1990 to six "technical violations" of the securities laws instead of facing trial, and he was sentenced by federal Judge Kimba Wood to 10 years in prison (though he was released in 1993). But the indignities suffered by Milken went far beyond Wood's courtroom or the California correctional facility where he served his jail sentence. The harshness of the government's prosecution of Milken, in which Milken was described in court documents as being "not unlike the Kingpins of other sophisticated criminal enterprises," combined with the brutal treatment he received from the media ("Barron's compar[ed] Drexel's fall with the defeat of Nazi Germany"), left Milken vulnerable. And in due course, the government, supported by the popular press, decided to pin Milken with the blame for the savings and loan debacle. It is this story that Fischel tells in the second half of Payback.