by Connie Bruck
He bought a house in Encino in the San Fernando Valley, near where he and his wife had grown up. Encino is a pleasant, well-to-do California suburb, but it has none of the palatial sweep of Beverly Hills or Bel Air. Milken, however, has no taste for such splendors. In Encino he was surrounded by family. When he arrived, his parents (his father has since died) lived nearby in a modest California ranch house, as did his brother, Lowell (in a larger one). His cousin Stanley Zax had just become chairman and president of the Zenith National Insurance Company, and the large Zenith building (with a Drexel retail branch on the first floor) was a half block from Milken’s parents’ home.
The nucleus of Encino is Gelson’s, the superfancy supermarket where Milken would often go on a Saturday morning, accompanied by a flock of his children and their friends from the neighborhood. These were not stolen, unproductive moments. Milken enjoyed doing this because he was interested in the business of Gelson’s and liked to see how things were priced and displayed. He likes children, generally feeling more comfortable with them than with adults, but their presence too had purpose: they would pick out their favorite products, and then Milken knew what was hot. “For Michael, there are no chores. Everything is a learning experience,” said Harry Horowitz, his friend since boyhood.
As homey a tableau as this makes, the house the Milkens chose was not without a certain cachet. It had been the guest house on the Clark Gable and Carole Lombard estate. When Gable died, in the midseventies, the land had been divided into numerous, relatively small lots, so, while some of the homes that were built there are large and ornate, most of them are close together. The overall impression of the area, now known as the Clark Gable Estates (with street names like Tara and Ashley from Gone With the Wind) is of an extremely upscale, nouveau-riche development.
The Milkens’ home, however, is different. Secluded, at the top of an uphill driveway, it is only partially visible from the street: a deep-blue multilevel shingle house with enormous stone chimneys. While it does not seem very large from the front, it opens up into large, airy spaces. “Mike paid $750,000 for it in 1978, and I remember we were all agog,” says one member of Drexel’s corporate-finance department.
Within several months of Milken’s move, his brother, Lowell, two years his junior, left the prestigious, hard-driving Los Angeles law firm of Irell and Manella where he was an associate to join Milken at Drexel. Lowell Milken, who graduated summa cum laude from UC Berkeley and then graduated from UCLA Law School, where he was the editor of the law review, had been a highly regarded fourth-year associate at Irell, clearly destined to make partner. But with his brother, at Drexel, he could utilize all he had learned at Irell and Manella and do much more.
Michael Milken had been investing for his brother as well as for himself for years, and by this time the Milken assets were probably between $25 million and $50 million. Lowell Milken came in to manage those assets; as those of Milken’s high-yield group grew, he would manage those as well. At Irell he had done tax work for small entrepreneurs; now he set about constructing tax shelters for his, his brother’s and the group’s incomes. Movies, including those produced by Dino De Laurentiis, became a favorite shelter. According to two former Drexel partners, they believed that these shelters were so effective that Michael Milken paid relatively little in taxes.
During the next several years, Lowell Milken would form a company at Drexel named Cambrent Financial Group, which would function as a service arm for the Milkens and the high-yield group and employ a handful of lawyers. Lowell Milken would draw on his Irell and Manella connections for talent, hiring two of the firm’s outstanding lawyers, Edward Victor and Craig Cogut. Richard Sandler, who had been Lowell’s close friend when they were growing up and had attended UC Berkeley and UCLA Law School with him, also joined and functioned as Michael Milken’s personal attorney. Cambrent would be located at Drexel—adjacent to Milken’s trading floor, in fact. But it would have no relationship to Drexel. And its very existence would underline the utter separatism of the Milken operation.
Lowell Milken was the technician with the green eyeshade, the administrator of the empire. But he would also be his brother’s closest adviser and probably his sole confidant. His office was shouting distance from Michael Milken’s desk in the center of the trading floor. Friends of both say that Michael trusted his brother to do the equity analysis that he did not have time to do himself. While Michael was a creative fount of ideas, in perpetual intellectual motion, Lowell distilled, rejected, organized, and attended to the legalities. He was a fail-safe mechanism for Michael. Michael made no important decision without consulting his brother.
Other functions of Lowell’s are less touted. Shorter than Michael, also sporting a toupee, Lowell was so abrasive that he would soon make Michael—notorious for driving his people by insult—look almost beneficent. The two did an effective good-guy/bad-guy routine. Michael would say, in response to a request from a group member, that it was fine with him, just check with Lowell; and then Lowell, his rage triggered at its mention, would summarily reject it. Lowell came to be regarded within the firm as Michael’s hatchet man and would be feared and disliked by some in Milken’s group. He shared his brother’s obsession with control, and it seemed to lapse over into his personal life as well; Lowell’s wife was said by employees at Drexel to wear a beeper. But however much animus existed between group members and Lowell, no one could come between the two brothers.
Michael Milken’s power did not go to his head in a way that impaired him as a salesman. Not long after he arrived in L.A. he called James Caywood, who had just arrived in Houston to run a high-yield-bond fund named American General Capital Management.
“Mike said, ‘I hear you’re the new high-yield manager,’ ” Caywood recalled. “ ‘I’m Mike Milken. Why don’t you get on a plane, come out here, we’ll spend some time and talk about the high-yield market?’
“I said, ‘Mike, I’ve been in this business ten years as a salesman. I know it’s customary for the salesman to come to see the customer.’
“He said, ‘You know, you’re right.’ And he walked in the door one day later,” Caywood added.
Milken arrived carrying under his arms two enormous files, like carousel cases, each weighing about thirty pounds. “He said, ‘Every bond you want to talk about is either in here’ (pointing to the files) ‘or in here’ (pointing to his head). There were about 150–175 issues—however many, he could tell you the name of the chairman’s cat. He cut the wheat from the chaff—‘This is what’s good about these guys, this is what’s bad.’ ”
Caywood thought that Milken had to be the world’s best bond salesman. He had an almost unbelievable memory for prices that bonds had traded at years earlier. Caywood also thought Milken was a workaholic, and told him so. “Mike got sort of insulted. He said, ‘I don’t think I should be criticized for working hard. Some people like to play basketball. Some like to play golf. I like to work hard.’ ”
That night, after Milken and Caywood had dinner, Milken boarded a plane for Los Angeles at eleven o’clock Houston time. Caywood estimated that Milken would have arrived at his home in the San Fernando Valley about four hours later. “When I got to work the next morning—it was five A.M. California time—Mike had already called. The man is a machine.”
By late 1978, demand was outpacing supply in the junk market. There were eleven high-yield mutual funds. At American General, Caywood had $150 million to invest and was receiving $1–2 million more a day. Like other high-yield funds, American General promised clients large monthly dividends—“so even if the bonds didn’t make sense to buy,” Caywood said, “you had to buy them.”
Offerings, moreover, tended to be small. “You were lucky to get ten percent of a twenty-five-million-dollar offering,” Caywood declared. “So that was two and a half million. Hell, I was getting in two and a half million a day.”
Whatever the investment demands of Caywood and other portfolio managers of these funds, which generally had
$50–150 million, they were dwarfed by David Solomon’s at FIFI. By the end of 1978, Solomon had $400–500 million. Solomon, therefore, could not afford to be choosy, and he opted of necessity for a bottom-fishing approach, buying up the dicey bonds, the junkiest of the junk.
Less than two years after Drexel had issued its first junk-bond offering for Texas International Company, then, a market with well over $2 billion in new issues had been created. Companies were lining up to issue the bonds. Buyers were clamoring for them. And Milken, with his core group holed up in Century City, was the undisputed patriarch of this new universe.
Years later, junk buyers who met him then would recall the fervor of Milken’s pitch. “He didn’t just say, he preached,” one buyer recalled. “He was like a messiah, preaching the gospel. He had this total singlemindedness of purpose.”
“If my purpose was to try to help people, maybe I was singleminded,” Milken responded, in an interview in 1987. “The marketplace was willing to invest in long-term, fixed-income securities of non-investment-grade companies. I felt it was our responsibility, in terms of making a contribution to both parties, the companies and the investors.
“To me,” Milken continued, “it was a form of discrimination—to discriminate against the management and employees of a company which offered value-added products and services, all because he didn’t get a certain rating. It seemed grossly unfair. So I would not have been true to myself if I didn’t use the tools I had, to try and raise capital for these people.
“If you say to me, ‘What characterizes Drexel?’ ” Milken concluded, “it’s a commitment to helping people—being there when they need you.”
What Milken had formed went far beyond his inspired salesmanship. One buyer who accepted his invitation to come out to see him in Century City in January 1979 was Howard Marks, who had managed money at Citibank for pension clients and was about to start managing a high-yield mutual fund there. Later Marks moved to L.A. to join Trust Company of the West, where by the mideighties he would be investing a portfolio of about $2 billion in junk bonds.
After his visit, Marks thought that Milken’s operation would make a great case study for Harvard Business School. He was struck by the completeness, the circularity, what he calls the “yin/yang” of Milken’s creation. As Marks recalled, “He had the issuers. He had the buyers. He had the most trading capital of any firm. He had the knowhow. He had the best incentive system for his people. He had the history of data—he knew the companies, he knew their trading prices, probably their daily trading prices going back at least to 1971. He had boxed the compass.”
It was, indeed, all in place. A springboard moment. And now Milken was about to add a new dimension to his fabulous farrago. For the past ten years he had been building his following, earning their fealty. With his extraordinary acumen and Tubby Burnham’s capital, he had been able to line the coffers of already wealthy men like Lindner, Riklis, Steinberg and Tisch. Others, less successful when Milken found them, owed him more. He had transformed David Solomon of First Investors into a star portfolio manager. And, through his trading partnerships, he had transformed his key people from nonachievers into millionaires, binding them to him with their newfound, albeit largely untouchable wealth.
As Milken’s universe expanded from trading to incorporate the original issuance of junk, however, the bounty that was his to distribute increased exponentially. Now he had a product which would not simply allow some wealthy investors to make a killing (buying for the upside) but could transform a dissolute financial institution into a powerhouse. And he had pools of capital that could be tapped to transform small-time entrepreneurs into major, and ever grateful, corporate players. There were many who would profit from Milken’s new, expanded abracadabra powers—and who would jump to do his bidding. As the first of them, Stephen Wynn, would say to Forbes magazine years later, about Drexel, “They made me.”
SHORTLY AFTER Milken arrived in Century City, Steve Wynn came to see him. Five years earlier, Wynn had taken control of a foundering, third-rate casino in downtown Las Vegas, the Golden Nugget. He had added a hotel to the gambling operation. Golden Nugget’s pretax profits had been $1.1 million the year before Wynn assumed control; by the end of 1978 they were $7.7 million. But the Golden Nugget was still a sleazy joint, and Wynn had bigger ambitions.
He had spent Memorial Day weekend in Atlantic City, where he visited the newly opened Resorts International. The crowds, in lines dozens deep for the slot machines and the gaming tables, had stunned him; he had never witnessed such raw, pent-up demand. Wynn had decided that Atlantic City was the future and he was going to get a piece of it. All he had to do was raise $100 million to build a Golden Nugget there.
“One hundred million, for a company which had a ten-million net worth and three million in income! It was ridiculous!” Wynn exclaimed in an interview in 1986.
Wynn’s close friend was Stanley Zax, the chairman of the Zenith National Insurance Company. “Zax knew I was dealing with a small broker,” Wynn recalls. “He said, ‘Get your ass on a plane and meet me at 1901 Avenue of the Stars, the thirteenth floor, and I will introduce you to the only guy who can do this—my cousin.’
“I got there and Stan introduced me to this young kid, thirty-two, wearing jeans, a plaid sports shirt and black loafers. Stan told him he’d known me for ten years and that I was good at my business.
“I told Mike about Atlantic City. He asked me brief, terse questions. He asked for annual reports of Golden Nugget. Asked where I’d gone to school (I’d gone to Wharton).
“He said, ‘I’m in the bond department, I don’t bring in clients, that’s the job of corporate finance. On the other hand, I usually can persuade them to look at things my way.’ (I didn’t realize how humorous that was).
“ ‘I’ll tell you what I’m going to do. You think you need a hundred million. I think you need a hundred twenty-five million. I don’t like people to be underfinanced. I’m going to do your deal. The firm has turned down Harrad’s, Bally’s and Caesar’s—they don’t want the gaming industry, don’t want the association. I don’t think they should have turned down Harrad’s.
“ ‘Get in that plane and go to see Fred Joseph in New York. Be there at eight A.M. Monday. Joseph will go and try to convince Tubby Burnham and Bobby Linton [who had become president of the firm, succeeding Mark Kaplan]. Wear a regular suit. Do you have shoes with laces?’ ” Wynn shook his head. “ ‘Well, dress conservatively.’ ”
Linton was nervous, but Burnham finally overruled him and decided in favor of it. There were good reasons to take the gamble. Wynn had a track record. He had his own money in, something which carried a lot of weight at Drexel; nearly his entire net worth, about $2 million, was in Golden Nugget. Moreover, the gaming industry was essentially without investment-banking services because no other firm wanted the taint and gaming was not considered a growth industry at the time; if Drexel could overcome its queasiness, it could probably have the whole industry. And besides—Milken wanted it.
Over the next two years, Drexel raised not $125 million but $160 million for Wynn’s idea. The capital came largely from mortgage debt, with some subordinated debt and small equity offerings—so Wynn’s ownership stake, roughly 20 percent, was barely diluted. And six years later Wynn’s $2 million stake would be worth about $75 million and he would sell the Atlantic City casino for $440 million. It would turn out to be, as one corporate-finance professional who worked on the deal says, a “grand-slam home run.”
“I was the first [investment-banking] client that Mike brought in,” said Wynn proudly. “He saw it. He saw that Drexel could get control of the whole gaming industry. And they did.”
But in the beginning Milken had raised $160 million for something that was little more than a gleam in Steve Wynn’s eye. One buyer, James Caywood, recalled that as hungry as he was for junk at that time, investing in the Golden Nugget bonds had required a leap of faith. “It was a dream. The balance sheet was nonexistent. Those of us
that bought were doing nothing but betting on, number one, Drexel, and, number two, Steve Wynn,” said Caywood.
Wynn concurred. “We symbolized, in terms of timing and our essential posture, the archtruth of Drexel’s philosophy. There we were, wanting more money than anyone could argue we had a right to. It was venture capital, masquerading as debt finance,” he concluded, capturing the essence of Milken’s operation.
Even with the enormous demand in the junk market in 1979, it took almost two years to raise that $160 million. Wynn crisscrossed the country, visiting scores of mutual funds and other institutions. In one fourteen-day period he did road shows in twenty-five cities. “Mike told me at the start that I’d have to sell them hard,” Wynn recalled. “He said, ‘Tell your story. If your deal works, and it will, inside of five years you’ll be able to do five hundred million over the phone.’ ”
And that, Wynn added, was exactly what had happened. Over the next six years, Drexel raised about $1 billion for him. He had never had to do another road show. He had never had to wait for the authorization of Burnham, or of anyone else at the firm. “If I want two hundred fifty million dollars, I just call Mike. Done. In one issue, Mike took forty million himself. Personally.”
Though the intense Milken and the flamboyant Wynn (now known through his television commercials, in which he features himself with Frank Sinatra, Dolly Parton and other stars) would seem to make an odd duo, the friendship had purpose. Wynn would be useful to Milken as an entertainment arm, providing stars as entertainers at the Predators’ Ball. He would be a business-getter, bringing to Milken clients such as Circus Circus and Lorimar. And, through Golden Nugget and also his personal portfolio, Wynn would become a major investor in other Drexel deals, including the hostile megadeals. Briefly he would become a principal in the hostile game, making a bid in 1985 for Hilton Hotels for $1.8 billion, which he then dropped.
