Michael Milken's $5 Billion Failure
Good morning, everyone.
This week’s newsletter includes: Mike Milken’s trip to the White House with Howard Marks and Dick Cheney, and Jon Gray’s unbelievable $18 Billion turnaround at Blackstone.
How To Be Anti-Consensus
In 1985, Michael Milken ruled Wall Street - but when Congress tried to kill junk bonds, he approached two unlikely allies for help...
By the mid-1980s, Michael Milken had transformed finance.
From a cramped back office at finance giant Drexel, he created the junk bond market - a way for overlooked entrepreneurs and small businesses to raise billions without relying on Wall Street’s old guard.
The results were staggering.
Entire industries - from airlines to cable TV - were funded through junk bonds. Millions of new jobs were created.
But some politicians hated it.
In 1985, Congress branded junk bonds a “scourge”. Laws were drafted that would wipe out Milken’s entire invention overnight.
So, he went to war…
Michael turned to an unlikely ally: a young Howard Marks, his colleague at Drexel who would later go on to found the world famous investment manager Oaktree Capital.
Together, the pair flew to Washington DC to argue their case.
Escorting them through the hallways of power was another future leader. A little-known Congressman who believed in the power of junk bonds called Dick Cheney.
The battle was relentless.
Michael, Howard and Dick went office by office, arguing that without junk bonds small businesses would die.
Michael recalled his conversation with a North Dakota congressman:
Michael: “Are you sure this is what you want? You’re banning access to capital for every company in your state.”
Congressman: “The citizens of North Dakota are willing to sacrifice to stop the scourge of junk bonds in America...”
The trio were stunned. Congress was willing to nuke their own citizens job prospects in order to kill junk bonds. In California, politicians went further - banning powerful pension funds from buying junk bonds altogether to “protect retirees.”
But the opposite happened...
Investors who snapped up those junk bonds made $5 billion in profits, while local job creation in California collapsed.
By 1992, the bans were finally reversed. Both politicians lost their elections and Michael’s invention survived. By his calculation, in the final 30 years of the 20th century, companies funded by junk bonds created 62 million jobs in the United States.
Reflecting on the battle for junk bond survival, Mike said:
“The most important thing we did was democratize capital. We wanted to give people a chance.”
Recommendation’s
To understand exactly what junk bonds are and why they changed the world, watch this 2-min clip of Mike alongside David Rubenstein.
For the full Milken experience, check out this recent 1-hour interview on his financial innovation, being a billionaire and his legacy.
The $18B Mistake That Made Blackstone
How did Jon Gray manage to turn an $18 Billion loss into one of the most profitable deals ever?
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Joseph Cass