The Resurrection of Michael Milken

Late last summer, the organizers of an annual convention called TechLearn '99 announced that two of the most famous icons of the 1980s would keynote the event. The first was Bill Cosby, one of the decade's most popular entertainers; the second was Michael R. Milken, the "junk bond king" who became a symbol of the decade's greed when he was sentenced to prison for securities fraud. Until recently, Milken's presence on the stage with Cosby would have seemed like a bizarre joke.

But that juxtaposition is just one sign of an amazing comeback. When Milken was sentenced to prison on November 21, 1990, he was one of the most reviled men in America. But today, nearly a decade later, the 53-year-old Milken is everywhere. A survivor of cancer, he is the founder and chairman of CaP CURE (the Association for the Cure of Cancer of the Prostate) and the author of a best-selling cookbook featuring recipes for fighting cancer; he has also expanded the Milken Family Foundation, a philanthropic venture best known for its education awards, and is a lead investor in Knowledge Universe, a family of companies specializing in early childhood education, Internet commerce, technology consulting, and educational testing. Milken, it seems, has made the classic American transformation from despised villain to "controversial" figure; he's now the subject of debate, not an object of scorn. It's a transformation that would have made Richard Nixon proud. But the role of his think tank, the Milken Institute, raises questions about where rehabilitation ends and self-promotion begins.

Today the public has only a dim recollection of what sent Milken to federal prison. Milken's defenders portray him as a financial genius who changed the country's capital markets for the better, but was caught up in the hysteria of the 1980s and unfairly scapegoated as a criminal. His critics more plausibly describe him as a crook--a man who used his financial know-how to fraudulently enrich himself and his associates, and whose machinations undermined the integrity of the market.

A quick refresher: At the investment firm Drexel Burnham Lambert, Milken virtually reinvented junk bonds--securities that are considered speculative and below investment grade. Before Milken, most junk bonds were "fallen angels," bonds for companies that were once investment grade but had fallen on hard times. Milken had two key insights. First, a diversified portfolio of junk bonds could have extremely impressive returns since the high interest paid by the successful firms more than offset the losses resulting from defaults. Moreover, such bonds could be a perfect source of capital for risky start-ups. During the 1970s and 1980s, Milken ran with these insights, personally creating an enormous new market for high-yield securities. This is the achievement for which his defenders hail him as a financial genius. But Milken did not stop there. He and his accomplices allegedly conspired to engage in insider trading, arrange illegal take-overs, and defraud their customers. It was this activity that helped make him a billionaire--and sent him to prison.

Greed is Good

Milken became a double-edged symbol of his time, an embodiment first of the "booming '80s" and then of the "decade of greed." Milken's x-shaped desk at the center of Drexel's Beverly Hills office became an object of legend, around which multimillion-dollar deals were negotiated by the hour. The junk bond market kept expanding, and with it Milken's net worth: In 1987 alone, he earned a whopping $550 million. Milken's junk bonds helped fuel new ventures such as MCI and Turner Broadcasting, but also helped destroy established corporations by funding corporate raiders. And with the advent of deregulation, junk bonds became entwined in the savings and loan mess.

Ultimately, Milken was the target of a 98-count criminal indictment and a massive civil case filed by the Securities and Exchange Commission (SEC). The charges against him included insider trading, price manipulation, falsifying records, filing false reports, racketeering, and defrauding customers; the heart of the indictment accused Milken of "stock parking," or arranging to swap securities with his accomplice Ivan Boesky to hide their true ownership. In essence, Milken used Boesky as a front to trade stocks in companies in which Drexel had a confidential interest--earning millions for both men. In one representative case, a Milken client named Victor Posner wanted to take over a construction company called the Fischbach Corporation, but had signed an agreement barring him from attempting a take-over unless someone else either tried first or filed a form showing ownership of 10 percent of Fischbach's stock. Milken allegedly instructed Boesky to begin buying Fischbach stock and guaranteed him against any losses he might incur--in short, Milken, Posner, and Boesky conspired to achieve a take-over through fraudulent and deceptive means. The victims were Fischbach's shareholders, and Posner was eventually convicted of fraud in the case. But Milken himself never went to trial on the many charges against him: In return for pleading guilty to six relatively minor securities violations, he was fined $600 million, sentenced to prison for a decade (he served 22 months), and barred from the securities industry for life.

Milken's supporters have put forward a new theory of the 1980s--a school of thought best described as Milken revisionism. Daniel Fischel, a law and economics scholar who recently became dean of the University of Chicago Law School, has emerged as Milken's most vocal scholarly defender; his 1995 book Payback argues that Milken did nothing wrong, but that his "financial revolution" threatened the Wall Street elite and provoked an unruly coalition of the "management establishment," old-line investment bankers, change-resistant labor unions, and unscrupulous prosecutors. If Milken actually broke the law, revisionists say, his crimes were trivial technicalities that had no real victims, and emblems of an outmoded legal framework. Belief in Milken and his financial brilliance have become articles of faith among right-wing commentators. The ubiquitous conservative pundit Dinesh D'Souza has even claimed that Milken deserves much of the credit for creating Silicon Valley.

Buying Respectability

The Milken Institute is ostensibly a nonprofit, nonpartisan think tank, based in Santa Monica, California, and founded by the Milken family in 1991. Its stated goals are to study the dynamics of economic growth and to examine deep-seated social problems through the lens of finance. The institute now encompasses four core research areas--global studies, regional and demographic studies, labor markets and human capital studies, and capital studies.

Tactically, the institute has two basic operating principles: recruiting a cadre of high-profile superstars and working closely with government and business on attention-grabbing projects. Donald Straszheim, the institute's president, joined the staff after working as Merrill Lynch's chief economist; New York Times economics columnist Peter Passell and former Harvard Business Review editor Joel Kurtzman joined last year to launch the institute's new magazine. Milken himself is the institute's chairman, working (in Straszheim's words) as a "hands-off manager" who helps set the institute's priorities.

Cooperation with state and local governments has been another of the institute's hallmarks. In 1997, it produced the final report for "Rebuild L.A.," the city's official response to the 1992 L.A. riots; more recently, it has worked closely with the Commerce Department's Minority Business Development Agency (MBDA) and the California treasurer's office on ways to increase access to capital for minority-owned businesses. The institute even has an ongoing project helping the Israeli government privatize state services, reform capital markets, and decentralize the peace process. Just this January, Glenn Yago, the institute's director of capital studies, spoke at the convention of Jesse Jackson's Wall Street Project, where he met briefly with President Clinton to discuss ways to expand the minority business community, and Hilton Root, the acting director of global studies, spent a week in Washington advising the International Monetary Fund (IMF).

And each spring, the institute hosts its Global Conference, a three-day event that draws over 1,000 attendees and dozens of top-name speakers. At last year's conference, for instance, the panel on Russia featured an all-star cast of experts: Marshall Goldman of Harvard, Princeton's Stephen Kotkin, the Nixon Center's Dimitri Simes, and even Boris Berezovsky, the controversial Russian financier. Milken, California Governor Gray Davis, and former Indiana Congressman Lee Hamilton delivered keynote addresses; publisher Mort Zuckerman and Los Angeles Mayor Richard Riordan also attended. The centerpiece was the Nobel panel, a round table moderated by Milken himself and featuring no fewer than four Nobel laureates in economics.

The institute's actual research delves into several distinct areas. Alec Levenson, the institute's acting director of labor markets and human capital, focuses on temporary work, welfare reform, and the factors that determine the success or failure of job-skills programs; the institute's global studies division has written about Korea's need for comprehensive reform, the impact of a country's size on its economic growth, and the ways in which economic incentives encourage world leaders to mismanage their countries' economies and maintain their hold on power. Another division focuses on California's economy, comparative regional economics, demographic changes, and technology's role in economic growth. The division recently published a study that ranked the nation's metropolitan areas in terms of technology growth and argued that cities failing to develop a technology base were risking stagnation. Another recent report focused on the effects of the Asian economic crisis on California. The institute also coordinated a November conference on the "state of the state," featuring California Attorney General Bill Lockyer, Oakland Mayor Jerry Brown, and former HUD Secretary Henry Cisneros.

At the same time, some people familiar with the institute's inner workings paint a picture of low morale and high staff turnover. One outside economist, who asked to remain anonymous, described the institute as "continually changing direction," and called the quality of its output "very mixed." The Global Conference, some insiders complain, diverts the think tank's energies away from serious, long-term research. "The Global Conference was originally intended as a way to spotlight the institute and give visibility to its work and staff, but year by year, it has threatened to swallow everything else the institute is doing," notes Ted Van Dyk, the institute's former executive vice president. Institute staffers are routinely asked to put aside their research and help, say, prepare a slide or raise money for the conference, which sucks up roughly half the institute's budget and energy.

Capital Ideas

The centerpiece of the institute's work is what Glenn Yago calls the "democratization of capital": the idea that national prosperity and world economic growth depend on increased access to capital markets and investment dollars. And it is here that the institute's role in promoting Milken's rehabilitation coincides with its goal of promoting his market-based solutions to economic problems.

One recent policy brief, "The Jobs/Capital Mismatch," calls for a broad program of deregulation and the elimination of the capital gains and estate taxes. A report commissioned by the MBDA and published by the institute last March, "Mainstreaming Minority Business," argues for changes in regulation and the creation of a new secondary loan pool (like Fannie Mae) to help minority-owned businesses find investment capital. The capital studies division also produces a Capital Access Index with Forbes Global, ranking countries around the world in terms of the openness of their capital markets. Other initiatives include work in the field of environmental finance--seeking ways to decrease pollution by marketizing the problem--and a joint initiative with the Israeli government to reform the country's capital markets, privatize certain government services, and push forward the peace process by developing markets for water rights and other commodities.

The institute's basic approach is also exemplified by its new quarterly magazine, The Milken Institute Review. The magazine's advisory board includes such famous names as Paul Krugman of MIT and Jagdish Bhagwati of Columbia University; the publication's style is informal, even irreverent. "I want our writing to scream, 'We're friendly--give us a try!'" explains Peter Passell, the editor. Each issue includes the cartoon Ekinomix, a "puzzler," and a "charticle" (which describes an economic trend in graphical form) as well as a section called "Research FYI" (describing academic work in the field) and a range of articles by well-known economists like Harvard's Jeffrey Sachs and the Cato Institute's Stephen Moore. Recent articles have discussed the "myth" of the savings crisis, the economics of collegiate sports, and the IMF's impact on Brazil.

The economists interviewed for this article agreed that the Milken Institute is a nonpartisan think tank with no overarching political agenda. Walter Russell Mead, a fellow at the Council on Foreign Relations, recalls a discussion he had with several participants at the 1999 Global Conference. "Some people felt that the institute was right wing, and others considered it left wing," he says. "We discussed this for a while but never came to a consensus." Glenn Yago rejects the idea of giving the institute any particular ideological label, calling it "post-partisan" instead.

Nonetheless, the institute has not quite been able to resist taking on issues that seem intended less to expand knowledge than to help transform a felonious businessman into a respected public intellectual. On several occasions, the institute has moved beyond Mideast peace and minority businesses and delved into subjects in which its founder has a clear interest, including junk bonds, savings and loans, securities litigation, and tort reform.

This spring, for instance, the Milken Institute plans to convene a retrospective conference on the lessons of the savings and loan debacle, a scandal that featured financier Michael Milken in a major role. Outside experts and Milken Institute analysts will seek to demolish several of the "myths" of the crisis and to "set the record straight" about the role of junk bonds, according to Yago.

The institute's work with securities litigation reform adds an ironic twist to the same basic theme. In a policy brief published last June, Yago argues that "frivolous" class-action lawsuits are a threat to capital formation and economic growth because they scare off investors and thus impose a dangerous "tax" on growing companies. But the central issue in these "strike suits" is securities fraud--the crime that landed Milken in prison. Congress has already narrowed the scope of such lawsuits. Contrary to what the institute alleges, further restricting securities lawsuits would threaten capital formation far more than any court battle, since there's no incentive to invest if you can't recoup your losses when you've been cheated.

The Milken connection runs deeper still. Last June, the institute co-hosted a round table called the "Lessons of Lexecon," discussing the implications of a recent court battle for the future of tort reform. In the case under discussion, Lexecon--a law and economics consulting firm based in Chicago--successfully sued a law firm that had included it in a class-action suit. The Milken Institute hailed the decision, arguing for tort reform, tougher judges, and defendants willing to fight back in court.

There was one problem with the round table, however: Lexecon has ties to Michael Milken running back to the early 1980s. Milken was a client of the firm during the SEC's Drexel investigation; Lexecon's president is Milken revisionist Daniel Fischel; and early last year, Lexecon was sold to Nextera, an educational firm owned by Milken. What's more, Lexecon was originally sued for fraud when it testified in court that Lincoln Savings and Loan--run by Charles Keating, who invested heavily in Milken's junk bonds--was in sound financial shape. None of these connections make the institute's work unethical, but they raise the question of how independent the think tank really is.

Yago argues that the institute's work in these areas has been completely objective. "We have to understand that history in order to examine the issues of the future," he says. But, like Milken's business record, the institute's Lexecon round table and S&L conference are riddled with conflicts of interest. And that isn't the only connection between the institute's work and Milken's past. In 1990, Yago himself appeared on Crossfire the night Milken was sentenced to prison, and denounced the "witch hunt" against Drexel. That same week, USA TODAY asked Robert Sobel, a professor of business history at Hofstra who ended his career as a fellow at the Milken Institute, what Milken's sentence should be. "He should be sentenced to five years as U.S. secretary of the Treasury," Sobel responded, before likening the Justice Department to Saddam Hussein.

Milken's Shrewdest Investment

Institute officials ask that their work be judged on its merits and deny that they're part of a Milken PR machine. "Our scholarship stands on its own," says Straszheim. "Material should be judged on what it does and what it is," Passell adds. "If people want to say that Michael Milken is trying to improve his reputation by publishing a first-rate magazine, then all power to him." But in practice it can be extremely difficult to separate Milken's life and work from the institute's mission.

Milken, after all, has done more than found a think tank; he has also bought himself a new public forum, at a cost (institute insiders say) of more than $5 million a year. That spending has bought credibility. Several well-known economists acknowledge that they would never have written for The Milken Institute Review if Passell hadn't been its editor. And like the Global Conference, many institute events give Milken the chance to reach out to the public. They enable him to share the podium with Nobel laureates, to cast himself as a public intellectual, and to portray his life in the most favorable light. Milken uses these speeches to discuss the importance of expanded education and health care, to call for the "democratization" of capital, and to refer to his own life story--a series of topics that couldn't have been better chosen to help his own rehabilitation.

Consider, once again, the institute's Global Conference. This year's event will convene in March with a schedule that places Milken at the center of the action. It will begin and end with Milken-moderated panels of Nobel laureates; in between, Milken himself will deliver the keynote address. Fifteen hundred people are expected to attend, and through it all, Milken will stand at center stage, a smiling, benevolent visionary leading the discussion and masterminding the event. In short, even the conference's structure drives home the idea that this is Michael Milken's conference, for Michael Milken's institute, discussing Michael Milken's favorite issues. It will even be held at the Beverly Hilton, the site of the notorious junk-bond conference known as the "Predators' Ball."

The problem with the institute can be summed up in six words: too much Milken, not enough institute. Far too much of the think tank's business seems designed to advertise its own importance--and, by extension, that of its founder. "Mike Milken is a genuine financial genius, who has been hurt and frustrated by his inability to do what he does best, so his activities in large part are devoted to redeeming his reputation and giving him positive exposure," notes Van Dyk.

Milken's investment, seemingly, is money well spent. Government officials who have worked with the institute are generally complimentary. The MBDA's Anita Cook Wells, for instance, describes the institute's work with emerging domestic markets as "innovative and creative." The Milken Institute Review has won plaudits as a well-edited and thoughtful magazine. And after attending last year's Global Conference, Walter Russell Mead wrote in Worth magazine that the institute was "hotter on the trail of a global economic cure than anybody I heard at Davos."

The Milken Institute may never reshape the policy debate--but if all goes according to plan, it could change the way we think about Michael Milken. To a remarkable degree, it has succeeded in attracting blue-chip intellectuals and building relationships with government officials just a decade after its founder and namesake went to prison. "The Milken name means different things to different people," notes Ross DeVol, the institute's regional studies director. "When some people think of Milken, they think of junk bonds and greed; others think of financial innovation." ยค