BOOKS

Too much interest on junk

James Buchan

DEN OF THIEVES by James B. Stewart

Simon & Schuster, £16.99, pp. 494

INSIDE OUT: AN INSIDER'S GUIDE TO WALL STREET by Dennis B. Levine with William Hoffer

Century, £17.99, pp. 431

Ten months after Michael Milken presented himself to a federal prison outside San Francisco to begin a 10-year sentence, his character and offences are no easier to understand. The speculative tide that engulfed US financial markets in the 1980s has receded, but left a debris of unresolved juristical and economic questions. Was Michael Milken the greatest swindler in history? Or was he, rather, the man who could redeem American capitalism, crucified by ignorant and vengeful authorities? Was Michael framed?

I am convinced that Michael Milken ran a diabolical enterprise that had to be stopped for the welfare of nations. My problem is that the legal means employed have been so mangled as to be quite use- less for the future.

Michael Milken's supporters, who are still numerous, claim that junk bonds brought long-term capital to the small and middle-sized corporations that will make America great again. I never understood that argument. Junk bonds are steroid capital: few legitimate businesses can pay such usurious real rates of interest over time without crippling themselves, breaking the law or defaulting. Milken was, by all accounts, a brilliant analyst of credit and must have known this. In early 1986, for example, Milken overrtiled several colleagues at Drexel Burnham Lambert and raised $660m for Ivan Boesky, who was known all over the Street as an insider trader.

What junk bonds were good for was destruction. Drexel Burnham ripped equity capital out of stable or declining industries and tossed the carcasses to the dogs of for- eign competition. The capital liberated was not deployed in growth areas of the US economy: it was fed back into the takeover machine, into Milken's personal fortune and, at the Manhattan end, into cheesy lux- ury imports such as Dennis Levine's beloved Ferrari Testarossa. To front these partial or total liquidations, Milken lined up a brilliant gallery of felons and eccentrics known as corporate raiders.

While these men were feted in the business press and in Reagan's Washington, I tried to keep in mind the tremendous passage from Timon of Athens (which also haunted Marx in his Parisian exile) about how money turns the world on its head and can

place thieves, and give them title, knee and approbation, with senators on the bench.

By the second half of the 1980s, when junk bonds with a face value of over $100 billion were supposedly in issue, Michael Milken was on his way to capturing the US markets for corporate capital, as a side- channel captures the waters of a great river. Regulated public markets were being eaten up by a parasitic monopoly run by a sleepless monomaniac at the intersection of Wilshire Boulevard and Rodeo Drive in Beverly Hills. Milken was quite beyond

control. Fred Joseph, Drexel Burnham's chief executive, thought to reduce Milken's power by building up the firm's New York office: unfortunately, he recruited crooks (Levine, Martin Siegel). As a manager, Joseph was essentially frivolous: he per- suaded the Drexel Burnham board to plea bargain with the government in December, 1988, then cast his own vote against it!

Milken's career was a shattering verifica- tion of Gresham's Law. Bad credit drove out good. The debt securities of conserva- tively capitalised corporations tumbled in value on the theory that all of American industry would get the Milken treatment. US business went into the 1990 recession with a balance sheet that didn't bear think- ing about. At Milken's sentencing in November 1990, Judge Kimba Wood said she did not intend to punish him for the severity of the recession or the destruction of the Savings & Loan industry, but we are not in court and the burden of proof is lighter. Deflationary fires are burning out of control in America and England and they are not insubstantially Michael's doing. Milken must also take a great share of the blame for the destruction of what was left of Wall Street's reputation for dis- interested client service. I know American business people who do not distinguish between investment bankers and common blackmailers.

Journalists and academics used to claim that junk bonds had quite a low default rate, amply compensated by their interest premium: but this was largely because Milken, from his eyrie at the centre of an X-shaped desk in Beverly Hills, always caught a borrower before he fell and bullied his docile bond buyers into refinancing. Once Milken was out of the way after the Drexel Burnham plea bargain, this Ponzi scheme quickly came unstitched. His successors were hopelessly outmatched. In late 1989, a Drexel Burn- ham client called Integrated Resources defaulted. In the turmoil, Drexel Burnham was forced to buy more and more

unsaleable bonds for its own inventory. By early 1990, the firm's free capital was large- ly represented by what a banker (quoted in

Levine) aptly described as 'an eclectic col- lection of illiquid securities'. Drexel Burn-

ham was.bankrupt. It is a great mercy that Michael Milken never got the chance to project this scheme onto a larger stage: his sycophants had spoken of Michael as a future Treasury Secretary and even whis- pered, eyes aglow, of a scheme he was mulling to convert Third World debt into equity at a stroke.

Michael Milken was real had news. But

did he break the law?

James Stewart, a reporter on the Wall Street Journal who covered the case with great enterprise, has no doubt he did. Dennis Levine, whose arrest in May, 1986 set off the Wall Street investigation, seems to think Milken merely came under Boesky's baleful influence, though he states the important truth that you don't plead guilty to a whole lot of criminal charges unless you are guilty of them.

Milken pleaded guilty to six felonies on 24 April, 1990 as part of his own rickety plea bargain with the Securities and Exchange Commission (which oversees US securities markets) and the Justice Depart- ment. These offences, and others intro- duced by the prosecution in a so-called `Fatico' hearing before Judge Wood, involved insider trading, false statements, various mechanisms for evading tax or net capital requirements and conspiracy with Boesky. They are either chickenshit or part of a master scheme to destabilise US finan- cial markets, depending on how you regard Michael Milken. Judge Wood seemed to have a big problem. She sentenced Milken to 10 years — Boesky got three — only to recommend later that he serve a minimum of 36-42 months. Meanwhile, other convic- tions arising from the investigation — of John Mulheren, the partners of Princeton- Newport, James Sherwin — have been partly or entirely reversed. Milken has been apparently telling people from gaol that he bitterly regrets the plea bargain.

Stewart, whose reporting of the case in the Journal helped scare Milken and Drex- el Burnham into settling, excuses the pros- ecution of everything except too much zeal. The truth is that the government, starting with Rudy Giuliani, the US Attorney for the Southern District of New York, made serious errors; even Gary Lynch and John Sturc at the SEC seem to have got carried away when the lawyer Harvey Pitt handed them Boesky and Levine on a plate. When things got sticky, Giuliani's staff got mean: hand-cuffing Freeman, Tabor and Wigton as if they were dope-dealers; using the racketeering law against the hapless Princeton-Newport; hounding Mulheren, who was quite obviously not a hood; and persecuting Lisa Ann Jones, a junior employee at Beverly Hills who perjured herself for Milken and was gaoled.

Giuliani and Lynch used to announce their arrests or deals after market hours: this made life excruciatingly hard for Euro- pean reporters. I used a payphone outside Giuliani's office or wrote amid sullen pro- fanity on the teeming, uptown subway. Once, buried in SEC v. Drexel Burnham Lambert et al, Complaint for Injunctive and Other Equitable Relief, I missed my station and surfaced in Harlem. I filed from 125th Street, while the dudes lounged about me, armoured in cool and heroin, frowning a little at whitey, so busy, busy, busy. I thought: downtown , uptown, everybody's a crook in this beautiful city except me. Giu- liani also fell into this simplification. He came onto the case trailing glory from his Mafia prosecutions. Asked for the differ- ence between Wall Street and the Mob, he said: Bankers 'roll (i.e. squeal) easier.' In the Southern District of New York, justice is fungible. If Wall Street was a sink-hole in the 1980s, the US criminal justice system didn't smell so sweet.

Stewart does not recognise this, which leads him into error. He asks why Tim Tabor, an arbitrageur fingered by Martin Siegel, didn't roll and concludes this was because of Wall Street's tradition of 'strong loyalty'. What tradition? It is more likely that Tabor didn't talk despite being thrown into gaol because he had nothing to say, which raises two questions which Stewart also ignores. If the Siegel-Tabor-Wigton- Freeman ring was fabricated by Siegel to buy a reduced sentence, shouldn't he have served a little more than two months in gaol? Or, conversely, if Freeman was as deep in insider trading as Siegel claimed and Stewart reports, then how come the case against him was so dismally weak?

There are three faults in Stewart's approach. It is written in a stylistic mixture of buttoned-down Journal-ese and blockbuster fiction, which is a truly awful vehicle for such a complex and important story. The source notes are so poor as to make the book useless as a work of refer- ence. And Stewart is too exhausted at the end to attempt even the most trivial judg- ments. The book is also an outstanding piece of dedicated investigation and organisation with a nice feel for profession- al culture in New York, a sort of sobersides Bonfire of the Vanities. Stewart is particular- ly good on lawyers. When Joseph, in exas-

peration, capped Milken's allowance for legal fees, at $1.25m a month, the senior

lawyer, Arthur Liman, exploded: 'The quality of Michael Milken's representation will not be affected by a Drexel's nickeling and diming their lawyers.'

Levine and his ghost have written a book riddled with malapropisms, misunderstand- ings, patent insincerities and charm. Levine & Co by Douglas Frantz (Henry Holt, 1987) told the story of Levine's insider trading ring and portrayed a thug and a bully. In Inside Out, Levine comes across as a cheerful chump, the 011y Hardy of M & A, with a nice line in Mittyish fantasy: ' "You're right, Dennis," said Mike, "and I'm wrong. As usual." 'etc etc. Stewart reports that Levine was so lacking in basic investment banking skills that even his colleagues at Drexel Burnham New York noticed.

Levine is unctuously apologetic to his wife but shows no professional regret what- ever: he is always beating up on Harvey Pitt; he blames his greedy and timid Swiss bankers for piggybacking his trades in the Bahamas and giving the game away; and he gives Lynch a stern lecture for riding roughshod over the Bahamian bank secrecy laws. He thinks his crimes had no victims. He is a numbskull, but irresistible. When the stock market crashed in October 1987, he was pestered by the governor of Lewis- burg prison for portfolio advice.

When Pitt negotiated Boesky's plea bargain at a meeting with Lynch in Boston on 27 August, 1986, he promised Boesky would open a 'window on Wall Street'. Regulators would, he said, be given an insight as clear and detailed as the Pecora hearings that led to the passage of the securities laws in 1933 and 1934.

But no laws have come out of Levine, Boesky, Siegel or Milken. The SEC is still working with a definition of insider trading that is fundamentally daft. To secure convictions, prosecutors resorted to actual and judicial violence. What a way to run a capital market.