Linda’s Reviews > The Predators' Ball: The Inside Story of Drexel Burnham and the Rise of the Junk Bond Raiders > Status Update

Junk bonds fell about 10% on average, “since they are really part debt, part equity, and their value tends to fluctuate with the equity markets….their key variable being less the direction of interest rates than the perceived ability of the issuer to service its debt.”

After the October 19, 1987 Black Monday crash, “‘debt’ and ‘leverage’ - which had seemed to possess magical properties for the conjuring of enormous wealth in the corporate arena -were demystified, seen as tools of excess”. Recessions follow orgies as Lent follows Fat Tuesday.

Nearly every cult leader develops some form of Stockholm Syndrome with his followers, some love-hate relationship, where they want to leave but believe they can’t, because he holds the keys to their life.

Milken becomes junk bond enforcer as his power and influence grow alongside “opportunities for abuse in the name of control, of expansionism, of disciplining the intransigent, of uprooting the indolent entrenched…it was for the greater good.”
Mostly so that Milken could become greater.

Also, the game of musical chairs was halfway to a Ponzi scheme. Atlantic Capital was using the same strategy that brought down the S&Ls, which borrowed in short three-year stints, and used that new money to pay out on their long-term 10-year loans. No liquidation. If interest rates rise, there won’t be enough to pay on long-term contracts.

Not only did Milken’s investment partnerships operate as “blind pools”, but also “most underwriters who accepted Atlantic Capital bids apparently looked to the AA ratings and not beyond.”

He told polite fictions to the SEC about his partnerships (as a limited investor), either that he didn’t have investment authority for accounts or that he didn’t make investment decisions. One former investment committee member of Otter Creek said, “I never made one decision. It was all Mike.”

He drew an unofficial crowd of loyalists by placing them into other companies, as portfolio managers or investment advisers or hedge fund operators. “By having ostensibly independent managers, Drexel avoided the conflict-of-interest problem it would have had if it had put its own new issues into these funds.”

Milken had a neo-Darwinian approach to the market, repeatedly referring to the resistance of change (“we’re faced with change….we’re not willing to recognize…that many of our money-center banks today are financially weak”). “Often, what’s old is weak and what’s new is strong.” Not the language of good, just power.

He explained the violence of resistance to his clairvoyant outsider stance. “He held himself apart from the mainstream. He had become both prophet and engineer of change.”