Michael Milken and Junk Bonds: The Man Who Corrupted Finance

Michael Milken pleaded guilty on April 24, 1990, to six felony counts of securities violations and paid $600 million in fines and restitution — the largest such payment in securities history at the time. He spent the 1980s as the dominant figure in the market for high-yield bonds, earning more than $500 million in personal income in 1987 alone, and built a network through which inside information and market manipulation flowed as features of the business rather than aberrations from it. In February 2020, President Trump granted him a full presidential pardon.

Part of Financial Crimes — ← Back to series hub

What Junk Bonds Were and Why They Mattered

A “junk bond” — more formally, a high-yield bond — is debt issued by a company with a credit rating below investment grade. Before Milken, the conventional wisdom was that these bonds were too risky to anchor large-scale financing. Companies with poor credit ratings couldn’t access capital markets for large sums.

Milken, working first at Drexel Burnham Lambert’s Beverly Hills office, argued that this wisdom was wrong: that junk bonds were mispriced by the market, that a diversified portfolio of them would outperform investment-grade bonds on a risk-adjusted basis, and that they could finance acquisitions of much larger companies.^1^ He was correct about the underlying financial theory. He used that insight to build a business empire, and the empire crossed into fraud.

The Daisy Chain That Investigators Dismantled

Milken built what investigators called a “daisy chain” of relationships among the issuers and buyers of junk bonds — a network in which the same parties traded favors, information, and price guarantees in ways that violated securities laws. Columbia Savings and Loan, Lincoln Savings and Loan, Executive Life Insurance — these were institutions that held massive Drexel junk bond portfolios and received implicit liquidity guarantees from Milken that were never publicly disclosed. The savings and loan institutions were using federally insured deposits to buy junk bonds under arrangements Milken structured.^2^

Ivan Boesky — whose cooperation became the model for white-collar fraud investigations — was connected to Milken through transactions in which Boesky paid fees to Drexel for what prosecutors described as parking arrangements: Milken would hold securities on Boesky’s behalf and record false profits or losses to manipulate Boesky’s reported returns. Milken’s cooperation agreement also identified deals in which he had helped manipulate securities prices and had assisted clients in evading position limits in corporate takeover situations. The insider trading network Boesky’s cooperation exposed extended through much of Wall Street’s 1980s elite.

The takeover business Milken financed was itself transformative and not inherently criminal. Corporate raiders like Carl Icahn and T. Boone Pickens used Drexel’s junk bond financing to threaten and acquire major corporations. The discipline this imposed on corporate management was a genuine contribution to efficiency. But the same network that financed legitimate takeovers also financed a set of practices in which market manipulation, inside information, and hidden obligations were routine.

How Did Drexel Burnham Lambert Collapse?

Drexel Burnham Lambert pleaded guilty to six felony counts in December 1988, paid $650 million, and agreed to cooperate with continuing investigations of Milken. Milken himself was indicted in March 1989 on 98 counts of securities fraud, racketeering, and conspiracy. The racketeering charges were dropped as part of his plea agreement; he pleaded guilty to six counts, paid $600 million, and agreed to cooperate.^3^

Drexel filed for bankruptcy in February 1990. The firm’s collapse was partly caused by the investigation and plea agreement, which dried up the market confidence that sustained its junk bond business. Thousands of Drexel employees lost their jobs. The savings and loan institutions that had been major buyers of Drexel junk bonds had already collapsed or were collapsing in the broader S&L crisis of the late 1980s, a crisis that cost American taxpayers an estimated $132 billion in federal bailout funds.

What the Presidential Pardon Meant

Milken served 22 months of his sentence. After release, he was diagnosed with prostate cancer in 1993 and became a prominent philanthropist in cancer research, donating more than $700 million through the Prostate Cancer Foundation and related organizations. He reinvented himself as a financier of educational reform and medical research.

In February 2020, President Donald Trump granted Milken a full presidential pardon, describing him as “a great champion for America.” Prosecutors and securities regulators who had pursued the original case objected.^4^ Milken’s victims — the investors in manipulated securities, the employees of collapsed institutions — had not been made whole by his philanthropic activities.

The System That Survived Him

Milken’s case established that the highest earners in finance could face criminal prosecution and significant prison time — a genuinely new development in 1990. The subsequent three decades demonstrated the limits of that deterrence. The same leveraged buyout strategies Milken pioneered, stripped of the most egregious manipulation, became the foundation of the private equity industry that grew enormously in the years that followed. The underlying insight — that debt could be used to acquire assets and restructure businesses — was sound. The criminal practices were discarded. The wealth-generating mechanism survived.

The workers at companies bought with junk bond debt, loaded with the debt obligations that financed the purchase, and then restructured to service those obligations — those workers paid some of the cost of a system they didn’t design and couldn’t exit. The same pattern, different scale, runs through Jordan Belfort’s retail investor targets and the ordinary customers of FTX: the people with the least information absorbed the most concentrated damage.

─────────

Sources:

1. Stewart, James B. Den of Thieves. Simon & Schuster, 1991.
2. Bruck, Connie. The Predators’ Ball: The Inside Story of Drexel Burnham and the Rise of the Junk Bond Raiders. Simon & Schuster, 1988.
3. United States v. Milken, No. 89-cr-41 (S.D.N.Y. 1990).
4. Kornbluth, Jesse. Highly Confident: The Crime and Punishment of Michael Milken. William Morrow, 1992.