======Michael Milken======
Michael Milken (also known as the 'Junk Bond King') is one of the most influential and controversial financiers of the 20th century. In the 1970s and 1980s, while at the investment bank [[Drexel Burnham Lambert]], he single-handedly created and dominated the market for [[high-yield bonds]] (more famously known as [[junk bonds]]). These are bonds issued by companies with lower credit ratings, which were traditionally overlooked by mainstream investors. Milken’s core insight was that the higher interest payments offered by these bonds more than compensated for their increased [[default risk]]. By creating a liquid market for this debt, he unlocked a massive new source of capital for thousands of emerging companies, struggling businesses, and entrepreneurs who were shut out of traditional financing. This innovation fueled the [[leveraged buyout (LBO)]] boom of the 1980s, fundamentally reshaping corporate America. However, his aggressive tactics and the web of relationships he built led to a major government investigation, and in 1990 he pleaded guilty to [[securities fraud]] and was sentenced to prison, marking a dramatic fall from grace.
===== The Rise of the Junk Bond King =====
Milken's journey began with a simple but powerful observation he made while studying at the University of California, Berkeley and the Wharton School. He analyzed decades of corporate bond data and concluded that a well-diversified portfolio of high-yield bonds would consistently outperform a portfolio of high-grade, 'safe' corporate bonds, even after accounting for defaults. The market, he realized, was mispricing risk.
When he joined Drexel Burnham Lambert in the early 1970s, he put this theory into practice. He didn't just trade these bonds; he created a powerful network of loyal buyers and sellers. He convinced investors like savings and loans, insurance companies, and mutual funds to buy the bonds, while simultaneously helping a new generation of ambitious entrepreneurs and so-called [[corporate raiders]] issue them. This created a self-reinforcing ecosystem with Milken at its center. Companies that couldn't get a loan from a bank could now raise billions of dollars through Milken's junk bond machine, funding growth, innovation, and, most famously, hostile takeovers.
==== Fueling the LBO Boom ====
The 1980s was the era of the Leveraged Buyout, and Michael Milken provided the fuel. An LBO is the acquisition of a company using a significant amount of borrowed money (leverage) to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loans.
Milken's junk bonds were the perfect financing tool for this. Raiders and private equity firms could use the high-yield debt he raised to take control of large, often complacent, public companies. Once in charge, they would aim to restructure the business, sell off underperforming assets, and improve efficiency to pay down the debt. Famous LBOs financed by Milken include:
  * The takeover of Revlon by [[Ronald Perelman]].
  * The acquisition of Beatrice Foods by KKR.
  * The expansion of media giants like MCI Communications and Turner Broadcasting.
While critics argued that these debt-fueled takeovers destroyed jobs and saddled companies with unsustainable debt, proponents claimed they forced lazy management to become more efficient, unlocking value for shareholders.
===== Downfall and Legacy =====
Milken's dominance and immense wealth eventually drew the scrutiny of federal investigators, led by then-U.S. Attorney Rudy Giuliani. In 1989, Milken was indicted on 98 counts of racketeering and securities fraud, including allegations of [[insider trading]], market manipulation, and concealing stock ownership.
Faced with the prospect of a lengthy trial and the powerful Racketeer Influenced and Corrupt Organizations (RICO) Act, Milken pleaded guilty in 1990 to six felonies. He was sentenced to ten years in prison (serving 22 months), paid over $1 billion in fines and settlements, and received a lifetime ban from the securities industry. His firm, Drexel Burnham Lambert, which was inextricably linked to him, declared bankruptcy.
==== A Polarizing Figure ====
Milken's legacy remains deeply divided. To his detractors, he is the symbol of 1980s greed, a market manipulator who bent the rules for personal gain. To his supporters, he is a financial visionary who democratized capital, challenging the cozy, established order of Wall Street and enabling innovators to build new industries.
After his release from prison, Milken successfully battled prostate cancer and has since devoted his life and fortune to philanthropy, primarily funding medical research through the Milken Institute. In 2020, he received a full presidential pardon.
===== Lessons for Value Investors =====
Milken’s story, though complex, offers timeless lessons for the thoughtful investor.
  - **Find Value in Neglected Assets:** Milken's entire career was built on the core value investing principle of looking where others won't. He looked past the "junk" label and analyzed the underlying businesses and their ability to generate cash flow. Like [[Benjamin Graham]] searching for 'cigar butt' stocks, Milken found immense value in bonds the establishment deemed worthless. The lesson is to do your own homework and not be scared off by negative labels assigned by rating agencies like [[Moody's]] or [[S&P Global Ratings]].
  - **Understand Risk is Not a Four-Letter Word:** High risk doesn't always mean bad investment; it just means it requires a higher potential return to be justifiable. Milken's genius was in calculating that the high yields on offer were more than enough to compensate for the risk of default. For investors, this highlights the importance of understanding and pricing risk correctly, rather than avoiding it altogether.
  - **Ethics and Margin of Safety:** Milken’s downfall is a stark reminder that genius and ambition are no substitute for integrity. His willingness to bend and break rules ultimately led to his ruin. For investors, this is the ultimate cautionary tale. Success built on a shaky ethical foundation is not sustainable. A true //margin of safety// is not just financial, but also ethical.