Making The Market

Tweet

No man is a market. But in the highly specialized world of low-rated debt, Drexel Burnham Lambert Inc.'s Michael Milken comes awfully close. In the late 1960s, Milken, now a 37-year-old senior vice-president, demonstrated in his MBA thesis for the University of Pennsylvania's Wharton School that companies with debt rated B or less were far less prone to bankruptcy than most people had assumed. Upon joining Drexel in 1968, the enterprising analyst/salesman began introducing his new employer to an unexploited corner of the corporate underwriting market -- one that has become the envy of Wall Street.

Drexel's strong franchise in low-rated debt didn't materialize overnight. In the early days, Milken worked long and hard out of Philadelphia and, later, New York, as a bond analyst, researching more than 2,000 issues -- many of them the downgraded bonds of ailing conglomerates. But, as he and the firm's credit analysts began learning more about the high-yield, or "junk," bond universe than anyone else on Wall Street, Milken proposed -- and got approval -- to take the next step. "We started making markets in these securities," he says.

Once Drexel's knowledge of buyers and sellers took hold, the firm's investment bankers, headed by Frederick Joseph, began underwriting new debt issues in 1977 for younger and smaller companies. In doing so, however, they have drawn heavily on Milken's talents for both structuring deals and selling them. Says one investor: "It's no exaggeration to say he knows nearly all the buyers and what they want. He's the one who's sold them on junk bonds."

Five years ago, in recognition of Milken's unique market grasp, Drexel management signed off on his unusual request to move the entire high-yield and convertible-bond department from Wall Street to Los Angeles. The three-hour difference in time zones enables Milken, a workaholic of legendary proportions, to stay in touch with buyers and sellers on both coasts. On a typical day, he commutes 20 minutes from his San Fernando Valley home (once the residence of Clark Gable) to be in Drexel's Beverly Hills trading room by 5 a.m. For the next 14 hours or so, he quarterbacks a team of more than 50 analysts, traders, and salespeople from the center of a large, X-shaped trading desk. Competitors estimate that Drexel's Los Angeles operation accounts for 60% to 70% of the trading volume of a booming over-the-counter market that, Milken claims, never closes. "If a guy called me at home and wanted to sell, I'd buy on a Sunday morning," he says. At a price, he notes, "there's always a market."

Even with some of Wall Street's biggest guns angling to become more influential in low-rated bond trading and underwriting, Milken claims he doesn't feel the pressure. "We've worked hard for many years and brought in lots of capable people." With confidence, he shrugs and says, "Others have always been interested in the market. But time is the greatest competitor. You have only so much time in a day."