Michael Milken

Michael Milken is a philanthropist and former felon who, as an executive at investment bank Drexel Burnham Lambert Inc. during the 1980s, used high-yield junk bonds for corporate financing and mergers and acquisitions. Milken amassed an enormous personal fortune, but in 1989 he was indicted by a federal grand jury and eventually spent nearly two years in prison after pleading guilty to charges of securities fraud. While he is credited with founding the high-yield debt market, he was banned for life from the securities industry.

Nicknamed the "Junk Bond King" in the 1980s, Milken earned between $200 million and $550 million a year at the height of his success. Following his release from prison, he worked as a strategic consultant. This was in violation of his probation, and he was subsequently fined $42 million for these actions. In 1993, Milken was diagnosed with prostate cancer; since then, he has devoted much of his time and resources to the pursuit of a cure for the disease.

Early in his career, Milken saw an opportunity to leverage junk bonds, also known as high-yield bonds. He saw a way for investors to see high returns, on a risk-adjusted basis, by buying bonds that were issued by companies with low credit ratings compared with acquiring bonds from AAA-rated companies.

At the time, the availability of such bonds was limited and Milken anticipated demand would quickly outpace supply for this investment opportunity. The firm he worked for, Drexel Burnham Lambert, launched an effort to underwrite more junk bonds by convincing such companies to issue them.

The companies in question may have been early-stage or otherwise not well-established. Their low credit rating might not necessarily have been a result of poor financial health, but rather from a lack of an extensive track record to base their credit ratings on. Such circumstances are typically seen with new and emerging industries. From the companies’ perspective, issuing bonds was a way to potentially access more capital that they might not otherwise have an opportunity to pursue. Milken’s efforts at Drexel Burnham are credited with launching this market.

As the junk bond market grew, Milken sought to maintain a dominant position over this sector, and some of his efforts led to engaging in business activities that eventually led to his arrest and conviction for securities fraud.